The opinion of the court was delivered by: Campbell, Chief Judge.
This is an action under § 1346(a) of Title 28, United States
Code to obtain a refund of federal income taxes allegedly
illegally assessed by the District Director of Internal Revenue.
Plaintiff filed a claim for refund with the District Director
on April 14, 1961, and the instant suit was commenced more than
six months after that date. The District Director has neither
allowed the claim nor granted credit, in whole or in part, for
the amount claimed. Plaintiff has therefore complied with §
6532(a)(1) of Title 26, United States Code.
In the return, plaintiff included in gross income decedent's
share of the income of the Henrici Trust for its fiscal year
ended January 31, 1957, and of the Collins Trust for its fiscal
year ended March 31, 1957. Plaintiff also included gross income
of the Henrici Trust for its fiscal year ended January 31, 1958,
which was actually distributed to decedent prior to her death.
There was also included in gross income the following
distributions from the Collins Trust for its fiscal year ended
March 31, 1958: $12,967.77 representing income of the trust
actually distributed to the decedent prior to her death; and
$2,893.02 of trust income which was paid to plaintiff as executor
of decedent's estate. The Government now concedes plaintiff's
right to recover taxes attributable to the inclusion in the
decedent's final return of the last stated amount, i.e., the
$2,893.02 which was paid to the estate after the decedent's
The remaining dispute and the issue presently before me
concerns only sums actually distributed to decedent prior to her
death which were earned in a trust year ending after her death.
The question, stated simply, is whether these sums should be
taxable to the decedent or to her estate.
These funds were not amounts paid for a trust year ending
with or within the taxable year of the beneficiary. §§ 652(c) and
662(c) of the Internal Revenue Code commonly referred to as the
"different taxable years rules" provides so far as material here
— that if;
"the taxable year of the beneficiary is different
from that of the trust, the amount which the
beneficiary is required to include in gross income in
accordance with the provisions of this section shall
be based upon the amount of income of the trust for
any taxable year or years of the trust ending
within or with his taxable year." (emphasis
Treasury Regulations promulgated to implement these sections
draw an exception to the above rule where — because of the
beneficiary's death — the taxable year of the trust does not end
within or with the last taxable year of the beneficiary. (T.R.
1.652(c)(2) and 1.662(c)(2). In such cases, so state the
regulations, a cash basis beneficiary must include in gross
income, amounts actually received prior to death. In compliance
with these regulations, plaintiff included in gross income
amounts actually received by the decedent from the respective
trusts for the periods February 1, 1957, (Henrici Trust) and
April 1, 1957, (Collins Trust) to November 29, 1957, the date of
Plaintiff does not question the applicability of the
regulations to the facts, but contends instead that the
regulations are arbitrary, unreasonable and inconsistent with the
expressed provisions of the Revenue Act (§§ 652(c) and 662(c))
and as such are illegal and void. He argues that the regulations
work undue and unintended hardship on a deceased trust
beneficiary because their application may result in a "bunching"
of more than 12 months trust income in the last return of the
decedent.*fn1 He further argues that the rule applicable to an
analogous partnership situation — which avoids the harsh rule of
"bunching" income in the last return of a decedent partner —
should be applied to trust beneficiaries.
Although the arguments advanced by the plaintiff are impressive
and may even suggest a more desirable approach, I find that these
regulations are generally reasonable and non-oppressive in their
application, and are not inconsistent with the Revenue Act.
Though, admittedly, in some cases*fn2 these regulations may
increase the tax burden of the beneficiary by bunching income in
his last return, yet I find in the basic statute no intent on the
part of Congress to relieve this apparent hardship.
In considering whether a decedent trust beneficiary should be
given tax treatment similar to a decedent partner, I have found a
review of the legislative history and case law development of the
"analogous" partnership sections quite enlightening.
The Internal Revenue Code's sub-chapter on partners and
partnerships contains a "different taxable year rule" very
similar to the sections applicable to trusts.
"Year in which partnership income is includable (1)
in computing his taxable income for a taxable year, a
partner is required to include his distributive share
of partnership items * * * for any partnership year
ending within or with his taxable year. * * *"
(I.R.C. § 706(a)).
An early case applying this rule determined that, upon the
death of a partner, the partnership would terminate and its
taxable year end. (Guaranty Trust Co. of New York v.
Commissioner, 303 U.S. 493, 58 S.Ct. 673, 82 L.Ed. 975 (1938)).
The effect of this decision was to cause the last "short
partnership year" to be included in the last return of the
deceased partner, thereby causing a bunching of more than 12
months income in his final return. Later cases circumvented the
harshness of this rule by holding that, where the partners had
provided by agreement that the partnership would not terminate on
the death of a partner, then the partnership taxable year would
not end within or with the last taxable year of the decedent
partner and the income from that partnership year would not be
includable in his final return. This income would instead be
included in the return of his estate filed after the end of the
partnership year.*fn3 (See Commissioner of Internal Revenue v.
Mnookin, 184 F.2d 89 (8th Cir. 1950); Girard Trust Co. v. U.S.,
182 F.2d 921 (3rd Cir. 1950); and Henderson's Estate v.
Commissioner of Internal Revenue, 155 F.2d 310 (5th Cir. 1946).
These cases, however, lay stress on the fact that, because the
partnership does not terminate, the translation of earnings into
individual income is deferred until the end of the next
partnership fiscal year with no partnership gain or loss to
report for the period immediately preceding ...