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SCHIMBERG v. UNITED STATES

April 15, 1965

LEWIS SCHIMBERG, EXECUTOR OF THE ESTATE OF ANNA H. COLLINS, DECEASED, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



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.

The facts, as stipulated by the parties, are as follows: Plaintiff is the Executor of the estate of Anna H. Collins (hereinafter referred to as the decedent), who died on November 29, 1957. On April 15, 1958 plaintiff filed an income tax return for the decedent for the period commencing January 1, 1957 and ending November 29, 1957. Income taxes of $68,432.72 were paid for said period. Decedent was the sole income beneficiary of the Phillip Henrici Trust (hereinafter referred to as the "Henrici Trust") and was also a 40% beneficiary of the William M. Collins Trust (hereinafter referred to as the "Collins Trust"). The Henrici Trust kept its books and filed its income tax returns for fiscal years beginning February 1 and ending January 31; the Collins Trust kept its books and filed its income tax returns for fiscal years beginning April 1 and ending March 31. Decedent kept her books and filed income tax returns on the cash basis for calendar years.

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 death.

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
  added)

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 her death.

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 ...


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