Petition for A Writ of Certiorari — Jacobs v. Hoey

IN THE

Supreme Court of the United States

October Term, 1943

No. 425

WILLIAM K. JACOBS, Jr.,

Petitioner,

vs.

JANE M. HOEY, as executrix of the Estate of

James J. Hoey, Deceased,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT AND BRIEF IN

SUPPORT THEREOF

Dav L. Sprune,

Attorney for Petitioner.

Arnoup M. Grant,

Herman L, Weisman,

Wourr R. Cuarney,

of Counsel.

————————————————

PAGE

f 48-0 5h Ke aks Uhre MES RDA ES a dake eas 1

Summary Statement of Matter Involved......... 2

oe aah vege 3h EEE ET EET OEE One aan 2

A ake sake hs adie ks Guukieeucen cL 3

The Question Involved.............ccccccceccee 3

POPE MRPUINII x 5 600050 bs cwOd sa bebdoccckwac 3

SE ME cs wi ie Vidns bite Seda yecmweccs 3

Specification of Errors to be as cg TET 7

Reasons for Granting the Writ of Certiorari...... 8

PO is Apa Vis NGL ae NeueY Th oma anad cs 12

BREF IN SUPPORT OF PETITION...............0.c0000. 13

WE eR Nbia cies cicenioss sc cede 13

PY hy baevincsee tind s Kok saw oe ea ad ce cee 13

WE Ribs 6 iainas) dis diboc Si ate e eeeae aie oe 13

hog ER EE Bre PR RPE EE el pee 17

hk, FREE EE ET IREY DROP bate CAM a Er ee 19

RNIN 564s ihcroacc ee poet eduh oa ele 22

Cases CrrEep

In re Barker, 230 N. Y. 364, 372; 180 N. E.579.... 15

Barker v. Magruder, 95 F. (2d) 122, 68 App. D. C.

We ch eas ven ce 4d tes dbbuuen kes easkes weet cues 21

In re Bates’ Estate, 167 Misc. 641.............. 10, 14

Beard v. Beard, 140 N. Y. 260, 35 N. E. 488...... 10, 14

Blair v. Commissioner, 300 U. 8. 5, 57 S. Ct. 330,

We i ME MG Akb docked sl Sho De edhe dekh sicd 17

a

i

PAGE

Brown v. Helvering, 291 U. S. 193, 199, 54 S. Ct.

Se vn eete de benineedenidacenes 21

Matter of Bushe, 227 N. Y. 85, 129 N. E. 154...... 15

an re Collins’ Estate, 158 Misc. 798.............. 14

Commissioner v. Cadwalader, 88 F. (2d) 274, 275;

certiorari denied, 301-U. S. 706............ 8, 13, 17

In re Douglas, 60 App. Div. 64.................. 15

Matter of Dunkel, Jr., 10 N. Y. St. R. 213........ 14

In re Furness, 75 F. (2d) 965............... 15

Griffin v. Smith, 101 F. (2d) 348, certiorari denied,

a Esper che dn Awa twee neeneudade dain 20

Estate of Henry Harris, 1 N. Y. St. R. 331........ Bh

Helvering v. Stuart, 317 U. S. 154, 63 S. Ct. 140,

eso pha Gkenchndudknue cubbankons 17

In re Jula’s Estate, 3 N. J. Misc. 976; 130 A. 733..11, 14

Lewis v. Bowers, 19 F. Supp. 745................ 15

Lockhart v. Mittleman, 123 F. (2d) 703........... 15

Mitchell v. Commissioner, 89 F. (2d) 873......... 20

National City Bank v. Helvering, 98 F. (2d) 93... 20

North American Oil Consolidated v. Burnet, 286

U. S. 417, 423, 424, 52 S. Ct. 613, 76 L. Ed.

MUSA tla Whe ho aeaNaewenenicns 7, 8,9, 10, 11,20

Oakeshott v. Smith, 104 App. Div. 384; affd. 185 |

ee & Ff Se reer errr 10, 14

Matter of Rutledge, 162 N. Y. 31,56 N. E.511..... 15

Saunders v. Commissioner, 101 F. (2d) 407....... 20

In re Sharp’s Estate, 140 Misc. 427.............. 15

In re Smith’s Estate, 107 N. J. Eq. 607, 153 A. 647.. 18

Stevens v. Melcher, 152 N. Y. 551, 46 N. E. 965.... 16

Titsworth v. Titsworth, 107 N. J. Eq. 436, 152 A.

GK a 5s canned asevneaens sasaudaeewaneeenen 18

ww

ili

PAGE

U.S. v. S. 8S. White Dental Mfg. Co., 274 U.S. 398,

Oy We RGB, TE Tn BR 29D. on. oon ck cccccncse. 21

Wheelwright v. Rhoades, 28 Hun. 57............ 14

Wyckoff v. O’Neil, 72 N. J. Eq. 880, 67 A. 32...... 18

MISCELLANEOUS

We Mee RAD, BR BO noe ovv cv vaveevevetccc, 18

SratuTEs CITED

Title 26, U.S. C. A.:

IS NG Giron ss re SL 3, 12, 17

ee Ol hier ie ae os acs 3, 17

Surrogate’s Court Act, Section 285...... 3, 10, 13, 14

ce cccae bP PIER AOE Cee nel Lite 16

5 SE a neem 16

Orphans’ Court Act of New Jersey, Section 129,

3 .N. J. Comp. St. 1910, p. 3860, Section 129...... 18

Revised Statutes of Maine, Section 43, Chapter 67,

eee EE ENE DA ne et ad 18

PAD 04h ore kbd cout abot wig ce. ieee. 23

|

|

PRM PEACE AR TIE

IN THE

Supreme Court of the United States

Ocroser Term, 1943

No.

a.

1

Wim K. Jacoss, Jr.,

Petitioner,

vs.

Janz M. Hoey, as executrix of the Estate of James J. Hoey,

Deceased,

Respondent.

a.

¥

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT AND BRIEF IN

SUPPORT THEREOF

Petition

To the Honorable, the Chief J ustice, and the Associate

Justices of the Supreme Court of the United States:

The petitioner, William K. Jacobs, J r., by his attorney,

prays that a writ of certiorari issue to review the judgment

of the United States Circuit Court of Appeals for the

Second Circuit entered in the above cause on J uly 16, 1943,

afirming the decision of the United States District Court

for the Southern District of New York.

Summary Statement of Matter Involved

This action was brought in the United States District

Court for the Southern District of New York for the re-

fund of $17,023.93 representing overpayment of income

taxes for the years 1936 and 1937. Plaintiff, one of the five

executors of the estate of Aaron EK. Norman, deceased, re-

quested and received from said estate on account of execu-

tor’s commissions, advances of $20,000 in 1936 and $19,500

in 1937. Plaintiff included said sums in his income tax re-

turns for said years and now contends that as a result

thereof he overpaid taxes to the extent of $9,835.74 in 1936

and $7,188.19 in 1937. The Surrogate of New York County,

having jurisdiction of the estate, did not approve the execu-

tors’ accounts or authorize payment of their commissions

until 1938.

Trial was had without a jury on November 12 and 13,

1942 before Judge Vincent L. Leibell. Judgment for de-

fendant was entered on February 4, 1943 (R. 240). An

appeal to the Circuit Court of Appeals for the Second Cir-

cuit was taken on February 4, 1943 (R. 242). The cause

was argued on May 21, 1943 and on June 30, 1943, a deci-

sion was handed down whereby the judgment of the Dis-

trict Court was affirmed (R. 246). Judgment was entered

on July 16, 1943 (R. 251).

Opinions Below

The opinion of the United States District Court for the

Southern District of New York (R. 219) is unreported.

The opinion of the Circuit Court of Appeals for the Second

Circuit (R. 246) written by Judge Augustus N. Hand is re-

ported at 136 F. (2d) 954.

Jurisdiction

The judgment of the Circuit Court of Appeals was

entered on July 16, 1943 (R. 251). The jurisdiction of this

Court is invoked under Section 240(a) of the Judicial Code

as amended (28 U.S. C. A. §347[a]).

The Question Involved

Whether for Federal Income Tax purposes, payments

advanced to an executor on account of commissions are tax-

able in the year of receipt, or in the year in which the com-

missions are finally approved by the Surrogate having jur-

isdiction over the estate where under pertinent local law

no commissions can legally be taken until such approval.

Statutes Involved

The applicable statutes, Sections 22 and 42 of Title 26,

U.S. C. A. and Section 285 of the Surrogate’s Court Act

of New York insofar as relevant are set forth in the ap-

pendix.

Statement of Facts

The plaiatiff alone testified, and offered numerous cor-

roborating documents as exhibits. Defendant called no

witnesses.

The relevant testimony and exhibits disclose that the

will and codicils of Aaron E. Norman, deceased (Ex. N,*

* When an exhibit is referred to, the first reference indi-

cates the page at which it was offered in evidence, the

second reference indicates the page at which the exhibit

appears.

4

R. 14, 114-130) were duly admitted to probate in the Sur-

rogate’s Court of New York County on August 3, 1936

(Ex. O, R. 14, 131). The will divided a gross estate in

excess of $3,000,000 (Ex. R, R. 32, 140; Finding of Fact 3,

R. 229) among a number of beneficiaries. There were sev-

eral small bequests, a large bequest of $1,000,000 (Ex. R,

R. 32, 147-151) and the creation of equal life interests in

the residuary for the benefit of decedent’s son and

daughter. The remaindermen of these life interests were

the daughter’s three infant children and the son’s two

infant children (Ex. R, R. 32, 149-151; Finding of Fact 5,

R. 230).

The plaintiff and four others named as executors, quali-

fied on August 3, 1936 and entered upon their duties (R. 14;

Finding of Fact 4, R. 229). The estate did not advertise

for the presentation of creditors’ claims (R. 14). On

December 17, 1936, the executors executed an agreement

in writing whereby three of them waived their rights to

commissions, and the plaintiff and one other were to re-

ceive as commission a fixed percentage. This agreement

by its terms was executed subject to approval of the Surro-

gate (Ex. P, R. 15, 132; Finding of Fact 6, R. 230). How-

ever, same was not submitted to the Surrogate for approval

until the executors’ account was filed in the Fall of 1938

(Finding of Fact 43, R. 237).

Shortly after the execution of this agreement, plaintiff

requested the other executors for an advance on account

of commissions (R. 16). The attorneys for the estate

advised the executors that such advances, while illegal,

were common (R. 18). Plaintiff thereupon orally agreed

to indemnify and hold the other executors harmless from

any liability that might arise by virtue of such an advance

5

(R. 18-19; Finding of Fact 7, R. 231). On December 23,

1936, plaintiff received from the estate an advance on ac-

count of executors’ commissions in the sum of $20,000

(R. 19; Ex. B, R. 19, 109).

In December of 1937, plaintiff again requested an ad-

vance and again made an oral agreement of indemnifica-

tion, whereupon he received a further net advance of

$19,500 (R. 24, 26).

None of the parties interested in the estate except the

other executors had been apprised of these advances. At |

the time of receiving these payments, the administration

of the estate was in its early stages: The specific bequest

of $1,000,000 had not been paid (R. 21), the trusts had not

yet been set up (R. 21), the estate tax had not been dis-

charged (R. 21, 26-27), the guardians of the infant re-

maindermen had not been appointed (R. 21), and all cred-

itors’ claims had not yet been adjusted (R. 27). The Sur-

rogate had not made the direction of the manner in which

the value of real or personal property was to be deter-

mined; had not been apprised of the executors’ agreement

as to their compensation and had not determined the ques-

tion of apportioning commissions among the executors

(Findings of Fact 14, 31, 32, R. 232, 234, 235).

By advice of counsel embodied in a letter dated March

4, 1937 (Ex. W, R. 22, 177-9), plaintiff included the 1936

advance as part of his gross income and paid a tax thereon

(R. 23; Ex. E, R. 23, 103; Finding of Fact 21, R. 233). On

the same advice he did likewise with respect to the advance

received in 1937 (R. 28; Ex. F, R. 29, 103; Finding of Fact

21, R. 233). Also, on advice of counsel (Ex. W, R. 22, 177-9)

Plaintiff made timely requests for refunds (R. 29; Ex. J,

R. 30, 105; Finding of Fact 29, R. 234; Ex. K, R. 30, 106;

Finding of Fact 30, R. 234). These refund claims were

rejected by the Internal Revenue Department (Kx. J-1,

R. 30, 113; Ex. T, R. 31, 172).

On November 4, 1938, the executors filed an interme-

diate account (Finding of Fact 34, R. 235) and therein for

the first time directed the Surrogate’s attention to the

earlier agreement on commissions (Finding of Fact 43,

R. 237). This account was occasioned by the need for

disposing of a number of minor problems and of obtaining

a determination in respect to a disputed claim of $700,000

against the estate (R. 31, Finding of Fact 35, R. 235)

which the executors had every reason to believe would be

litigated (Finding of Fact 40, R. 236). Immediately prior

to the entry of the decree approving the account, the estate

was relieved of this liability through a settlement, the

financial burden of which was shouldered by others (R. 33;

Finding of Fact 40, R. 236). On December 27, 1938, the

Surrogate’s decree approving the account and awarding

the commissions was entered (Ex. Q, R. 34, 133).

On March 15, 1939, plaintiff filed his income tax return

for the year 1938’(R. 46; Ex. G, R. 46, 104; Finding of

Fact 46, R. 238) and explained therein that the Court had

allowed him commissions of $40,278.57 in the year 1938, but

that inasmuch as he had paid taxes on a substantial part in

the years 1936 and 1937, and his application for refund of

said taxes had been rejected, that he had not included said

commissions in the 1938 return although he believes same

properly includible therein (Ex. G, R. 46, 104). There-

after, plaintiff received a notice for a deficiency for the

year 1938 upon the theory that taxes were payable on all

of the commissions in the year when the final account

thereof was fixed by the Surrogate (Ex. U, R. 48, 173;

Finding of Fact 47, R. 238). Litigation in regard to this

7

deficiency assessment is presently pending before the

United States Board of Tax Appeals (R. 49; Ex. AA,

R. 49, 186; Ex. BB, R. 49, 192; Finding of Fact 48, R. 238).

These are the essential facts showing the circumstances

under which the advances were made in 1936 and 1937, the

need for an accounting in 1938, the judicial approval of the

executors’ commissions in 1938, and the precipitation of

the question here presented as to whether such advances

were part of gross income in the years when they were

received.

Specification of Errors to be Urged

The Circuit Court erred:

1. In holding that the commissions advanced to the peti-

tioner in 1936 and 1937 were income to him in those

years, rather than in 1938 when the Surrogate ap-

proved these commissions.

- In erroneously applying the ‘‘claim of right’’ doc-

trine in the North American Oil case* to payments

made when there was neither the right to demand

nor the duty to make such payments.

- In not looking to the laws of the State of New York

to determine the character of the commissions re-

ceived in advance of Surrogate’s approval.

Reasons for Granting the Writ of Certiorari

1. The decision of the Circuit Court below is in direct

conflict with the decision of the Circuit Court of Appeals

* North American Oil Consolidated v. Burnet, 286 U. S.

417, 423, 424, 52 S. Ct. 613, 76 L. Ed. 1197.

8

for the Third Circuit in Commissioner v. Cadwalader, 88 F.

(2d) 274; certiorari denied 301 U. S. 706. In the Cad-

walader case the Third Circuit expressly held that in the

State of New Jersey, where as in New York, executors are

not entitled to commissions until the executors file their

account and the commissions are allowed by the Orphans’

Court, the executrices were taxable on commissions in the

year when they were allowed by the Orphans’ Court, al-

though such commissions had been advanced to them in a

prior year. The Court below in the instant case takes the

opposite view—holding the advance commissions taxable

in the year of receipt.

2. This case presents an important question on Federal

Tax law of general interest to many taxpayers and to the

Commissioner of Internal Revenue. The question has not

been, but should be, definitely settled by this Court. By

the multitude of cases in numerous states raising the issue

of the propriety of an executor’s taking commissions in

advance of court approval, it is apparent that this practice

is quite popular. It should, therefore, be finally determined

when such commissions are taxable.

3. As a correlative to point ‘‘2’’ this Court should de-

termine whether the Federal Courts are bound by decisions

of the State Court holding such advances illegal under state

legislation.

4. The Circuit Court below erroneously applied the

‘‘elaim of right’’ doctrine set forth in North American OW

Consolidated v. Burnet, 286 U. S. 417, 423, 424, 52 S. Ct.

613, 76 L. Ed. 1197.

9

The doctrine is embodied in the opinion by Mr. Justice

Brandeis which states in part:

“‘If a taxpayer receives earnings under a claim of

right and without restriction as to its disposition

he has received income which he is required to re-

turn, even though it may still be claimed that he is

not entitled to retain the money, and even though

he may still be adjudged liable to restore its equiva-

lent.’’

A review of the facts in the Burnet case indicates ex-

actly what this doctrine means. The Oil Company had

operated certain land and the United States Government

under a claim of title had instituted suit to oust the Com-

pany from possession, A receiver was appointed. He

operated the land and derived substantial profits therefrom

during the year 1916. In 1917, the suit was decided in

favor of the Oil Company, the receiver was discharged

and the profits turned over to the Oil Company. The

Government took an appeal to the Circuit Court of Appeals.

In 1920, that Court affirmed the decree and in 1922 a further

appeal to the Supreme Court was dismissed by stipula-

tion.

The question before the Supreme Court was in what

year were the profits taxable to the Oil Company. The

Supreme Court held that such money was not income in

1916 because ‘‘at no time during that year was there a

right in the company to demand that the receiver pay over

the money’’, that it was not income in 1922, the year in

which the ownership litigation was finally terminated, but

that it ‘‘became income of the company in 1917, when it

first became entitled to them and when it actually re-

ceived them.’’

10

This latter quotation precisely indicates what is meant

when one receives money under a ‘‘claim of right’’. Note

the word ‘‘and’’. A taxpayer cannot be said to have re-

ceived money under a ‘‘claim of right’’ merely because

he has received the money, he must also be legally entitled

to receive the money. It should also be noted that in the

Burnet case the duty to pay the money to the company,

which made the Company entitled to receive it, was es-

tablished by legal adjudication in its favor.

The Supreme Court has given to the words ‘‘claim of

right’’ a definite legal connotation. They cannot be loosely

applied to any circumstances where money is simply re-

quested and received, nor interpreted to mean any claim

short of larcenous. Payment under ‘‘claim of right’’ refers

to a receipt when the recipient had a right to demand pay-

ment and when the paying party was under a duty to pay.

The Circuit Court below misapplied the doctrine to

include receipt of payment when there was no right to de-

mand nor duty to pay.

The New York law is well settled that under Section

285 of the Surrogate Court Act the right of an executor

to commissions depends not only upon the rendition of the

services, but also upon the settlement of the account. Until

both events have occurred, the executor is not legally en-

titled to commissions (Oakeshott v. Smith, 104 App. Div.

284; aff’d 185 N. Y. 583, 78 N. E. 1108; Beard v. Beard, 140

N. Y. 260, 35 N. E. 488; In re Bates’ Estate, 167 Misc. 641).

Hence, by deciding that the petitioner in the instant

case when he took his commissions before the settlement

of the estate accounting took under claim of right, the

Circuit Court extended the doctrine of the Burnet case

to an uncontemplated degree.

11

First, it changed the determination of whether the tax-

payer was entitled to the money when he received it from

a question of law upon receipt to a question of fact to be

resolved in the light of subsequent events. In the instant

case, petitioner was not entitled to the advances in 1936

and 1937 because the legal adjudication namely, the Surro-

gate’s award of commissions was lacking. In point of fact

there existed numerous possibilities that the Surrogate

might not award the commissions already advanced, be it

for misfeasance, malfeasance, neglect the death of the

executor, the non-approval by the Surrogate of the agree-

ment as to the appropriation of fees, or for a host of other

reasons (R. 21, 26, 27). It was only in 1938 upon the hand-

ing down of the decree by the Surrogate was it first deter-

mined that petitioner was entitled to the commissions.

Until then the advances were mere loans. (In re Jula’s

Estate, 3 N. J. Misc. 976; 130 A. 733, 735.)

Second, the Court below added degrees of legality or

rather of illegality to the doctrine, additions never intended

by the Supreme Court. The Burnet case succinctly stated

that the money became income when the Company ‘‘first

became entitled to them and when it actually received

them.’’ Therefore, a taxpayer in order to take under a

claim of right must have been entitled to receive the money.

The word ‘‘entitled’’ means what it says—the legal right

to receive. The Circuit Court below mistakenly held the

receipts in question as payments under a ‘claim of right”’

because no fraud was involved—though it was definitely

illegal—and because by hind sight it would appear that no

serious doubt existed that the Surrogate would ultimately

decree payment of commission exceeding the amounts im-

properly advanced.

|

12

The controlling factor herein is that plaintiff did not

have the right to demand and the estate did not have the

duty to pay advances of commissions in 1936 and 1937,

It is, therefore, contended that the moneys received by

the plaintiff were not so received under a claim of right;

they were not compensation for personal serv.zes within

the meaning of Section 22 of the Revenue Act and were,

therefore, not taxable income.

It is respectfully submitted that the points at issue

should be decided by this Honorable Court.

Wuererore, it is prayed that this petition for a writ

of certiorari be granted.

Respectfully submitted,

Davw L. Sprune,

Attorney for Petitioner,

295 Madison Avenue,

New York, N. Y.

Arnotp M. Grant

Herman L. WEISMAN

Wo re R. Coarney

of Counsel

RIAN

ae

Swe ba as al OD