Brief for the Respondents in Opposition — Newbury v. United States

“as

INDEX

Opinions below

Jurisdiction — —_.

Question presented _

Statutes and regulations involve 4.

Statement

Argument

Conclusion

CITATIONS

Cases:

Burbach v. Burbach, 217 Ill. 547.

Commissioner v. Netcher, 143 F. 2d 484, certiorari denied,

October 23, 1944- ;

Magruder v. Washington B. & A. Realty Corp., 316 U.S. 69_-

Newbury v. Commissioner, 26 B. T. A. 101

Taft v. Commissioner, 304 U.S. 351

United States v. Dakota- Montana O:l Co., 288 U. 8. 459

Statutes:

Revenue Act of 1934, c. 277, 48 Stat. 680:

Ie : " 2,

Revenue Act of 1936, c. 690, 49 Stat. 1648:

See. 33.... - a nae

Miscellaneous:

FRA Oa. Tse OD siti wns een oe

H. Rep. No. 1882, 70th Cong., Ist Sess. » pp. 11-12 (1939- 1

Cum. Bull, (Part 2) 444, 445) oh

8. Rep. No. 960, 70th Cong., Ist Sess., p. 20 (1939-1 Cum.

Bull. (Part 2) 409, 423).

Scott on Truats, vol. 1, sec. 99.3- : ie

Treasury Regulations 74, Art. 201_.. Saneure wc “

Treasury Regulations 77, Art. 201_..._..._- aha

Treasury Regulations 86, Art. 23 (I)-1___.---

Treasury Regulations 94, Art. 23 (I)—-1__.___-

Treasury Regulations 101, Art. 23 (I)-1____-_-

Treasury Regulations 103, Sec. 19.23 (1)-1___-

Treasury Regulations 111, Sec. 29.23 (1)-1__-

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626079--45

Inthe Supreme Court of the Anited States

OcrToBerR TERM, 1944

No. 725

MoLLIE NeTcHER NEWBURY, PETITIONER

Uv.

THE UNtIrep STaTes

ON PETITION FOR A WRIT OF CERTIORARI TO THE COURT

OF CLAIMS

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the Court of Claims (R. 33-

39) is reported in 57 F. Supp. 168. The coneur-

ring opinion of Judge Madden (R. 40-42), in

which Judge Whitaker joined, is also reported

therein.

JURISDICTION

The judgment of the Court of Claims was

entered on October 2, 1944 (R. 43). The petition

for a writ of certiorari was filed on December 2,

1944 (R. 43). The jurisdiction of this Court is

invoked under Section 3 (b) of the Act of Febru-

ary 13, 1925, as amended by the Act of May 22,

1939,

(1)

A as SER RS

2

QUESTION PRESENTED

Whether the income beneficiary of a certain

trust who also had a remainder interest subject

to invasion for the benefit of other beneficiaries

is entitled, under Section 23 (1) of the Revenue

Acts of 1934 and 1936, to an allowance for depre-

ciation on trust assets not absorbed by the trust

income, where the trust instrument as construed

by the court below required that the trustee, in

determining the distributable income, should with-

hold an amount sufficient to offset depreciation.

STATUTES AND REGULATIONS INVOLVED

Revenue Act of 1934, ¢. 277, 48 Stat. 680:

Src. 23. DepucTIONS FROM GROSS INCOME.’

In computing net income there shall be

allowed as deductions:

* * * * *

(1) Depreciation—A_ reasonable allow-

ance for the exhaustion, wear and tear of

property used in the trade or business,

including a reasonable allowance for ob-

solescence. In the ease of property held

by one person for life with remainder to

another person, the deduction shall be com-

puted as if the life tenant were the absolute

owner of the property and shall be allowed

to the life tenant. In the case of property

held in trust the allowable deduction shall

be apportioned between the income benefi-

‘Similar provisions are contained in Section 23 (1) of the

Revenue Act of 1936, c. 690, 49 Stat. 1648.

3

ciaries and the trustee in accordance with

the pertinent provisions of the instrument

creating the trust, or, in the absence of

such provisions, on the basis of the trust

income allocable to each.

* * * * *

Treasury Regulations 86, promulgated under

the Revenue Act of 1934:

Art. 23 (1)-1.? Depreciation—A reason-

able allowance for the exhaustion, wear and

tear, and obsolescence of property used in

the trade or business may be deducted from

gross income. For convenience such an al-

lowance will usually be referred to as depre-

ciation, excluding from the term any idea

of a mere reduction in market value not

resulting from exhaustion, wear and tear,

or obsolescence. The proper allowance for

such depreciation of any property used in

the trade or business is that amount which

should be set aside for the taxable year in

accordance with a reasonably consistent -

plan (not necessarily at a uniform rate),

whereby the aggregate of the amounts so

set aside, plus the salvage value, will, at

the end of the useful life of the property in

the business, equal the cost or other basis of

the property determined in accordance with

section 113. Due regard must also be given

to expenditures for current upkeep. In the

case of property held by one person for

* Similar provisions are contained in Article 23 (1)-1 of

Treasury Regulations 94, promulgated under the Revenue

Act of 1936.

4

i (OREN. SS haba AAG

life with remainder to another person, the

deduction for depreciation shall be com-

# puted as if the life tenant were the absolute

owner of the property so that he will be

entitled to the deduction during his life, and

thereafter the deduction, if any, will be

allowed to the remainderman. In the case

of property held in trust, the allowable

deduction is to be apportioned between the

: income beneficiaries and the trustee in ac-

5 cordance with the pertinent provisions of

3 the will, deed, or other instrument creating

¥ the trust, or, in the absence of such provi-

é sions, on the basis of the trust income which

is allocable to the trustee and the beneficiar-

¥ ies, respectively. For example, if the trust

instrument provides that the income of the

trust computed without regard to deprecia-

tion shall be distributed to a named bene-

ficiary, such beneficiary will be entitled to

« the depreciation allowance to the exclusion

of the trustee, while if the instrument pro-

vides that the trustee in determining the

4 distributable income shall first make due

allowance for keeping the trust corpus in-

tact by retaining a reasonable amount of

the current income for that purpose, the

allowable deduction will be granted in full

to the trustee.

STATEMENT

/ The special findings of fact of the Court of

: Claims (R. 26-33) may be summarized as fol-

lows:

-

0

Petitioner is the widow of Charles Netcher

and is also trustee of a trust created under the

will of her husband of which she is one of the

beneficiaries. This suit is brought by her in her

individual capacity. (R. 26.)

By the will of Charles Netcher who died on

June 19, 1904, his wife and four children surviv-

ing (R. 26), his entire estate, aside from a special

bequest to his widow, was left in trust, the

widow being named trustee. One-third of the

net income from the trust estate was to be paid

to her for life, and she was granted the power,

by will or deed, to dispose of the right to such

income from the date of her death until the

termination of the trust. The income from the

remaining two-thirds of the estate was to be di-

vided by the trustee into four equal portions,

each of such portions to be thereafter held in

trust by the trustee as a separate fund for each

of the decedent’s children. (R. 28-29.)

It was further provided by the will that until

each of such children attained the age of twenty-

five years respectively, the trustee should use and

expend so much of each separate trust fund held

for each child as in her opinion was necessary

for the education and support of such child. On

attaining his or her twenty-fifth year each child

was to become entitled thereafter to receive one-

fourth of the entire net income of the above

mentioned two-thirds of the principal trust es-

6

tate. (R. 33-34.) The instrument further pro-

vided that at any time after the children had

reached the age of twenty-five, the trustee might

pay over to any child in her discretion the sum

of $25,000 and after attainment of the age of

thirty years the trustee might pay over to the

child the sum of $100,000, both such payments to

be made out of the separate trust fund provided

for the benefit of the child to whom such pay-

ments are made, or if such separate trust fund

was not sufficient then out of the principal of the

principal trust estate, provided (R. 29)—

it be not necessary to sell any of the real

estate in Block Fifty-eight (58) of the

Original Town of Chicago, in Cook County,

Illinois, for the purpose of making such

payments, it being my wish that said real

estate in said Block Fifty-eight (58) shall

be held together for the benefit of my en-

tire Estate and the beneficiaries thereunder,

subject to the power of sale or other dis-

position hereinafter given to the executor

i or executors, trustee or trustees under this

f Will.

One of the assets included in the estate was real

estate in Chicago, Illinois. Following the de-

cedent’s death the widow, acting as trustee under

the will, borrowed the necessary funds and erected

on this property a 17-story fireproof store and

office building at a cost of $5,714,759.52 which was

thereupon leased to the Boston Store. (R. 27.)

4

a

¥

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For the calendar years 1935, 1936, and 1937 the

sum of charges for ground rent, interest on mort-

gage, taxes, and depreciation exceeded the rents

from the building by considerable amounts. These

deficits were treated as part of expenses of the

so-called principal trust already referred to. The

charges for depreciation for each of the years were

reasonable allowances for losses sustained through

exhaustion, wear, and tear of the building. In

computing the distributable net income of the

trust created by the will, the trustee has continu-

ously deducted from the gross income of the trust

estate an allowance for loss sustained through

exhaustion, wear, and tear of improvements, and

has set up a reserve to cover the loss so sustained.

(R. 27-28.)

The Commissioner of Internal Revenue deter-

mined that depreciation sustained on properties of

the principal trust estate in the taxable years was

deductible only by the trustee in computing net

income of the trust and that any depreciation

thus set up and consequently reported in the net

loss of the estate was not subject to deduction by

the individual beneficiaries from income received

by them from other sources. (R. 32.)

As a result of this action by the Commissioner

of Internal Revenue, deficiencies were determined

and assessed against the petitioner for the years

1935, 1936, and 1937 and were duly paid. Timely

claims for refund were rejected and this suit was

ER eae

S

brought in the Court of Claims within two years

of such rejection. (R. 32-33.) The Court of

Claims sustained the Commissioner and rendered

Judgment against the petitioner (R. 33-42, 43).

ARGUMENT

The question of whether certain of the income

beneficiaries under the trust created by the will of

Charles Netcher were entitled to depreciation de-

ductions for the year 1937 was decided in favor

of the Government by the Circuit Court of Ap-

q peals for the Seventh Cirenit in Commissioner v.

e Netcher, 143 F. 2d 484. That court held that

although the will contained no specifie provisions

as to depreciation, it was clearly the testator’s

intention that the trustee and not the beneficiaries

should take the depreciation deduction. Cer-

Aga

tlorart was denied in that ease on October 23, 1944

(No. 418),

The holding of the Court of Claims that the

petitioner, another beneficiary under the same

trust, Is not entitled to the depreciation deduction,

is in accord with that of the Seventh Cireuit. In

fact, the petition for certiorari in this case raises

substantially the same issues as were raised there

and, for this reason, we do not believe it: neces-

sary to diseuss the various issues raised in the

petition at any great length.

The holding of the court below was based upon

ORT Ae ae OR aE Raa ge ES TS MNS EE

the ground that the provisions of the will rather

—

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Maniacs

+)

clearly “‘expressed the intention and desire of

the decedent that a deduction for depreciation

of the trust property should be taken by the trus-

tee for the Trust Estate in determining the net

income distributable to the beneficiaries’? (CR.

37). Since Section 23 (1) of the Revenue Acts

of 1934 and 1936, supra, pp. 2-3, provides that in

the ease of property held in trust the allowable

deduction for depreciation shall be apportioned

between the income beneficiaries and the trustee

in accordance with the pertinent provisions of

the trust instrument, the beneficiaries are clearly

not entitled to the deduction for depreciation

but. as the court below held, the trustee is the

only one entitled thereto,

Petitioner attempts to distinguish her situation

from that of the beneficiaries in the Vetcher case

upon the ground that she was not merely a life

beneficiary but had a remainder interest as well *

The petitioner and the other beneficiaries for many years

took the view that the trustee was required to set up a de-

preciation reserve, and in an earlier case relating to their

income taxes for the years 1923 to 125 ( Vewbury v. Commis-

sioner, 26 B. T. A. 101), the Board of Tax Appeals so held,

and the Commissioner acquiesced (XI-2 Cum. Bull. 7

(1952)).

‘The provision in the will that after the termination of

the trust one-third of the principal trust estate and accumu.

lations was to be conveyed to the widow (petitioner herein),

if living, or. if dead, to others designated by her, was not

included by the court below in its special findings of fact

(R. 26-33). However, the entire will was in evidence in the

court below (Exhibit 1, attached to the stipulation of facts

Pacis an Sa oss be

2 Rha PAE HERS BR Ee

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3

4

2

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and that, as the holder of an equitable fee inter-

est she had the right to depreciation deductions

(Pet. 5, Br. 12-14). In the first place, however,

petitioner’s remainder interest in the corpus was

subject to invasion if necessary to make the $25,-

000 and $100,000 payments to the children (R.

29). Under the applicable Tlinois law, more-

over, petitioner certainly does not have an equi-

table or a legal fee, as she may be suggesting (Br.

12-14), for even aside from this possibility of

invasion, the trust here established was not a “dry

or passive trust’’, and there could be no merger

of her life and remainder interests. Burbach vy.

Burbach, 217 Ul. 547; see 1 Scott on Trusts, sec.

99.3.

Petitioner relies upon the provision, in Section

23 (1), that in the case of property held by one

person for life with a remainder to another

person, the deduction shall be computed as if the

life tenant were the absolute owner of the prop-

erty and shall be allowed to the life tenant. She

urges that since the life tenant may take a de-

preciation deduction, she, having more than a life

interest, certainly may. But petitioner ignores,

as she did in the court below, the provisions in

Section 23 (1) dealing specifically with property

held in trust. These provisions first appeared in

filed by the parties), and the pertinent portion may also be

found in the petition in the court below (R. 6).

1]

the Revenue Act of 1928 and have been in all

sueceeding Revenue Acts. As Judge Madden said,

in the court below (R. 42):

It was not possible, in the statutory scheme,

to treat the trust situation exactly like the

legal life tenant and remainder situation,

since in the latter case there is frequently

no ascertainable person to represent the

permanent interest in the property, and

even if there is such a person, he has no

income from it. It probably seemed fair

to Congress, therefore, to give the life

tenant the depreciation allowance even

though the loss is, largely, not his loss,

rather than to deny any depreciation allow-

ance to anyone.

The Committee Reports relating to the 1928

Act * clearly show that there was to be a distinc-

tion between the situation of an ordinary life

tenant where the deduction was to be computed

as if the life tenant were the. absolute owner of

the property and accordingly allowed to him and

that of a beneficiary under a trust where the de-

duction was to be allocated between the trustee

and the beneficiaries. Those reports contain the

following example where the property is held in

trust:

°S. Rep. No. 960, 70th Cong., Ist Sess., p. 20 (1939-1 Cum.

Bull. (Part 2) 409, 423): H. Rep. No. 1882, 70th Cong., Ist

Sess., pp. 11-12 (1939-1 Cum. Bull. (Part 2) 444, 445).

CURE ee

12

* * * if the trust instrument provides

that the income of the trust computed with-

out regard to depreciation shall be dis-

tributed to a named beneficiary, such bene-

ficiary will be entitled to the depreciation

allowance to the exclusion of the trustee,

while if the instrument provides that the

trustee in determining the distributable in-

come shall first make due allowance for

keeping the trust corpus intact by retaining

a reasonable amount of the current income

for that purpose, the allowable deduction

will be granted in full to the trustee.

This example was incorporated in the regulations,

and it has remained unaltered therein for many

years. Article 201, Treasury Regulations 74 and

77; Article 23 (1)-1, Treasury Regulations 86, 94

and 101; Section 19.23 (1)-1, Treasury Regula-

tions 103; Section 29.23 (1)-1, Treasury Regula-

tions 111. It is entitled, therefore, to substantial

weight in construing the statute. Taft v. Commis-

stoner, 304 U.S. 351; United States v. Dakota-

Montana Oil Co., 288 U.S. 459; Magruder v.

Washington, B. & A Realty Corp., 316 U.S. 69.

The holding of the court below is in accord with

the statute and these regulations, and the peti-

tloner is not entitled to the claimed deduction for

depreciation,

OS Pine Rhee Se

13

CONCLUSION

The. decision of the court below is correct.

There is no conflict and the petition should be

denied,

Respectfully submitted.

CHARLES FAHY,

Solicitor General.

Samvuent O, Ciark, Jr.,

Assistant Attorney General.

SEWALL Key,

Ropert N. ANDERSON,

EvizaBetH B. Davis,

Special Assistants to the Attorney General.

JANUARY, 1945.

US GOVCLRNMENT PRINTING OFFICE 1969