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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Brief for the Respondents in Opposition
- **Published:** January 1, 1945
- **Citation:** 323 U.S. 802

## Text

“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
¥

7

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

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3
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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA34806415_2414%3A4. Public record. Not legal advice.