Opposition Brief — Emery v. Commissioner

"9

|

Opinions below

Jurisdiction

Question presented

Statutes involved

Statement

Argument

Conclusion

Appendix

SOnnN NNN

—

CITATIONS

Cases:

Burnet v. Whitehouse, 283 U. 8. 148

Commissioner v. Giannini, 129 F. 2d 638

Corliss v. Bowers, 281 U. 8. 376

Frank v. Commissioner, 145 F. 2d 413

Harrison v. Schaffner, 312 U. 8. 579

Helvering v. Clifford, 309 U. 8S. 331

Helvering v. Grinnell, 294 U. S. 153

Helvering v. Horst, 311 U. 8. 112

Helvering v. Pardee, 290 U. 8. 365

Jergens v. Commissioner, 136 F. 2d 497, certiorari denied,

320 U.S. 784

Mallinckrodt v. Nunan, 146 F. 2d 1, certiorari denied, 324

U. 8. 871, rehearing denied, 325 U. S. 892

Plimpton v. Commissioner, 135 F. 2d .482

Richardson v. Commissioner, 121 F. 2d 1, certiorari denied,

314 U.S. 684, rehearing denied, 314 U. 8. 714________-

Richardson v. Commissioner, 151 F. 2d 102, certiorari

denied, 326 U. S.

Russell v. Commissioner, 45 B. T. A. 397

Statutes:

Internal Revenue Code:

Sec. 22 (26 U. S. C. 22)

Sec. 23 (26 U.S. C. 23)

Sec. 162 (26 U. S. C. 162)

Sec. 167 (c) (Revenue Act of 1943, sec. 134, 58 Stat.

51, 26 U. S. C. Supp. V, 167 (c))

718788—46——-1 (1)

os

ae

one NON OO

—

Inthe Supreme Gourt of the Bnited States

OctToBER TERM, 1946

No. 555

Exstre C. EMERY, PETITIONER

v.

CoMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE FIRST

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the Tax Court (R. 28-40) is

reported in 5 T. C. 1006. The opinion of the

circuit court of appeals (R. 119-124) is reported

ported in 156 F. 2d 728.

JURISDICTION

The judgment of the circuit court of appeals

was entered on July 22, 1946 (R. 124). A petition

for rehearing, filed on August 5, 1946, was denied

on August 26, 1946 (R. 124). The petition for a

writ of certiorari was filed on September 30, 1946.

The jurisdiction of this Court is invoked under

(1)

2

Section 240 (a) of the Judicial Code, as amended

by the Act of February 13, 1925.

QUESTION PRESENTED

Whether the entire income of certain trusts

created by her husband in 1937 is includible in the

gross income of the taxpayer for the years 1939,

1940 and 1941, under Section 22 (a) of the In-

ternal Revenue Code, where the taxpayer pos-

sessed the power to alter, amend or éancel the

trusts at any time and thereby to receive the

whole or any part of the principal of the trusts

and undistributed income, free of all trusts.

STATUTES INVOLVED

The statutes involved are set forth in the Ap-

pendix, infra, pp. 13-15.

STATEMENT

The facts as stipulated (R. 53-115) and as

found by the Tax Court (R. 30-36) may be sum-

marized as follows:

Taxpayer is the wife of Allan C. Emery, and

resides with her husband in Weymouth, Massa-

chusetts. Her individual income tax returns for

the calendar years 1939, 1940 and 1941 were filed

with the Collector for the District of Massa-

chusetts. (R. 30.)

On August 20, 1937, Allan C. Emery created

five trusts, with the Boston Safe Deposit and

Trust Company as the trustee. He retained no

reversionary interest in the trusts and had no

3

power to alter, amend, or revoke. (R. 30-31,

55-61.)

Under each of the trusts, the taxpayer was to

receive during her lifetime $300 a month, payable

first out of income and thereafter out of principal,

if necessary. The balance of the net income was

payable to such religious, charitable or educational

institutions or associations as the settlor and the

taxpayer might designate.

Paragraph five of the trust instruments pro-

vided (R. 32, 58) :

5. Should the net income from the prin-

cipal of the trust fund prove insufficient

at any time to meet and discharge the an-

nuity obligation in Paragraph 1 hereof im-

posed, or if for any reason to be expressed

at any time by the said Elsie Conant

Emery, it should be her desire or wish that

the trust in this indenture created be termi-

nated, she is hereby vested with full power

and authority to cancel or revoke this trust

a at any time in whole or in part by a writ-

ing to that effect addressed to the Trustee,

and she is further vested with the power

to amend or alter this trust in such manner

and at such time or times as she may see

- fit. In the event of cancellation or revoca-

tion by the said Elsie Conant Emery, it

shall be the duty of the Trustee forthwith

to pay unto her the whole of the principal

of the trust fund, or such part or amount

thereof, as she may designate, together with

any accrued and undistributed income, less

4

the charges there against, frée and dis-

charged of all trusts.

In the event of the decease of the taxpayer with-

out having exercised the full power of revocation

or cancellation, given to her in paragraph five of

the trust instruments, provision was made for

further disposition of the remaining trust funds

(R. 31-33).

Amendments to each of the trusts were made

by the taxpayer in 1937, 1939, 1942, and 1944

(R. 31, 34, 62-75). By the amendment in 1944,

the taxpayer released all power which she had

to amend, alter, or revoke the trusts (R. 34, 75).

The total income of the five trusts for 1939 was

$28,943.62, before any deduction for any distribu-

tion to beneficiaries. Of that amount, $10,943.62

was reported by the fiduciary as set aside for

religious, charitable, and educational purposes

and $18,000 was reported as taxable to the fidu-

ciary. (R. 34.)

Taxpayer did not report in her return for the

year 1939 any income as having been received

from any of the five trusts. The Commissioner

increased the income reported by adding thereto

the above-mentioned amount of $28,943.62, repre-

senting the total income of the five trusts for

1939, and decreased the income thus determined

by allowing an additional deduction for contribu-

tions of $4,341.55, applying the 15 percent limita-

tion with respect to such contributions, (R. 34.)

5

The taxable income of the fiye trusts for 1940

was $25,837.52 before any deduction for any

distribution to beneficiaries. The five fiduciary

returns show a total of $7,837.52 as the amount

distributable to beneficiaries, and a total of

$18,000 as the net income (taxable to fiduciary).

The individual income tax return filed by tax-

payer for 1940 reported $7,837.53," as received

by her from the five trusts but the return did

not include any portion (except apparently one

cent) of the $18,000. The Commissioner increased

the income reported by adding thereto the

amount of $17,999.99, representing the difference

between the above-mentioned amounts of $25,-

837.52 and $7,837.53. The Commissioner also al-

lowed taxpayer an additional deduction for con-

tributions in 1940 of $2,457.06. (R. 35.)

For the year 1940, the trustee of the five trusts

paid taxpayer a total of $18,000 from the five

trusts and made contributions to different or-

ganizations from the five trusts in the total

amount of $1,075. The balance of the net income

of the five trusts for the year 1940 was accumu-

lated. (R. 35.)

The total income of the five trusts for 1941

was $44,949.46 before any deduction for any dis-

1 This amount and the $26,177.01, similarly described for

1941 (see infra, p. 6), was, for some reason not explained in

the record, thus reported, although taxpayer did not, in fact,

receive it (R. 50). She makes no claim here with reference

to these amounts. See Pet. 5-6.

oe

6

tribution to beneficiaries. The five fiduciary re-

turns show a total of $26,177.01, as the amount

distributable to beneficiaries, and a total of $18,-

772.45 as the net income (taxable to fiduciary).

The individual income tax return filed by tax-

payer for 1941 reported $26,177.01 as received

by her from the five trusts but did not include

any portion of the $18,772.45. The Commissioner

increased the income reported by adding thereto

the amount of $18,772.45,* representing the differ-

ence between the above-mentioned amounts of

$44,949.46 and $26,177.01. The Commissioner also |

allowed taxpayer an additional deduction for con-

tributions in 1941 of $224.38. (R. 35-36.)

For the year 1941, the trustee of the five trusts

paid taxpayer a total of $18,000 from the five

trusts and made contributions to different or-

ganizations from the five trusts in the total

amount of $2,455. The balance of the net income

of the five trusts for the year 1941 was accumu-

lated. (R. 36.) £

Taxpayer’s individual income tax returns for

the years 1939, 1940 and 1941, were prepared on

the basis of cash receipts and disbursements (R.

36).

Except for minor adjustments which are not

involved on this appeal, the deficiencies in income

tax asserted against the taxpayer are due to the

Commissioner’s determination that the net in-

* This amount of $18,772.45 includes $2.45 of a net long-

term capital loss adjustment of $3.73 which is not involved

on this appeal.

—

come as disclosed by the taxpayer’s returns for

the years 1939, 1940 and 1941 should be increased

on account of “income from fiduciaries’’ of

$28,943.62, $17,999.99 and $18,770, respectively.

The Commissioner’s determination that the entire

income of the five trusts created by taxpayer’s

husband was taxable to the taxpayer was based

upon the ground that the taxpayer had the power

to amend or-alter the trusts in such manner and

at such time or times as she might see fit, and

7

the power to cancel or revoke the trusts at any

| time or times in whole or in part and thereby

to receive in her own right the principal of the

trusts. (R. 12, 14, 29.) The Tax Court and the

court below agreed with the Commissioner that

the powers thus vested in the taxpayer required

f that the income of the trusts should be taxed to

her under Section 22 (a) of the Internal Revenue

Code. (R. 38-40, 119-124.)

ARGUMENT

1. The decision of the court below is in accord

with a great wealth of authority in this Court,

the circuit courts of appeals and the Tax Court.

See Helvering v. Clifford, 309 U. S. 331; Helver-

iny v. Horst, 311 U. S. 112; Harrison v. Schaffner,

312 U. S. 579; Corliss v. Bowers, 281 U. S. 376;

Richardson v. Commissioner, 121 F. 2d 1 (C. C.

A. 2d), certiorari denied, 314 U. S. 684, rehearing

denied, 314 U. S. 714; Jergens v. Commissioner,

136 F. 24 497 (C. C. A. 5th), certiorari denied,

718788—46——2

8

320 U. S. 784; Mallinckrodt v. Nunan, 146 F. 2d

1 (C. C. A. 8th), certiorari denied, 324 U. S. 871,

rehearing denied, 325 U. S. 892; Frank v. Com-

missioner, 145 F. 2d 413 (C. C. A. 3d); Russell v.

Commissioner, 45 B. T. A. 397. See also Rich-

ardson Vv. Commissioner, 151 F. 2d 102 (C. ©. A.

2d), certiorari denied, 326 U. S. 796.

The contentions made by the taxpayer in the

petition for certiorari bear a marked similarity

to the contentions advanced in the petitions for

certiorari in the Jergens, Mallinckrodt and Rich-

ardson cases, supra. Since the denial of certio-

rari in those cases, nothing has occurred which

would call for a review by this Court in the

present case of the now well-settled principles

which control here.

In the Jergens petition, as in the present peti-

tion (Pet. 7, 9-12), conflict was alleged with the

decision of the Ninth Cireuit Court of Appeals in

Commissioner Vv. Giannini, 129 F. 2d 638. In the

Giannini case a corporation had passed a resolu-

tion to pay the taxpayer there involved certain

compensation for his services to the corporation,

but the Board of Tax Appeals found that the

taxpayer did not receive the money and did not

direct its disposition when the corporation subse-

quently used the money to establish a Foundation

of Agricultural Economies at the University of

California. The circuit court of appeals rejected

the Commissioner’s contention that there was in-

sufficient evidence to support the Board’s finding

9

that the taxpayer had not directed the disposition

of the money, stating (p. 641) that all the tax-

payer did was to refuse unqualifiedly to accept

any further compensation with the suggestion

that the money be used for some worth while pur-

pose. Indeed, it is doubtful that the court even

passed upon the question whether a waiver of

compensation, with nothing more, is such an exer-

cise of dominion over the moneys to be received

as to render them taxable, for, as pointed out in

the footnote at page 641 of the opinion, the year

in which the taxpayer renounced any further com-

pensation was not before the court. But if it be

assumed that the court did hold that a renuncia-

tion of a right to receive compensation for per-

sonal services would not result in the realization

of income, that. question is far removed from the

question here presented.

In the present case, the income was derived

from property. This property was subject to the

complete and unfettered control of the taxpayer

to do with as she might please. The only act re-

quired of her to secure the entire principal and

income of the trusts in her own right, discharged

of all trusts, was to address a writing to the,

trustee cancelling the trusts. Or, by alteration or

amendment of the trusts, she could have directed

the principal and income to be disposed of-in any

manner that might suit her fancy. The taxpayer

accepted these incidents of ownership of the prin-

cipal and income of the trusts and continued to

10

enjoy them during all of the taxable years, and

it was not until the year 1944 that she divested

herself of these rights. As stated by the court

below (R. 122), a person could have a more

unrestricted control of property only by having

outright title and the act required to give the tax-

payer outright title was so negligible that her

position cannot be treated any differently from

that of an outright owner.

The earlier decision of the court below in the

ease of Plimpton v. Commissioner, 135 F. 2d 482,

which the taxpayer alleges (Pet. 7, 13) to be in

conflict with that court’s present decision is suff-

ciently distinguished in the court’s opinion (R.

124).

2. The eases of Burnet v. Whitehouse, 283 U.S.

148, and Helvering v. Pardee, 290 U.S. 365, relied :

upon by the taxpayer (Pet. 14-15), are not incon-

sistent with the decision below. Those cases in-

volved annuities which were a charge against

principal as well as income, but the annuitants

had no such powers as were possessed by the tax-

payer in this case. The holding there was that

the annuities were gifts and that the periodical

payments were not a distribution of income but

a discharge of the gifts and, as such, not taxable

as income. Here the holding is that the taxpayer

acquired substantial ownership of the entire prin-

cipal of the trusts. Such principal constituted

the gift to the taxpayer. While Section 22 (b)

FF

;

(3) of the Internal Revenue Code (Appendix,

infra, p. 13) provides that the value of property

acquired by gift shall not be included in gross

income, it further provides that the income from

such property shall be included in gross income.

The entire income from the trusts is taxed to the

taxpayer, not because of her actual receipt of a

portion of it, namely the $300 monthly payment

from each of the trusts, but because of her sub-

stantial ownership of the entire principal of the

] trusts, which was the source of the income, and

| because of the complete control possessed by her

over all of the income. The circumstance that

she was to be paid a portion of the income under

the trusts as they were originally drawn does not

derogate from her complete control of the whole.

The case of Helvering v. Grinnell, 294 U. S.

153, cited by the taxpayer (Pet. 14-15), involved

an estate tax statute, which, in its then form,

| required that property ‘‘pass’’ under the exercise

( of a general power of appointment to be included

in the decedent’s estate. That case is irrelevant

to the question here. And Section 167 (c) of the

Internal Revenue Code, referred to by the tax-

\ payer (Pet. 18-19), was added by the Revenue

Act of 1948, See. 134, 58 Stat. 51, was not made

generally retroactive, and applies, moreover, only

to amounts distributable in satisfaction of a legal

obligation to support or maintain.

12

CONCLUSION

The decision below is correct; there is no con-

flict of decisions; and there is no occasion for

further review.

Respectfully submitted.

J. Howarp McGratn,

Solicitor General.

SEWALL Key,

Acting Assistant Attorney General.

J. Lovis Monarcu,

Lee A. JACKSON,

Special Assistants to the Attorney General.

OctToBER 1946.

APPENDIX

Internal Revenue Code:

Sec. 22. Gross INCOME.

(a) General Definition—‘Gross _ in-

come’’ includes gains, profits, and income

derived from salaries, wages, or compen-

sation for personal service, of whatever

kind and in whatever form paid, or from

professions, vocations, trades, businesses,

commerce, or sales, or dealings in property,

whether real or personal, growing out of

the ownership or use of or interest in such

property; also from interest, rent, divi-

dends, securities, or the transaction of any

business carried on for gain or profit, or

gains or profits and income derived from

any source whatever. * * *

(b) Exclusions from Gross Income.—

The following items shall not be included

in gross income and shall be exempt from

taxation under this chapter:

*

* * * *

(3) Gifts, bequests, and devises.—The

value of property acquired by gift, bequest,

devise, or inheritance (but the income from

such property shall be included in gross in-

come) ;

* * * * *

(26 U.S. C. 22.)

Sec. 23. DepuCTIONS FROM GROSS INCOME.

In computing net income there shall be

allowed as deductions:

* * * * *

(0) Charitable and Other Contribu-

tions—In the case of an individual, con-

(13)

14

tributions or gifts payment of which is

made within the taxable year to or for the

use of:

* * * * *

(2) a domestic corporation, or domestic

trust, or domestic community chest, fund,

or foundation, organized and operated ex-

clusively for religious, charitable, scientific,

literary, or educational purposes, or for the

prevention of cruelty to children or ani-

mals, no part of the net earnings of which

inures to the benefit of any private share-

holder or individual, and no substantial

part of the activities of which is carrying

on propaganda, or otherwise attempting,

to influence legislation;

* > * * ” *

to an amount which in all the above cases

combined does not exceed 15 per centum

of the taxpayer’s net income as computed

without the benefit of this subsection.

Such contributions or gifts shall be allow-

able as deductions only if verified under

rules and regulations prescribed by the

Commissioner, with the approval of the

Secretary.

* * * * *

(26 U.S. C. 23.)

Sec. 162. NET INCOME.

The net income of the estate or trust

shall be computed in the same manner and

on the same basis as in the ease of an in-

dividual, except that—

(a) There shall be allowed as a deduction

(in lieu of the deduction for charitable,

ete., contributions authorized by section

23 (0)) any part of the gross income, with-

out limitation, which pursuant to the terms

of the will or deed creating the trust, is

during the taxable year paid or perma-

ee

nently set aside for the purposes and in the

manner specified in section 23 (0), or is to

be used exclusively for religious, charitable,

scientific, literary, or educational pu q

or for the prevention of cruelty to children

or animals, or for the establishment, acqui-

sition, maintenance or operation of a public

cemetery not operated for profit;

(b) There shall be allowed as an addi-

tional deduction in computing the net in-

come of the estate or trust the amount of

the income of the estate or trust for its tax-

able year which is to be distributed cur-

rently by the fiduciary to the beneficiaries,

and the amount of the income collected by

a guardian of an infant which is to be held

or distributed as the court may direct, but

the amount so allowed as a deduction shall

be included in computing the net income of

the beneficiaries whether distributed to

them or not. Any amount allowed as a

deduction under this paragraph shall not

| be allowed as a deduction under subsection

(c) of this section in the same or any suc-

ceeding taxable year;

* a * * *

15

(26.U. S. C. 162.)

U.S. GOVERNMENT PRINTING OFFICE: 1946