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INCOME OF TRUST CREATED BY BEQUEST TAXABLE AS INCOME TO RECIPIENT.

APR. 27, 1925

Irwin, Roscoe v. E. Palmer Gavit

DATED APR. 27, 1925
DOCUMENT ATTRIBUTES
  • Case Name
    IRWIN, FORMER COLLECTOR OF INTERNAL REVENUE v. GAVIT
  • Court
    United States Supreme Court
  • Docket
    No. 325
  • Judge
    Taft, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler,
    Sanford, Stone
  • Cross-Reference
    Irwin v. Gavit, 268 U.S. 161 (1925)
  • Parallel Citation
    268 U.S. 161
    45 S. Ct. 475
    69 L. Ed. 897
    1 U.S. Tax Cas. (CCH) P132
    5 A.F.T.R. (P-H) 5380
    1925 U.S. LEXIS 557
    1925-1 C.B. 123
    1925 P.H. P8032
  • Code Sections
  • Index Terms
    gross income
    gifts and inheritances
  • Jurisdictions
  • Language
    English
  • Tax Analysts Electronic Citation
    1994 TNT 241-50
    1925 LEX 90-390

Irwin, Roscoe v. E. Palmer Gavit

                SUPREME COURT OF THE UNITED STATES

 

 

                        Argued: April 15, 1925

 

 

                       Decided: April 27, 1925

 

 

     CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND

 

CIRCUIT.

 

 

     CERTIORARI to a judgment of the Circuit Court of Appeals

 

affirming a judgment for the plaintiff in an action to recover taxes

 

and penalties exacted under an income tax law. See 275 Fed. 643.

 

 

     295 Fed. 84, reversed.

 

 

     1. A will provided that the income from a fund in trust should be

 

applied to the education and support of the testator's granddaughter

 

so far as the trustees deemed proper and that the balance of it should

 

be divided into two equal parts one of which should be paid to the

 

plaintiff in equal, quarter-yearly instalments during his life. On the

 

granddaughter's reaching the age of twenty-one or dying, the fund was

 

to go over, so that, considering her age, the plaintiff's interest

 

could not exceed fifteen years. Held, that the sums paid the

 

plaintiff were taxable income within the meaning of the Constitution,

 

and of the Income Tax Act of October 3, 1913, which taxed "the entire

 

net income arising or accruing * * * to every citizen of the United

 

States" and defined net income as "gains or profits and income derived

 

from any source whatever, including the income from but not the value

 

of property acquired by gift, bequest, devise or descent." P. 166.

 

 

     2. The provision of the above act exempting bequests assumes the

 

gift of a corpus and contrasts it with the income arising from it, but

 

was not intended to exempt income, properly so called, simply because

 

of a severance between it and the principal fund. P. 167.

 

 

     3. The rule that tax laws shall be construed favorably for the

 

taxpayers is not a reason for creating or exaggerating doubts of their

 

meaning. P. 168.

 

 

     The Solicitor General, with whom Mr. Chester A. Gwinn, was on the

 

brief, for petitioner.

 

 

     The payments were income, taxable at normal and surtax rates

 

under Section II of the Income Tax Act of 1913. The decision of this

 

Court in the case of Maguire v. Trefry, 253 U.S. 12, directly refutes

 

the contention that earnings of capital, in order to be income to the

 

recipient within the meaning of the Income Tax Act of 1913 and the

 

Sixteenth Amendment, must be a gain derived from a capital or corpus

 

actually owned by the recipient of the income. Merchants' Loan & Trust

 

Co. v. Smietanka, 255 U.S. 509. The error of the Circuit Court of

 

Appeals lies in confusing the income from a legacy with the legacy

 

itself. Under the act the former is taxes as income while the latter

 

is not. What Gavit in fact took under Brady's will was a vested

 

beneficial interest in the trust estate, enforceable in a court of

 

equity, and which consisted of the right to receive, under certain

 

conditions, a portion of the income. On this interest or use there was

 

no tax because he received it as a bequest. On the other hand, what

 

income Gavit received from the trustees of the estate was taxable.

 

Gavit's interest in the trust fund was "property," the "value" of

 

which is exempt from tax as income because received as a bequest.

 

Raymer v. Trefry, 239 Mass. 410. The fact that the enjoyment is

 

uncertain never interferes with the vesting of an estate. When the

 

contingency is not in the person, but in the event when enjoyment

 

shall commence, or in the time of the enjoyment, the interest is

 

considered vested. Neilson v. Bishop, 45 N. J. Eq. 473.

 

 

     "Income" from capital must be, not capital, but the proceeds of

 

capital. A gift or bequest of capital assets even if payable in

 

installments is not "income." Here not a portion of the capital assets

 

forming the corpus, but certain of the earnings thereof, passed to the

 

cestui que trust. The cestui que trust has an interest in the corpus,

 

because he is legally entitled to receive whatever income is given him

 

and must have the right to enforce payment if it is wrongfully with

 

held. The act of 1913 specifically taxes income "growing out of the

 

ownership or use of or interest in real or personal property."

 

Therefore, it must inevitably follow that, as Gavit had an "interest

 

in" the corpus, the proceeds thereof coming into his hands were

 

taxable income. In denying that the cestui que trust had any interest

 

in the principal the lower courts ignored the law of the State of New

 

York as to trust estates. Metcalfe v. Union Trust Company, 181 N. Y.

 

39.

 

 

     The most important aspect of the decision below is not the

 

obvious error in this particular case, but the serious and far

 

-reaching effect upon the whole income-tax system of the Government.

 

 

     A Constitutional question is involved. The suggestion of the

 

opinion below is that a bequest of income can not be "income" under

 

the Sixteenth Amendment, where the beneficiary owns no part of the

 

corpus, and is not made income by Congress calling it such. Under this

 

theory Congress has no power to tax the income from property acquired

 

by gift or legacy where income is bequeathed apart from the corpus;

 

but under such circumstances both the value of the property itself and

 

the income therefrom are necessarily exempt. The income from a legacy

 

is taxable as income whether the legatee owns any part of the corpus

 

or not. Baltzell v. Casey, 1 Fed (2) 29; aff'd. by C. C. A., Jan. 14,

 

1925. Stratton's Independence v. Howbert, 231 U.S. 399; Merchants'

 

Loan & Trust Co. v. Smietanka, supra. There is, and always has been,

 

ample power in Congress to tax income from whatever source derived.

 

Congress used the word "income" in its popular and broadest sense.

 

Eisner v. Macomber, 252 U.S. 189; Lynch v. Hornby, 247 U.S. 339.

 

 

     Mr. Neile F. Towner, for respondent.

 

 

     The respondent was bequeathed a certain portion of the increase

 

of the estate of the testator for a definite period; that is, until

 

the granddaughter of the testator, who is the daughter of the

 

respondent, attained the age of twenty-one years. The gift to Mr.

 

Gavit is further limited by the life of the granddaughter, as the will

 

provided that if, prior to attaining the age of twenty-one, she died,

 

respondent was to receive no further sum whatsoever under the will as

 

the entire trust estate went to the issue of the granddaughter, if

 

any, otherwise to the testator's issue. What, then, did Mr. Gavit

 

receive from the estate? A legacy and a bequest are held to be

 

synonymous terms and are properly used to distinguish a gift of

 

personalty made by a testator from a devise which is a gift of realty.

 

In re Campbell's Estate, 75 Pac. 851, 853. A bequest is a conditional

 

or unconditional voluntary disposition of personal property by will.

 

Merriam v. United States, 263 U.S. 179. Under these well recognized

 

definitions, it can not be held that Mr. Gavit did not receive a gift

 

or bequest. It is urged, however, that because, instead of receiving a

 

definite sum or a definite portion of the corpus of the estate, he

 

received a part of the increase, his gift ceased to be a legacy and

 

became income. This contention we believe is unsound when we bear in

 

mind that we are considering this proposition, not from the viewpoint

 

of the estate or the testator's executors and trustees, but from the

 

viewpoint of Mr. Gavit. There is ample authority for our contention

 

that, so far as a beneficiary is concerned, the fact that the gift he

 

received from a testator is measured by the increase of the corpus of

 

the estate, does not change his position, and what he receives

 

continues to be a legacy or bequest and he continues to be a legatee.

 

Disston v. McClain, 147 Fed. 114; United States v. Fidelity Trust Co.

 

222 U.S. 158; Westhus v. Union Trust Co. 164 Fed. 795; Matter of

 

Stanfield, 135 N. Y. 292.

 

 

     Assume, for instance, in this case that the testator had directed

 

one hundred and fifty thousand dollars to be paid to the respondent in

 

fifteen annual installments which would be approximately the period in

 

this case, there could be no question but that such a gift would be

 

considered as a bequest. Assume further, that the testator had divided

 

his estate into six equal parts and directed his executors to pay to

 

the respondent a portion of one of the parts in fifteen annual

 

installments. In either case, as far as the beneficiary was concerned,

 

he would be in receipt of a bequest and not income. This leads

 

logically and directly to the present case, where the testator,

 

instead of giving any part of the corpus of his estate to the

 

respondent, directed that a certain percentage of the corpus should be

 

set aside and that the respondent should receive a certain portion of

 

the interest on that trust fund for a period limited. Smietanka v.

 

First Trust & Savings Bank, 257 U.S. 602, distinguished. Maguire v.

 

Trefry, 253 U.S. 12, distinguished. See Knowlton v. Moore, 178 U.S.

 

41.

 

 

     A conclusive answer to the contention that, although this gift

 

might not be income so far as the respondent himself was concerned, it

 

was income so far as the estate was concerned, and hence taxable, is

 

that the income of an estate was not taxable under the Act of 1913

 

where there was no person in receipt of such income, simply as income.

 

Smietanka v. First Trust & Savings Bank, 257 U.S. 602.

 

 

     Mr. Frank Davis and Mr. John W. Davis filed a brief as amici

 

curiae by special leave of Court.

 

 

     Mr. James Craig Peacock and Mr. John W. Townsend also filed a

 

brief as amici curiae by special leave of Court.

 

 

     HOLMES

 

 

MR. JUSTICE HOLMES delivered the opinion of the Court.

This is a suit to recover taxes and penalties exacted by the Collector under the Income Tax Act of October 3, 1913, c. 16, Section II, A. subdivisions 1 and 2; B. D. and E. 38 Stat. 114, 166, et seq. The Collector demurred to the complaint. The demurrer was overruled and judgment given for the plaintiff by the District Court, 275 Fed. 643, and the Circuit Court of Appeals, 295 Fed. 84. A writ of certiorari was granted by this Court. 264 U.S. 579.

The question is whether the sums received by the plaintiff under the will of Anthony N. Brady in 1913, 1914 and 1915, were income and taxed. The will, admitted to probate August 12, 1913, left the residue of the estate in trust to be divided into six equal parts, the income of one part to be applied so far as deemed proper by the trustees to the education and support of the testator's granddaughter, Marcia Ann Gavit, the balance to be divided into two equal parts and one of them to be paid to the testator's son-in-law, the plaintiff, in equal quarter-yearly payments during his life. But on the granddaughter's reaching the age of twenty-one or dying the fund went over, so that, the granddaughter then being six years old, it is said, the plaintiff's interest could not exceed fifteen years. The Courts below held that the payments received were property acquired by bequest, were not income and were not subject to tax.

The statute in Section II, A, subdivision 1, provides that there shall be levied a tax "upon the entire net income arising or accruing from all sources in the preceding calendar year to every citizen of the United States." If these payments properly may be called income by the common understanding of that word and the statute has failed to hit them it has missed so much of the general purpose that it expresses at the start. Congress intended to use its power to the full extent. Eisner v. Macomber, 252 U.S. 189, 203. By B. the net income is to include 'gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise or descent.' By D. trustees are to make 'return of the net income of the person for whom they act, subject to this tax,' and by E. trustees and others having the control or payment of fixed or determinable gains, &c., of another person who are required to render a return on behalf of another are 'authorized to withhold enough to pay the normal tax.' The language quoted leaves no doubt in our minds that if a fund were given to trustees for A for life with remainder over, the income received by the trustees and paid over to A would be income of A under the statute. It seems to us hardly less clear that even if there were a specific provision that A should have no interest in the corpus, the payments would be income none the less, within the meaning of the statute and the Constitution, and by popular speech. In the first case it is true that the bequest might be said to be of the corpus for life, in the second it might be said to be of the income. But we think that the provision of the act that exempts bequests assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income properly so-called simply because of a severance between it and the principal fund. No such conclusion can be drawn from Eisner v. Macomber, 252 U.S. 189, 206, 207. The money was income in the hands of the trustees and we know of nothing in the law that prevented its being paid and received as income by the donee.

The Courts below went on the ground that the gift to the plaintiff was a bequest and carried no interest in the corpus of the fund. We do not regard those considerations as conclusive, as we have said, but if it were material a gift of the income of a fund ordinarily is treated by equity as creating an interest in the fund. Apart from technicalities we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it. The fund is appropriated to the production of the same result whichever form the gift takes. Neither are we troubled by the question where to draw the line. That is the question in pretty much everything worth arguing in the law. Hudson County Water Co. v. McCarter, 209 U.S. 349, 355. Day and night, youth and age are only types. But the distinction between the cases put of a gift from the corpus of the estate payable in instalments and the present seems to us not hard to draw, assuming that the gift supposed would not be income. This is a gift from the income of a very large fund, as income. It seems to us immaterial that the same amounts might receive a different color from their source. We are of opinion that quarterly payments, which it was hoped would last for fifteen years, from the income of an estate intended for the plaintiff's child, must be regarded as income within the meaning of the Constitution and the law. It is said that the tax laws should be construed favorably for the taxpayers. But that is not a reason for creating a doubt or for exaggerating one when it is no greater than we can bring ourselves to feel in this case.

Judgment reversed.

DISSENTING OPINION OF JUDGE SUTHERLAND

MR. JUSTICE SUTHERLAND, dissenting.

By the plain terms of the Revenue Act of 1913, the value of property acquired by gift, bequest, devise, or descent is not to be included in net income. Only the income derived from such property is subject to the tax. The question, as it seems to me, is really a very simple one. Money, of course, is property. The money here sought to be taxed as income was paid to respondent under the express provisions of a will. It was a gift by will, -- a bequest. United States v. Merriam, 263 U.S. 179, 184. It, therefore, fell within the precise letter of the statute; and, under well settled principles, judicial inquiry may go no further. The taxpayer is entitled to the rigor of the law. There is no latitude in a taxing statute, -- you must adhere to the very words. United States v. Merriam, supra, pp. 187-188.

The property which respondent acquired being a bequest, there is no occasion to ask whether, before being handed over to him, it had been carved from the original corpus of, or from subsequent additions to, the estate. The corpus of the estate was not the legacy which respondent received, but merely the source which gave rise to it. The money here sought to be taxed was not the fruits of a legacy; it was the legacy itself. Matter of Stanfield, 135 N. Y. 292, 294.

With the utmost respect for the judgment of my brethren to the contrary, the opinion just rendered, I think without warrant, searches the field of argument and inference for a meaning which should be found only in the strict letter of the statute.

MR. JUSTICE BUTLER concurs in this dissent.

DOCUMENT ATTRIBUTES
  • Case Name
    IRWIN, FORMER COLLECTOR OF INTERNAL REVENUE v. GAVIT
  • Court
    United States Supreme Court
  • Docket
    No. 325
  • Judge
    Taft, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler,
    Sanford, Stone
  • Cross-Reference
    Irwin v. Gavit, 268 U.S. 161 (1925)
  • Parallel Citation
    268 U.S. 161
    45 S. Ct. 475
    69 L. Ed. 897
    1 U.S. Tax Cas. (CCH) P132
    5 A.F.T.R. (P-H) 5380
    1925 U.S. LEXIS 557
    1925-1 C.B. 123
    1925 P.H. P8032
  • Code Sections
  • Index Terms
    gross income
    gifts and inheritances
  • Jurisdictions
  • Language
    English
  • Tax Analysts Electronic Citation
    1994 TNT 241-50
    1925 LEX 90-390
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