McConnell v. Commissioner

concurring: I am of the opinion that the decision in this appeal is governed by Irwin v. Gavit as above set forth, and I concur in the decision only for that reason. I agree also that the question here involved is not a question of depreciation of a life interest, but is the more fundamental question whether the so-called income received through an estate or trust by life tenants is in fact in any proper sense all income to the life tenant.

We have been for many years familiar with the valuation of estates for inheritance, transfer, and estate-tax purposes, whereby definite and determined values are placed on the inheritance, or transfer or bequest of property to life tenants. These values, plus the values of the remainders, are necessarily the values assigned to the entire property transferred by the devise. The difference in these estates is well recognized both in law and in fact, and it is recognized that the life tenant receives under such circumstances something which has capital value, and upon which taxes on inheritances and bequests are imposed and paid. The Federal Government has itself imposed inheritance taxes (in 1898), although in later years it has chosen to impose the death duties in the form of an estate tax which graduates the tax in accordance with the entire property passing instead of in accordance with the value passing to each particular heir, legatee, or devisee. It would be an anomalous situation, indeed, if the Fed*268eral Government, imposing an inheritance tax, held that for the purpose of that tax a life tenant might be in receipt of something of capital value, and then held, after that transfer had paid its contribution to the public revenue, that all of the amounts received year by year constituted income subject to taxation again. It seems to me perfectly clear that the amount received under these circumstances is a mixture of capital and income, the life tenant year by year receiving a portion of that value which was originally estimated as his capital, thereby diminishing his interest in the capital as the years go by. It is likewise true, it seems to me, that the remainderman, as the .years pass and his expectancy of ultimate receipt of the property approaches, has a greater and greater interest in the capital which comes to fruition at the death of the life tenant and the actual passing of title and possession. Whether upon the happening of the latter event the remainderman is in receipt of income in the amount of the difference between the value of the property received at that time and the value based upon the remainder interest when the original estate or trust came into existence, is a further question of interest not immediately at issue in this appeal, but probably a necessary corollary of the reasoning set forth above.

It seems to me that the fallacy of treating as income all the receipts, under the circumstances of this appeal, becomes clear if we consider the effect which would result from such a rule in the case of an outright purchase of an annuity, an uncommon thing in the United States, but a very common practice in most European countries. Annuities may readily be purchased on the basis of the life expectancy of the annuitant and, like ordinary life insurance, are figured upon the period of time expected to elapse between the beginning of the payment of the annuity and the death of the annuitant. The computation is merely the reverse of the computation involved in life insurance. It seems perfectly clear to me that if a person purchased an annuity for $100,000 he would be entitled to treat as a return of capital that pro rata portion of each annuity payment necessary to produce $100,000 out of the total expected annuities.

Such an annuitant is in no different position from the recipient of a life estate or from the recipient of an annuity from a life insurance company in those cases where provision has been made that the beneficiary should taire a certain sum per annum for life in lieu of the gross face amount of the policy.

I am not unmindful of the fact that in the instant appeal the interest of the taxpayer in her grandfather’s estate which she inherited on the death of her mother was contingent upon the total number of grandchildren then living who should survive their re*269spective parents, and upon her surviving the last of Poth’s children to die, and that her annual distribution was subject to be increased or decreased as her uncles and aunts died leaving more or less than two children surviving. As set forth in the findings of fact, this contingency was apparently not considered in the facts pleaded by the taxpayer, and the value of the life interest of the taxpayer at the death of her mother can not, therefore, be computed from the data submitted. In view of the decision in this appeal, this point is immaterial. It is introduced merely to show one of the elements of difficulty surrounding the treatment of a portion of a life estate with a contingent remainder in corpus as a return of capital, although such difficulty is in .the last analysis a mere problem in valuation, far less difficult in its intrinsic features than many problems of March 1, 1913, value, with which the Board and the courts are constantly struggling.

*264OPINION.

The appeal of the taxpayer is based on three points: First, that the receipts from the estate of Frederick A. Poth did not constitute income; second, that if the amounts received from the *265estate during the taxable years are considered income they should be reduced by depreciation of the taxpayer’s life estate due to the lapse of time; and, third, deductions should be allowed for obsolescence of the life estate due to the passage of the prohibition amendment.

Under the will of Frederick A. Poth, the residue of his estate was left to trustees, who were to exercise absolute control over the property so long as any of the children of the testator should live, and to pay the income of the estate to these children annually in the proportions specified in the will. In the event of the death of one child leaving issue, such issue would take, by representation, the parent’s '-hare of the income, subject to an allowance for life of one-fourth of such share to the husband or wife, as the case might be, of such deceased child, or, in the event of the death of more than one child, the issue of such deceased children were to take per capita the combined shares of their parents, subject to the allowance for life to the surviving parents.

On August 30, 1915, the taxpayer’s mother died leaving two children, the taxpayer and a sister. Within a few months after the death of the mother their father died, leaving the mother’s share of income from the estate to the daughters.

It is argued in behalf of the taxpayer that the amounts received by the taxpayer from the income of the estate are in the nature of a devise or bequest, and that, under the provisions of section 213 (b) of the Revenue Act of 1918, devises and bequests are excluded from gross income. It is also argued that the amounts in question do not come within the meaning of the word “ income ” as used in the sixteenth amendment, and that the mere fact that, under section 219 (d) of the Revenue Act of 1918, the income of an estate which is distributed to beneficiaries periodically in accordance with the provisions of the will is included in the income of the beneficiary, can not convert the amounts distributable into income if they are not in fact income within the meaning of the sixteenth amendment.

This point is governed by the decision handed down by the United States Supreme Court on April 27,1925, in the case of Irwin v. Gavit, 268 U. S. 161. In that case an individual was entitled to receive a certain proportion of the income of an estate until such time as the testator’s granddaughter, who was 6 years of age at the time of the testator’s death, should reach the age of 21, unless she should die before reaching the age of 21, in which event the individual’s right to receive the income would terminate on the death of the granddaughter. The court held that the income of the estate distributable to the taxpayer under the will was income to the taxpayer within the meaning of the sixteenth amendment, the Revenue Act *266of 1913, and the definition of income as previously laid down by that court in Eisner v. Macomber, 252 U. S. 189. The court said:

The statute in Section II, A, subdivision 1, provides that there shall be levied a tas “ upon the entire net income arising or accruing irom 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 [U. S. Tax Cases, 196], 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 [U. S. Tax Cases, 196]. 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. ♦

* * * 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.

The remaining contentions of the taxpayer that, in the event the Board should decide that the amounts received under the will from the income of the estate were income to the taxpayer, allowance should be made for the depreciation of the taxpayer’s life estate due to the lapse of time and for obsolescence of such life estate due to the passage of the prohibition amendment, will be considered together, since the deductions claimed on account of depreciation and obsolescence are governed by the same provisions of law. Section 214 of the Revenue Act of 1918 reads in part as follows:

*267(a) That in computing net income there shall be allowed as deductions:

⅝ ⅜ ■* * * * *

(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence ; * ⅞ *

The taxpayer does not contend that she is entitled to deductions on account of the property belonging to the estate or on account of obsolescence of the brewery business because of the advent of prohibition. She does claim, however, that she has a life estate of determinable value and is entitled to an allowance for the exhaustion of this estate due to lapse of time, and, further, that prohibition has seriously impaired the value of the life estate for which allowance should be made by way of obsolescence. From the language just quoted, it is clear that there is no basis for such deductions as contended for by the taxpayer. Deductions for exhaustion, wear and tear, and obsolescence are allowable to an individual only in respect of property used in trade or business, and, regardless of whether or not the taxpayer has a life estate of the value contended for, and regardless of whether or not her share of income from the estate was.materially reduced by the advent of prohibition, it can not be said, under the most liberal construction, that the taxpayer’s right to share in the income of the estate was property used in the trade or business.