Lowery v. Commissioner ( 1932 )

EMILY GALE LOWERY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lowery v. Commissioner

Docket No. 57646.

United States Board of Tax Appeals

27 B.T.A. 137; 1932 BTA LEXIS 1120;

November 25, 1932, Promulgated

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When the owner of a property right assigns merely the income arising therefrom and retains the other incidents of ownership which are essential factors in the production of income, he, and not the assignee, must pay the Federal tax on such income.

James F. Hubbell, Esq., for the petitioner.

Nathan Gammon, Esq., for the respondent.

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VAN FOSSAN

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1928 in the sum of $5,370.38.

The sole issue is whether the income from a life estate in property given to the petitioner by the will of her deceased husband is taxable either to her to the assignees of such income.

The case was presented on a stipulation and depositions.

FINDINGS OF FACT.

The will of James L. Lowery, late husband of the petitioner, was duly admitted to probate on September 9, 1895. The material portions of that will are as follows:

Third. I do hereby give, bequeath and devise unto my wife Mrs. Emily Gale Lowery for and during her natural life the possession, management and the control, and the rents, profits, use and income of all the rest, residue and remainder of all my personal and real property, and proceeds of real property if sold of every name and nature and wheresoever situated which I may own at the date of my death, but my said wife is to pay out of said income to my sister Mrs. Isabelle Lowery Williams the sum of one thousand dollars ($1000.00) each year in semi-annual payments of $500.00 each from the date of my death, but no payment after my sister's death is to be paid to her legal representatives or to her estate.

Fourth. Subject to the right of my said wife Mrs. Emily Gale Lowery for life as aforesaid, I do hereby give, bequeath and devise all of the principal of said rest, residue and remainder of said personal and real estate and proceeds of real estate, if sold, of which my said wife, Mrs. Emily Gale Lowery has the possession, control, management, use, income, rents, profits for her lifetime, unto my brother-in-law Clifford F. Marklove and my friend William L. Downing who resides at No. 423 Genesee Street in Utica aforesaid in trust nevertheless for the following purposes, to-wit:

At the date of the death of my said wife, Mrs. Emily Gale Lowery, said trustees or the survivor of them or if neither of them are living the person who my wife in her lifetime by her last will and testament should appoint in their place are to take possession of said principal sum and divide the same into seven equal shares for the equal benefit of my said children Marklove Lowery, Jenner Lowery, Amelia Lowery, Emily Gale Lowery, James Lincoln Lowery, Samuel Stewart Lowery and Harriet Isabelle Lowery. * * *.

On or about April 30, 1928, the petitioner duly executed the following written instrument:

I, Emily Gale Lowery, of Utica, N.Y., being entitled under the paragraph numbered "Third" of the will of my deceased husband, James L. Lowery, dated July 30, 1895, to the income of his residuary estate, do hereby assign and transfer said income as follows:

to my son, Marklove Lowery, one-seventh thereof,

to my son, Jenner Lowery, one-seventh thereof,

to my son, James Lincoln Lowery, one-seventh thereof,

to my son, Samuel Stewart Lowery, one-seventh thereof,

to my daughter, Emily Gale Beardsley, one-seventh thereof,

to my daughter, Harriet Isabelle Crouse, one-seventh thereof,

to my grandson, Clarkson Doolittle, one-twenty-eighth thereof,

to my granddaughter, Julia Ogden, one-twenty-eighth thereof,

to my granddaughter, Mary Adams Doolittle, one-twenty-eighth thereof,

to my grandson, John Doolittle, one-twenty-eighth thereof.

IN WITNESS WHEREOF, I have hereunto set my hand and seal this 30th day of April, 1928.

[Signed] EMILY GALE LOWERY [L.S.]

OPINION.

VAN FOSSAN: The only question presented in this case is whether or not the assignment of the income from the life interest of the petitioner in the estate of James L. Lowery relieves her from paying the income tax thereon.

In , we said:

The rule is well established that * * * the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the granting or assignment of such income or profits to another.

When the owner of a property right assigns merely the income arising therefrom and retains the other incidents of ownership which are essential factors in the production of income, he, and not the assignee, must pay the Federal tax on such income. ; affd., ; ; affd., ; ;.

By the terms of the third paragraph of James L. Lowery's will the petitioner received "the possession, management, and the control and the rents, profits, use and income" of his residuary estate. All of those elements combined constituted the property rights she acquired in her husband's estate. Of them she assigned only one, the income, to her children and grandchildren. The will provides specifically that she should possess, manage, control and use the residuary estate of the testator "for and during her natural life." Her life estate, therefore, was so established and defined, and in order to divest herself of her entire property rights she must include in the instrument of conveyance or assignment all the elements of ownership of such estate which were specifically set forth in and granted to her by the will. She did not do so, but chose instead to give to her children and grandchildren only the income flowing from the estate, which she still held. Under such circumstances we must conclude that the income in question is taxable to her.

The petitioner, on deposition, offered testimony tending to show that she had not had the actual possession of the residuary estate of James L. Lowery, nor had she exercised management and control over it. The will created the estate to which the petitioner was entitled. If she elected to permit others to manage it for her, she can not thus be absolved from the responsibilities and legal burdens of its ownership.

The petitioner contended that the instrument of assignment is ambiguous in its terms and offered evidence to explain away such asserted ambiguity. We can perceive no such ambiguity. The petitioner set forth that she was entitled to the income of the residuary estate of her deceased husband and then proceeded to assign and transfer that income to her children and grandchildren in certain stated proportions. We must be governed by the plain words of the instrument itself and conclude that only the income from her life estate was assigned.

Reviewed by the Board.

Decision will be entered for the respondent.

BLACK dissents.

LOVE

LOVE, dissenting: Had I been called upon to write this case and render a decision thereon, I would have felt impelled, in view of prior decisions of the Board, as well as decisions of some of the higher courts, including the Supreme Court, to have decided the case as it is decided in the prevailing opinion. But, as is well known, I have consistently challenged the correctness of such prior decisions of the Board and of the courts.

I have been requested to present my views in detail, and, as an individual member of the Board, I feel at liberty to do what I would not feel at liberty to do were I writing an opinion and decision to be promulgated as the decision of the Board. In other words, this dissent is a challenge to the soundness and correctness of the decisions of the courts, and the Board, which constitute a controlling, authoritative basis for the prevailing opinion. If I have a hope or purpose at all, it is that the higher courts may correct what I deem to be erroneous decisions, which are now controlling precedents.

The fundamental doctrine or theory of the instant case, as well as those court and Board decisions upon which the instant case is based, is that one may not assign the usufruct of a corpus estate without assigning also that corpus from which such usufructs flow; that is, the fruit can not be separated from the tree that produces the fruit. The ramifications of the tentacles of that fundamental doctrine reach out and affect hundreds of the ordinary, daily business transactions of business life.

It is said that one may not assign the whole or any part of his future salary under a specified employment contract. It is said that a partner may not assign the whole or any part of his distributive share of the partnership profits. When one acquires, by will, or a trust instrument, the right to receive the rent on a certain piece of real estate, or the dividend on a certain block of stock during a period of time in the future, for life, or a term of years, what he acquires by and as a gift, is the right to receive that income, and that right is property, and in the ordinary sense of the word, is income, but, being acquired by gift, under the statute is not taxable income. The annual payments made to him as a result of that right are not gifts, but are taxable income.

It is said, as in the instant case, that the holder of such a right may not assign it to another and retain in himself title to any part of the corpus from which such income flows. There are many phases of the general principle now under consideration. In discussing the instant case, I shall assume:

1. That what the mother assigned to her children was the right, which she acquired, by and through her deceased husband's will, to receive, for her own use and benefit, the rents and profits flowing from her husband's residuary estate during her natural life.

2. That such assignment was and is irrevocable.

The instrument of assignment clearly indicates such a purport, and it is so treated in the prevailing opinion.

The Sixteenth Amendment to the Constitution does not authorize Congress or any judicial tribunal to impose a tax on one person which is based on the income of another person. Hence, the vital question to be determined in any given case is, Whose is the income sought to be taxed? It matters not what the source of the income is, the vital question is, Whose income is it?

In the instant case, it is not claimed that under the laws of New York the assignment in question was void and transferred no title to the income as and when received. New York courts recognize such transactions as valid and binding. It is to the state laws and not to the Federal laws that we must look to determine who owns certain property.

Notwithstanding the fact that there are decisions holding that he who earns a salary is the one who must pay the tax thereon, it is now settled law that, in Texas, a wife owns one-half her husband's salary and may include the same in her return for income tax purposes. Notwithstanding the fact that it has been held that a partner may not assign and thus divide his distributive share of the partnership profit, it is now settled law that a wife in Texas owns and may include in her income tax return one-half of such income. The same may be said with reference to rents or profits flowing from the separate property of the husband, and such is the case not only in Texas, but in all the community property states.

It is said that in the community property states the wife is entitled to share in such incomes by operation of law and not by contract. I do not believe it will be contended by anyone that a title acquired by and through a contract is any less a legal title than one acquired by operation of law. A title emanating from and through a will is no less a legal title than one derived by and through the laws of descent and distribution. They are both legal titles and stand on equal footing. Moreover, since when, in the history of American jurisprudence, has a contract been deemed less sacred than a statute?

It has been the burden of the courts for more than an hundred years to impress upon the American people the sanctity and inviolability of contracts. It is only when the collection of income tax is involved that rights derived through contracts have been discounted and ignored.

I want to point out and emphasize the fact that in none of the cases which I have in mind, including the instant case, has the bona fides of the contract been questioned. In the instant case, I do not perceive how it can be contended for a moment that the mother did not irrevocably pass from herself to her children the right to receive the income in question, and that from the moment that document was signed, sealed and delivered, she had no more title to such income than any other person, a total stranger to the whole transaction, and that as and when such income was received by those children, it was their income and taxable to them.