Opinion
Docket Nos. 1565 1566 1567.
1944-12-20
G. P. FITZGERALD, NONRESIDENT ALIEN, CARE OF R. J. ARNETT, AGENT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.R. J. ARNETT, AGENT FOR WITHHOLDING ACCOUNT OF G. P. FITZGERALD, NONRESIDENT ALIEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.R. J. ARNETT, TRUSTEE FOR G. P. FITZGERALD, NONRESIDENT ALIEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles B. McInnis, Esq., and Harold A. Kertz, Esq., for the petitioners. Richard L. Shook, Esq., for the respondent.
Petitioner, one of several resident trustees of two trusts established by a nonresident alien for the benefit of his divorced wife and minor children, held, not liable to withholding tax and penalties for the years 1933 to 1939, inclusive; held, further, not liable as a fiduciary under section 3467, Revised Statutes, as amended, for any liability of the nonresident alien for tax upon any portion of the income of the trusts. Charles B. McInnis, Esq., and Harold A. Kertz, Esq., for the petitioners. Richard L. Shook, Esq., for the respondent.
These proceedings, consolidated for hearing, involve income tax deficiencies and penalties as follows:
+------------------------------------------------------------------------+ ¦Petitioner ¦Docket No.¦Year ¦Deficiency¦Penalty¦ +------------------------------------+----------+-----+----------+-------¦ ¦G. P. Fitzgerald, nonresident alien,¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+-----+----------+-------¦ ¦care of R.J. Arnett, agent ¦1565 ¦(1936¦$3,020.09 ¦$755.02¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1937¦2,927.93 ¦731.98 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1938¦2,586.10 ¦646.53 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1939¦3,744.54 ¦936.14 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1933¦2,477.84 ¦619.46 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1934¦1,023.07 ¦255.77 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦R. J. Arnett, agent for withholding ¦ ¦(1935¦993.69 ¦248.42 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦account of G.P. Fitzgerald ¦1566 ¦(1936¦2,962.69 ¦740.67 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1937¦2,289.17 ¦572.29 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1938¦2,288.66 ¦572.17 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1939¦2,826.70 ¦706.68 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1933¦3,028.19 ¦ ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1934¦1,883.73 ¦ ¦ +------------------------------------+----------+-----+----------+-------¦ ¦R. J. Arnett, trustee for G.P. ¦ ¦(1935¦2,186.74 ¦ ¦ +------------------------------------+----------+-----+----------+-------¦ ¦Fitzgerald ¦1567 ¦(1936¦3,020.09 ¦755.02 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1937¦2,927.93 ¦731.98 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1938¦2,586.10 ¦646.53 ¦ +------------------------------------+----------+-----+----------+-------¦ ¦ ¦ ¦(1939¦3,744.54 ¦936.14 ¦ +------------------------------------------------------------------------+
The income on which the above tax liabilities and penalties have been determined was a portion of the income of two trusts created by G. P. Fitzgerald, a nonresident alien, for the benefit of his wife, from whom he was divorced in 1907, and their minor children. The petitioner, R. J. Arnett, is one of the trustees of the two trusts. In Docket No. 1565, involving the years 1936 to 1939, inclusive, the deficiency notice was sent to ‘Mr. G. P. Fitzgerald, Nonresident Alien, Care of R. J. Arnett, Agent.‘ In Docket No. 1566, involving the years 1933 to 1939, inclusive, the deficiency notice was sent to ‘R. J. Arnett, Agent for Withholding Account of G. P. Fitzgerald, Nonresident Alien.‘ In Docket No. 1567, which also involves the years 1933 to 1939, inclusive, the deficiency notice was sent to ‘Mr. R. J. Arnett, Trustee for G. P. Fitzgerald, Nonresident Alien.‘
The principal question for our determination is whether petitioner R. J. Arnett is liable either personally or as withholding agent, or as a fiduciary, under section 3467, Revised Statutes, as amended, for any taxes claimed to be due from G. P. Fitzgerald for the years involved. An affirmative answer to that question would require consideration of several additional issues involving the statute of limitations and the computation of proposed tax liabilities and penalties.
Both parties ask for a dismissal of the proceeding brought under Docket No. 1565, the Commissioner on the ground that the petitioner is not the proper party to file a petition from the deficiency notice therein, and the petitioner on the ground that the deficiency notice was improperly addressed by the Commissioner and was never received by Fitzgerald.
FINDINGS OF FACT.
A written stipulation of facts has been filed, which is incorporated herein by reference.
During the taxable years 1933 to 1939, inclusive, G. P. Fitzgerald was a nonresident alien and a citizen of the Irish Free State. He was married in 1899 in California to Lida Eleanor Nichols, a citizen of the United States. Three sons were born of the marriage, one in 1899, and two (twins) in 1900. After marital difficulties, the wife instituted proceedings against Fitzgerald which resulted in a decree of divorce and separation from bed and board and mutual cohabitation, rendered by the High Court of Justice of Ireland on December 5, 1906.
On December 6, 1906, Fitzgerald, his wife, and three trustees, consisting of the husband and two residents of Uniontown, Pennsylvania, entered into an agreement which provided in part:
1. The husband agrees to pay to the wife by quarterly payments alimony at the rate of Three Thousand Pounds per annum from the 5th day of December one thousand nine hundred and six to the twelfth day of August, one thousand nine hundred and seven, or to the date of the passing of the Act of Parliament dissolving her said marriage if passed earlier than the twelfth August, one thousand nine hundred and seven, the wife undertaking to make no application in the meantime to the Court for alimony.
2. As from the date of the passing of the Act of Parliament finally dissolving the marriage of the husband and wife and in consideration of the premises the husband will pay to the Trustees in trust and for the uses and purposes hereinafter set forth so much of his share of the profits accruing annually from and out of the properties known as the Fayette Coke Company and the Shamrock Supply Company situate at Shamrock near New Salem, Fayette County, Pennsylvania, United States of America, as will yield an annuity of Fifteen Thousand Dollars per annum for three years and after three years so much of his share of the said profits therefrom as will yield an annuity of Twenty Thousand Dollars per annum, the said annuity or annuities respectively to be collected from the said companies and paid to the wife by and through the trustees in such lawful manner and at such times as they shall determine but not less often than in the sums of Five Thousand Dollars on January first, May first, and September first, for the first three years and Five Thousand Dollars on December first, March first, June first and September first of each year after the said three years to be due and payable to the wife for and during the term of her natural life.
3. For the consideration aforesaid the husband will also pay to the Trustees out of the balance of his nine-tenths share of the profits arising out of the said two companies named above to be paid to and collected by the Trustees from time to time from the passing of the said Act of Parliament in manner as follows to wit: One-third of his said share of the said profits after deducting the said annuities above provided for, such payment to be made to the Trustees at the end of each financial year of the said companies after the ascertainment of the said yearly profits, the first of such payments to be made on February first one thousand nine hundred and seven as the profits calculated as from the first of September one thousand nine hundred and six, and such payments shall be invested by them until a total sum of Three Hundred Thousand Dollars has accumulated in the hands of the Trustees, whereupon the Trustees shall pay to the wife on the first February One thousand nine hundred and eight and on the first February in each succeeding year thereafter for and during her natural life one-half of the income received from the investment of the said Three Hundred Thousand Dollars or of so much thereof as at the date thereof shall have been received and invested by such Trustees, and shall in their discretion either accumulate or expend the other half of such income for the benefit of the said children of the husband and wife, videlicit; John, Edward and Gerald Fitzgerald, or the Trustees may pay the entire income to the wife in their absolute discretion until the eldest surviving child shall have attained the age of twenty-one years. In case the wife should die the entire income from the Trust Fund shall belong to the children. If all the children should die before the death of the wife, the children's share of the income from the said fund may be paid to her in the discretion of the Trustees, and if not paid to her shall be paid to the husband or to his executors, administrators or appointees.
The agreement further provided:
7. In consideration of the benefits to be obtained by the foregoing provisions in her favor the wife hereby agrees that in the event of the act of divorce becoming law that any right she may have to dower, alimony or otherwise under the laws of any of the United States or of Great Britain or Ireland shall be extinguished by and merged in this agreement, the execution whereof by her shall be deemed and taken to be a waiver by her of all such rights to all intents and purposes as affecting the property of the husband.
On July 26, 1907, the bond of matrimony between G. P. Fitzgerald and his wife was ‘wholly dissolved, annulled, vacated and made void to all intents, constructions and purposes whatsoever‘ by an act of Parliament.
Fitzgerald had extensive business interests in this country in Fayette County, Pennsylvania. He had a nine-tenths interest in two partnerships known as the Fayette Coke Co., and the Shamrock Supply Co., situated at Shamrock, near New Salem, Fayette County, Pennsylvania. He was in receipt of a large annual income from these partnerships at the time that he was divorced from his wife. For a time he made the payments called for by his agreement of December 6, 1906. However, in 1910 he became in arrears in making the required payments and his divorced wife, in her own right, and Josiah V. Thompson, one of the trustees under the agreement of December 6, 1906, on October 27, 1910, filed a bill in equity in the Court of Common Pleas, Fayette County, Pennsylvania, for judgment against him for the amounts then due. On March 15, 1911, the court gave judgment against Fitzgerald, as requested, and decreed in part:
III.
That the payments provided for in said agreement of December 6, 1906, be and the same are hereby adjudged to be a lien on all the right, title and interest of the defendant, Gerald Purcell Fitzgerald, in and to the real property described in Paragraph Ninth of the Bill filed herein and known as the Fayette Coke Company property.
VII.
That the defendant, Gerald Purcell Fitzgerald, be and he is hereby restrained and enjoined from anywise alienating, encumbering or otherwise disposing of his interest in the property of the Fayette Coke Company and in the property of the Shamrock Supply Company unless and until there shall first have been accumulated in the hands of the Trustees under the said agreement of December 6, 1906, the sum of Three Hundred Thousand Dollars, as provided by Paragraph Third of said agreement.
Thereafter Fitzgerald made the required payments until 1914, when he again became in arrears. Disputes and contentions arose between him and the trustees concerning the proper construction of paragraph 2 of the agreement of December 6, 1906, and especially (as shown by the bill in equity filed in the Court of Common Pleas of Fayette County) ‘concerning the questions of what are properly to be considered as profits and whether in view of the mining operations, the value of the coal in place shall or shall not be considered as capital and held subject to the lien aforesaid for the production of further income or profits to be applied toward the payment of the annuity aforesaid. ‘ An agreement was then reached between Fitzgerald and his divorced wife and the trustees that from January 1, 1915, all of the profits from the Fayette Coke Co. property should be received by Fitzgerald alone; that there should be paid to the trustees out of the sinking fund of the Fayette Coke Co. $10,242.12 representing the deficiency in annuity payments to January 1, 1915; and that the balance in the sinking fund, amounting to $78,491.08, should be paid over to the trustees toward the accumulation of a fund of $400,000; that Fitzgerald should give a mortgage to the trustees securing the balance of the $400,000 fund above referred to of $321,508.92, which should bear interest from January 1, 1915, at the rate of 6 percent per annum payable semi-annually until the $400,000 fund should be fully established; that there should also be paid to the trustees, in addition to interest upon the $321,508.92, 18 cents out of each ton of coal mined from the Fayette Coke Co. property until the mortgage indebtedness had been paid off and the fund of $300,000 referred to in paragraph 3 of the agreement of December 6, 1906, was established. It was further provided in the agreement that the divorced wife's annuity of $20,000 should, from January 1, 1915, come not out of the profits from the Fayette Coke Co. property, but out of the interest payments received on the mortgage indebtedness and out of income from securities purchased by the trustees from the moneys which should be accumulated by them from payments made to them by Fitzgerald; that any excess income of the fund should be retained by the trustees for the purpose of paying off any accumulated deficiencies in the annuity payments; and that upon the death of the divorced wife the residue of the $400,000 fund, hereinafter called the alimony fund, and its surplus accumulations, if any, should be paid to Fitzgerald, his heirs, executors, administrators, or assigns.
On March 5, 1915, the Court of Common Pleas of Fayette County, Pennsylvania, was requested to modify its decree entered March 15, 1911, and to incorporate therein the agreement which had been made between Fitzgerald and the trustees. On the same date the court entered a decree as requested. The decree provided in part:
3. The said sum of $78,491.08 and the sums paid from time to time on the principal of said mortgage shall be held by said Trustees during the life of the Wife in Trust to invest the same in good, safe interest bearing lawful and secure trust securities and apply the net income therefrom together with the interest arising from the mortgage aforesaid to the payment to the wife of the annuity aforesaid, the surplus income, if any, to be accumulated and applied as occasion may require to make up any deficiency that may occur in the payment of such annuity.
Pursuant to the terms of this decree the children's fund in the amount of $300,000 was completed on July 1, 1919. The fund for the benefit of the divorced wife, the alimony fund, was completed May 25, 1925. The mortgage was therefore fully paid off on the last named date. Fitzgerald was thereafter in full possession and ownership of the Fayette Coke Co. property. He disposed of all of his business interests in Fayette County prior to 1933, except that he continued to own certain gas rights upon lands formerly owned by him, from which he appears never to have received any income subsequent to 1932.
On June 11, 1928, Fitzgerald entered into an agreement with the Second National Bank of Uniontown, Pennsylvania, whereby he transferred to the bank as trustee his remainder interest under the agreement of March 5, 1915, with respect to the alimony fund, reserving to himself the income for life, provided he survived the wife. Other sections of the agreement made provision for his children ‘Upon and after my death, and that of said Lida (divorced wife), whichever shall the later occur.‘
On July 7, 1939, Fitzgerald entered into another agreement with his former wife and three children modifying the agreement of December 6, 1906, and providing that the number of trustees should be reduced from three to two and that such trustees could be removed from office and successor trustees appointed by the divorced wife during her lifetime and, after her death, by the beneficiaries of the alimony fund and children's fund.
There were three trustees of the alimony fund until 1938. One of them died in that year and no successor was appointed. R. J. Arnett was appointed a trustee by an order of the Court of Common Pleas of Fayette County in 1930. He continued to act as one of the trustees during the taxable years herein involved.
The following tables show the gross income and expenses of the trusts and the amounts distributed to the wife and children in each of the taxable years 1933 to 1939, inclusive:
+-------------------------------------------------------+ ¦ALIMONY FUND ¦ +-------------------------------------------------------¦ ¦ ¦¦Gross ¦Taxes paid ¦Trustees' ¦Administration¦ +-----+----------+-----------+-----------+--------------¦ ¦Year ¦income ¦by trustees¦commissions¦expenses ¦ +-----+----------+-----------+-----------+--------------¦ ¦1933¦¦$19,918.81¦$885.32 ¦$951.50 ¦ ¦ +----++----------+-----------+-----------+--------------¦ ¦1934¦¦21,229.59 ¦846.56 ¦962.78 ¦$532.00 ¦ +----++----------+-----------+-----------+--------------¦ ¦1935¦¦18,810.48 ¦490.22 ¦859.15 ¦ ¦ +----++----------+-----------+-----------+--------------¦ ¦1936¦¦23,619.75 ¦1,181.41 ¦1,181.09 ¦ ¦ +----++----------+-----------+-----------+--------------¦ ¦1937¦¦17,657.11 ¦2,498.28 ¦882.60 ¦367.55 ¦ +----++----------+-----------+-----------+--------------¦ ¦1938¦¦13,743.38 ¦1,328.59 ¦704.99 ¦155.84 ¦ +----++----------+-----------+-----------+--------------¦ ¦1939¦¦17,825.21 ¦1,707.79 ¦891.26 ¦106.75 ¦ +-------------------------------------------------------+
CHILDREN'S FUND Gross income, less taxes, trustees' Gross Taxes paid Trustee's Administration commissions, Year income by trustees commissions expenses and administration expenses 1933 $16,535.00 $620.27 $816.74 $152.21 $14,945.78 1934 15,884.16 632.26 807.82 273.70 14,170.38 1935 14,061.24 444.57 602.66 13,014.01 1936 13,197.13 703.29 713.61 11,780.23 1937 11,153.34 1,392.72 570.01 34.26 9,156.19 1938 12,478.29 988.74 616.79 10,872.76 1939 11,820.19 1,080.48 557.41 10,182.30
Paid to wife Paid to children Year Alimony Children's Children's fund fund fund 1933 $20,000.00 $8,000.00 $8,000.00 1934 20,000.00 8,000.00 8,000.00 1935 20,000.00 8,000.00 8,000.00 1936 20,000.00 8,000.00 8,000.00 1937 20,000.00 4,657.65 4,657.65 1938 14,812.71 4,763.84 4,763.84 1939 6,738.80 2,565.03 2,565.03
The excess of the income distributions made by the trustees during some of the taxable years over the net income of the trusts, as shown above, was made up from undistributed earnings of $13,308.44 which had accumulated in the children's fund prior to January 1, 1933.
For the years 1933 to 1939, inclusive, the trustees filed fiduciary returns on behalf of the trusts with the collector of internal revenue at Pittsburgh, Pennsylvania, showing the income received by them as trustees and the distributions made to the beneficiaries. They also filed returns on Form 1040 in which they reported, and paid taxes on, all the income not distributed to the beneficiaries.
The petitioner, R. J. Arnett, filed no income tax returns and paid no income tax for or on behalf of Fitzgerald, either as withholding agent, trustee, or otherwise, for any of the years involved.
Returns were filed by or on behalf of Fitzgerald with the collector of internal revenue at Pittsburgh for the years 1933, 1934, and 1935, showing net income in the amounts of $518.52, $376.66, and $456.10, respectively. No returns were filed for the years 1936 to 1939, inclusive. The return for 1935 bore the caption ‘G. P. Fitzgerald By Geo. H. Reynolds, Agent,‘ Uniontown, Pennsylvania, and was signed and sworn to by Reynolds as agent.
During the years 1933 to 1939, inclusive, the trusts received, and the trustees reported in the fiduciary returns which they filed, the following amounts of interest on bonds issued by municipalities of the United States:
+------------------------------------------------+ ¦ ¦Alimony ¦Children's¦ ¦Alimony¦Children's¦ +----+--------+----------+----+-------+----------¦ ¦Year¦fund ¦fund ¦Year¦fund ¦fund ¦ +----+--------+----------+----+-------+----------¦ ¦1933¦$297.50 ¦$2,102.50 ¦1937¦$297.50¦$1,607.50 ¦ +----+--------+----------+----+-------+----------¦ ¦1934¦3,297.50¦2,102.50 ¦1938¦297.50 ¦1,157.50 ¦ +----+--------+----------+----+-------+----------¦ ¦1935¦297.50 ¦2,102.50 ¦1939¦297.50 ¦977.50 ¦ +----+--------+----------+----+-------+----------¦ ¦1936¦297.50 ¦2,057.50 ¦ ¦ ¦ ¦ +------------------------------------------------+
In 1933 there was a gain to the trusts of $5,358.62 in the alimony fund and a loss of $1,737.50 in the children's fund from the sale of securities.
At all times here material the trusts were administered under the supervision of the Court of Common Pleas of Fayette County, Pennsylvania, and accounts showing receipts, disbursements, and distribution of income were submitted by the trustees and approved by the court.
The trustees were not required to and did not pay over or distribute any of the income or principal of the trusts to Fitzgerald during any of the years involved.
The petitioner, R. J. Arnett, never acted as agent or attorney in fact for Fitzgerald or looked after any of his business interests, except in the capacity of trustee of the trusts under consideration. George H. Reynolds, of New Salem, Pennsylvania, mentioned above as having filed an income tax return for Fitzgerald for 1935, was his agent. Reynolds died about 1941. The Commissioner addressed two letters and a notice and demand for income tax for 1933 to ‘Mr. G. P. Fitzgerald, c/o Mr. George H. Reynolds, New Salem, Pennsylvania,‘ during the months of January, March, and June 1936.
The parties stipulate that to the best of their information Fitzgerald is living at Waterford, Ireland, and that a letter sent to him at that address would be delivered to him.
OPINION.
OPPER, Judge:
These proceedings result from an attempt on the part of the respondent to collect an income tax upon the portion of the income of two trust funds (one of which, called the alimony fund, was set up pursuant to a decree of the Court of Common Pleas of Fayette County, Pennsylvania, dated March 5, 1915, and the other, the children's fund, pursuant to an agreement between husband and wife and others of December 6, 1906) distributed to the divorced wife of a nonresident alien. On November 1, 1911, the divorced wife married Prince Victor of Thurn and Taxis, of Hungary, who died in January 1918. She has for many years been a resident of Uniontown, Pennsylvania. She has been receiving income from the trust funds from the date the trusts were created. For the years 1913 to 1930 the respondent determined deficiencies in income tax on the distributions against the recipient thereof, the divorced wife. She applied to the Board of Tax Appeals for a redetermination of those deficiencies. Princess Lida of Thurn and Taxis, 37 B.T.A. 41. It was apparently conceded in that proceeding that we had no jurisdiction to redetermine deficiencies for the years 1913 to 1915. The deficiencies for 1916 to 1930 were expunged for the reason that they were received by the divorced wife as alimony or in lieu of alimony. We held that the Commissioner incorrectly found such income to be taxable to her.
While the Tax Court is ordinarily concerned solely with the disposition of questions of tax liability, and while our function is generally exhausted by the announcement of a decision on that question, certain collateral phases of enforcement and collection are sometimes submitted for disposition here. The most frequent situations are those involving efforts to follow the course of property which may have been disposed of by those having the primary tax obligation, especially under the provisions imposing so-called transferee liability. The questions arising may differ from the usual problems of tax liability, rules to be applied may not be identical, and it is important at the outset of such a proceeding as this that the distinction be emphasized. For the controversy in this case deals almost exclusively with methods of the collection of a tax asserted to be due from a stranger to this proceeding.
We shall assume for purposes of the present opinion, without deciding, that Fitzgerald, the father and ex-husband of the respective trust beneficiaries, and the creator of the trusts of which petitioner is trustee, was liable under our income tax law with respect to the entire income of the trusts. Douglas v. Willcuts, 296 U.S. 1. We shall make the further assumption that his status as a nonresident alien has no greater effect upon his tax liability than possibly to increase the burden of convincing us that the law of the foreign domicile— which in this case would be a pure question of fact— is favorable to his contention that no continuing liability for the maintenance of the trust beneficiaries could be enforced, and that the burden in question has not been borne. Helvering v. Fitch, 309 U.S. 149.
The question still remains whether this petitioner can be used as the medium of collection. In Docket No. 1566 that expedient is attempted by resort to the withholding provisions of the relevant revenue acts, section 143. But there is a distinction between attributing income to a taxpayer for purposes of reporting income and incurring tax liability and the determination of ownership under general rules of property law. In cases of this nature that distinction is universally recognized. It is frequently observed that tax liability may attach notwithstanding that enforceable property rights may have passed irrevocably from the taxpayer. Cf., e.g., Helvering v. Clifford, 309 U.S. 331; Helvering v. Horst, 311 U.S. 112; Higgins v. Smith, 308 U.S. 473. In order to sanction the imposition upon petitioner of a withholding obligation, it must appear that he had ‘the control, receipt, custody, disposal, or payment of * * * income * * * of any nonresident alien individual * * * .‘
In this posture of the problem the Treasury must be viewed purely as any other creditor, and not as the tax-collecting agency of a democratic system, with obligations to eliminate tax evasion and other unfair discriminations between taxpayers whose situations are essentially similar. If the trust income did not belong to Fitzgerald from the standpoint of rights of property, as distinguished from concepts of income tax liability, those requirements would not be satisfied, and the requisites for enforcement and collection out of the trust would fail. ‘We think it clear that in a case of this kind the rights of the collector rise no higher than those of the taxpayer whose right to property is sought to be levied on. ‘ Karno-Smith Co. v. Maloney (C.C.A., 3d Cir.), 112 Fed.(2d) 690, 692.
SEC. 143. WITHHOLDING OF TAX AT SOURCE.(b) NONRESIDENT ALIENS.— All persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest * * * dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income * * * of any nonresident alien individual * * * shall * * * deduct and withhold from such annual or periodical gains, profits, and income a tax equal to * * * (the figure varies in the several acts) per centum thereof. * * *(c) RETURN AND PAYMENT.— Every person required to deduct and withhold any tax under this section shall make return thereof on or before March 15 of each year and shall on or before June 15, in lieu of the time prescribed in section 56, pay the tax to the official of the United States Government authorized to receive it. Every such person is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section.
There seems little dispute that, viewing this trust income solely as a matter of the rights conferred by property law, the beneficiaries of the trust were the wife and children, who were entitled to the income in its entirety. It is a contradiction in terms to conclude that any part of it belonged to the nonresident alien or that it was for that reason properly subject to withholding by petitioner. In our view there was consequently no interest in that income which as a matter of property right made it the proper subject for recourse in order to enforce collection of Fitzgerald's tax, even if all of the income may have been attributable to him in determining his tax liability. The effort to apply the withholding provisions must accordingly fail.
For similar reasons the same conclusion must be reached as to Docket No. 1567, in which the effort is made to hold petitioner responsible for Fitzgerald's tax as a fiduciary under section 3467. The liability under that section is severe, more so even than that of a transferee.
The latter's responsibility is limited to the value of property he has unjustly received, and the result can not be detrimental to him beyond his improperly acquired gains. But the fiduciary under section 3467 may be liable irrespective of any benefit, and conceivably notwithstanding that he has received none. The severity of these provisions imposes a corresponding obligation to apply them only in the clearest and most unmistakable reading of their precise terms.
Section 3467—‘Every executor, administrator, or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid.‘
The apparent purpose and background of section 3467 is to deal with cases where a fiduciary voluntarily and in the exercise of a free option elects to satisfy other debts in preference to those due the United States.
* * * But this provision is in pari materia with section 3466 * * * providing that, whenever any person indebted to the United States is insolvent or whenever the estate of any deceased debtor in the hands of a fiduciary is insufficient to pay all the debts due from the deceased, then the debts due to the United States shall be first satisfied * * * . And it creates no lien, either present or continuing. * * * It has no application to a payment by a stranger occupying no fiduciary capacity * * * . (United States v. Western Union Telegraph Co. (C.C.A. 2d Cir.), 50 Fed.(2d) 102, 103.)
The import of the section implies a choice. It moreover relates the forbidden payment to the identity of the debtor, so that the debt must be ‘due by the person or estate for whom or for which he acts.‘ It accordingly appears that only if we can find that the tax was due by the trust estate or its beneficiaries, on the one hand, or that petitioner was acting in a fiduciary capacity for the nonresident taxpayer on the other, and that furthermore petitioner with an unhampered election chose to pay a debt due from the taxpayer in preference to the latter's obligations to the United States, can the personal liability of the petitioner as a fiduciary be established. United States v. Western Union Telegraph Co., supra.
The authority of this case with respect to the enforcement of liens for the collection of taxes has been radically diminished if not destroyed by subsequent cases. See, e.g., United States v. Long Island Drug Co. (C.C.A., 2d Cir.), 115 Fed.(2d) 983, and particularly, United States v. Warren R. Co., 127 Fed.(2d) 134. But we do not read those decisions as weakening the force of the rule applying to section 3467.
As we view the circumstances, these essential prerequisites are lacking. The trusts, it is true, were established by Fitzgerald. If there was a tax obligation it was his, and not that of the trusts. But in the years in question Fitzgerald was entitled to neither principal nor income and hence can not be considered the person for whom the petitioner was acting. Since the tax was not due by the estate nor by the beneficiaries, petitioner had no election to use estate property for its discharge. We are of the opinion that under the existing facts no greater liability attached to pay the tax under section 3467 than under the withholding provision.
Both petitioner and respondent apply for dismissal of the proceeding at Docket No. 1565, though for different reasons. Since the parties are in accord as to this procedure, the proceeding will be disposed of by the entry of an order of dismissal without the expression of any other grounds. It is not apparent that any useful purpose will be served by extended discussion of a subject which, if not moot, can be dealt with when it arises in the future more adequately than upon the present record.
Reviewed by the Court.
Decisions will be entered for petitioner, except in Docket No. 1565, which is dismissed.
TYSON, J., concurs only in the result.
SMITH, J., concurring: I concur in the result reached by the Tax Court in this case. I do not think that the petitioner Arnett is liable to income tax upon any part of the income of the alimony trust which was properly paid over by him to Princess Lida. My reason for that conclusion is that in my opinion no part of the income of that trust for the taxable years here in question was taxable income of Fitzgerald. If it was taxable income of Fitzgerald, then the income tax laws are not so mechanically deficient as to make it impossible for the respondent to collect an income tax upon the income of the trust. If Fitzgerald is liable to income tax on the trust, then Arnett, the one who in the first instance received the income, should at least be liable as a withholding agent upon Fitzgerald's income.
We held in Princess Lida of Thurn and Taxis, 37 B.T.A. 41, that Princess Lida was not taxable upon the income of the alimony trust. This holding was apparently correct in the light of Supreme Court decisions bearing upon the question. But, since that time the Supreme Court has clarified the law in Helvering v. Fitch, 309 U.S. 149; Helvering v. Fuller, 310 U.S. 69; and Pearce v. Commissioner, 315 U.S. 543. Upon the facts in this case, I do not think that Fitzgerald had a continuing liability for the support of Princess Lida after the so-506 called alimony trust was fully established. There can be no question but that atl parties concerned considered that Fitzgerald had fulfilled all of his obligations for the support of his wife by the establishment of the alimony trust. After that trust was established the income therefrom belonged to Princess Lida. She is the logical target for the tax and she is the only one from whom any income tax due can be collected. The trustees of the trust were entitled in filing returns for the trust to deduct from gross income the amounts of income properly paid over to Princess Lida. She had a life interest in the trust and is taxable upon the income in accordance with Irwin v. Gavit, 268 U.S. 161. I therefore think that Arnett has no liability for tax as withholding agent or under section 3467, Revised Statutes, as amended.