Opinion
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Plaintiff is the executor under the will of John Moir, a resident of Newton, Massachusetts (hereinafter sometimes referred to as the "taxpayer") who died September 20, 1938.
2. March 15, 1937, the taxpayer filed his income-tax return for the year 1936 on the cash basis and paid the tax of $60,674.99 shown to be due on that return as follows:
March 15, 1937 ......
$15,111.24
April 8, 1937 ............
57.51
July 14, 1937 ........
15,168.75
September 17, 1937 ...
15,168.75
December 15, 1937 ....
15,168.74
Additional income tax for the year 1936 in the amount of $982.86 was assessed against the taxpayer and paid by him April 22, 1938. Interest on the additional assessment in the amount of $65.02 was paid by the taxpayer May 13, 1938, making a total amount of $61,722.87 paid as tax and interest for the year 1936.
On that return the taxpayer included in gross income under the item "Income from Fiduciaries," an amount of $16,332.94 which represented a part of the net income of a trust known as the Chase & Sanborn Pension Fund hereinafter referred to.
3. March 15, 1938, the taxpayer filed his income-tax return for the year 1937, on a cash basis showing a tax due of $62,261.30 which was paid as follows:
March 15, 1938 ......
$15,565.33
June 15, 1938 ........
15,565.33
September 15, 1938 ...
15,565.32
December 15, 1938 ....
15,565.32
Additional income tax for the year 1937 was assessed against the taxpayer in the amount of $5,065.44 and paid October 4, 1939, together with interest of $471.71, making the total amount of tax and interest paid for the year 1937 $67,798.45.
On that return the taxpayer included in his gross income under the term "Income from Fiduciaries," an amount of $16,841.36 which represented a part of the net income from the Chase & Sanborn Pension Fund.
4. The partnership of Chase & Sanborn (hereinafter sometimes referred to as the "partnership") was formed in Boston, Massachusetts, in 1878, and was engaged from that time until 1929 in the business of importing and jobbing tea and coffee. During that period the partnership was made up of a succession of different combinations of partners. The taxpayer became a limited partner about 1907, a full partner about 1912, and in 1929, when the sale hereinafter referred to was made, he was the senior partner of the firm as it then existed.
5. July 16, 1929, the partnership was sold as a going business to Standard Brands, Inc. The sale included all the assets of the business and was subject to all its liabilities except a few obligations of the partnership which the purchaser did not assume and which the partners took over. Thereafter neither the partnership nor any of the partners engaged in any new transactions carrying forward the business. Neither the partnership nor the partners, as such, were engaged in business in 1936 and 1937 except as they, through the trust, the Chase & Sanborn Pension Fund, were engaged in paying out compensation to former employees, as shown hereinafter. No gross income was received either by the partnership or the partners, as such, in those years. Upon the sale of the business, a fund of $50,000 was set aside from the proceeds and turned over to one of the partners to be used by him to discharge the expenses of the sale, and the liabilities and obligations of the partnership which had not been assumed by Standard Brands, Inc. More than the $50,000 so set aside was eventually required for these purposes and the individual partners contributed whatever additional funds were needed. These debts and expenses were fully paid and discharged in that manner before 1936.
6. The partnership had no definite pension plan and was under no legal obligation to pay pensions to its employees, but for a considerable period prior to 1929 it had been the practice and policy of the partnership to take of its old employees by keeping them employed at a reduced compensation as long as they were able to perform some work and when they became unable to work at all to continue to pay them part of their salaries. This policy was followed in recognition of a moral obligation on the part of the partnership towards these employees because of their long years of valuable service to the partnership.
7. While negotiations were taking place for the purchase of the business by Standard Brands, Inc., the question was discussed with the purchaser as to whether arrangements could be made to take care of the old employees, but the purchaser refused to give any consideration to such a proposition and no arrangements of that nature were made with the purchaser. At that time the partnership had between 400 and 500 employees of whom 60 or 70 were approaching the end of their active lives and had been with the firm for twenty-five years or more. In view of this situation the partners determined that provision should be made by them to take care of there old employees in their declining years. Sometime prior to the date of the sale a trust instrument was accordingly drafted under which each of the partners made a contribution to the trust in proportion to his interest in the partnership and that instrument was executed by the partners on the day of the sale. The trustees named in the instrument were the taxpayer John Moir, William T. Rich another partner, and the Day Trust Co.
The trust instrument read in part as follows:
"Whereas the Contributors have been heretofore associated together as co-partners doing business as Chase & Sanborn, and have sold said business to Standard Brands, Inc.; and "Whereas the Contributors desire to create a pension fund to be used for the benefit of former employees of Chase & Sanborn (hereinafter called the Beneficiaries) as a reward for their faithful service in the employ of Chase & Sanborn and in order, in some instances, to ameliorate their condition in life; such benefit to accrue immediately in some cases and to be deferred in others; "Now Therefore the Contributors, each in consideration of the contribution of every other of them, and other good and valuable consideration, respectively sell, assign, transfer and deliver to the Trustees the property described and set opposite their respective names in the schedule hereto annexed marked 'Schedule A', to hold, manage, invest and reinvest the same and any additions that may from time to time by made thereto, in trust for the following purposes: "1. Except as hereinafter provided, to pay from the income to the Beneficiaries names in the schedule hereto annexed marked 'Schedule B', or use and apply for their benefit, the monthly payments set opposite their respective names. "2. Except as hereinafter provided, to pay from the income to such of the Beneficiaries named i the schedule hereto annexed marked 'Schedule C' as the Trustees shall from time to time determine, or use and apply for their benefit the monthly payments set opposite their respective names. "3. To pay to the Contributors annually, in proportion to their contributions, or to their legal representatives, such part of the income as the Trustees in their uncontrolled discretion shall determine to be not required for the purpose hereinbefore set forth. "4. To pay from the principal to or for the benefit of the Beneficiaries from time to time, such sums as may be necessary for the purposes set forth in Paragraphs 1 and 2 hereof (if the income shall be insufficient for such purposes) until the aggregate amount of principal so expended in that year and prior years shall equal the aggregate amount of income paid in that year and prior years to Contributors as provided in Paragraph 3 hereof, and thereafter to use for the purposes set forth in Paragraphs 1 and 2 hereof such further parts of the principal as the Trustees shall by unanimous vote determine. "5. To pay over and distribute from time to time to the Contributors, in proportion to their contributions, or to their legal representatives, such part of parts of the principal as the Trustees in their uncontrolled discretion shall determine to be no longer required for the purposes of the trust. "6. Upon the death of the survivor of the Beneficiaries named in said Schedules B and C, to pay to the Contributors in proportion to their contributions, or to their legal representatives, the principal as it shall then be, with any accrued income, and the trust shall thereupon terminate."
[The followed other sections which gave the trustees full power to manage and deal with the property of the trust, made provision for filling vacancies among the trustees, and set out other similar provisions.]
The trust instrument contained the following further provisions:
"13. The persons who shall receive the benefits of the pensions hereunder shall have no rights, title or interest of any kind or nature in and to said trust or the income thereof or any portion of the same until such sums as may be paid to them actually come into their hands. The Trustees at any time may temporarily or permanently discontinue payments to any Beneficiary or Beneficiaries, provided however that any periodical payment once determined to be paid to any Beneficiary shall be continued without change during the life of such Beneficiary, unless the then Trustees shall by unanimous vote otherwise determine. The interest of any Beneficiary hereunder, either as to income or principal, shall not be anticipated, alienated or in any other manner assigned by such Beneficiary, and shall not be subject to any legal process, bankruptcy proceedings, or the interference or control of creditors or others. * * * * * * * "15. This agreement may be modified or amended at any time by the unanimous vote of the Trustees for the time being, signified by their written signatures to such amendment, except that they shall have no power to modify the provisions herein made for distribution of the principal. Additional persons who will receive benefits hereunder may be added at any time or times within three years from the date hereof by unanimous vote of the Trustees, provided that such additional persons shall have been employees of Chase & Sanborn prior to the date hereof."
8. In determining the amount of principal to be set aside for the pension fund, the partners estimated that an annual income of approximately $50,000 would be required for trust purposes and they accordingly contributed a total of 6,858 shares of Standard Brands, Inc., 7 percent first preferred stock of an approximate value of $800,000, each partner making his contribution in proportion to his interest in the partnership. The contributions of the partners were as follows:
John Moir ...........
2,512
shs.
Standard Brands, Inc.,
1st pfd.
William T. Rich .....
1,288
shs.
Standard Brands, Inc.,
1st pfd.
Frederick A. Flood ....
966
shs.
Standard Brands, Inc.,
1st pfd.
Harry L. Jones ......
1,031
shs.
Standard Brands, Inc.,
1st pfd.
Francis W. Kimball ....
322
shs.
Standard Brands, Inc.,
1st pfd.
Charles R.Butler ......
322
shs.
Standard Brands, Inc.,
1st pfd.
John Anderson .........
238
shs.
Standard Brands, Inc.,
1st pfd.
Henry T. Brown ........
179
shs.
Standard Brands, Inc.
1st pfd.
In determining which of the employees would be entitled to the pensions, the partners selected such persons as had been in the service of the partnership twenty-five years or more, and, in the case of men, had reached the age of sixty-five and in the case of women, the age of sixty. The amount of the pensions varied in accordance with the previous salaries or wages and the character of duties performed, and at first ranged from $30 to $200 per month. Later, when the income of the trust was smaller, it became necessary to make a proportionate reduction in the amounts paid to the pensioners, all of whom were former employees of the partnership except certain widows of former employees who, by amendment of the trust instrument, had been included. The sum paid to widows amounted, each year, to $1,980.
The amounts paid to the old employees and their widows under that plan, when added to the salaries formerly paid to the employees, did not exceed reasonable compensation for past services rendered by the employees.
9. Prior to 1934, the trustees treated the income of the trust which was paid out to the beneficiaries as taxable to the beneficiaries and advised them to return these amounts as taxable income in their federal income tax returns. However, with the passage of the revenue act of 1934, the trustees advised the contributors (including the taxpayer) as follows:
"The Trustees of the Chase and Sanborn Pension Fund--acting under legal advice--have up to the return of 1934 income reported the income of the Fund as being taxable to the beneficiaries in so far as they received payments from the fund. "With the passage of the Revenue Act of 1934 the Trustees again obtained legal advice. After considerable discussion--for the legal aspects are involved and open to argument--we are of the opinion that 1934 income of the Fund should be reported by the Donors of the Fund in their individual returns in amounts in proportion to their contributions to the Fund. "As soon as possible, the Day Trust Company will advise you as to the amount which should be included in your return. "The Trustees have the sections of the indenture which apparently cause the income of the Fund to be taxable to the Donors under consideration and are discussing the proper method of correcting them."
10. During 1936 and 1937 the amount of income earned by the trust was slightly in excess of the total amounts paid out by the trustees to the beneficiaries. The amounts of the net income of the trust for 1936 and 1937, which were attributable to the contribution to the corpus of the trust by the taxpayer Moir, were $16,332.94 and $16,841.36, respectively. Consistent with the advice given by the trustees, set out in the preceding finding, the taxpayer, as shown by findings 2 and 3, included these amounts as a part of his gross income in his original returns filed for those years.
11. During 1936 and 1937 the trustees paid out of the income from the trust fund to the beneficiaries the respective amounts of $41,480 and $37,932.50. Based upon the proportionate amount contributed by him in the creation of the trust fund, the taxpayer Moir's shares of the foregoing amounts were $15,194.12 and $13,894.67 for 1936 and 1937, respectively.
12. November 22, 1939, plaintiff filed amended income-tax returns for the calendar years 1936 and 1937. In the amended return for 1936, plaintiff showed a tax due of $51,540.01 upon the basis that no part of the amount of $16,332.94, referred to in findings 2 and 10, constituted income to the taxpayer; or, in the alternative, a tax due of $52,237.50 upon the ground that if the amount of $16,332.94 constituted taxable income, the taxpayer was entitled to a deduction therefrom of $15,194.12, such amount representing his share of pension payments made from the Chase & Sanborn Pension Fund.
In the amended return for 1937, plaintiff showed a tax due of $57,537.09 upon the basis that no part of the amount of $16,841.36, referred to in findings 3 and 10, constituted income to the taxpayer; or, in the alternative, a tax due of $58,635.89 upon the ground that if the amount of $16,841.36 did constitute income to the taxpayer he was entitled to a deduction therefrom of $13,894.67, such amount representing his share of pension payments made from the Chase & Sanborn Pension Fund.
13. At the same time the amended returns were filed, namely, November 22, 1939, plaintiff filed claims for refund consistent with those amended returns in which refunds were demanded for the years 1936 and 1937 in the respective amounts of $10,117.84 and $9,789.65. In each of these claims for refund plaintiff assigned as grounds therefor that no part of the income of the Chase & Sanborn Pension Fund was taxable to the taxpayer under the provisions of sections 166 and 167 of the revenue act of 1934. In the alternative it was contended that in the event income from that fund was properly included in gross income, the taxpayer was entitled to a deduction as ordinary and necessary business expenses for his proportionate share of the amounts paid to the pensioners from the fund in those years.
14. The claims for refund for 1936 was rejected by the Commissioner of Internal Revenue December 11, 1940. More than six months had passed since the filing of the claim for refund for 1937 before this suit was brought and the Commissioner had not advised plaintiff of any action taken thereon.
Philip Nichols, of Boston, Mass., for plaintiff.
Elizabeth B. Davis, of Washington, D. C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C. on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, and MADDEN, Judges.
MADDEN, Judge.
Plaintiff, executor of the will of John Moir, deceased, sues to recover income taxes paid for the years 1936 and 1937. Moir was taxed upon a proportionate part of the income received by a trust, the Chase and Sanborn Pension Fund, which had been set up by Moir and other partners in the partnership of Chase and Sanborn. When the partners sold the partnership business to Standard Brands, Inc., in 1929, the partners contributed, in the proportion in which they had owned the business of Chase and Sanborn, a total of $800,000 to the Pension Fund, the income to be used to pay pensions to the former employees of Chase and Sanborn, who had had many years of service. Moir, the partner who had owned the largest interest in Chase and Sanborn, Rich, another partner, and the Day Trust Company were made trustees of the Pension Fund. The trust agreement created no legal rights in the old employees. The fund was to revert to the contributors when its purpose had been served. The trust agreement could be modified or amended at any time by the unanimous vote of the trustees.
Plaintiff claims, first, that no part of the income of the trust was Moir's income on which he could be taxed because, he says, the trust was not a revocable trust within the provisions of Sections 166 and 167 of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev. Acts page 895, since Rich had a substantial interest adverse to revoking the trust and revesting the title to the trust property in the former partners, including Moir, who had contributed to the fund.
Plaintiff claims, second, that even if the income of the trust was income of the former partners in proportion to their contributions to the fund, and otherwise taxable, the income had been spent to pay "ordinary and necessary expenses * * * in carrying on * * * trade or business', and the expenditure was a legitimate deduction from Moir's income within the Provisions of Section 23(a) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev. Acts, page 827, and he therefore should not have been taxed upon it.
The Government contends, first, that the income was Moir's for tax purposes because Rich did not have a substantial adverse interest which would have deterred him from consenting to a revocation of the trust, and, second, that the expenditure of the income to pay pensions to former employees to whom the partners were under no legal obligation, at a time when the former partners were engaged in no business except that of paying these pensions, through the trust, was not a business expense within the meaning of Section 23(a) and was, therefore, not deductible.
Plaintiff sued in the District Court of the United States for the District of Massachusetts to recover taxes paid upon Moir's 1938 income from January 1 to September 20, the date of Moir's death. That suit related to the tax upon the same Pension Fund, the income of which was received and distributed in the same way as was done in 1936 and 1937, the years covered by this suit. The contentions of the parties were the same in that case as in this. The District Court decided both issues against plaintiff. Flood v. United States, D.C., 44 F.Supp. 509.
Plaintiff appealed to the Circuit Court of Appeals for the First Circuit. That Court decided the first issue against plaintiff. On the second issue, it held that the pensions paid by the trust were deductible business expenses, and that plaintiff was entitled to have Moir's income taxes recomputed to allow those deductions. Flood v. United States, 133 F.2d 173.
We agree with the decision of the Circuit Court of Appeals in the Flood case and with the reasons given in the opinion. We conclude that plaintiff should have been permitted to deduct from Moir's income for 1936 and 1937 Moir's proportions of the pensions paid by the trust.
Plaintiff is entitled to recover. The entry of judgment will be suspended by the parties showing the exact amount due plaintiff in accordance with this opinion.
WHALEY, Chief Justice, and WHITAKER, Judge, concur.
LITTLETON, Judge (dissenting).
I am of opinion that plaintiff is not entitled to recover any amount for the reasons stated by Judge Ford in Flood v. United States, D.C., 44 F.Supp. 509, 513, 514.
JONES, Judge, took no part in the decision of this case.