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Argument for Petitioner.

IRWIN, FORMER COLLECTOR OF INTERNAL

REVENUE, v. GAVIT.

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE

SECOND CIRCUIT.

No. 325. Argued April 15, 1925.-Decided April 27, 1925. 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

oy 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. 295 Fed. 84, reversed.

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.

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 $ II of the Income Tax Act of 1913. The

Argument for Petitioner.

268 U.S.

come.

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 in

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 taxed 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 withheld. The act of 1913 specifically taxes income “growing out of the ownership or use

161

Argument for Respondent.

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 Argument for Respondent.

268 U.S.

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. I'nited States, 263 l. 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; Il'esthus 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

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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, distingushed. 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.

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

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