The opinion of the court was delivered by: MARIS
This is a suit by the trustees under the will of Edward B. Smith, deceased, against the United States to recover income taxes alleged to have been erroneously paid for the years 1924 and 1925. From the evidence I make the following special findings of fact:
Edward B. Smith died January 7, 1918, leaving a will by the eighth article of which he directed that one-half of his residuary estate be held in trust and that the net income thereof be paid to his widow, Laura Howell Smith, during her life. The latter elected to take under the terms of the will and to accept the benefits thereby conferred upon her in lieu of her dower and other statutory rights under the laws of Pennsylvania.
The petitioners are the trustees under the decedent's will. The four sons of the decedent and his wife, Albert L. Smith, Edward B. Smith, Jr., Geoffrey S. Smith, and John Story Smith, were entitled under the decedent's will to the principal of the trust after the death of their mother, the life tenant.
The decedent's widow received income from the trust during the calendar years 1924 and 1925 in the amounts of $52,845.34 and $51,845.34, respectively. She included these amounts in her income tax returns filed for the respective years and paid income tax in the amounts of $55,088.92 and $50,733.49, respectively, on this and other income received by her in those years.
The petitioners as trustees of the decedent's estate filed fiduciary returns for the years 1924 and 1925 disclosing the amounts of net income of the trust distributable to the widow and claiming such amounts as deductions in computing the net income of the trust. The trustees did not file individual income tax returns for the trust for either year.
The decedent's widow, Laura Howell Smith, died June 11, 1927. The residuary legatees of her estate were her sons, Albert L. Smith, Edward B. Smith, Jr., Geoffrey S. Smith, and John Story Smith.
On March 15, 1929, a notice of deficiency of income tax for the years 1924 and 1925 in the total amount of $105,823.41, addressed to "Est. of Edward B. Smith, c/o Girard Trust Co., Phila., Pa.," was sent by registered mail from the office of the collector of internal revenue at Philadelphia. The notice was on the letterhead of the Commissioner of Internal Revenue, Treasury Department, Washington, and was in the usual form. It was signed, "D. H. Blair, Commissioner, By J. S. MacLaughlin, Collector of Internal Revenue." In a statement attached to the notice of deficiency, the amount of deficiency asserted for the year 1924 was stated to be $55,089.92 and for the year 1925 $50,733.49. The notice was prepared and sent by an authorized subordinate of the collector after an examination of the claims for refund filed three days previously by the widow's executor, pursuant to instructions in writing given the collector by H. F. Mires, assistant to the Commissioner, under date of February 27, 1929.
No appeal was taken by the trustees of the decedent's estate to the Board of Tax Appeals, and on July 13, 1929, the Commissioner of Internal Revenue assessed the deficiencies in income tax proposed in the notice of March 15th, with interest. On July 19, 1929, the collector of internal revenue at Philadelphia demanded payment of these assessments, and on August 2, 1929, petitioners paid the sum of $12,048.64 on account of the assessments, $6,779.90 on account of the tax and interest assessed for 1924, and $5,268.74 thereof on account of the tax and interest assessed for 1925. The sum thus paid was charged by the petitioners against the principal of the trust for the decedent's widow, who was then deceased, and on January 31, 1930, the principal account was reimbursed in the same amount by Albert L. Smith, Edward B. Smith, Jr., Geoffrey S. Smith, and John Story Smith, the persons entitled to the principal of the trust fund in remainder.
On October 7, 1929, petitioners filed with the collector claims for the refund of the taxes so paid for the years 1924 and 1925 in the amounts of $6,779.90 and $5,268.74, respectively. On or about December 16, 1930, the Commissioner redetermined the income tax liability of the estate, including interest, for the year 1924 to be $6,018.54 and for the year 1925 $4,670.50. Thereupon the Commissioner abated the unpaid balance of the assessment of $130,251.44 made on July 13, 1929, and refunded to petitioners the sum of $1,359.60 representing the difference between the amount paid by them on August 2, 1929, and the amount redetermined to be due. As to the balance, aggregating $10,689.04, the Commissioner rejected the petitioners' claims for refund. That amount correctly represents the total income tax due and payable for the years 1924 and 1925 by the decedent's estate if the income of the trust distributed to the decedent's widow is not allowed as a deduction in determining the taxable net income of the estate.
The claims for refund filed on behalf of the estate of the decedent's widow on March 12, 1929, were allowed by the Commissioner and the amounts claimed with interest, representing that portion of her income taxes for the years 1924 and 1925 applicable to the income distributed to her from the decedent's estate, were paid to the Girard Trust Company, as executor of her estate, on January 13, 1931.The amounts so refunded were credited to the principal of her estate and distributed to her residuary legatees Albert L. Smith, Edward B. Smith, Jr., Geoffrey S. Smith, and John Story Smith.
If the petitioners succeed in the present suit, the amounts recovered by them will be distributed equally to Albert L. Smith, Edward B. Smith, Jr., Geoffrey S. Smith, and John Story Smith, as remaindermen under the decedent's will.
Other facts which may be material appear in the stipulation of facts and additional stipulation of facts filed by the parties and are ...