City Bank Farmers Trust Company v. Helvering/Opinion of the Court

The ultimate question here involved is whether two testamentary trusts of which petitioner is trustee were in 1931 'carrying on * *  * business' within the meaning of section 23(a) of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Code, § 23(a)(1).

Pursuant to the will of Angier B. Duke, two trusts, consisting of stocks and bonds worth approximately $7,600,000, were established in 1923 for the benefit of Duke's two minor sons. Petitioner, as trustee, was charged with the duty of applying a sufficient amount of the income of each trust to the support and education of the beneficiary; the surplus income was to be accumulated until the beneficiary's majority; and at that time all accumulated income was to be paid to the beneficiary, while the principal was to be continued in trust for the benefit of the son and his descendants. By 1931, the principal and accumulated income of the two trusts aggregated about $10,000,000. In that year the Surrogate Court of New York County allowed trustees' commissions of about $77,000, ordering that payment be made out of principal. In reporting trust income for 1931, the trustee did not claim any deduction for these commissions. Later, in proceedings before the Board of Tax Appeals, the deduction was claimed but denied. The ground of denial was that during the taxable year the trusts had not been 'carrying on any trade or business', the carrying on of such an activity being a condition precedent to the allowance of the claimed deduction under the controlling Revenue Act. The Circuit Court of Appeals affirmed. Differing interpretations as to the meaning and scope of 'carrying on any trade or business' prompted us to grant certiorari in this case, 312 U.S. 672, 61 S.Ct. 619, 85 L.Ed. --, i the case of Pyne v. United States, Ct.Cl., 35 F.Supp. 81, and in the case of Higgins v. Commissioner, 2 Cir., 111 F.2d 795; Id., 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. --.

In the Higgins case, decided on February 3, we affirmed the judgment of the same Circuit Court of Appeals that rendered the decision below. Higgins, an individual taxpayer whose activities did not vary materially from the activities of the taxpaying trusts in the case at bar, was denied the deduction which petitioner here seeks. And sections 161, 162 of the Revenue Act of 1928 provide: 'The taxes imposed by this title (chapter) upon individuals shall apply to the income of estates or of any kind of property held in trust. * *  * The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual *  *  * .' Since the trust is subject to the same rules as the individual, and since the findings of the Board of Tax Appeals in the Higgins case and in the case at bar are substantially the same, the Higgins case is controlling here, unless, as petitioner contends, distinguishable by reason of administrative practice in relation to trusts.

But we regard the Higgins decision as controlling despite petitioner's insistance that administrative practice has long permitted deduction of trustees' commissions. In view of the express Congressional command that the same method and basis of computation must be applied to trust income as to individual income, it is doubtful whether any administrative practice, no matter how clear or long existing, would warrant our applying one concept of carrying on business in the case of an individual and another concept in the case of a trust. This is particularly true here, where the statutory interpretation petitioner urges has never received support in any regulations promulgated by the Secretary of the Treasury. And not only is the result reached by the court below consistent with our decision in Higgins v. Commissioner, but, as we said in the Higgins case (312 U.S. 218, 61 S.Ct. 478, 85 L.Ed. --), the conclusion of the Board of Tax Appeals 'is adequately supported by this record, and rests upon a conception of carrying on business similar to that expressed by this Court for an antecedent section.' The judgment below is accordingly

Affirmed.