Mrs. Matilda Schutt Smith, Appellant, v. United States of America, Appellee, 265 F.2d 834 (5th Cir. 1959)

This appeal from a judgment entered against plaintiff in a suit for refund of income taxes presents a single question for decision. This is whether taxpayer, to whom her husband, subject to the terms and conditions of his will, had bequeathed all his property, and who, including in her individual income tax return only that portion of the income which she actually used, had included the remainder in the estate's return, was under Sections 22(a) and 162(b) of the 1939 Code, 26 U.S.C.A. §§ 22(a), 162 (b) properly taxed on the entire income.

The case was heard below on a stipulation supplemented by a small amount of oral testimony, with none of the facts¹  in dispute, and the question presented below and here was and is entirely one of law.

The district judge holding:

"The Smith will devised to the plaintiff widow a life estate, carrying broad powers of control, use and enjoyment, and with a contingent remainder to the unnamed remaindermen described as a class."

and concluding that she was therefore properly taxed, gave judgment accordingly, and this appeal followed.

Taxpayer, presenting her attack upon the judgment against her here, as Mrs. Smither, in United States v. Smither, 5 Cir., 205 F.2d 518, had presented her defense of the judgment in her favor there, argues that the decision in that case is controlling here. Urging upon us:

(1) That the testator by his will intended to create and did create a testamentary trust;

(2) That the will imposed upon her a legal obligation to use of the income only amounts which were proper and necessary, and to that end established clear and definite standards as to what would be reasonably necessary; and

(3) That the taxpayer therefore did not have such unfettered control over income derived from the property of the estate as to make such income taxable to her under Sec. 22(a), Title 26 U.S.C.A.;

taxpayer cites in support 44 Texas Jurisprudence, 837, McHatton's Estate v. Peale's Estate, Tex.Civ.App., 248 S.W. 103, Paton v. Baugh, Tex.Civ.App., 265 S.W. 250, Wagnon v. Wagnon, Tex.Civ. App., 16 S.W.2d 366, United States v. Smither, supra, and Flato v. Commissioner, 5 Cir., 245 F.2d 413.

Differentiating to her own satisfaction the cases relied on by appellees, she vigorously insists that, giving to the will the plain and reasonable construction its language imports, there is no logical escape from the conclusion that she is right in insisting that the will created a trust under the terms of which she held the property, and the district judge was wrong in holding that, under the will, she took a life estate in the property with unfettered control over the income and the right to use or not use it as she saw fit.

The United States, marshalling in support of the judgment below Medlin v. Medlin, Tex.Civ.App., 203 S.W.2d 635, Grant v. Commissioner, 5 Cir., 174 F.2d 891, Flato v. Commissioner, 5 Cir., 195 F.2d 580, Jergens v. Commissioner, 5 Cir., 136 F.2d 497, the last three holding that a beneficiary, having unrestricted control of trust income, is taxable upon the entire income whether or not he actually takes and uses it, insists that the Smither will contained special provisions and the Smither case presented special circumstances wholly absent here, and in essence and principle is authority not against but for the judgment appealed from here.

For the reasons briefly stated, we find ourselves in agreement with appellee, that the particular provisions of this will, construed in the light of the surrounding facts and circumstances, require the conclusion that it was not the intention of the testator to prescribe any standard for the exercise of, or to in any other way limit, taxpayer's right and power of disposition and control of the income from the property short of full and unfettered dominion and control.

It is true that, knowing the taxpayer as he did, the testator certainly believed, indeed knew, that she would not waste the property but, on the contrary, would manage it with great frugality so as not only to preserve it but if possible to enlarge it for the benefit of those whom he wished to succeed to the property upon taxpayer's death. It is equally true, however, that he placed no limitations whatever upon her use of the income. Indeed, giving her full power of management and control, he went on in sweeping language to provide in terms not of sufferance but of power:

"She is empowered to use the income arising out of said property and so much of the principal as she may deem proper without the interference or molestation from any remaindermen hereinafter mentioned."

In view of this language and of the other controlling facts and circumstances of the case, it must be conceded that taxpayer's failure to appropriate more of the income to her own use was the result, not of real or supposed limitations upon her power but of great self abnegation.

Speaking without reservation for myself, and for my brothers to the extent that they are willing to go along with me, I think it entirely fitting to say, out of my experience in sitting as one member of the court in the Smither and Flato cases, dissenting in the first and concurring in the second Flato case, that whatever may be thought or said of the correctness of the decisions in the three earlier cases, this case presents facts and features completely differentiating it from those others and making crystal clear that for us to hold for the taxpayer in this case would be to close our eyes to the dominating facts it presents, that, as fully empowered custodian and for the time complete and rightful owner of the income from the property, she was clothed with full powers of ownership, disposition and control of the income, and that her failure to use it all was because of want of will and not lack of power to do so.

The judgment was right. It is affirmed.