Appeals by the State Tax Commissioner from judgments of the Superior Court, New Castle County, affirming orders of the State Tax Board disallowing deficiency assessments of state income taxes against the trustees of various trusts. The Supreme Court, Southerland, C. J., held that sections of state income tax law, defining word ‘ taxable’ as including every trustee to extent that trust income is accumulated or distributed during taxable year to or for benefit of resident of state, and declaring tax imposed applicable to trust estates or property only to extent that income is distributable or accumulated for future distribution to a ‘ taxable,’ exclude from taxation only income distributed to nonresident beneficiaries and not accumulated income required to be spent for any purpose, so that amounts of federal income and other taxes paid by trustees were not excludable or deductible from trusts' gross income accumulated for future distribution in computing state income taxes.
Judgments affirmed in part and reversed in part, and cause remanded to Superior Court with instructions.
[49 Del. 420] Appeals from judgments of the Superior Court of New Castle County, affirming orders of the State Tax Board disallowing deficiency assessments of state income taxes. Affirmed in part, reversed in part, and remanded.
Herbert L. Cobin, Chief Deputy Atty. Gen., and Wilfred J. Smith, Jr., Deputy Atty. Gen., for appellant.
William S. Potter (Henry R. Horsey, Wilmington, with him on the brief), of Berl Potter & Anderson, Wilmington, for appellees.
SOUTHERLAND, C. J., and WOLCOTT and BRAMHALL, JJ., sitting.
SOUTHERLAND, Chief Justice.
These cases call for a construction of the provisions of the state income tax law of 1949 relating to trusts. Two questions are presented.
1. When income of a trust is accumulated for future distribution and not distributed to the beneficiaries of the trust, and federal income and other taxes on such income are paid, are the amounts of tax so paid excludable-or deductible-under the provisions of the act of May 27, 1949, from the gross income of the trust for the purpose of computing the state income tax ?
2. If not, were the deficiency assessments made within the two-year period fixed by the statute ?
There are two cases before us. The facts of the first are as follows:
Irenee du Pont, Sr., trustee under a trust dated June 4, 1924, filed a state income tax return for the year 1950. The return showed total income of the trust as $988,457.87. From this amount there were deducted payments of income to the beneficiary of $170,000; federal and Canadian income taxes of $377,885.31; and $10,576.48 of accounting fees and trustee's commissions. After the deduction of the exemption of $1,040 there remained a balance of $468,956.08 which was reported as taxable income.
[49 Del. 421] The second case concerns the income tax return of Wilmington Trust Company, trustee under a trust dated March 30, 1925, for the year 1950. The same principle was followed in computing the tax. In addition to deducting payments to the beneficiary the trustee also deducted federal and Canadian income taxes, payments to the trustee, and a payment to the State Tax Department (the nature of which does not appear).
In both cases the Tax Commissioner disallowed all the deductions for taxes and assessed additional tax. He made no objection to the deductions for trustees' commissions or for accounting expense.
The taxpayers appealed to the Tax Board. They urged two contentions: (1) that the taxes so deducted were excluded from taxable income by the language of two sections of the income tax laws; and (2) that in any event the deficiency assessments had not been made within the prescribed time. The Board rejected the latter contention, but sustained the first, and accordingly ordered the deficiency assessments abated. On appeal to the Superior Court, that court affirmed the order of the Tax Board on both points. The Commissioner brings the cases here for review.
1. Were the federal and Canadian income taxes excludable-or deductible-from the income of the trusts for the purpose of the state income tax ?
The applicable statute is the act of May 27, 1949, 47 Del.L.Ch. 147. That act was
by its terms limited to the taxable years 1949 and 1950. Whereas pre-existing income tax laws imposed a tax on ‘ net income’, the 1949 act imposes the tax upon ‘ gross income’ . Hence it is often referred to as ‘ the gross income tax law’, although, as the court below correctly said, it is not, strictly speaking, such a law, since it merely narrows the scope of the exemptions and deductions permitted under the prior laws.
A summary of its provisions pertinent here is as follows:
[49 Del. 422] By Section 1(b) of the act the word ‘ taxable’ is defined to include, among others, the following:
‘ (1) A natural person twenty-one years of age or over who is a resident or citizen of the State of Delaware or who has been a resident or citizen of the State of Delaware at any time during the income years.
‘ (2) A minor with gross income of One Thousand and Forty Dollars ($1040.00) or more who is a citizen or resident of the State of Delaware, or who has been a citizen or resident of the State of Delaware at any time during the income year.
‘ (3) Every trustee of a trust whether created by a resident or non-resident of Delaware, to the extent that the ...