LEDERER v. STOCKTON(1922)
[260 U.S. 3, 4] Mr. Assistant Attorney General Ottinger, for petitioner.
[260 U.S. 3, 6] Mr. Maurice Bower Saul, of Philadelphia, Pa., for respondent.
Mr. Chief Justice TAFT delivered the opinion of the Court.
The question in this case is whether the Income Tax Law of September 8, 1916 (39 Stat. 756), as amended by the Act of October 3, 1917 (40 Stat. 300), requires the Contributors to the Pennsylvania Hospital, a corporation of Pennsylvania, created for charitable uses and purposes, no part of whose net income is for the benefit of any private stockholder or individual, to pay a tax on the income of a residuary estate devised to it by the will of Alexander J. Derbyshire in 1879 and inuring to its benefit under the following circumstances: The devise was subject to the payment of certain annuities. All of the annuitants are dead save one. The Supreme Court of that state decided that the income could not be paid outright to the Hospital until the death of all the annuitants, and until then must remain in control of the trustee appointed under the will. Derbyshire's Estate, 239 Pa. 389, 86 Atl. 878. The trustee transferred the whole residuary [260 U.S. 3, 7] fund as a loan for 15 years to the Hospital, and secured himself by mortgage on property of the Hospital. Under the terms of the loan and mortgage, the Hospital only pays interest enough to satisfy the administrative charges and the annuity. It uses the remainder of the income from the fund for its expenses. It is thus actually receiving the full benefit of the income of $15,000 from the residuary fund, reduced only by the annuity of $800.
Section 2b of the Income Tax Law of 1916, supra (Comp. St. 6336b), is as follows:
Section 11(a) of the same act (Comp. St. 6336k) provides:
Upon these facts, Lederer, the internal revenue collector, assessed Stockton, the trustee, on the income from [260 U.S. 3, 8] the residuary estate for the years 1916 and 1917, under section 2b, and collected the same. The trustee brought suit in the United States District Court against the collector to recover the sums so paid as illegally collected. The District Court gave judgment for the trustee, and this was affirmed by the Circuit Court of Appeals for the Third Circuit, 266 Fed. 676.
This residuary fund was vested in the Hospital. The death of the annuitant would completely end the trust. For this reason, the trustee was able safely to make the arrangement by which the Hospital has really received the benefit of the income subject to the annuity. As the Hospital is admitted to be a corporation, whose income when received is exempted from taxation under section 11(a), we see no reason why the exemption should not be given effect under the circumstances. To allow the technical formality of the trust, which does not prevent the Hospital from really enjoying the income would be to defeat the beneficent purpose of Congress.
The judgment of the Circuit Court of Appeals is