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CENTRAL HANOVER BANK & TRUST CO. v. HOEY

October 24, 1947

CENTRAL HANOVER BANK & TRUST CO., et al.
v.
HOEY. DILLON et al. v. HOEY



The opinion of the court was delivered by: BONDY

These two actions involving the same issues of fact and law were consolidated for the purpose of trial. They originally were tried in November, 1945. In September, 1946, the judge who tried them disqualified himself. Upon the transcript of the minutes of the trial, upon the depositions and memoranda submitted to him and upon files of the Central Hanover Bank and Trust Company received in evidence pursuant to stipulation, and the additional evidence taken before me on April 24, 1947, upon the reopening of the case for trial, the court hereby makes the following Findings of Fact and Conclusions of Law:

Findings of Fact

 1. Action No. 3-191 was brought by Central Hanover Bank and Trust Company and Clarence Dillon, trustees under a trust indenture dated December 31, 1931.

 2. Action No. 3-192 was brought by Clarence Dillon and Anne D. Dillon, his wife.

 3. The defendant in each case is Jane M. Hoey, as executrix of the estate of James J. Hoey, deceased. James J. Hoey was Collector of Internal Revenue for the Second District of New York in 1934 and was originally the defendant in these actions. After the actions were instituted he died and the defendant Jane M. Hoey as executrix of his estate was substituted as defendant.

 4. Plaintiffs in Action No. 3-191 on or before March 15, 1935, filed a Federal Income Tax Return for the year 1934 showing net income of $ 59,194.27 subject to tax and a tax of $ 10,220.81 due thereon which they paid to the Collector of Internal Revenue.

 5. On February 15, 1937, these plaintiffs filed with the Collector a claim for a refund of said tax but no part thereof has been refunded.

 6. Clarence Dillon and Anne D. Dillon, plaintiffs in Action No. 3-192, filed a joint Federal Income Tax Return for the year 1934. After audit and review of said return, the Commissioner of Internal Revenue on the June and July 1938 assessment rolls assessed additional income taxes against them of $ 18,235.13, and $ 3,687.30 interest, making total assessments of $ 21,922.43.

 7. On July 22, 1938, after demand by the Collector of Internal Revenue the said individual plaintiffs paid to the Collector the said alleged deficiency, together with the interest thereon.

 8. On September 29, 1938, said plaintiffs filed with the Collector a claim for a refund of $ 17,888.50 of the additional taxes so paid for the year 1934 and $ 3,613.55 interest thereon amounting to $ 21,502.05, no part whereof has been refunded.

 9. On December 31, 1931, Clarence Douglas Dillon, son of Anne D. and Clarence Dillon, executed a trust indenture in which Douglas Dillon was named as grantor and Central Hanover Bank and Trust Company, Clarence Dillon and Douglas Dillon were named as trustees. Pursuant to the indenture Douglas Dillon transferred to the trustees certain securities (said trust being herein referred to as the 'security trust'). The 'security trust' provides that the trustees thereunder should pay to the trustees of another trust created at the same time and herein referred to as the 'insurance trust,' so much of the net income of the 'security trust' as the trustees of the 'insurance trust' certified to be required to pay the premiums on insurance policies on the life of Clarence Dillon held by them and it authorizes the trustees of the 'security trust' to encroach upon principal for such purpose. It is provided that the remainder of the income of said 'security trust' is to be paid to Clarence Dillon for life. After the death of Clarence Dillon the entire income of the trust is payable to Douglas Dillon for life. After the death of the survivor of Clarence and Douglas Dillon, one-quarter of the income is to be paid to Douglas Dillon's widow for life and three-quarters to his issue or if no issue to his mother, Anne D. Dillon, if living, and if not living to his sister Dorothy. On the termination of the trust the principal is to be distributed to the issue of Douglas Dillon of if none, then to his mother, or if not living, then to his sister or his sister's issue, or if none then living, then to his widow or two sisters of Clarence Dillon, or if neither is then living, then to Harvard College. The trustees of the 'security trust' are empowered to encroach upon the whole amount thereof for the benefit of Clarence Dillon whenever in their opinion such encroachment is for his best interest and protection or welfare.

 10. In the 'insurance trust' indenture also executed December 31, 1931, Douglas Dillon is named as grantor, and Central Hanover Bank and Trust Company and Douglas Dillon as trustees. Douglas Dillon transferred to the said trustees thirty-nine insurance policies on the life of Clarence Dillon of the total face amount of approximately $ 1,500,000 and a cash surrender value of about $ 180,000. The 'insurance trust' provides that the trustees should certify to the trustees of the 'security trust' the amount required to pay the premiums on the insurance policies held by them. Upon Clarence Dillon's death the trustees are to collect the net proceeds of the policies and to pay the income thereon to Anne D. Dillon, the widow of Clarence Dillon, for life. After the death of the survivor of Anne D. and Clarence Dillon the trustees are to divide the principal into two equal parts, the income of one of which is payable to Douglas Dillon for life and the income of the other to his sister Dorothy for life. The issue of Douglas is to receive the principal of his share and the issue of Dorothy the principal of her share. In default of such issue the entire principal is payable to two sisters of Clarence Dillon.

 11. Douglas Dillon was born August 21, 1909. He married March 10, 1931. In June, 1931, he was graduated from Harvard College. Subsequently he was employed by the banking firm of Dillon, Read & Company, of which Clarence Dillon was the senior partner.

 12. For the year 1934 the net income of the 'security trust' available for distribution was $ 117,253.75 of which $ 59,194.27 was distributed to the trustees of the 'insurance trust' upon certification of such amount by them in the manner specified in the Trust Indenture and the remaining $ 58,059.48 was distributed to Clarence Dillon. The sum of $ 59,194.27 so distributed to the trustees of the 'insurance trust' was applied by them to the payment of current premiums on the policies on the life of Clarence Dillon held in the 'insurance trust' and this sum was reported as taxable income in the Federal Income Tax Return filed by them for the year 1934. ...


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