Catlin v. Commissioner

THERON E. CATLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. IRENE C. ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. DANIEL K. CATLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Catlin v. Commissioner Docket Nos. 25413, 25414, 25421. United States Board of Tax Appeals 25 B.T.A. 834; 1932 BTA LEXIS 1464; March 11, 1932, Promulgated *1464 Petitioners were the settlors and sole beneficiaries of a revocable trust. Two of the three were trustees of the trust and the third trustee was the husband of the third settlor-beneficiary. During 1922 and 1923 the trust estate sold certain stocks held by it at a loss. The larger part of such sales were made to the mother of the petitioners. Held, that such sales were not of trust property within the meaning of the Revenue Act of 1921, and that petitioners are entitled to deduct from their personal incomes, pro rata, losses sustained on such sales. Held, further, that the sales to petitioners' mother were bona fide sales. E. G. Curtis, Esq., and D. N. Kirby, Esq., for the petitioners. C. H. Curl, Esq., for the respondent. MARQUETTE *835 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income taxes asserted by the respondent as follows: Deficiency Petitioner [1923] Theron E. Catlin $14,904.63 $16,786.90 Irene C. Allen 25,535.23 26,391.18 Daniel K. Catlin 15,104.32 16,301.72 Each petitioner alleges error in the disallowance of deductions*1465 representing losses sustained in 1922 and 1923 from sales of stocks held by a trust of which petitioners were the beneficiaries. FINDINGS OF FACT. The petitioners, together with their mother, Justina G. Catlin, are the only devisees of the estate of Daniel Catlin, deceased. On October 31, 1916, petitioners and their mother entered into a trust agreement, the pertinent provisions of which are as follows: This Agreement, made and entered into this 31st day of October, 1916, by and between Justina G. Catlin, Daniel K. Catlin and Theron E. Catlin, all of the City of St. Louis, Missouri, and Irene C. Allen, wife of Frederick W. Allen, of the City of New York, State of New York, hereinafter called Beneficiaries and Daniel K. Catlin, Theron E. Catlin and Frederick W. Allen, hereinafter called Trustees, witnesseth: Whereas, said Beneficiaries are the devisees and the only devisees of the estate of Daniel Catlin, deceased, and as such devisees are entitled to and do now possess said estate, both personal and real, the said Justina G. Catlin the one-half thereof, and the other beneficiaries each the one-sixth thereof, and Whereas, said Beneficiaries desire that of the*1466 said personal estate of said Daniel Catlin, deceased, the cash or money in hand and the stocks, bonds, choses in action and other securities mentioned and set forth in a detailed schedule thereof, hereto attached and made part hereof, marked "Exhibit A", shall not be divided and distributed, but shall be held together by said Trustees for the uses and upon the trusts hereinafter set forth, and Whereas, said Beneficiaries now also own and possess jointly certain stocks, the said Justina G. Catlin the one-half thereof, and the other beneficiaries each the one-sixth thereof, which said stocks are mentioned and set forth in a *836 detailed schedule, hereto attached and made part hereof, marked "Exhibit B", and the Beneficiaries desire that these stocks also shall not be divided and distributed, but shall be held by the Trustees for the uses and upon the trusts hereinafter set forth, * * * Now, therefore, in consideration of the premises and the promise and agreement of the Trustees to execute the trust in this instrument imposed upon them, the Beneficiaries have sold, assigned, transferred and delivered unto the Trustees, and by these presents do hereby sell, assign, transfer*1467 and deliver unto the Trustees, the cash or money in hand and the stocks, bonds, choses in action and other securities so mentioned and set forth in said Exhibits "A" and "B", the said Trustees hereby acknowledging the receipt thereof, * * * all in trust for the following uses and purposes: First. The name of this trust shall be "Catlin Estate." Second. The Trustees shall have the right, power and authority to sell, assign, transfer and dispose of, from time to time and at prices which to them may seem advisable, any or all the securities belonging to the trust estate hereby created, whether the same be original or represent new investments or reinvestments, and to collect any of such as may mature or become due, and invest and reinvest the proceeds of such sales or collections, and also any portion they may deem advisable of the money in hand at the date of these presents, in like securities or in other investment securities, as they deem advisable, and for the purpose of making final distribution of the trust estate they shall have the power to sell any or all of the securities then held by them in trust, for cash. * * * Third. During the term of this trust the*1468 Trustees shall collect, receive and receipt for the income of the trust estate, including therein the rents, issues and profits of the real estate above mentioned, as and when the same become due and payable, and after deducting the proper expenditures, charges and costs incurred by them in administering the trust, shall pay over the net income to the Beneficiaries, at such periods as may be most convienent to the Trustees, as follows: to Justina G. Catlin the one-half thereof, and to each of the other beneficiaries the one-sixth thereof; provided, however, if at any time all the Beneficiaries shall elect that the whole or a part of their net income shall be accumulated by the Trustees, and so notify the Trustees in writing, then the Trustees shall be subject to the same duties and shall have the same rights and powers to invest and reinvest such accumulated income as they are herein given and charged with in regard to the corpus of the trust estate, and the same shall be and remain a part of the trust estate until final distribution, * * * Fourth. The trust herein created shall continue for the life time of the said Justina G. Catlin, and at its termination the trust property, *1469 including therein the accumulations made thereto as hereinabove provided for, shall be divided and distributed as follows: (a) The share of the said Justina G. Catlin, being the one-half thereof, shall go and be distributed to the persons who may be nominated in the last will and testatment of the said Justina G. Catlin as the Distributees of her residuary estate and in the same proportions as such residuary estate may be directed to be divided by such last will and testament, and in the event that she shall die leaving no will, then and in such case her share of the trust estate shall be paid over by the Trustees to her heirs at law. (b) The shares of the other Beneficiaries, each being the one-sixth of the total trust estate as above defined, shall be paid over to them respectively. Fifth. Nothing in this instrument contained shall be construed to held to prevent the beneficiaries hereunder, meaning not only the original but also those who may hereafter become beneficiaries under the terms hereof, from *837 withdrawing from the operation of this trust the rents, income and profits of the real estate hereinabove made subject thereto, but this right of withdrawal*1470 shall not include the right to withdraw from the trust any accumulations theretofore made by the Trustees out of such income. Sixth. In addition to the powers hereinabove conferred upon the Trustees over the trust property, it is hereby provided that they shall have the right and power, at any time, when in their judgment it may seem to them advisable for the better or more convenient handling of the trust property, to form and create a corporation and vest the title to the trust property therein, or to transfer the trust property to a corporation formed or to be formed or to be created for the purpose of handling and dealing in real estate as well as personal property, in which event the stock received by the Trustees in payment for the trust property so transferred to such corporation shall represent the trust estate hereunder for all the purposes herein provided. Seventh. The estate of the Trustees in and to the property hereby vested in them shall be that of a joint tenancy, but for convenience of holding and transferring stocks and other like securities they may take title thereto in the name or names of any one or more of the Trustees if they deem it best, and every*1471 right, power and authority, and every trust hereby declared shall vest in, be imposed upon and be exercised by the surviving trustee or trustees in case one or more of the Trustees shall die, and in the remaining trustee or trustees in case one or more of the Trustees declines or refuses to act after accepting the trust. * * * Ninth. Nothing in this instrument contained shall prevent any one or more of the immediate Beneficiaries, herein named, from alienating, in his or her life time, the whole or any fractional portion of his or her entire share of the trust estate, in which event his or her assignee or assignees shall take the interest assigned and transferred absolutely, the corpus, however, being only payable to such assignee or assignees by the Trustees at and upon the termination of the trust, with the right in such assignee or assignees to receive the income thereof from the Trustees during the continuance of the term of the trust. The income from some real estate was also included in the trust agreement, but was withdrawn therefrom on December 31, 1916, by mutual consent. On January 1, 1921, Justina G. Catlin assigned her entire interest in the trust estate to*1472 these petitioners equally. The trust was terminated by the beneficiaries at the end of 1923. During the years 1922 and 1923 certain of the stocks held by the trust estate were sold, some upon the open market and some to Justina G. Catlin at the market price. These sales resulted in losses amounting to $125,830.83 in 1922 and $218,013.14 in 1923. Of those losses, $79,050 in 1922 and $215,500 in 1923 arose from the sales made to Justina G. Catlin. One purpose in selling the stocks, but not the only one, was to get credit for losses for the beneficiaries on their income-tax returns. From 1918 to 1923, both inclusive, it was the practice of the trustees to file information returns, but to pay no income tax for the trust. Also, it was the practice of the petitioners to report their respective individual shares of the income earned by the trust estate *838 and pay income tax thereon. Such income was not actually received by the beneficiaries, however, as they left it in the estate and it was added to capital. This was done by tacit agreement, the trustees concurring, and there were no written requests for such treatment of the income. Justina G. Catlin paid an aggregate*1473 price of $281,000 for the stocks which she bought from the trust estate in 1923. During that year she sold to the estate certain other stocks for an aggregate price of $282,690, from which sales she suffered some loss. The stocks which she bought did not stand in the name of the trust, but in the name of Daniel K. or Theron E. Catlin, who endorsed them in blank. One such stock was transferred on the books of the issuing corporation to Justina G. Catlin; the others were delivered to her by simply removing them from the safe-deposit box, or the capital-asset box in the Catlin's office vault, making a notation on the certificates that the stocks were the property of Justina G. Catlin, then placing the certificates in an envelope bearing her name and returning the envelope to the deposit box or the office vault. All this was done by Daniel K. or Theron E. Catlin as agents for Justina G. Catlin. The stocks purchased from the trust estate by Justina Catlin were entered upon her individual books of account, and income from those stocks was deposited to her credit in the bank. She still owns all the securities bought from the trust estate, except such as may have matured or been paid*1474 out. The parties to the trust agreement have treated the Catlin Estate throughout as an agency arrangement rather than as a trust. In their individual income-tax returns for 1922 and 1923 the petitioners each deducted one-third of the losses resulting from the sales in those years of stocks held by the trust estate. Those deductions were all disallowed by the respondent. OPINION. MARQUETTE: The first question here presented is whether under the trust agreement of October 31, 1916, the beneficiaries of the Catlin Estate may, as individuals, deduct losses sustained by the sale of capital assets of the estate. It is clear, we think, that the trust in question was revocable. The respondent so treats it, and the facts sustain that view. While the trust agreement did not contain an express power of revocation, in haec verba, it did permit any or all of the beneficiaries to alienate his or her interest in the trust assets at any time. The settlors of the trust were the sole beneficiaries in exactly the same proportions as were their contributions to the trust, and they were also the remaindermen. Throughout the taxable years the present petitioners *839 were*1475 the only settlors and beneficiaries of the trust, in equal proportions; two of them were trustees, while the third trustee was the husband of the third settlor-beneficiary, and the trust was revoked by the settlor-beneficiaries, the petitioners herein. These facts bring the present proceedings into close analogy with the cases of Stoddard v. Eaton, 22 Fed.(2d) 184; Selah Chamberlain,19 B.T.A. 126, and Trudie T. Munger,16 B.T.A. 168. Each of those cases dealt with a revocable trust and it was held in each that sales of securities which had been nominally placed in trust by the settlor-beneficiary were not sales of trust property within the meaning of the Revenue Acts of 1918 and 1921, and that losses sustained on such sales were deductible by the settlor-beneficiary from his personal income. In support of his contention that the petitioners, as beneficiaries of the trust, are not entitled to make such deductions, respondent cites Baltzell v. Mitchell, 3 Fed.(2d) 428; *1476 Abell v. Tait, 30 Fed.(2d) 54; Arthur H. Fleming,6 B.T.A. 900; Mary P. Eno Steffanson,1 B.T.A. 979; George M. Studebaker,2 B.T.A. 1020; Henry Stoddard,3 B.T.A. 79; and Helen R. McConnell,3 B.T.A. 260. Apparently none of those decisions, except that of Henry Stoddard, dealt with a revocable trust such as we are now considering, and the Board's decision in the Stoddard case was virtually overruled by the United States District Court in Stoddard v. Eaton, supra. The court was there dealing with the Revenue Act of 1918, section 219; but, so far as it is here applicable, the language is identical with that in the Revenue Act of 1921. In reaching its conclusion in that case the court said: After all, the word "trust" as used in section 219 of the Revenue Act of 1918 (Comp. St. Sec. 6336 1/8 ii), can hardly have been intended to comprehend every instance in which a trust is recognized in equity. A trust ex maleficio, a resulting trust, or a constructive trust are examples of trusts which do not fit into the frame of the statute. A trust, as therein understood, *1477 is not only an express trust, but a genuine trust transaction. A revenue statute does not address itself to fictions. The policy of the law is now more clearly expressed in the language of the acts of 1924 and 1926, which provide (43 Stat. 275, and 44 Stat. 32 [(26 U.S.C.A. Sec. 960 subd. (g)] that, where a grantor of a trust reserves the power to revest himself with the title to any of the corpus of the trust, then the income of such part is the income of the grantor. While the Act of 1924 is not applicable to the case at bar in the sense that the statute is not retroactive, nevertheless the action of Congress under the circumstances may well be regarded as a clarification of an originally obscure expression of legislative intent. In view of the surrounding circumstances, we are unable to agree with respondent's contention. Following the decisions in Stoddard v. Eaton; Selah Chamberlain; and Trudie T. Munger, supra, it is our opinion that the sales of securities during 1922 and 1923 were *840 not sales of trust property within the meaning of section 219 of the Revenue Act of 1921, and that losses sustained by reason*1478 of those sales were properly deductible by petitioners individually and prorata for the respective years, unless such losses were otherwise nondeductible. The respondent contends that the stock-sale transactions between Justina G. Catlin, mother of these petitioners, and the trust estate, were not bona fide and that therefore the alleged losses were not deductible. There is no dispute as to losses from stocks sold on the market, nor as to the amounts of losses sustained. We are unable to concur with the respondent's view. While transactions of the sort in question may call for careful scrutiny, the record discloses actual sales, for cash, at the regular market prices of the stocks sold. After Justina G. Catlin purchased the securities from the trust estate she retained them as investments. There is nothing in the evidence to indicate that she was not fully competent to conduct business transactions, or that either she or the trustees were the victims of fraud, deceit or misrepresentation with respect to any of their mutual dealings in 1922 and 1923. We are not aware of any rule of law by which the stamp of bad faith attaches to a business transaction between parent and child, *1479 ipso facto, where each party is legally capable of conducting his affairs, as was the case here. Nor is there anything inherently wrong or contrary to the statute in so conducting one's affairs that his income tax may be thereby reduced. Our conclusion, therefore, is that each petitioner is entitled to deduct his proportionate share of the losses from the sales of stock in each year. Decision will be entered under Rule 50.