Primm v. Commissioner

T. J. PRIMM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. T. J. PRIMM, TEMPORARY ADMINISTRATOR OF THE ESTATE OF MATTIE PRIMM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Primm v. Commissioner Docket Nos. 37792, 37793. United States Board of Tax Appeals 28 B.T.A. 13; 1933 BTA LEXIS 1198; May 4, 1933, Promulgated *1198 In December 1922, petitioner T. J. Primm made an oral declaration that he would operate a certain cotton-trading account for the benefit of his wife and children. In November 1923, this declaration was set forth in a written instrument in which the wife and children were designated as equal beneficiaries of "all the income of this fund." Held, the income from the trading account was first income to Primm and taxable to the marital community in 1923. Benjamin H. Saunders, Esq., and A. C. Upleger, C.P.A., for the petitioners. Shelby S. Faulkner, Esq., for the respondent. SMITH *13 The Commissioner determined a deficiency of $10,099.76 in the income tax of each of the petitioners, who were members of a Texas marital community, for 1923. The proceedings were duly consolidated. The petitioner, Mattie Primm, having died prior to the hearing, her administrator has been substituted as the petitioner in Docket No. 37793. The petitions contain several allegations of error, all of which have been abandoned except the allegation that the Commissioner erroneously included in the income of the marital community $110,290.01 alleged to be the income*1199 of a trust. FINDINGS OF FACT. T. J. Primm and Mattie Primm were husband and wife and, in 1923, residents of Waco, Texas. For a number of years prior to 1923, T. J. Primm had speculated in cotton futures. In some years he had profits from such transactions and in others had losses. He had been in the habit of making generous gifts to his six children. One of his friends had dealt speculatively in cotton futures through a so-called "cotton trust," the beneficiaries thereof being his children. Near the end of 1922, Primm was of the opinion that cotton prices were going to advance and conceived the idea of dealing in cotton futures through a trust account for the benefit of his wife and children, as his friend had done. *14 During the Christmas season, 1922, four of Primm's six children were at his home in Waco and he informed them and his wife that he was going to create a trust, as his friend had done and deal in cotton; that any profits he made from such dealings would be theirs, but that if the operations resulted in losses he would bear them. Primm's wife and children readily agreed to such proposition. At the time he had an account with J. D. Hayward & Sons, *1200 of New Orleans, cotton brokers. He wrote to his brokers requesting them to change the name of his account to "T. J. Primm, Trustee." The balance in the account at January 1, 1923, was $2,327.50. Soon after January 1, 1923, Primm began to make purchases of cotton through his brokers. Purchases and sales continued throughout the greater part of 1923 and resulted in a profit for the year (before the deduction of any salary for the trustee) of $127,838.34. At some time in 1923 Primm discussed with his wife and some or all of his children the question of a salary for himself and they agreed upon a salary of $5,000 for 1923. In 1923 the petitioner, as trustee, withdrew from the brokerage account $53,618.70. The balance remaining in the account at the end of 1923 (after which date there were no transactions in cotton) was $76,547.14. Of the amount withdrawn in 1923, $50,000 was withdrawn on November 22, 1923, and deposited by Primm in his own checking account at the Provident National Bank of Waco. On November 24, 1923, Primm distributed to each beneficiary from his individual account the amount of $2,500. After consultation with his income tax adviser, petitioner, on November 24, 1923, executed*1201 the following document before a notary: STATE OF TEXAS County of McLennan KNOW ALL MEN BY THESE PRESENTS: In consideration of love and affection, on the first day of January 1923 I transferred from my personal account with J. D. Hayward & Sons to a Trust Account the sum of $2,327.50 to be used for the operation of cotton trading or other investment for the benefit of my wife and six children. The sole beneficiaries of this Trust Fund are as follows: Mrs. Mattie Primm Waco Texas Thos. C. Primm Meridian Texas Jas. F. Primm El Paso Texas John Hubert Primm Marlin Texas Lizzie Primm Boggs Dayton Ohio Helen Primm Ross Waco Texas Clara Primm Mailander Waco Texas All the income of this fund is to be equally divided among the several beneficiaries. On this day I am distributing to each beneficiary the sum of $2,500.00 and will continue to distribute the cash income as it accrues, reserving in the fund an amount sufficient, in my opinion, to properly conduct the cotton operations, through which this trust is created, or an amount necessary to invest in any *15 other undertaking which, in my opinion, will prove beneficial to the interests*1202 of the beneficiaries of this trust. It is, however, understood that the entire income except the expense of operation is to be held by me for the several beneficiaries, and that no part of this fund can be diverted to my private or any other purpose. In 1923 petitioner kept no books of account and had no clerk or stenographer and due to his advanced age (77 years, September 27, 1923), and failing eyesight he depended upon the bankers and brokers for whatever information he needed in respect of his transactions. In 1923 the petitioner paid to his wife and children certain amounts of money for taxes, repair of buildings, etc., in addition to the $2,500 distributed to each on November 24, 1923. In November 1923, at a time when he had on deposit with the Provident National Bank a balance of only $1,358.80, Primm drew a check for $10,538.33 for the purchase of 400 acres of land from one Higginbotham, title to which was taken in Primm's own name. The balance of the money for the payment of the check was supplied by earnings that had been made in the cotton-trading account with J. D. Hayward & Sons. He advised his beneficiaries after the end of 1923 that each one's share of the profits*1203 from the trading account in 1923 was $17,548.33 and each beneficiary reported such amount of income in his or her individual income tax return for 1923. On or about March 15, 1924, Primm filed a fiduciary return with the collector showing income of the T. J. Primm trust for the year 1923 of $122,838.34, which is $5,000 less than the profits made in the trading account in 1923. The return shows the distributive share of each beneficiary for 1923 to have been $17,548.33. In January 1924, Primm withdrew from the account with J. D. Hayward & Sons $50,000, which was deposited in a savings account with the Provident National Bank at Waco under the caption "T. J. Primm, Trustee." This deposit was made separately from that in his checking account, for the purpose of deriving interest at a higher rate upon such account. Primm made distributions to his beneficiaries in 1924 of a portion of the earnings from the cotton trading account of 1923. He gave to some of the beneficiaries a greater amount than to others. In 1924 the petitioner conceived the idea that money could be made by dealing in automobile installment paper. He accordingly organized a company called "Security Investment*1204 Co.," using approximately $15,000 or $20,000 of the profits realized from cotton trading in the promotion of this company. Primm also advanced large amounts of cash belonging to him individually. This company was unprofitable and all of the money invested in it was ultimately lost. *16 In determining the deficiencies the respondent added $110,290.01 to the income of the marital community as reported upon the individual returns of T. J. Primm and Mattie Primm. This sum, $110,290.01, represents the net profits from the cotton-trading account, amounting to $127,838.34, less Mattie Primm's share of $17,548.33 which had been included in the income of the marital community and reported on their individual returns. OPINION. SMITH: The only question for decision in these proceedings is whether the petitioner and Mattie Primm, constituting a marital community in the taxable year, are liable to income tax upon the net profits of the cotton-trading account, amounting to $127,838.34, of which amount $17,548.33 was returned as taxable income by the marital community. The respondent contends that the evidence of record does not warrant a finding that the income of the trading*1205 account was the income of a trust. It is to be noted that the respondent makes no claim against T. J. Primm as a fiduciary. The issue, then, is whether T. J. Primm intended to and did actually create a valid trust with respect to the cotton-trading account. The existence or nonexistence of the alleged trust must be determined by the laws of the State of Texas. The rule as stated in Houser v.Jordan, 26 Tex.Cv.A. 398; , is: * * * Our statute of frauds does not apply to trusts arising directly from an express contract, nor to implied or constructive trusts, and the contract by which an express trust is created, or the facts from which an implied trust will result, may alike be proven by parol. ; ; . In section 99 of Perry on Trusts, it is said that: Whether the trust is perfectly created or not, is a question of fact in each case; and the court, in determining the fact, will give effect to the situation of the property, and the purposes or*1206 objects which the settlor had in view in making the disposition. When shown the instrument dated November 24, 1923, and asked when the alleged trust was created, T. J. Primm testified that: It was created the latter part of 1922, we discussed that when my children were gathered at home at Christmas, and from then on, about January 1, 1923, we considered it a trust, and so acted. He further testified as follows: I was going to try the cotton market, and if I made any money I wanted them to be the beneficiaries, and they wanted me to handle it as I thought best, and I proceeded to do so. * * * *17 I said I was going to play the cotton market and wanted them to have the benefit of the money made. * * * It came up this way. Usually I would give the children what I made during the year. This conversation came up, and my son, J. F. Primm, who is here now, he was one of the children living in El Paso, and in the conversation he said he would not let me give him anything. He said: "I don't want it. You give it to the balance of the children. I have plenty. I don't need it." He would not take anything. It came up at the gathering Christmas. Primm continued*1207 his operations in the cotton-trading account and toward the end of 1923 he said he "finally sold out and found I had made some money." The profit from dealing in cotton through the brokerage account with Hayward & Sons resulted from Primm's efforts. With the exception of a check for $50,000 which was deposited in a savings account, all of the money made in the brokerage account was handled by Primm through his individual bank account. He gave to his children as their needs required - some receiving more than others. Approximately $10,000 of the earnings from the brokerage account was used by Primm in purchasing land. With respect to this purchase Primm testified as follows: A. I bought an undivided half interest in 400 acres of land from Mr. Higginbotham. * * * Q. This land was taken in your own name? A. This was in my own name. * * * Mr. Upleger. That check for $10,538.33 was on your own personal account and for your own personal benefit? Mr. Primm. Yes. The venture in the automobile finance business absorbed the earnings that were not distributed to the children or used by Primm. Several of the children, beneficiaries of the alleged trust, testified*1208 with respect to the conversation at Christmas 1922. From their testimony it appears that they considered that they were to receive the benefit of any profits that their father made through the brokerage account, and that he would stand any losses that might be incurred. The discussion at Christmas 1922, was consistent with Primm's custom of making gifts to members of his family. The earnings of the trading account were distributed by Primm as he saw fit, and not equally among the designated beneficiaries. A large portion of these earnings went for the purchase of land (title to which was taken by Primm) and for the automobile finance company (of which Mrs. Primm and the children may or may not have been the stockholders). Then, too, the written instrument which was prompted by the accumulation of profits merely provides for the division of "the income of this fund." Although Primm's trading account was *18 transferred from himself as an individual to himself as a trustee upon the books of the broker, there was no transfer of an interest in the $2,327.50 (the property producing the income) to the beneficiaries. In *1209 , we said: The rule is well established that notwithstanding the document of grant or assignment itself may be perfectly valid and enforceable between the parties thereto, the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the grant or assignment of such income or profits to another. * * * It appears that the designated beneficiaries each received in November 1923, a distribution of $2,500, although at the time of that distribution there was a considerable profit in the account and Primm said he wanted "to let each child have what was his." The earnings which the respondent has taxed to the marital community resulted from Primm's trading activities. He realized the profits and distributed or used them as he saw fit. His disposition of the profits indicates that they were subject to his "unfettered command," and the evidence refutes the contention that the income was the income of a trust. The fact that the designated beneficiaries reported and paid a tax upon such profits*1210 does not relieve these taxpayers of their liability for tax upon income that belonged to the marital community. The respondent's determination is sustained. Cf. ; . Reviewed by the Board. Judgment will be entered for the respondent.