Donner & Marine Trust Co. v. Commissioner

CARROLL E. DONNER AND THE MARINE TRUST COMPANY OF BUFFALO, GUARDIANS OF THE PROPERTY OF JOSEPH W. DONNER, JR., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CARROLL E. DONNER AND THE MARINE TRUST COMPANY OF BUFFALO, EXECUTORS OF THE ESTATE OF JOSEPH W. DONNER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CARROLL E. DONNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Donner & Marine Trust Co. v. Commissioner Docket Nos. 60235-60237. United States Board of Tax Appeals 32 B.T.A. 364; 1935 BTA LEXIS 953; April 16, 1935, Promulgated *953 1. The value of securities at the time contributed to a partnership and not the cost to the contributor is the proper basis for determining gain or loss upon the future sale of such securities by the partnership. Edward B. Archbald,27 B.T.A. 837, followed. 2. Partnership income attributable to the limited interest of Joseph W. Donner, which he assigned to a trust company, as trustee, to collect the profits and income therefrom and pay the same to his wife during her lifetime, is taxable to the assignor. burnet v. Leininger,285 U.S. 136, followed. Ralph M. Andrews, Esq., for the petitioners. W. Frank Gibbs, Esq., and Frank M. Thompson, Jr., Esq., for the respondent. MORRIS *365 These duly consolidated proceedings are for the redetermination of the following deficiencies in income tax. Name Docket Year or period Amount No. Carroll E. Donner and the Marine Trust Co. of Buffalo, Guardians 60235 [1929] $676.23 Carroll E. Donner and the Marine Trust Co. of Buffalo, Executors 60236 Jan. 1 to Nov. 9, 1929 22,256.20 Carroll E. Donner 60237 [1929] 4,235.81 *954 The issue common to all three proceedings pertains to the respondent's erroneous inclusion of the following amounts in the taxable incomes of the several petitioners: Docket No. Year or period Amount 60235 [1929] $18,872.50 60236 Jan. 1 to Nov. 9, 1929 107,746.69 60237 [1929] 56,152.50 being the difference between the costs of certain securities contributed to Rennod Co., a limited partnership, and the market values of said securities at the time of such contributions. Another issue, found only in Docket No. 60236, pertains to the respondent's allegedly erroneous inclusion of $3,614.13 in taxable income, representing the decedent's distributive share of the net income of the Rennod Co. for the taxable year 1929. The respondent moved at the hearing for an increased deficiency and reiterated his claim thereto in amended answers filed by him. The respondent expressly abandons the averment in Docket No. 60236 that the petitioner had the power to revest in himself title to the entire corpus of the trust set up for the benefit of Joseph W. Donner, Jr., and concedes that the income of that trust was not taxable to the decedent. He also abandons his averment*955 that there was no bona fide partnership. He adheres to his position that the partnership income attributable to the interest of Joseph W. Donner, which Donner relinquished by his assignment of such interest in trust for his wife, is taxable to his estate. FINDINGS OF FACT. Joseph W. Donner, the decedent in Docket No. 60236, prior to his death, was a resident of the city of Buffalo, New York. He died on November 9, 1929, leaving a will appointing his wife, Carroll E. Donner, and the Marine Trust Co. of Buffalo, a trust company organized under the laws of the State of New York, with its offices *366 and places of business in the city of Buffalo, New York, his executors. Letters testamentary were issued by the Surrogate of Erie County, New York, to said executors on November 25, 1929, and at all times thereafter they have been and now are the duly qualified and acting executors of the estate of Joseph W. Donner, and are the petitioners in said proceeding. Joseph W. Donner left surviving him a son, Joseph W. Donner, Jr., who was and now is a minor. On May 15, 1931, letters of guardianship of the property and estate of Joseph W. Donner, Jr., were issued by the Surrogate*956 of Erie County, New York, to Carroll E. Donner, his mother, and the Marine Trust Co, of Buffalo, above referred to. Said guardians at all times thereafter have been and now are the duly qualified and acting guardians of the property and estate of Joseph W. Donner, Jr., and are the petitioners in Docket No. 60235. Carroll E. Donner, individually, is the petitioner in Docket No. 60237. On January 31, 1929, and for some time prior thereto (but subsequent to January 1, 1927) Joseph W. Donner was and had been the owner of numerous securities including certain shares of Columbia Graphophone Co., Ltd. On said date by an instrument in writing Joseph W. Donner assigned, transferred, and delivered absolutely to his wife, Carroll E. Donner, without consideration and by way of gift, 1,200 of his shares in that company. Joseph W. Donner's cost in the 1,200 shares was $33,847.50, and their value on January 31, 1929, was $90,000. On February 11, 1929, by declaration of trust, dated February 1, 1929, the decedent, Joseph W. Donner, constituted himself trustee of 500 shares of stock of said company for the benefit of his minor son, Joseph. Joseph W. Donner's cost in the 500 shares was*957 $18,627.50. On February 11, 1929, the date of the creation of the trust for Joseph W. Donner, Jr., said shares had an aggregate value of $37,500. Said declaration of trust provided, among other things, in paragraph 3 thereof, as follows: All dividends, income, increment and rights in respect of said property shall be received and paid over to or used by me for the benefit of said infant during minority, and all proceeds of any sale, exchange or other disposition of such property above named shall be held by me for the benefit of said infant, provided, however, that I shall have the right to reinvest any of such income, increment or proceeds during the minority of said infant, and after such infant arrives at the age of twenty-one years any of the proceeds thereof, and any increment or appreciation thereof, or the proceeds thereof during the existence of this trust, for the benefit and use of said infant in any property whatsoever, including the right to invest the same in any partnership becoming a member thereof as such trustee, and I shall not be accountable for any loss sustained in the exercise of my unrestricted discretion in respect of such reinvestment. *367 *958 It also provided in article 7 that the trust should be revocable by the donor subject to the following conditions: (a) That at least two years' written notice of his intention to revoke is given by the donor. (b) That the donor be living on the date of the expiration of said two years. (c) That the donor at the date of such expiration shall deliver to the trustee an instrument in writing revoking the trust pursuant to the notice. No notice of revocation under article 7 of said trust indenture was given. On February 11, 1929, Joseph W. Donner, Carroll E. Donner, and Joseph W. Donner, as trustee for Joseph W. Donner, Jr., under declaration of trust dated February 1, 1929, above referred to, entered into a written agreement, by the terms of which it was agreed that the parties thereto should enter into a limited partnership, pursuant to the Limited Partnership Act of the State of New York, under the name of "Rennod Company", for the purpose of dealing in stocks, bonds, and other securities. The general partners and the value of securities each agreed to contribute were as follows: Joseph W. Donner $60,011.80 Carroll E. Donner 20,000.00 The limited partners*959 and the value of securities each agreed to contribute were as follows: Carroll E. Donner $70,000 Joseph W. Donner 120,000 Joseph W. Donner, as trustee for Joseph W. Donner, Jr 37,500 The limited partners were to receive annually from the partnership income amounts equal to the following percentages of their capital contributions: Carroll E. Donner 7 percent Joseph W. Donner, as trustee for Joseph W. Donner, Jr 7 percent Joseph W. Donner 10 percent The general partners were to receive the balavce of the profits of the partnership and to absorb its losses in proportion to the amount of their respective contributions. Carroll E. Donner and Joseph W. Donner, as trustee for Joseph W. Donner, Jr., were to have priority as limited partners over Joseph W. Donner as a limited partner, both in the matter of sharing in the partnership profits and in the return of their contributions on liquidation. In the same manner Joseph W. Donner, as a limited partner, was to have priority over the general partners. On February 11, 1929, a "Certificate of Formation of Limited Partnership of 'Rennod Company'" was filed pursuant to the Limited*960 Partnership Act of the State of New York, in the office of the Clerk of Erie County, New York. On February 11, 1929, Joseph W. Donner, by an instrument in writing, duly assigned, transferred, and delivered to Rennod Co., *368 as his limited partnership contribution to the capital of Rennod Co., 1,600 shares of the common capital stock of Columbia Graphophone Co., Ltd., which he acquired during the calendar year 1928 at an aggregate cost of $64,742.50, and which had a fair market value on February 11, 1929, of $120,000. On February 11, 1929, Joseph W. Donner, by an instrument in writing, duly assigned, transferred, and delivered to Rennod Co., as his general partnership contribution to the capital of Rennod Co., certain other securities having a then aggregate fair market value of $275,980. Said securities were subject to indebtedness to brokers in an amount of $215,968.20, which Rennod Co., in consideration of the transfer of the securities to it, assumed and agreed to pay. The net value of Joseph W. Donner's general partnership contribution was $60,011.80. All of the securities transferred to Rennod Co. as his general partnership contribution were purchased by Joseph*961 W. Donner on or after January 1, 1927, at an aggregate cost of $222,800.32. On February 11, 1929, Carroll E. Donner, by an instrument in writing, duly assigned, transferred, and delivered to Rennod Co., as her limited and general partnership contributions to the capital of Rennod Co., 1,200 shares of the common capital stock of Columbia Graphophone Co., Ltd., which shares she had previously acquired by gift from her husband, as hereinbefore stated, and which he had acquired by purchase subsequent to January 1, 1927, at an aggregate cost of $33,847.50. Said shares had an aggregate fair market value on February 11, 1929, of $90,000 and were entirely free from indebtedness. It was agreed by the terms of the partnership agreement that of the $90,000, $70,000 represented Carroll E. Donner's limited partnership contribution, and $20,000 represented her general partnership contribution. On February 11, 1929, Joseph W. Donner, as trustee for Joseph W. Donner, Jr., under the declaration of trust dated February 11, 1929, by an instrument in writing, duly assigned, transferred, and delivered to Rennod Co., as his limited partnership contribution to the capital of Rennod Co., 500 shares*962 of the common capital stock of Columbia Graphophone Co., Ltd., which Joseph W. Donner had theretofore but subsequent to January 1, 1927, purchased at a cost of $18,627.50. Said shares had an aggregate fair market value on February 11, 1929, of $37,500. Subsequent to the organization of the partnership and on March 14, 1929, Joseph W. Donner purchased 75 shares of the capital stock of Marine Union Investors, Inc., at a cost of $2,400. On the same date, by an instrument in writing, he duly transferred, assigned, and delivered to Rennod Co. the 75 shares of Marine Union Investors, Inc., as an additional general partnership contribution to the capital of Rennod Co. *369 On March 22, 1929, by an indenture of trust, dated and effective as of February 1, 1929, Joseph W. Donner granted, assigned, and transferred to the Marine Trust Co. of Buffalo, as trustee: The interest of the Donor as a limited partner in the partnership of "Rennod Company", of Buffalo, New York, said interest consisting of the capital contribution and a share of the profits to the extent of Ten Percent (10%) per annum on the capital contribution made by the Donor as such limited partner, which the donor*963 as such limited partner would otherwise be entitled to receive under the provisions of the said partnership agreement; but without in any way subjecting the Trustee to liability for the obligations or for the losses of said partnership; it being understood and agreed, that by virtue of said assignment the Trustee shall not become a member of said partnership. The trustee was to receive and collect the profits and entire net income therefrom and pay over the same to Carroll E. Donner during her lifetime. No notice of revocation under article 7 of said trust indenture was given. The partnership, for the period from the date of its organization to the death of Joseph W. Donner on November 9, 1929, had gross income and expenditures properly deductible for income tax purposes as follows: If profits and If profits and losses from sale of losses from sale of securities are com- securities are com- puted on basis of puted on basis of contributing the values thereof partner's cost on date of contri- bution to Rennod Co Dividends from domestic corporations $10,667.73 $10,667.73 Interest on bank balances 3.39 3.39 Net profit from sale of securities contributed by partners 178,798.20 22,692.31 Net loss from sale of securities purchased or acquired by Rennod Co (Loss (3,616.37) (Loss) (4,391.31) Gross income 185,852.95 28,972.12 Interest, taxes, legal expenses 20,445.62 20,445.62 Net income for period 2/11/29 to 11/9/29 165,407.33 8,526.50 *964 The partnership, for the period from the death of Joseph W. Donner on November 9, 1929, to the close of business on December 31, 1929, had gross income and expenditures properly deductible for income tax purposes as follows: If profits and If profits and losses from sale of losses from sale of securities are com- securities are com- puted on basis of puted on basis of contributing the values thereof partner's cost on date of contri- bution to Rennod Co Dividends $0.13 $0.13 Net loss from the sale of securities (Loss) 46,611.29 (Loss) 47,875.72 Gross income (Loss) 46,611.16 (Loss) 47,875.59 Interest and taxes 171.28 171.28 Net loss for period 11/9/29 to 12/31/29 46,782.44 48,046.87 *370 Subsequent to the death of Joseph W. Donner, and on June 4, 1931, Rennod Co. was liquidated and wound up. On his death on November 9, 1929, Joseph W. Donner left a last will and testament by the terms of which no specific bequest was made of the testator's interest in the partnership, Rennod Co., but which bequeathed "the rest, residue and remainder" of the testator's property, "real, personal and mixed, of whatsoever nature*965 and wheresoever situated" to a trustee, to invest the same and collect the income therefrom, and to pay over the net income to his wife in quarterly installments in each year during her life. Upon the death of his wife, the principal of the trust was to be distributed among the testator's children, share and share alike. At all times material herein Joseph W. Donner, individually, Carroll E. Donner and the Marine Trust Co. of Buffalo, as executors of the estate of Joseph W. Donner, Carroll E, Donner, individually, Carroll E. Donner and the Marine Trust Co. of Buffalo, as guardians of the property and estates of Joseph W. Donner, Jr., and the partnership Rennod Co., kept their accounts and filed their returns on a cash receipts and disbursements basis. On March 15, 1930, the partnership filed a return with the collector of internal revenue in Buffalo, New York, on Treasury Department form 1065, covering the period from the date of organization of the partnership on February 11, 1929, to the close of business on December 31, 1929. Said return disclosed a net loss from the sale of securities for the period of $21,885.20, and a total net loss after addition of other income and*966 deduction of various expenses of $31,703.72. Profits and losses from the sale of securities acquired from the contributing partners were computed in the return by determining the difference between selling price and the value of said securities on the date they were transferred to Rennod Co. The total net loss of $31,703.72 was shown in the distribution schedule of Rennod Co.'s return to be distributable between the general partners in proportion to their respective general partnership contributions as prescribed by paragraph 8 of the partnership agreement as follows: Joseph W. Donner $20,805.54 Executors of estate of Joseph W. Donner 2,972.25 Carroll E. Donner 7,925.93 The amounts reported as distributable to Joseph W. Donner and to the executors of his estate, respectively, were the same proportions of the total net loss which would have been distributable to Joseph W. Donner had he lived through the whole of the year 1929, as the number of days between the organization of Rennod Co. and November 9, 1929, bore to the number of days from November 9, 1929, to the end of the year 1929. The loss of $20,805.54 was not included in the *371 return filed*967 for Joseph W. Donner for the period January 1 to November 9, 1929. A return showing no taxable income was filed by the executors of the estate of Joseph W. Donner for the period from November 9 to December 31, 1929. No returns were filed on behalf of Joseph W. Donner, Jr., a minor, or Carroll E. Donner for the calendar year 1929. The respondent having determined that there was taxable income to Carroll E. Donner and Joseph W. Donner, Jr., a minor, for said period, caused delinquent returns to be filed for the calendar year 1929 for Carroll E. Donner and Joseph W. Donner, Jr., a minor. In determining the taxable income to Carroll E. Donner and Joseph W. Donner, Jr., for the calendar year 1929, the only income determined by the respondent as having been received by the two petitioners was in connection with Rennod Co. The exhibits attached to and incorporated in the stipulation of facts entered into between the parties are incorporated in our findings, by reference, to the same effect as if included herein. OPINION. MORRIS: The major question for our determination is the proper basis for computing gain or loss upon the securities transferred to the partnership, Rennod Co. *968 , upon the sale of such securities by that company in the taxable year. The respondent contends that the basis should be the cost to the contributing partners and that the fair market value thereof at the date of such contributions should not be used, as the petitioners contend. ; affirmed at ; certiorari denied, , so completely disposes of this issue in favor of the petitioners that further discussion is useless. See also ; certiorari denied, October 8, 1934. The respondent's answer places in issue the question of whether or not the partnership income attributable to the interest of Joseph W. Donner, which he assigned as of February 1, 1929, to the Marine Trust Co. of Buffalo, as trustee, to collect the profits and income therefrom and pay the same to his wife, Carroll E. Donner, during her lifetime is, notwithstanding such assignment, taxable to him or, in his stead, his estate. The respondent contends that, in effect, this was merely an assignment of "future income" and that therefore for tax purposes the income*969 must be taxed to the assignor. The petitioner relies mainly upon , and , affd., , both of which held that there was an asignment of a partnership interest, and that thereafter the profits accruing to that interest were taxable to the assignee. These cases were decided, however, prior to *372 the decision of the United States Supreme Court in . In that case the Court said: The statute dealt explicitly with the liability of partners as such. Applying to this case, the statute provided that there should be included in computing the net income of Leininger his distributive share of the net income of the partnership. That distributive share * * * was one half. In view of the clear provision of the statute, it can not be said that Leininger was required to pay tax upon only a part of this distributive share because of the assignment to his wife. * * * * * * The Congress could thus tax the distributive share of each partner as such, as in Lucas v. Earl, supra, it taxed the salary*970 and fees of the person who earned them. * * * In the instant case, the right of the wife was derived from the agreement with her husband and rested upon the distributive share which he had, and continued to have, as a member of the partnership. Sections 181 and 182(a) of the Revenue Act of 1928 are practically identical with section 218(a) of the Revenue Acts of 1918 and 1921, which were involved in the Leininger case. In the instant proceeding the trustee's rights rested upon Donner's distributive share, and were derived from the trust agreement. That agreement specifically provided that the trustee was not to become a member of the partnership. There was no change therefore in the membership of the partnership by virtue of the agreement. Accordingly, under the statute as construed by the Supreme Court in the above opinion, Joseph W. Donner is taxable upon the distributive share of his limited partnership interest whether distributed or not. Several other questions were raised by the pleadings, which it is unnecessary to decide, either due to concessions made by the parties or to our conclusion on the first issue. Reviewed by the Board. Decision will be entered*971 under Rule 50.