Elbert v. Commissioner

MARIAN BOURNE ELBERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Elbert v. Commissioner Docket No. 100497. United States Board of Tax Appeals 45 B.T.A. 685; 1941 BTA LEXIS 1088; November 12, 1941, Promulgated *1088 1. Held, the facts showing that the several steps were but parts of an integrated transaction agreed to in advance, petitioner is not entitled to deduct interest paid on a promissory note given by her to her husband and herself as trustees of a trust established by her for her daughter, the note being given to evidence an alleged loan to her by the trust. 2. Held, petitioner was not engaged in a trade or business and is not entitled to deduct as ordinary and necessary expenses a prorated share of the cost of maintaining an office. C. M. Charest, Esq., and John W. Fisher, Esq., for the petitioner. Z. N. Diamond, Esq., for the respondent. VAN FOSSAN *685 Respondent determined a deficiency of $13,431.80 in petitioner's income taxes for the fiscal year ended October 31, 1936. Petitioner contends that respondent erred in failing to allow as deductions from gross income $13,410 representing interest paid and $11,820.36 representing ordinary and necessary expenses incurred in carrying on a business. FINDINGS OF FACT. Petitioner is an individual residing with her husband at Miami Beach, Florida. Petitioner keeps her books on*1089 a cash receipts and *686 disbursements basis and filed her return for the period in question on that basis with the collector of internal revenue for the second district of New York. Petitioner is a woman of wealth, having assets of several million dollars and an annual income ranging from $150,000 to over $600,000. She derives the majority of her income from a trust or trusts established for her benefit by her father sometime prior to 1919. During 1935 petitioner received through the trust an extra dividend of $300,000 on stock of the Singer Sewing Machine Co. On December 31, 1935, petitioner established a trust for her daughter, Patricia Bourne Elbert, who was at that time ten years old, and executed a check in the amount of $300,000 payable to herself and her husband, Robert G. Elbert, as trustees. Petitioner filed a gift tax return reporting the transfer of $300,000 and paid a gift tax of $18,600 thereon. By the trust instrument the trustees are given unlimited authority to invest and reinvest the trust fund, including the power to invest in corporations in which the trustees may be interested personally and to make direct loans to one or more of the trustees, *1090 provided the loans shall be properly evidenced by written documents for the protection of the trust. The trustees are directed: * * * to apply so much of the net income as the Trustees, in their sole discretion, may deem necessary to the use, maintenance, support and education of Patricia Bourne Elbert, the beneficiary, until she shall attain the age of 21 years, and so long thereafter as this Trust shall be in existence to pay the net income thereof to said Patricia Bourne Elbert, the beneficiary, direct. Surplus income accruing during the minority of the beneficiary at the discretion of the trustees may be added to the corpus or distributed to the beneficiary upon her reaching the age of twenty-one years. The trustees are given the authority to carry any or all of the property in the name of one or both of the trustees. Each of the individual trustees is empowered to appoint a substitute trustee to act in his or her place. Power to distribute the principal to the beneficiary or to use it for expenses of the trust is also granted. The trust is to terminate upon the death of the beneficiary or upon her attaining the age of thirty years. On the termination of the trust*1091 by the beneficiary attaining the age of thirty years the trustees are to pay over the principal and any undistributed income to the beneficiary. On the termination by the death of the beneficiary the trustees are to pay over the principal and any undistributed income to such person or persons as the beneficiary may designate by last will and testament or, in the absence of any such designation, then to the person or persons who will inherit the estate of the beneficiary under the laws then in effect. *687 The power of the grantor to alter, modify, or amend or to revoke, cancel, or annul the trust is expressly denied. On January 3, 1936, the trustees executed a check for $298,000, payable to petitioner in exchange for her unsecured promissory note for $298,000 with interest at 6 percent. The note is payable on demand and no time for payment of interest was specified. At the time the trust was established it was understood that petitioner and her husband as trustees would give petitioner a check for $298,000 in exchange for her promissory note payable to the trustees. No part of the principal of the note has ever been paid. On October 8, 1936, petitioner executed*1092 a check in the amount of $13,410, payable to the trustees in payment of interest on the note from January 3 to October 3, 1936. The trust in its Federal income tax return for the taxable year reported the amount of the check and paid the tax thereon. The interest was also reported as income to the trust for New York State income tax purposes. Prior to the establishment of the trust petitioner's husband was primarily responsible for the support, maintenance, and education of Patricia Bourne Elbert out of his current income and a small trust established in 1926. At the time the trust was established petitioner had no reason to believe that she or her husband would not be able to continue to take care of their daughter who was at that time named a beneficiary in petitioner's will. No part of the income of the trust has ever been applied by the trustees in any year to the use, maintenance, support, and education of the beneficiary. Separate books which were regularly audited were kept for the trust. Those books show disbursements as follows: Jan. 3, 1936, loaned to petitioner $298,000.00 Dec. 2, 1937, premium on policy No. 12197331, issued by the New York Life Insurance Co. on the life of Robert G. Elbert 4,279.00 Dec. 2, 1937, premium on policy No. 4799087, issued by the Mutual Life Insurance Co. of New York on the life of Robert G. Elbert 8,408.24 Jan. 19, 1939, premium on policy No. 12197331 2,732.32 Jan. 19, 1939, premium on policy No. 4799087 6,812.42 *1093 No payments were made from 1935 to the time of the hearing for any purpose except the above payments of premiums on life insurance policies on the life of Robert G. Elbert and income tax payments on the interest received from petitioner. The trust instrument was deposited for safe keeping with the New York Trust Co. and was kept along with petitioner's other personal papers. During the taxable year petitioner and her husband maintained an office at 599 Madison Avenue, New York, New York. The office had been located previously at 149 Broadway but prior to the taxable year it was moved uptown so that it could be reached more easily. *688 When she was in town petitioner went to the office three or four times a week. During the time that they were away from the city, which was several months during the taxable year, petitioner and her husband kept in close touch with the office. During the taxable year there was a stock ticker in the office and direct private wires to the office were maintained by several brokers at the brokers' expense. The office subscribed to a number of investment services, including some publications on general business conditions. During*1094 the taxable year petitioner and her husband employed Jane McHeffey, William N. Brooks, and a Miss Langston to take care of the affairs of the office. Jane McHeffey's salary was $4,499.98, Brooks' salary was $4,474.98, and Miss Langston's salary was $1,429.98. Jane McHeffey has been employed by petitioner and her husband since 1923 as a secretary and bookkeeper. Along with the regular duties of the office she handled personal matters for petitioner and her husband, including the payment of premiums on insurance policies, bills for wearing apparel of petitioner, medical supplies, gifts of petitioner, traveling expenses of petitioner, personal income taxes of petitioner, and all expenditures for the two residences maintained by petitioner and her husband at Manhasset, Long Island (called Elbourne) and in South Carolina (called Airy Hall Plantation). She also arranged personal appointments for petitioner and her husband. These personal matters were estimated not to take more than three or four days of her time each month. William N. Brooks has been employed by petitioner and her husband as an investment counsel since 1926. He is not authorized to deal on his own initiative but*1095 handles the placing of orders to buy and sell securities for petitioner and her husband. His time is spent in watching the market and studying its trends in order to advise with petitioner and her husband as to investments. Brooks makes weekly detailed reports to petitioner and her husband showing the securities held in the various accounts, the credit balances with brokers, a comparison of their position in the market with the action of the market itself, and other items of interest. During the taxable year a large number of securities transactions were executed through the office at 599 Madison Avenue on behalf of petitioner and her husband. In 211 transactions, 29,996 shares of stock were purchased at a cost of $814,256 for the account of petitioner and her husband and in 229 transactions 27,230 shares were sold at a selling price of $857,226.08. Petitioner made purchases and sales on 37 different days during the taxable year. In 40 transactions petitioner sold 4,400 shares, which cost $198,525, for $218,652.92. In 15 instances the stock sold had been purchased less than one month prior *689 to the sale; in five instances it had been purchased less than two months*1096 before; in 17 instances less than three months before; and in three instances less than four months before. In three additional transactions she purchased, at a cost of $24,120,400 shares which were not sold during the taxable year. In addition to the above transactions, approximately 58 purchases and 53 sales were executed during the taxable year through the office at 599 Madison Avenue on behalf of accounts other than those of petitioner and her husband. Included in these transactions were a number on behalf of the trust established in 1926 for petitioner's daughter. During the taxable year the total expense incurred and paid in maintaining and operating the office at 599 Madison Avenue was $22,997, as follows: Salaries $10,704.94 Rent 4,500.00 Telephone and telegraph 741.56 Postage 213.01 Miscellaneous expenses 798.35 Subscriptions 218.38 Accountants (special services) 2,600.00 Accountants (regular services) 1,985.00 Accountants (travel) 200.00 Brooks - Business trip to Miami for consultation 342.22 New York Trust Co. (safe keeping) 50.00 Legal expenses 643.63 Petitioner was not engaged in a trade or business during the taxable year. *1097 OPINION. VAN FOSSAN: Reduced to its simplest terms, the first issue may be stated to be: Were the several steps taken by petitioner and her husband, i.e., the formation of the trust of which petitioner and her husband were trustees, the transfer to it of $300,000, the "borrowing" three days later by petitioner of all but $2,000 of the corpus of the trust, the giving by petitioner of a demand note without a fixed date for payment of either principal or interest - were these all steps in a single integrated transaction by virtue of which petitioner retained all the valuable incidents of ownership, control, and enjoyment of the funds while making a semblance of a gift? A consecutive reading of the facts would lead one to answer the above question in the affirmative. When we examine the testimony of petitioner and her husband in the matter a sharp cleavage appears. The testimony of petitioner unequivocally supports the above conclusion. She testified that at the time the trust was set up she and her husband arranged that they would give her the check for $298,000 *690 and that she would execute the promissory note. Petitioner's husband testified categorically and with*1098 much emphasis that no such understanding existed, and that he never gave a thought to the investing of the $300,000 fund until after it was paid into the trust, when the plan of "loaning" it to petitioner came to him. This square conflict of important testimony requires a careful weighing of the surrounding circumstances and inherent probabilities to determine wherein lies the truth. Consequent on this examination, we conclude that the testimony of petitioner is the more consonant with probability and is the more accurate story of the transaction. Having heard petitioner's testimony and realizing that it was damaging to the case, when petitioner's husband took the stand he was at pains to attempt to counteract her statements, explaining that she was confused, but our study leads us to accept her guileless statement as accurate and to reject the highly improbable, though emphatic, declarations of the husband. The above conclusion is dispositive of the first issue. Since it was intended from the start that the fund should be transferred back to petitioner, under the terms set out, no real gift occurred. The trust was merely a convenient conduit, and petitioner in effect is*1099 claiming a deduction for interest on money "loaned" to herself. See , affirming ; , affd., . The second issue must also be resolved against petitioner. The evidence does not reveal that she was engaged in any trade or business. She described herself as "an old-fashioned wife." True, having a very large independent income, more than $600,000 in the taxable year, petitioner concerned herself with the investment thereof and when in New York dropped into the office maintained by her husband and herself with some frequency. But looking after one's investments, however large, does not in fact or in law constitute engaging in business. ; . On the record of her activities we have found as a fact that petitioner was not engaged in a trade or business. The deduction of a prorated cost of maintaining the office was properly disallowed. It may be observed as to the foregoing issue, were our decision the converse, *1100 petitioner would yet fail for failure adequately to prove the amount of expense properly allocable to her. In fact there is no proof that petitioner paid any part of the expenses of the office. Decision will be entered for the respondent.