Mallinckrodt v. Commissioner

*194 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1921 of $2,471.45. The error alleged is that the respondent erred in holding that the petitioner did not sustain a deductible loss by reason of the transfer of certain securities to a trust estate.

FINDINGS OF FACT.

The petitioner is a resident of St. Louis, Mo. On June 6, 1921, he made a voluntary trust, by means of a written Indenture of Trust, as follows:

THIS INDENTURE OF TRUST, Made and entered into this 6th day of June, 1921, by and between EDWARD MALLINCKRODT, JR., hereinafter designated at the "Donor," and EDWARD MALLINCKRODT, JR., and the ST. LOUIS UNION TRUST COMPANY, a Missouri Corporation, hereinafter designated as the "Trustees," WITNESSETH: That,

The Donor, in consideration of his affection for the several beneficiaries hereinafter named, has sold, assigned, transferred*3006 and set over unto the Trustees, and does hereby sell, assign, transfer, set over and deliver unto the Trustees all the personal property described in Exhibit "A" hereunto attached and made a part hereof, and which for convenience will hereinafter be designated as the "trust estate"; in trust, however, for the uses and purposes, upon the terms and conditions and with the powers and duties hereinafter set forth:

(a) The trustees shall hold and manage the trust estate and shall have power and authority at any time and from time to time to sell, transfer and convey the trust estate or any part or portion thereof upon such terms and conditions as in their judgment may seem to be for the best interest of the beneficiaries of this trust; to invest the proceeds of any such sale and any other money forming a part of the trust estate by lending the same upon good security *195 or by expending the same in the purchase of any property which in their opinion will yield a safe and regular return; to change investments from time to time either by the sale and purchase of securities or by the exchange of the same for others; to decide whether any dividend or other increment of value accruing*3007 from any shares of stock or other personal property held by them is principal or income or partly one and partly the other; and in general to do all such other acts in connection with the care and management of the trust estate as may from time to time seem to them necessary or proper.

(b) The Trustees shall collect all income and profits accruing from the trust estate, shall pay therefrom all legal and proper charges and all expenses of administering this trust, and distribute the remainder as follows: So long as she shall remain the wife or the widow of the Donor the Trustees shall pay to Elizabeth Elliot Mallinckrodt, in monthly installments as nearly equal as practicable, the entire net income from the trust estate, subject, however, to limitation upon her right to receive the same hereinafter set forth. When she shall cease to be the Donor's wife or his widow the net income from the trust estate shall be divided, in equal shares, per stirpes, among his children and other descendants until the expiration of the life of this trust. This trust shall continue in full force and effect until the death of the survivor of the wife and present living children of the Donor, and*3008 at its expiration the estate shall be divided, in equal shares, per stirpes, among the descendants of the Donor; provided, that if at such time any such descendant shall be under the age of twenty-one years his or her share shall be held in trust by the Trustees until he or she shall have reached such age; provided, further, that if any child of the Donor shall then have died having left a last will, the share of the income and of the principal which would be distributed to him or her under the foregoing provision, if living, shall be disposed of in the manner appointed or directed by such last will.

(c) If at any time during the existence of the trust and thereafter from time to time there shall, in the opinion of the Trustees, exist an emergency then requiring the expenditure of any portion of the principal of the trust estate for the benefit of either the wife of the Donor or any of his children, the Trustees are authorized to use such amount as in their judgment will be necessary to relieve such emergency, and if the person for whose benefit such principal shall be used, or any descendant of such person, shall be thereafter entitled to enjoy any part of the income or*3009 principal of the trust estate, his, her or their right of participation therein shall be reduced proportionately. If at any time or from time to time the Trustees shall decide that it is either necessary or for any reason desirable to increase the principal of the trust estate or to make up any shrinkage or diminution thereof, they are hereby authorized and empowered to withhold from the beneficiaries hereunder any portion of the income accruing from the trust estate, for such period or periods of time as they may fix.

(d) If the individual trustee shall die during the life of this trust or if either of the trustees shall resign or become disqualified to act the other trustee shall have all the powers and responsibilities hereinabove respectively conferred and imposed upon them jointly.

(e) No interest of any of the above mentioned beneficiaries in the principal or income of the trust estate shall be liable for his or her debts or be subject to levy or seizure under any writ of execution or attachment or other process of law, nor shall any beneficiary have the right to sell, transfer, mortgage or hypothecate or otherwise alienate, encumber or anticipate any interest in the income*3010 or principal of the trust estate, and every such attempted disposition, hypothecation or anticipation of such interest shall be null and void.

*196 IN TESTIMONY WHEREOF the said parties have caused this indenture to be duly executed the day and year first above written.

The property covered by "Exhibit A" mentioned in the trust indenture and delivered to the trustees consisted of preferred stock of the Houston Oil Co. of the par value of $295,800 and cash of $159,606.50.

On the date the trust indenture was executed the petitioner informed the then president of the St. Louis Union Trust Co. that he, the petitioner, had some stocks that he was going to sell if the St. Louis Union Trust Co. as trustee would approve them. The petitioner was told that if they were good stocks, the trust would buy them at current prices.

On the same day the trust indenture was executed the petitioner executed and delivered to the St. Louis Union Trust Co. a letter as follows:

ST. LOUIS, Mo., June 6, 1921.

City.

GENTLEMEN: As Donor in a certain Trust Indenture executed by me on June 6th, 1921, and as your co-Trustee therein, I hereby authorize*3011 and direct you to invest the cash this day deposited with you, to be invested under the terms of the said Indenture, and referred to in Exhibit "A" in the following described securities, to be held for the account of the trust estate:

Very truly yours,

(Signed) ED. MALLINCKRODT, Jr.

The petitioner's financial secretary, Adolph H. Stille, who handled all his financial transactions, on June 7, 1921, consulted G. H. Walker & Co., an established brokerage house in St. Louis, with reference to disposing of certain securities of the petitioner. Stille delivered the securities to G. H. Walker & Co. Stille and an official of G. H. Walker & Co., checked to market price and agreed upon the price at which they might be sold. Stille advised G. H. Walker & Co. that if they would talk to*3012 the St. Louis Union Trust Co. they probably could sell the whole block there. G. H. Walker & Co. did talk with the St. Louis Union Trust Co. and sold all the stocks to that company. G. H. Walker & Co. did not know who the Trust Company was buying the securities for. The securities involved, the *197 cost and/or March 1, 1913, value thereof and the net amounts received were as follows:

The St. Louis Union Trust Co., Trustee, issued its check dated June 8, 1921, to G. H. Walker & Co. for $159,606.50 and received the securities. G. H. Walker & Co. rendered its reports of sale to the*3013 petitioner on June 8, 1921, showing the following:

On June 8, 1921, G. H. Walker & Co. issued to the petitioner its check for $159,163.43, the amount of the net proceeds of said sale.

The prices at which the securities were sold to the trust estate were the market values of the respective securities on the date of sale.

OPINION.

SIEFKIN: It is contended by the petitioner that the facts in this case closely parallel those which we considered in *3014 , in which we held that a transfer to a trust resulted in a deductible loss. The trust indenture in that proceeding was created by Edward Mallinckrodt, Sr., as donor, and the trustees were his son, Edward Mallinckrodt, Jr., and the St. Louis Union Trust Co. In this proceeding Edward Mallinckrodt, Jr., is the donor under the trust agreement and he is also a cotrustee with the St. Louis Union Trust Co. Except for this difference and *198 the resulting question that it raises, i.e., whether the petitioner, as a trustee, does not still retain some interest in the trust assets as an individual, it is clear that the provisions of the trust indenture effectually sever the legal and beneficial interest in the property from the petitioner. Thus the situation is the same as that considered in the previous case. If it once be granted that the trust is a valid one and that its terms govern the trustees, then it can make no difference that the petitioner is both donor and a trustee since, in the latter capacity, he can act only in accordance with the terms of the instrument. We have not had a brief from the respondent or any statement*3015 of the reasons for his position. On the record before us, however, we can not see any position which he could successfully urge which would justify us in denying the deduction as a loss.

Reviewed by the Board.

Judgment will be entered for the petitioner.