Balch v. Commissioner

*270 This proceeding involves income tax liability for the year 1935. The respondent determined a deficiency of $2,119.98, of which $1,275 is in controversy. The question presented is whether certain corporate stock belonged in the taxable year to the petitioner or to a trust, and therefore whether petitioner was entitled to deduct from gross income an assessment paid upon such stock by the trust with money paid to the trust by her.

All facts were stipulated, including a deed of trust made a part of the stipulation. We find the facts to be as so stipulated. The stipulation, except formal*1352 parts, reads as follows:

1. The petitioner is an individual residing at Cincinnati, Ohio, and makes her Federal income tax returns on a cash receipts and disbursements basis for each calendar year.

2. On May 9, 1928, petitioner transferred to The Chase National Bank of New York City certain securities, including twenty (20) shares of the capital stock of The Kalamazoo-City Savings Bank, and on the same date petitioner entered into an Indenture of Trust with The Chase National Bank of the City of New York, providing that the said bank should hold the securities as trustee for the uses and purposes therein set forth. A copy of the said Indenture of Trust is attached hereto, hereby made a part hereof, and marked "Exhibit A."

3. The said twenty (20) shares of the capital stock of The Kalamazoo-City Savings Bank were later exchanged by the trustee for two hundred seventy-one (271) shares of stock of Kalamazoo Bancshares, Inc., and in April of 1932 petitioner, in accordance with the terms of said Trust, added to the Trust one thousand six hundred and twenty-one (1621) additional shares of the stock of Kalamazoo Bancshares, Inc., making a total of one thousand eight hundred and*1353 ninety-two (1892) shares of Kalamazoo Bancshares, Inc. held in said Trust.

4. The said Kalamazoo Bancshares, Inc. was a holding corporation, holding among other bank stocks all the stock of the Bank of Kalamazoo, and said Kalamazoo Bancshares, Inc. was duly organized and existing under the banking laws of the United States of America.

5. The receiver for Kalamazoo Bancshares, Inc. was appointed on December 26, 1934, and on January 10, 1935, an assessment of $3.876 per share was levied against the stockholders of that company. The said trustee of petitioner's said Trust had no cash balance in the Trust at that time, and rather than have the trustee sell any of the securities held in trust, the petitioner advanced to the trustee seven thousand three hundred and thirty-three and 40/100 dollars ($7,333.40), the amount necessary to pay the assessment. The petitioner filed a Federal gift tax return for the year 1935 and included said amount with other gifts made during said year. The trustee paid the receiver of Kalamazoo Bancshares, Inc., seven thousand three hundred and thirty-three and 40/100 dollars ($7,333.40) on February 11, 1935, upon order of the Circuit Court of the County*1354 of Kalamazoo, Michigan, dated January 10, 1935.

6. At the time required by law, petitioner filed a Federal income tax return for the taxable year 1935, showing no taxable income, and showing as a deduction *271 the assessment of seven thousand three hundred and thirty-three and 40/100 dollars ($7,333.40) so paid by her.

7. It is stipulated and agreed that there is a deficiency in Federal income tax due from the petitioner for the taxable year of 1935, and if the Board finds that the petitioner was not entitled to deduct the payment of seven thousand three hundred thirty-three and 40/100 dollars ($7,333.40) referred to in Paragraph 5 above on said Income tax return, the amount of said deficiency is two thousand one hundred nineteen and 98/100 dollars ($2,119.98). It is further stipulated and agreed that if the Board determines that the petitioner was entitled to a deduction for the taxable year 1935 in the amount of seven thousand three hundred thirty-three and 40/100 dollars ($7,333.40) on account of the above-mentioned payment, then the amount of said deficiency due from the petitioner is eight hundred forty-four and 98/100 dollars ($844.98).

So far as herein material, *1355 the trust instrument provides that the grantor assigns certain securities, and the proceeds thereof, in trust; that the trustee is directed to retain the securities and any additions thereto; that the trustee shall collect "the income, issues, rights and profits" from the trust corpus, and pay the "income", quarterly, to the petitioner during her life, and upon her death to pay the principal to the petitioner's son, or if dead, to divide and hold the corpus in trust for his children or their issue; that the trustee shall during petitioner's life make investments only with the petitioner's consent in writing; that the trustee shall "determine any question which may arise as to what constitutes income and principal as between any beneficiary entitled to income and any remainderman, such determination to be conclusive against all persons interested hereunder"; that the grantor expressly surrenders the right or power to amend or revoke the trust in whole or in part; that the petitioner has power to appoint a successor to the trustee in case of the trustee's resignation, insolvency, failure to act, or failure to carry out the provisions of the trust instrument; and that the trust shall*1356 be administered in the State of New York and be governed by the law of that state; that the trust is irrevocable.

OPINION.

DISNEY: The question presented is whether the petitioner is entitled to deduct as a loss an amount paid by her to the trust set up by her to pay a statutory assessment upon bank stock owned by the trust. The parties seem in agreement that the bank stock became worthless in a prior year, so that the assessment constituted a capital loss either to the trust or to the petitioner, and we so assume. The petitioner's view is, in substance, that under section 167(a)(2) and (b), Revenue *272 Act of 1934, ¹ capital gains constituted income to her because the trustee, having no substantial adverse interest in the disposition of income, could in its discretion distribute such capital gains to her, and that therefore she is entitled to a capital loss in the amount of the assessment. The respondent takes the position that the loss is that of the fiduciary.

*1357 We have held that, where a trustee with no substantial adverse interest in disposition of income may distribute capital gain to the trustor, such trustor is taxable upon capital gain as income. ; ; . Under such decisions, it is apparent and we hold, that here the petitioner was taxable upon any capital gains so distributable to her. Does it follow that she is entitled to the capital loss contended for? In , we held that a capital loss sustained by an estate in process of administration is personal to the estate as a taxable entity and that a sole devisee and legatee receiving the income may not deduct from such income any part of the capital loss, and we said that no distinction could in that respect be made between estates in process of administration and trusts, the statute itself making no distinction. Our holding in *1358 , was to the same effect. In , the beneficiaries, like the petitioner-beneficiary herein, received income quarterly "to be made from the income, so far as possible, and if the income be not sufficient, then to be paid from the principal of said trust estate." The beneficiaries were also the remaindermen. Yet, we held that the beneficiaries were not entitled to deduct capital losses of the trust on their individual income tax returns. In , the situation did not, in essence, differ from that herein. The trustees were authorized by the will to distribute the proceeds of sales of corpus or retain the same, in the meantime paying net income semiannually to those entitled to receive it. Yet, the Court held that capital losses were not deductible by the beneficiaries. We have here no case of naked trust or mere conduit to the beneficiary, but a taxable entity which the petitioner's brief expressly concedes is *273 separate from that of the petitioner. We conclude and hold that the*1359 provisions of section 167(a)(2) do not entitle the petitioner to deduct the bank stock assessment as capital loss. The fact that she advanced the amount necessary to pay such assessment is immaterial, and amounts to a capital contribution to the trust.

The petitioner further takes the position that, regardless as to whether entitled to receive the capital gains of the trust, she is personally liable, as beneficial owner of the stock, for the assessment and therefore may deduct as loss the assessment paid. The argument we consider untenable, for the reason that the petitioner can not be said to be the complete beneficial owner of the bank stock merely because she has a right for life to the ordinary trust income, with discretion in the trustee to distribute corpus. The remainderman has an interest in the corpus, and at least participates in the beneficial ownership of the bank stock included therein, as to which the assessment was laid. In our opinion , plainly indicates that the petitioner herein has no beneficial ownership in the corpus such as to cause disregard of the trust entity, or permit deduction by the petitioner of its*1360 capital losses. Therefore, under the provisions of the stipulation as to amount of any deficiency,

Decision will be entered that there is a deficiency in the amount of $2,119.98.