Rand v. Commissioner

*233 This proceeding was brought for a redetermination of petitioner's income tax liability for the years 1934 and 1935 in the respective amounts of $166,314.74 and*877 $199,553.38.

The questions presented are (1) the taxability under section 167(a)(3), Revenue Act of 1934, of the income from certain trusts created by petitioner for the benefit of his children, and (2) whether petitioner is entitled to a deduction by reason of an alleged capital loss resulting from the sale of certain stocks in 1934.

FINDINGS OF FACT.

Petitioner is an individual and resides at University City, Missouri. For approximately forty years he has been associated with the International Shoe Co. in various positions. In August 1916 petitioner was elected president of the company, in which position he served until 1930, when he was made chairman of the board.

Since 1920 petitioner's family has consisted of his wife and their six children. The names and dates of birth of his children are:

Edgar E. Rand	Sept. 26, 1905
Miriam L. Rand (now Mrs. Gail F. Johnston)	Jan. 25, 1907
Frank C. Rand, Jr	Dec. 28, 1937
Henry H. Rand	Jan. 16, 1909
Norfleet H. Rand	Dec. 8, 1913
Laura H. Rand	Mar. 12, 1919

Impressed with the fact that, upon the death intestate of petitioner's predecessor as president of the company, his son upon attaining his majority*878 would come into a substantial fortune, and being *234 desirous of avoiding a situation of that kind, petitioner determined to form trusts for his own children, none of whom owned any property and who at that time were all minors. On various dates between 1920 and 1926 petitioner caused securities to be issued to "Frank C. Rand, natural guardian for," naming the child, the name being followed by the words "a minor donee." Petitioner's intent in constituting himself natural guardian was to convert the guardianships into trusts for the children when he could determine upon the permanent form for such trusts.

Petitioner, as natural guardian, collected the income of the guardianship estates and kept it separate and apart from any of his or his wife's personal incomes. During this period petitioner did not use any of the income from the guardianship estates for his own benefit nor did he use any of it to relieve himself from any obligation imposed by law for the maintenance, support, or education of his children. During the minority of the children he provided for their support, maintenance, and education out of his personal funds.

On September 26, 1926, petitioner's son*879 was to become of age, and on September 15, 1926, petitioner executed a declaration of trust by which he caused to be transferred to himself, as trustee, the guardianship estate which he had previously held for his son, Edgar E. Rand.

A trust in the form of a marriage settlement for his daughter, Miriam L. Rand, was dated October 28, 1926. The indenture recited the intended marriage, and stated that Miriam L. Rand was "possessed of certain property which, with a view to present settlement, has been assigned and transferred to the name of said trustee or his successor or successors in trust"; and that petitioner had caused to be transferred into his name as trustee certain other property to be held under the trust. At the time of Miriam's marriage part of the estate was distributed to her.

Petitioner executed declarations of trust for his remaining four children on October 29, 1926, in all of which he was named trustee. All of the trusts, save the one for his daughter Miriam, by their terms were irrevocable. In the trust for Miriam there was no provision making it revocable.

The provisions of the trusts so far as here pertinent are common to all of them. The property was*880 transferred to Frank C. Rand, as trustee, "to hold, manage, and improve said property, with full authority to such trustee to change the investment of the same or any part thereof and to invest or reinvest the proceeds from time to time, with full power to accumulate, invest, change, or reinvest the surplus of any income, dividends and interest from said securities and property, nevertheless for the benefit" of the respective children. At stated times portions of the trust principal were to be turned over to the *235 designated beneficiary and the respective trusts were to terminate on the final distribution of the trust estate.

The trust instruments each provided:

I. The trustee shall have the following powers in addition to those hereinbefore conferred or those ordinarily possessed by trustees:

* * *

2. The power to purchase securities at a premium and to charge the premium against principal or against income or partly against income as in the opinion of the trustee may be suitable and appropriate.

3. The power to purchase for cash or on credit securities or other property, and to borrow money from time to time upon such terms as the said trustee may think*881 expedient, upon the security of any of the property of this trust, whether real or personal, and for such purposes to give and execute and acknowledge mortgages, with such powers and provisions as said trustee may think proper, and also to execute and deliver such notes or bonds as it is necessary to use in connection with such transactions.

* * *

Petitioner, as trustee, has kept individual book account records for each of the six beneficiaries of all of the transactions of the trusts, and has kept the trust funds deposited in a bank account known as the "Rand-Six Trusts," and the trustee's books show the separate individual interest of each trust beneficiary.

Prior to 1934 none of the income or principal of the trust estates had been used for the purchase of life insurance. In 1934 and for several years previous there had been accumulations of trust income. Petitioner, as trustee, found it difficult to determine what investments he could advantageously make at that time due to the uncertainty of general market conditions. Substantially the same situation obtained in 1935. In view of this, petitioner thought a good, safe investment could be made in a substantial amount*882 of life insurance taken out by him as trustee for the benefit of the several trusts. Forty-five separate life insurance policies issued by seven different life insurance companies on the life of petitioner were taken out in 1934 by petitioner, as trustee of the respective trusts for his children. The total protection provided by these policies aggregates $1,000,000. The proceeds of all of the policies are payable to Frank C. Rand or his successors in trust, as trustee for his respective children, and, pursuant to the trust instruments, are primarily for the benefit of the respective children. In instances when the right to change beneficiary exists it is exercisable by the trustee.

Petitioner, as trustee, out of the income of the trusts, applied $63,927.53 to the payment of premiums upon the policies of life insurance during 1934, and during 1935 paid $61,606.70 in premiums on the same policies. Since 1935, petitioner's six children have paid the premiums on the insurance policies out of their own separate property

*236 The total income of all of the trust estates for 1934 and 1935 was $322,277.91 and $359,138.20, respectively. Respondent has included these entire*883 amounts in petitioner's gross income for 1934 and 1935.

Petitioner has never used any of the income from the trusts for the direct benefit of himself or his wife, nor has he used it for the support, maintenance, or education of his children.

The Reorganization Investment Co. was organized in 1931 to take over the obligations and liquidate the partnership of Lorenzo E. Anderson & Co., which had been conducting a stock and bond brokerage business in St. Louis, Missouri. Petitioner and members of his family were creditors of the company to the extent of approximately $665,000.

At the time of the organization of the Reorganization Investment Co., petitioner subscribed $847,166.67, for which he received 847 1/16 certificates of beneficial interest in the stock of the company. (For convenience these certificates of beneficial interest will be hereinafter referred to as stock in the company.)

In 1933 petitioner sold 500 shares of the above stock, which had cost him $500,000, for the net nominal sum of $4. He claimed and was allowed a deduction on this account in his income tax return for that year.

On December 27, 1934, petitioner sold 12 shares of the Reorganization Investment*884 Co. stock through St. Louis brokers at the price of 10 cents per share, which, after deduction of commission, resulted in a net sales price of 22 cents for the 12 shares. This was the stock for which petitioner paid $1,000 per share in 1931.

The balance sheet of the Reorganization Investment Co. as of December 31, 1933, shows assets and liabilities as follows:

ASSETS
Cash		$28,003.06
Notes receivable		104,427.33
Accounts receivable	$1,760,663.97
Less reserve for bas debts	1,491,612.38
		269,051.59
Inventory stocks and bonds		1,257,476.84
Cash surrender value life insurance		2,395.80Accrued interest on bonds
	90,134.21
Memberships		17,600.00
Total assets		1,769,088.83
LIABILITIES
Accounts payable		$1,130,192.70
Reserve for loss on securities	$555,000.00
Special reserve	35,070.00
		590,070.00
Capital stock - 2,200 shares no par common		48,826.13
Total liabilities		1,769,088.83

*237 The stock of the Reorganization Investment Co. was worthless prior to 1934.

OPINION.

OPPER: The first issue presented is whether petitioner is taxable on the income of six separate trusts created for the benefit of his*885 children. Respondent bases his determination on section 167(a)(3), Revenue Act of 1934, which provides:

SEC. 167. INCOME FOR BENEFIT OF GRANTOR.

(a) Where any part of the income of a trust -

* * *

(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor * * *;

then such part of the income of the trust shall be included in computing the net income of the grantor.

(b) As used in this section, the term "in the discretion of the grantor" means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question."

This issue can be considerably restricted by adopting for purposes of discussion a quotation from petitioner's reply brief (p. 28):

We do not doubt that if Mr. Rand, by the trust instruments, had authorized or directed the trustee to use or treat trust income in the manner described in section 167(a)(3), and if it had been so used, then such conduct*886 by the trustee could properly have been imputed to Mr. Rand as grantor, and he would have become individually liable in respect of the amounts so used.

Bearing in mind that, at least as to the amounts actually expended, there is no doubt that "trust income" has been "so used", this statement of petitioner's position leaves open only the question whether the trust instrument authorized that use. We think it must be concluded that it did.

Petitioner concedes that nothing in the statutes or decisions of Missouri affirmatively prohibits "investment" of trust funds in life insurance policies, nor is there any expression in the trust instrument directly bearing upon the question. It being elementary that construction of trust deeds is dependent on the grantor's intention, see St. Louis Union Trust Co. et al., Trustees,40 B.T.A. 165, and that in case of doubt or ambiguity extraneous evidence of that intent may be considered, Endowment Association v. Wood, 4 Mackay (D.C.) 19, 29; see Securities Investment Co. v. International Shoe Co. (Mo.), 5 S.W.(2d) 682, 685, it seems to us that no more persuasive factor could possibly appear than the*887 conduct of petitioner himself. It is inconceivable that his action as trustee can be viewed as inconsistent with his intention as grantor, since he is the same individual in both *238 instances, though acting in different capacities; and we are thus relieved from having to decide what would be the situation in a case where the trustee is a different person and his actions can not be attributed to the intention of the grantor on the one hand or to the petitioner taxpayer on the other.

We may add that any different view would place petitioner in a less favorable light than that suggested. "* * * it is at least unusual that a taxpayer should be heard to assert the possibility of an adjudication of alleged misconduct and breach of trust, as relieving him from tax liability which is predicated upon the assumption of the honesty and legality of his acts. * * *" Board v. Commissioner, 51 Fed.(2d) 73, affirming 14 B.T.A. 374; certiorari denied, 284 U.S. 658. If the payment of premiums was unauthorized it was a breach of trust for which petitioner could be held to account. *888 His motive would be immaterial. Restatement of the Law of Trusts, § 201, a. He could not be heard to claim a credit as trustee for the funds so used, Cornet v. Cornet,296 Mo. 298; 190 S.W. 333, 341, 342; and the presumption would be inescapable that premiums paid for insurance policies on his own life payable to beneficiaries of his own choice, resulting in recognized indirect benefits to him, Burnet v. Wells,289 U.S. 670, should be treated as an expenditure made for his own account. Cornet v. Cornet, supra.Any claim that he should escape taxation because he was enabled to obtain that benefit through his own wrongdoing and with income not rightfully his would be given short shrift. National City Bank of New York, Executor,35 B.T.A. 975; affd., 98 Fed.(2d) 93 (C.C.A., 2d Cir.). And whether he would be entitled to a deduction if and when he made good to the trust for the misappropriated funds would be a question outside the present record.

Petitioner challenges the constitutionality of section 167(a)(3) as applied to the present facts. He urges that by taxing the income*889 of the respective trusts to petitioner, respondent is measuring petitioner's income tax liability by the income of another and placing a burden on petitioner unrelated to his privileges or benefits. Consideration of that question is foreclosed by Henry A. B. Dunning,36 B.T.A. 1222.

However, respondent endeavors to charge petitioner with the entire income of the several trusts. In the recent case of Genevieve F. Moore,39 B.T.A. 808, respondent urged the taxability of the entire trust income where authority to invest in life insurance contracts was given by the trust instrument, although it did not appear that any policies existed in the tax year. We there said:

While on its face section 167 might appear to apply, it has, so far as can be discovered, never been considered applicable even by the respondent as broadly as is now suggested. * * *

* * * application *239 of the provision in question depends upon the existence in the tax year of policies upon which it would have been physically possible for the trustees to pay premiums and upon the amount of the premiums so payable.

The taxability of the trust income to petitioner is thus*890 limited to premiums paid or payable on existing policies. As to the trust income above the premiums actually paid, we hold for petitioner.

The remaining question involves a loss claimed by petitioner on the sale in 1934 of stock held by him in the Reorganization Investment Co. The sole issue is whether the stock sold by petitioner in 1934 was worthless in a prior year. It has become a postulate that a loss deduction can not be taken in a subsequent year, if the stock was actually worthless in a prior year. Claude D. Cass,32 B.T.A. 713; affd., 83 Fed.(2d) 841; Walter W. Moyer,35 B.T.A. 1155. A taxpayer can not thus defer losses to his convenience.

Respondent has found that the stock in question was actually worthless in 1933. In that year petitioner had also sold some of the stock in this company at the nominal sum of $4 for 500 shares, or four-fifths of a cent a share, for shares which had cost him $1,000 each. In the taxable year petitioner received the net sum of 22 cents for 12 shares of this stock which had cost him $12,000.

To sustain his burden of proving some value in 1933, petitioner introduced the balance sheets*891 of the Reorganization Investment Co. as of December 31, 1933, upon which the assets are given a substantial value. It may be that the assets of a corporation are properly to be considered in arriving at the value of its stock (Lillian G. McEwan,26 B.T.A. 726), and it may even be that in the absence of any other showing the book value of those assets may be some evidence of their actual value, and may sufficiently shift the burden of going forward to the respondent. B. F. Edwards,39 B.T.A 735; see Wessell v. United States, 49 Fed.(2d) 137; Commissioner v. Brier Hill Collieries, 50 Fed.(2d) 777. In this proceeding, however, the book figures are shown to have no bearing whatever on the actual value of this stock, by the fact that petitioner disposed of 500 shares of this stock in the year prior to the taxable year for the nominal sum of $4. A sale of stock at a nominal price may not of itself establish worthlessness or the existence of value. Claude D. Cass, supra;*892 De Loss v. Commissioner, 28 Fed.(2d) 803. However, if bona fide, it must establish that the stock is worth no more than the sale price. Rhodes v. Commissioner, 100 Fed.(2d) 966. Hence, in the present case the book figures are shown to bear no relation to the actual worth of the stock. Thus, we are left with no evidence of any probative force that it had value prior to 1934. It follows that petitioner has failed to sustain his burden of proof. Claude D. Cass, supra;Sterling Morton,38 B.T.A. 1270.

*240 Petitioner urges that at all times the Reorganization Investment Co. continued in the operation of its business and was at all times able to pay its current obligations as they matured. The continued operation of the company does not of itself prove value in its stock. Claude D. Cass, supra;Floyd E. Poston et al., Administrators,17 B.T.A. 921. Moreover, the company by its very nature was a liquidating company, and would presumably continue to operate until its purpose was fulfilled, even though the final result of its operations could leave nothing for stockholders.

*893 Nor does the sale in 1934, if the stock was already worthless, aid the petitioner. De Loss v. Commissioner, supra. This is especially true where, as appears from this record, the purchaser was actuated solely by "speculative" motives. Gilbert H. Pearsall,10 B.T.A. 467.

Since petitioner has not established value for the stock in 1934, the balance sheet showing of value in assets being discredited by the terms of the sale in the prior year, and the continued operation of the company not being indicative of any value, we have found the stock to have been worthless prior to 1934, as determined by respondent.

Decision will be entered under Rule 50.