1934 BTA LEXIS 1450">*1450 An alleged transaction whereby an individual, through an auctioneer, offers property for sale and at the same time, through a broker, bids a prescribed price for himself as sole trustee of a trust at which the property is struck down to such broker, held, under all the circumstances, to lack intent of sale and not to result in deductible loss.
29 B.T.A. 976">*977 Docket No. 61961.
Respondent determined deficiencies of $40,704.69 and $4,092.27 in petitioner's income taxes for 1928 and 1929, respectively, by disallowing deductions for alleged losses and by including in petitioner's income from a trust amounts alleged to have been distributable and distributed to another beneficiary.
FINDINGS OF FACT.
1. Petitioner, a resident of New York, is trustee of a trust created March 12, 1923, by Jennie C. H. Marston, his wife, who died prior to 1928. By the trust instrument the settlor conveyed all her property to petitioner, as trustee, for the purpose of collecting the income1934 BTA LEXIS 1450">*1451 and profits therefrom, deducting all expenses or charges connected with the management, and paying the balance to the settlor for life, and on her death -
* * * to use so much of the net income as may be necessary to support the mother of the party of the first part (the settlor) so long as she may live and in the same way that she has been accustomed to live * * *,
and to pay the residue to petitioner individually for life. On his death the corpus was to be divided among his three children. The trustee was empowered to sell, exchange, or otherwise dispose of the trust property and reinvest the proceeds as he deemed proper. The trust books, bank, and brokerage accounts were separately kept and its property placed in a separate deposit box. On advice of counsel, petitioner treated profits from sales of trust property as corpus.
Petitioner paid to the settlor's mother, Mrs. Chapin, $3,000 annually (in monthly installments $250of each) during 1928 and 1929, out of the income of the trust for said years, respectively, in accordance with the provisions of the trust. This amount was twice the amount which the settlor had contributed to her mother's support. Petitioner reported1934 BTA LEXIS 1450">*1452 the entire distributable income of the trust for each of said years without diminution or reduction for the amounts paid to Mrs. Chapin.
2(a). On October 10, 1923, petitioner acquired 22,000 shares of no par common and 11,000 shares of $10 par preferred stock of Moose Mountain, Ltd., an Ontario condoration which owned 4,600 acres of low-grade iron ore lands in Ontario. This stock was kept in petitioner's personal deposit box and was held in the name of his secretary, Owen S. McHarg. The corporation was closely held by 29 B.T.A. 976">*978 wealthy business associates, who made it advances of funds. Petitioner had so advanced $110,136.34, for which he held corporate notes until October 10, 1923, when, pursuant to a refinancing scheme, he exchanged them for the said shares of stock. These shares were never listed on an exchange.
Moose Mountain, Ltd., experimentally developed a process for treating ores, with the expectation of selling its holdings at a profit. The land and experiments cost about $3,900,000. Prior to 1928 its shares were sold at par or above, and there were promising negotiations for a profitable sale of its property, but with the discovery of a great field of superior1934 BTA LEXIS 1450">*1453 ore, Moose Mountain's beds lost their commercial utility and the market and price of its shares crashed. In 1928 the the stock had a speculative value only, based on the anticipation that as high-grade iron ores would become exhausted in future years, the low-grade ore lands would become valuable. The corporation never paid a dividend, and in 1928 there was no prospect of any for many years to come. After fruitless efforts to sell his holdings privately to business associates, petitioner ordered them sold at public auction by Muller & Sons on December 26, 1928, and at the same time entered a bid of $1,000 for them through a stock broker on behalf of the trust. The shares were advertised for sale, and formally struck down at auction to the trust for the bid, plus fees, which amount was paid to the broker by a trust check. After deduction of commissions and transfer taxes, petitioner received from the auctioneer $656.75, and placed the stock in the trust's deposit box. Petitioner's children, the remaindermen, aged 44, 41, and 30 years, respectively, consented to and approved of this. Early in 1929 Moose Mountain was selling for 12 cents a share.
Six months after this, petitioner's1934 BTA LEXIS 1450">*1454 ex-partner, Blair, who was also interested in Moose Mountain, Ltd., pressed a cash claim against him, and in the negotiations for settlement insisted on having the Moose Mountain stock. In July 1929 petitioner gave the trust $1,010, took the stock, and settled Blair's claim by a large cash payment and delivery of these shares, which have not been reacquired either by petitioner or the trust. He "promised the beneficiaries in addition to reimburse the trust for any sum that Mr. Blair might ultimately realize on the sale of said stock."
2(b). On June 10, 1925, petitioner subscribed for 3,300 shares of stock in the Cumberland Coal Products Corporation, a Virginia corporation, organized in 1925 for the purpose of acquiring from the United States a plant for the distillation of bituminous coal, located at South Clinchfield, Virginia. The shares, which cost him $110,000, were issued in the name of petitioner's secretary, and were deposited in petitioner's personal safe-deposit box. The Cumberland Corporation acquired the plant for $500,000 and 15,000 shares, 29 B.T.A. 976">*979 or one half of its stock, and also acquired an exclusive patent license for use at the plant. In 1926 a competitor1934 BTA LEXIS 1450">*1455 company perfected an improved process for bituminous coal distillation, and thereafter the Cumberland plant depreciated greatly in value, and was sold as scrap in 1927 for $55,000.
On December 26, 1928, petitioner ordered Muller & Sons to "sell" His 3,300 shares of Cumberland Corporation at public auction, and at the same time entered a bid of $1,500 for them through a stock broker on behalf of the trust. The shares were struck down to the trust for the amount bid, which, together with a brokerage fee, was paid the broker by trust check. When received from the broker, the shares were deposited in the trust's safe-deposit box. In October 1931 they were sold for $4,490.
In determining petitioner's income tax for 1928, respondent disallowed a deduction for a claimed loss of $218,186.50 on the sale of petitioner's shares of Moose Mountain, Ltd., and Cumberland Coal Products Corporation.
OPINION.
STERNHAGEN: 1. It is stipulated that petitioner paid Mrs. Chapin $3,000 each year "out of the income of said trust," but that he included it in the gross income shown on his individual tax return. This was plainly an error which he is now entitled to have corrected. The opposition1934 BTA LEXIS 1450">*1456 to his claim seems to involve a misconception of the question as one of the petitioner's right to a deduction for an amount which he in his individual capacity gave to Mrs. Chapin. Being, however, rather a question of his right to exclude from his own income an amount which he never received from the trust - the answer is clear - it should be excluded.
2. Being of opinion, from all the evidence, that there were no sales of the Moose Mountain and Cumberland shares by petitioner, we have omitted to include findings that sales occurred. The motions which petitioner went through to simulate sales were in our opinion merely to promote a sham. The presence of the auctioneer and the broker, and the payment of their charges, added nothing to substantiate a sale. If there had been a genuine sale, it would have been just as effective if made directly by the petitioner individually to himself as trustee, and it was a waste of effort for him as an individual to tell himself as trustee to buy it at the auction and fix the price to be bid. So far from indicating a genuine sale, the devious method discloses artifice to give the appearance of substance.
Whether there has been a sale depends1934 BTA LEXIS 1450">*1457 upon the juristic intent of the parties, and this is determinable by the trier of the facts from the evidence as to words, conduct, and other circumstances which manifest the intent. The Commissioner having officially determined that 29 B.T.A. 976">*980 no bona fide sale took place, the petitioner must establish not only that there seemed to be a sale or that he had gone through the forms which people usually employ to carry out their intention to sell, but also that the forms and seeming were vitalized with the genuine intent to definitively sell. In judging this, our judicial duty does not require that we should recognize as true what our more common sense regards as specious. The history of the shares during petitioner's ownership, of which he was fully aware, would normally restrain him from unloading them upon a trust of which he was the fiduciary; and there is a natural reluctance in attributing to him an intention to do so.
Were there still a lingering doubt as to the change of ownership and the realization of loss sustained, it would be dispelled by the incident of the Blair claim when the petitioner took the Moose Mountain shares and delivered them in satisfaction of his obligation. 1934 BTA LEXIS 1450">*1458 While this subsequent act is only a makeweight in the evidence, it corroborates the belief that a legally effective sale was never intended and never regarded as having occurred. The ambiguous promise by petitioner to the beneficiaries when Blair took the shares adds nothing to his argument but confusion.
We are of the opinion that both the alleged transactions between the petitioner individually and himself as trustee in Moose Mountain shares and Cumberland shares lacked legal reality, and the claimed losses were not sustained because the shares were not sold. However real was the diminution in their value, there was no realization of loss without a genuine sale.
Docket No. 61960.
Respondent determined a deficiency of $5,567.10 in petitioner's income tax for 1929, in part by disallowing a loss on the alleged sale of stock by its trustee to himself as an individual.
FINDINGS OF FACT.
Petitioner is the trustee of an inter vivos trust created March 12, 1923, by Jennie C. H. Marston, who died prior to 1928. By the trust instrument she conveyed all her property to petitioner, who was her husband and a resident of New York, for the purpose of collecting the income1934 BTA LEXIS 1450">*1459 and profits therefrom, deducting all expenses or charges connected with the management, and paying the balance to her for life, and on her death to pay the income to himself as life beneficiary after advancing from it sufficient funds to support her mother. On the trustee's death, the corpus was to be divided among the settlor's and trustee's three children who were 44, 41, and 30 years of age in 1928. The mother was surviving in 1929.
29 B.T.A. 976">*981 In 1927 [as stipulated], the trustee acquired for the trust 1,800 shares of the common stock of Clinchfield Coal Corporation at a cost of $46,800. These shares were placed, with other securities of the trust, in its separate deposit box. On November 6, 1929, they were formally offered for sale at public auction and struck down for $5,400. After the deduction of selling costs, a check for $5,099 was deposited to the credit of the trust, and a sale was entered on its books in November 1929 to reflect a net loss of $41,701. At the auction the stock was bid in by a brokerage firm acting on behalf of petitioner individually. The brokers presented their check for $5,400 on November 6, 1929, and the certificate was delivered to petitioner's1934 BTA LEXIS 1450">*1460 secretary, who deposited it in his personal safe-deposit box. The beneficiaries consented to and approved of the alleged sale.
At the time in 1925 [as testified by Marston], when the trust is alleged to have acquired these shares from petitioner individually, he took a loss in respect thereof on his individual return.
OPINION.
STERNHAGEN: For reasons essentially similar to those just stated as to the alleged sales by Marston individually to Marston trustee, we are unable to find from the evidence that there was a sale by Marston trustee to Marston individually, and therefore affirm the respondent's disallowance of the deduction for loss.
Reviewed by the Board.
Judgment in both proceedings will be entered under Rule 50.
MCMAHON concurs in the result.
SMITH and TRAMMELL dissent.