*2269 1. Beneficiaries of a trust which sustained net losses for its fiscal periods ended March 31, 1922, March 31, 1923, and March 31, 1924, are not entitled to deductions upon their individual returns for the calendar years 1922, 1923, and 1924, respectively, of amounts equal to the portions of the said net losses allocable to their interests in the trust.
2. Held that an alleged bad debt is not proven to have been worthless at the close of the year 1923 and therefore is not a proper deduction from income for that year.
*592 These are proceedings for the redetermination of deficiencies in income taxes as follows:
| Year | Clarence M. Busch | Bonnie M. Busch |
| 1922 | $324.79 | $33.58 |
| 1923 | 3,620.64 | |
| 1924 | 2,354.56 | 247.54 |
The Commissioner determined an overassessment of $26.30 in respect of the tax of Bonnie M. Busch for 1923.
The petitioners assert error in the respondent's denial of deductions for each of the years involved, of their shares of the alleged net loss of a certain trust estate. The petitioner, *2270 Clarence M. Busch, also asserts error in the denial of a deduction of $29,000 for the year 1923, as an alleged bad debt.
The facts were presented by the pleadings and a stipulation.
FINDINGS OF FACT.
The petitioners are individuals with their principal places of business at Palm Island, Miami Beach, Fla.
On April 23, 1921, a corporation known as the South Florida Farms Co., of which the petitioners were stockholders, was dissolved, its entire assets being distributed in kind to its stockholders *593 as joint owners. The said assets consisted of interests in and to various lands situate in De Soto and Lee Counties, Florida. The stockholders were Clarence M. Busch and Bonnie M. Busch, his wife; Frederick W. White and Pansy B. White, his wife; and W. Russell Osborn.
July 20, 1921, the joint owners of the assets above described executed a deed and conveyance in trust relating to the lands situate in De Soto County, and so far as material, reading as follows:
DEED AND CONVEYANCE IN TRUST.
THIS INDENTURE, Made this 20th day of July, A.D. 1921, between CLARENCE M. BUSCH and BONNIE M. BUSCH, his wife, each joined by the other, FREDERICK W. WHITE and PANSY B. WHITE, *2271 His wife, each joined by the other, and W. RUSSELL OSBORN and ADA W. OSBORN, his wife, each joined by the other, parties of the first part, and CLARENCE M. BUSCH, as Trustee, of the County of Dade, State of Florida party of the second part,
WITNESSETH: That Whereas the parties hereto are the owners of all the property hereinafter described and located in De Soto County, Florida; and
WHEREAS, it is the wish and desire of the parties hereto to convert said property into cash as soon as practicable; and
WHEREAS, it is deemed impossible and impracticable to dispose of all of said property at a profit at the present time; and
WHEREAS, it is deemed inconvenient and impracticable to leave the management, control and disposal of said properties in the hands of all of said owners as they are scattered in different parts of the country, etc., but it is deemed desirable and expedient to select and appoint one of their number to manage, control and dispose of said property as Trustee for the other owners under a trust arrangement, the particulars of which will hereinafter be set forth:
NOW, THEREFORE, In consideration of the premises and the sum of Ten Dollars ($10.00) and other valuable*2272 consideration to us in hand paid by the party of the second part, the receipt whereof is hereby acknowledged, and in consideration of the acceptance by the Trustee of the trust herein created, we, the said parties of the first part, have granted, bargained, sold, and do hereby grant, bargain, sell and convey unto the said party of the second part, his successors and assigns, all of our several and respective interests in and to the following described land lying and being in De Soto County, State of Florida, to-wit:
* * *
TO HAVE AND TO HOLD the same, with all the rights, immunities, privileges and appurtenances thereto belonging unto the said Trustee, successors and assigns in fee simple forever.
In trust, nevertheless, for the uses and purposes and subject to the conditions and provisions in this indenture expressed, to-wit:
Said Trustee is to serve without bond and without compensation or remuneration of any sort. All reasonable and necessary expenses, however, incident to the proper performance and execution of the Trustee's duties are to be paid out of the trust estate.
*594 Said Trustee is to manage and administer said trust fund in its entirety for the use*2273 and benefit of the parties hereto and shall, as rapidly as in his judgment the same can be done advantageously, convert all the trust estate into money, and for that purpose may sell, wholly or in part, all the trust property hereinbefore described, at such price or prices as he may think proper or expedient. Such sales may be made for cash or on credit, or partly for cash and partly on credit, and with or without security for deferred payments. The Trustee may also, in his discretion, accept and receive other property, real and personal, in payment, or in part payment of property sold or contracted to be sold by him. He may likewise, in his discretion, exchange any property belonging to this trust for any other property which, in his judgment, can be more readily or more advantageously reduced to cash than the property exchanged therefor, but such exchange shall be with the unanimous written consent of the parties of the first part first had and obtained.
Said Trustee on the first of each month shall pay and distribute all moneys so coming into his hands to and among the parties hereto or their heirs, executors, administrators, or assigns in the proportion of their holdings*2274 and interests, to-wit:
| Per cent | |
| Clarence M. Busch | 51.675 |
| Bonnie M. Busch | 2.5 |
| Frederick W. White | 24.975 |
| Pansy B. White | 11.75 |
| W. Russell Osborn | 9.1 |
It is understood, however, that said Trustee before making monthly payments shall at all times reserve sufficient funds to manage and operate said trust estate.
In order that there may be no doubt about the power and authority of said Trustee under the terms of this trust to grant and convey a legal title to any and all of the said property described herein, and in order that there may be no unnecessary delay in the delivery of deeds executed by said Trustee, the said parties hereto do hereby authorize and empower said Clarence M. Busch, Trustee, to sell and convey any or all of the property herein described to any person or persons, corporation or corporations, at any time and at any price that he may decide or deem to the best interests of all concerned, and to grant and convey a legal title to such purchaser or purchasers by deeds duly signed and acknowledged by him as such Trustee, without requiring said purchaser or purchasers to look to the application of the purchase money, and said Trustee is hereby*2275 given and granted any and all other power or authority to properly perform and execute said trust.
Provision was also made for succession of trustees and the grantors' warranty of title.
By a similar instrument of the same date the lands situated in Lee County were conveyed to the same trustees. A third instrument was likewise executed by the said parties, this being a conveyance in trust, to Clarence M. Busch, trustee, of all of the personal property formerly held by the South Florida Farms Co., consisting principally *595 of 50 mortgages relating to lands in De Soto and Dade Counties, Florida. So far as material the conveyance of the said personal property provided:
WITNESSETH, That Whereas the Trustees of the South Florida Farms Company have this day transferred and assigned to the stockholders of said Company pursuant to order of court and the statute in such cases made and provided, all the real estate owned by said corporation by deed duly executed and intended to be forthwith recorded; and
WHEREAS said Trustees of the South Florida Farms Company have this day transferred and assigned to the stockholders of South Florida Farms Company pursuant to order of court*2276 and the statute in such cases made and provided, all the personal property owned by said South Florida Farms Company by assignment duly executed and intended forthwith to be recorded; and
WHEREAS the parties of the first part are desirous of transferring and assigning all of said personal property, and particularly certain mortgages hereinafter described to party of the second part, Clarence M. Busch, Trustee, to be held, administered and disposed of by said Clarence M. Busch, Trustee, in accordance with and pursuant to the terms and conditions contained in the trust agreement hereinbefore referred to:
NOW, THEREFORE, in consideration of Ten Dollars ($10.00) in hand paid by the party of the second part, receipt of which is hereby acknowledged, and the acceptance by the Trustee of the trust herein referred to, we, the parties of the first part have granted, bargained, sold, assigned, transferred, and set over and by these presents do grant, bargain, sell, assign, transfer and set over to the said party of the second part, all the personal property which was transferred to us by the Trustees of South Florida Farms Company, as aforesaid, and particularly certain mortgages bearing*2277 date and recorded and made by the parties and covering property situated and being in De Soto County, State of Florida, as follows:
* * *
TOGETHER with the notes or obligations described in said mortgages or the money due or to become due thereon, with interest.
TO HAVE AND TO HOLD the same unto the said party of the second part, his successors and assigns forever.
Said Trustee is hereby given full power and authority to collect, assign, sell or satisfy the foregoing mortgages.
* * *
The joint owners had attempted to create these trusts on May 12, 1921, but the instruments then executed were found to be defective. The trustee therefore deeded back the property and thereafter the instruments above described were executed.
For the period May 17, 1921, to March 31, 1922, the trust estate, created as above described, sustained a net loss of $14,353.55. For the period April 1, 1922, to March 31, 1923, the said trust estate sustained a net loss of $6,002.02. For the period April 1, 1923, to March 31, 1924, the said trust estate sustained a net loss of $93,535.69.
*596 The proportionate beneficial shares of the petitioners in the said trust estate and the portions*2278 of the net losses assignable to such shares, are as follows:
| Clarence M. Busch | Bonnie M. Busch | |||
| Period | Interest | Amount | Interest | Amount |
| Per cent | Percent | |||
| 5/17/21-3/31/22 | 49.175 | $7,058.36 | 5.0 | $717.67 |
| 4/1/22-3/31/23 | 49.175 | 2,951.49 | 5.0 | 300.10 |
| 4/1/23-3/31/24 | 51.675 | 48,334.57 | 2.5 | 2,338.39 |
On May 1, 1923, taxes for the year 1922 on certain of the lands held by the petitioner Clarence M. Busch as trustee, became due and payable. The trust estate had no available liquid assets out of which such taxes could be paid. On or about May 1, 1923, the said trustee advanced to the trust estate out of his personal funds the amount of $29,000. The said advance was deposited to the credit of the trust estate, which thereupon issued its check in the amount of $28,808.79 in payment of the said taxes.
In 1923 the assets of the trust estate consisted principally of lands in southern Florida which had been seriously damaged by floods in 1922 and 1923. There was at that time practically no market for such lands.
In his income-tax return for 1923 the petitioner, Clarence M. Busch, claimed a deduction of $29,000 as taxes paid, by reason*2279 of his advance of that amount to the trust estate on or about May 1, 1923. The respondent has disallowed the deduction. The petitioner now asserts his right to such a deduction as a bad debt.
In January, 1924, Clarence M. Busch as trustee, unexpectedly sold for cash to a creditor of the trust estate certain bonds outstanding against the above mentioned lands. He thereupon reimbursed himself for the $29,000 advanced by him to the trust estate in 1923 and he returned the said $29,000 as income for the year 1924.
OPINION.
LOVE: On brief, the respondent moves the Board to dismiss the petition of Bonnie M. Busch so far as it relates to the year 1923, for lack of jurisdiction. The respondent has determined an overassessment for that year. It appears that the motion is well founded and accordingly it is granted. ; .
We are satisfied that the instruments of July 20, 1921, created a trust estate. .
*597 The petitioners were beneficiaries of a trust estate which sustained net losses for its fiscal years ended*2280 March 31, 1922, March 31, 1923, and March 31, 1924. The petitioners' returns were filed on a calendar year basis. For the years 1922 and 1923 they claimed deductions upon their individual returns of amounts equal to the proportionate shares of the net losses of the trust estate allocable to their respective beneficial interests. For the year 1924 they claimed deductions of such portions of the net loss of the trust estate for its fiscal year ended March 31, 1924, as are allocable proportionately to the nine months of that fiscal year which fell within the calendar year 1923, and upon the basis of the portion of such loss allocable to their respective beneficial interests.
In support of their contention the petitioners rely upon certain sections of the Revenue Act of 1921, viz:
SEC. 214. (a) That in computing net income there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit. * * *.
Section 204 of the*2281 Revenue Act of 1921 prescribes the manner in which taxpayers may claim net losses arising in one year as deductions from income of the next or next two succeeding taxable years. Subdivision (c) provides:
(c) The benefit of this section shall be allowed to the members of a partnership and the beneficiaries of an estate or trust, and to insurance companies * * * under regulations prescribed by the Commissioner with the approval of the Secretary. (Italics ours.)
The Revenue Act of 1924, in section 206(h) which corresponds to section 204(c), supra, provides that the benefits of the section shall be allowed to "an estate or trust" instead of the "beneficiaries of an estate or trust." Section 206(g) of that Act provides, however, for an adjustment of net loss deduction claims so that when the period for which the loss occurs falls partly in two calendar years, as to which the laws applicable differ, the deduction shall be determined proportionately in accordance with the laws in effect during such years. The petitioners accordingly claim that in their individual returns for 1924 they should be allowed deductions of such portions of the net loss of the trust for its fiscal*2282 year ended March 31, 1924, as are assignable to the nine months of that fiscal year falling within the calendar year 1923 and allocable to their interests in the trust.
*598 In , we considered an analogous contention under section 204(c) of the Revenue Act of 1918, which is similar to section 204(c) of the 1921 Act. After quoting subdivision (c), we said:
It is argued that the refusal to permit deductions by beneficiaries on their individual returns on account of net losses suffered by the trust will nullify the provision quoted above. How this conclusion was reached does not appear, for it seems quite clear that this provision permits the application of a net loss suffered by a trust in one year to be applied against the net income of the trust in another year for the purpose of determining the shares of income which are to be distributed to beneficiaries. Since under section 204(a) the "term 'net loss' refers only to net losses resulting from * * * (1) the operation of any business regularly carried on by the taxpayer, * * *" and a trust which distributes all of its income periodically is not taxable, subdivision*2283 (c) was added in order that the beneficiaries might, in determining their distributive shares, apply against the net income of one year the net loss of the other. Furthermore, section 204 does not add other losses to those for which deductions are allowed under section 214(a), but merely extends the scope for applying the losses which are allowed under that section. It does not appear, therefore, that this provision is subject to the interpretation asked by the taxpayers.
The petitioners herein seek to differentiate that decision because the beneficiaries therein were such under a trust created for their benefit by another person and under which they were not the remaindermen. In support of this the petitioners rely upon our decision in . In the De Forest appeal, the petitioner has received as an absolute gift from her husband certain shares of stock of a corporation then in the process of dissolution. On June 21, 1920, the corporate assets were assigned in dissolution of the corporation to the stockholders, including the petitioner. On the same date the stockholders assigned their undivided interests in certain patents*2284 and license agreements to a trustee for the purpose of enforcing all rights under the patents and for the collection of royalties. The patents then had 4 years and 12 days to run and a value of $1,600,000. In his information return for 1920 the trustee reduced the royalties received by expenses and by $227,066.56 for exhaustion of the patents. He indicated that the distributable share of Mrs. De Forest, after such deductions, was $8,787.47, and she reported that sum as income from the trust. The Commissioner restored to her income an amount representing the proportion of the exhaustion deduction allocable to her interest in the trust. We held that the petitioner was entitled to the exhaustion deduction claimed.
It should be noted that in the De Forest proceeding there was no claim for a net loss deduction. The petitioner was there claiming a deduction for exhaustion of a patent and under the circumstances *599 her claim was the only way in which the benefit of a deduction provided by statute might be secured, since such deduction must be claimed in the year in which the exhaustion occurs. The statute on the other hand makes specific provision for allowance of a*2285 "net loss" sustained by a trust, and this provision is that it may be deducted by the trust from income of certain succeeding taxable years. The beneficiaries then derive the benefit of the statute.
The petitioner, Clarence M. Busch, further alleges that he is entitled creosote oils which it sold for the most part to railroads for preserving appears that to avert a tax sale of certain of the lands which he then held as trustee, this petitioner on May 31, 1923, advanced to the trust the sum of $29,000. The trust, not having at that time, nor at the close of the year 1923, liquid assets sufficient to repay the advancement, the petitioner personally claimed the deduction of the said advancement as taxes paid in his income-tax return for 1923. The respondent denied the deduction. The petitioner now asserts that he is entitled to a deduction of the said advancement for the year 1923 as a bad debt. Through fortuitous circumstances the trust was able to dispose of certain bonds during 1924, and the petitioner repaid himself the advancement out of the funds so secured and reported the repayment as income during 1924.
*2286 Upon the state of facts presented, we can not accept the petitioner's contention that the amount of his voluntary advancement to the trust was a bad debt at the close of the year 1923. The record rather indicates that the trust then possessed extensive properties, which while they could not readily be realized upon, were by no means worthless. See ; ; .
We approve the respondent's determination in all particulars.
Judgment will be entered for the respondent.