*2455 The petitioners by written instrument transferred securities to a certain person, designated by said instrument as a trustee, with power to sell and reinvest, to collect the income and pay the same to the petitioners, but reserving the right to revoke the written instrument at will. Under the instrument sales of securities and reinvestments were made at the suggestion of, or after consultation and agreement with the petitioners. The proceeds of sales and of matured securities were paid in some instances to the person designated as trustee and in some instances directly to the petitioners. Held that such sales were not of trust property under the Revenue Act of 1921 and that the petitioners are entitled to deduct losses sustained on the sales from their personal incomes.
*127 These proceedings are for the redetermination of deficiencies in income tax asserted by the respondent as follows:
Ellen Steele Chamberlain | Selah Chamberlain | ||||
Year | Docket No. | Deficiency | Year | Docket No. | Deficiency |
1921 | 16598 | $7,717.66 | 1921 | 16597 | $9,814.29 |
1922 | 24285 | 4,007.21 | 1922 | 24284 | 1,955.33 |
1923 | 29479 | 13,894.44 | 1923 | 29480 | 9,394.11 |
*2456 The proceedings were consolidated for hearing and decision. The issues in all are identical. They are: (1) Whether certain securities, upon the sales of which losses were sustained during the taxable years, were included in a revocable trust agreement, and (2) if so, are such losses allowable deductions to the petitioners as beneficiaries of the trust?
FINDINGS OF FACT.
In 1906 the petitioners and their brother, Joseph P. Chamberlain, received jointly a large amount of property by inheritance. This property consisted of some real estate in Chicago and Cleveland, and a large amount of stocks and bonds issued by corporations, most of which had their places of business in New York City. The Chamberlains lived in California. Originally the securities had been placed in trust for the three heirs, but in 1907 the trust terminated and new certificates, covering separate one-third portions, were issued to the heirs individually. In 1908 Joseph Chamberlain took up his residence in New York City and the securities issued by eastern companies were then placed with the American Exchange National Bank in New York for safe keeping. Both Joseph Chamberlain and Selah, one of the present*2457 petitioners, had access to the safe-deposit box where the eastern securities were kept. All records and account *128 books concerning the property were kept by Selah Chamberlain in San Francisco, except for about one year during a part of 1908 and a part of 1909. Ellen Chamberlain gave a general power of attorney to Selah and he represented her in all transactions concerning the property.
The two brothers, Joseph and Selah, together decided questions of sale of securities, purchase of others, reinvestments, etc. Selah made frequent trips to New York where consultations were held concerning administration of the property. Occasionally, when quick action was necessary, Joseph sold or purchased securities without first consulting his brother, and occasionally, also, Selah did likewise respecting western securities. Such instances were not frequent, however. A checking account was opened with the American Exchange National Bank entitled "Joseph P. Chamberlain and Selah Chamberlain, Special Account." Income from their securities was deposited in this account and such deposits were divided from time to time, usually but not always by Joseph, checks for two-thirds the amount*2458 being sent to Selah for himself and his sister. When sales of securities were made by Joseph, he first obtained from these petitioners special powers of attorney for each sale. This practice proved unsatisfactory, and in 1915 the petitioners signed separate agreements whereby each conveyed to Joseph, in trust, an undivided one-third interest in a large amount of personal property.
The purpose for which these trust agreements were executed was to obviate the necessity of furnishing Joseph Chamberlain with special stock-selling powers of attorney for each sale. These agreements were never delivered to Joseph Chamberlain, he never accepted the trusteeship thereunder, and nothing was ever done to put them in effect. No change was made in the method of dealing with the securities or as to their custody and safe-keeping.
In May, 1920, the petitioners, as parties of the first part, joined in signing another indenture, which was acknowledged by them in September, 1920. By this instrument the petitioners transferred to Joseph Chamberlain, in trust, the following property:
Shares | |
Santa Fe Railroad Co. preferred stock | 800 |
Am. Exchange National Bank stock | 68 |
General Electric Co. stock | 400 |
Northern Pacific R.R. Co. stock | 600 |
Southern Pacific R.R. Co. common stock | 400 |
Northern Pacific-Great Northern joint | |
bonds (C., B. & Q. collateral trust | |
4%, $200,000 par.) |
*2459 This trust was accepted by Joseph, as trustee. Its terms were:
* * *
TO HAVE AND TO HOLD said property to the party of the second part and his successors, IN TRUST, nevertheless to hold, manage, invest and reinvest the *129 same, to collect and receive the net income and profits thereof, and after deducting all proper charges and expenses, to pay the net income therefrom in equal shares to the parties of the first part during their respective lives; and upon the death of each of the parties of the first part, to transfer and convey one-half of the principal of the trust estate to such person, persons, or corporations and in such proportions as he or she shall by last will and testament or instrument in the nature thereof direct and appoint, and in the absence of such direction and appointment, to those who would be entitled to the personal estate of the one so dying according to the laws of the place of his or her residence at the time of his or her death if he or she had died intestate.
The party of the second part is hereby authorized and empowered in his discretion to hold the said property in the form of investment in which he received the same, and to sell the*2460 property, or any part thereof, as well as any property hereafter acquired in trust hereunder, and to reinvest the same, and the proceeds of the sale thereof in such property, real or personal, as to him shall seem best, and he shall not be restricted to such securities as are usually denominated trustees' investments; to vote in person or by proxy on all stocks or other securities constituting a part of the trust fund; to exchange said securities for other securities issued by the same or any other corporation; to consent to the reorganization, consolidation or merger of any corporation or to the sale or lease of its property and upon such reorganization, consolidation, merger, sale or lease, to exchange said securities for other securities issued in connection therewith; to pay all assessments, subscriptions and other sums of money as he may deem expedient for the protection of the trust fund, and to exercise any option contained in any of said securities for the conversion thereof into other securities, or to take any rights to subscribe for additional stocks, bonds, or other securities, and to make any and all necessary payments in connection therewith; and generally to exercise*2461 in respect to said securities all rights, powers, privileges, as are or may be lawfully exercised by any person owning similar property in his own right, provided, however, that he shall not be required to make any of the payments in this paragraph provided or to do any of the things therein set forth, except in his discretion. In case of any securities taken or purchased at a premium, the party of the second part shall not be required to set aside any part of the income thereof as a sinking fund to amortize or absorb such premium, or to make any other provision for possible depreciation in the value of the securities constituting the trust fund; and all cash dividends which shall be received by the party of the second part shall be deemed income, but all stock dividends shall not be deemed income, but shall be and be deemed principal and become a part of the principal of the trust fund accordingly.
The party of the second part is further authorized and empowered to receive and add to the principal of the trust fund hereby created, any property which may be given, bequeathed, or devised to him and to hold the same subject to the terms hereof.
If during the lives of the parties*2462 of the first part or during the life of the survivor, the party of the second part should die or become incapacitated from any cause to perform the duties hereby imposed upon him, the parties of the first part or the survivor shall have the right to appoint a successor as trustee hereunder; and the decision of the parties of the first part or the survivor, as to the fact of incapacity shall be final and controlling; such appointment shall be made in writing and be duly acknowledged so as to permit it to be recorded in accordance with the laws of the State of New York. Upon the execution and delivery of such a written appointment of a successor trustee, the whole of *130 the trust fund then held by the parties of the first part shall thereupon vest in such successor trustee who shall take the same with all the rights and powers vested in the party of the second part by this instrument, but subject to any proper charges existing under the trust fund at the date of such appointment.
It is understood and agreed that the parties of the first part, and the survivor of them, reserve the right at any time by an instrument in writing, duly executed and acknowledged, so as to authorize*2463 it to be recorded under the laws of the State of New York, to revoke and amend this agreement, and to terminate the trust hereby created.
The party of the second part hereby accepts the trusts hereby created, and covenants that he will faithfully perform and discharge all the duties of his office as trustee hereunder.
* * *
In addition to the securities specifically mentioned in the 1920 trust agreement, a large number of other stocks owned by the petitioners were thereafter reissued in the name of Joseph Chamberlain, Trustee. Included in such reissue were all of the stocks sold at a loss during the taxable years here involved. They are listed later in these findings. No registered bonds, other than those set forth in the 1920 agreement were transferred to the trustee after that agreement was executed. Following that agreement Joseph Chamberlain placed his one-third portion of the securities in his own separate account in the New York bank; he also changed the petitioners' safe-keeping and checking accounts in the New York bank to accounts entitled "Joseph P. Chamberlain, Trustee for Selah and Ellen S. Chamberlain." Except that special powers of attorney for stock sales*2464 were no longer necessary, the course of dealing with the securities continued just the same as that followed prior to the 1920 agreement. The two brothers consulted together concerning sales, reinvestments, and the like; Selah continued to keep the accounts; Joseph, the trustee, did not exercise any powers over the securities which he had not exercised before the agreement.
In 1922 Selah wired direct to New York brokers to convert the Northern Pacific-Great Northern bonds mentioned in the trust agreement. In 1921 a sale of Pennsylvania Railroad stock was made by Joseph, upon the suggestion of his brother Selah. The proceeds of sales and of redeemed and matured securities were deposited in the New York bank account and commingled with other income of the petitioners deposited there after the 1920 agreement just as had been the custom before. Sometimes the proceeds of sales were remitted by the brokers direct to Selah Chamberlain and did not pass through the hands of the trustee at all. The petitioners did not intend, when the 1920 agreement was made, that dividends or proceeds of sales and of matured securities should be retained by the trustee; they intended only to obviate*2465 the necessity of furnishing Joseph with powers of attorney on each occasion when stocks were to be sold. *131 The practice of depositing the proceeds of sales, and of redeemed and matured securities, in the New York bank account was continued. Such proceeds were commingled with other income in that account and no attempt was made to preserve their identity or earmark them in any way, either before or after the 1920 agreement.
During the taxable year here involved the following securities, property of these petitioners in equal shares, were sold:
1921 | |
Shares | |
Pennsylvania Railroad stock | 2,000 |
Munising Paper Co., stock, pref | 80 |
Northern Pacific-Great Northern | |
railways, joint C.B. & Q.4 per | |
cent bonds, $ 66,666.66 par. |
A total net loss of $42,655.17 resulted from these sales, although the bonds were sold at a profit.
1922
M., K. & T. RY. 4 per cent bonds, $66,000 par.
A total net loss of $16,814 resulted from this sale.
1923 | |
Shares | |
C., M. & St. P. Ry. preferred stock | 400 |
Presque Isle Transp. Co., stock | 376 |
Great Northern Ry. preferred stock | 600 |
New Orleans, Texas & Mexico Ry. stock | 100 |
C., M. & St. P. Ry. 4 1/2 convertible | |
bonds, $ 50,000 par. |
*2466 A total net loss of $100,239.84 resulted from these sales, although the N.O.T. & M. Ry. Co. stock was sold at a profit.
The petitioners claimed their respective losses from these sales as deductions from gross income, in their individual income-tax returns for the appropriate years involved. The respondent has determined that the securities so sold were included in a revocable trust, and that the losses sustained could not be deducted from income distributable to the beneficiaries.
OPINION.
MARQUETTE: These proceedings present the following questions for our consideration, namely:
1. Did the agreements which the petitioners signed in 1915 purporting to make Joseph Chamberlain a trustee of the petitioners' securities, actually create such trusts?
2. Did the agreement of May, 1920, jointly executed by these petitioners and purporting to make Joseph Chamberlain a trustee of specified securities owned by the petitioners actually create such a trust within the meaning of section 219 of the Revenue Act of 1921?
*132 3. If so, were there included in such trust stocks not specified in the agreement, but which were later reissued in the name of "Joseph Chamberlain, *2467 Trustee"?
Regarding the first question, it is the generally accepted rule that one of the essential elements in the creation of a valid trust is the consent of the proposed trustee to act as such. 26 Ruling Case Law, pp. 1191, 1192; 1 Perry on Trusts, sec. 259. In the present instance there was no such consent by the proposed trustee, nor was anything done toward carrying out the provisions of the 1915 agreements. The securities mentioned therein were handled by the petitioners and their brother in exactly the same fashion after, as they had been before, the agreements were signed. In our opinion these facts are not consonant with a valid trust and we must conclude that none was created by the petitioners in 1915.
As to the agreement of May, 1920, it appears that the proposed trustee accepted the trust. It also appears that the trustee exercised no more authority over the securities than he had exercised before the agreement was executed; that Selah Chamberlain, one of the grantors and one of the cestuis of the trust, continued to consult with and advise the trustee as to the management of the trust property, not only in his own behalf, but also as attorney in fact for*2468 his sister Ellen, the other grantor and cestui of the trust; and that the sole purpose of the petitioners in executing that agreement was to avoid the cumbersome necessity of furnishing to their brother Joseph special powers of attorney whenever any stock was to be sold.
The respondent contends that under section 219 of the Revenue Act of 1921 a beneficiary of a trust is not entitled to a deduction for losses sustained in the sale of capital assets of a trust. Section 219 provides:
SEC. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including -
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneflciaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
* * *
*2469 The respondent, in support of his contention, relies upon the case of Baltzell v. Mitchell, 3 Fed.(2d) 428, and upon the decisions in Mary P. Eno Steffanson,1 B.T.A. 979">1 B.T.A. 979; Lloyd D. Newman,15 B.T.A. 369">15 B.T.A. 369; Richard Sharpe,17 B.T.A. 135">17 B.T.A. 135, and Clarence M.*133 Busch et al.,17 B.T.A. 592">17 B.T.A. 592. But in none of these cases does it appear that a revocable trust was involved; in the present proceedings we are dealing with an instrument revocable at the will of the grantors. Further, there was no complete identification of settlor and beneficiary in the cases above cited; in the present proceedings the settlors are the sole beneficiaries under the instrument. These differences in the facts definitely detract from and diminish the authority of those cases as precedents for guidance in the present instance.
In the case of Stoddard v. Eaton, 22 Fed.(2d) 184, we find the controlling facts very similar to those now before us. There, as here, the instrument was in form a complete conveyance in trust, and revocable at the will of the grantor; there, as here, the grantor had no intention*2470 of dispossessing himself of the ownership and dominion of his securities, and this was the common understanding of himself and his trustee; there, as here, there was no intent or purpose of establishing a genuine trust transaction, but the sole aim was to enable an agent to deal readily with securities in the grantor's absence, and for his benefit; there, as here, the trustee did not exercise full power or discretion over the securities, but he acted at the direction or with the advice and consent of the grantor, who was also a beneficiary; there, as here, the proceeds of sales of securities were sometimes paid directly to the grantor - cestui, and at others they were paid to the trustee. In Stoddard's case the annual income from the securities conveyed in trust was to be paid, $3,000 to his wife and the balance to himself; in these proceedings the income is all to be paid to the grantors. Stoddard retained control of the securities held by the trustees, though just how he retained it is not stated but left to inference, and directed the sales of securities and the investment of funds; the present petitioners had access to the safe-deposit box where the securities were kept, *2471 one of the petitioners kept all the accounts relative to the securities, and on at least one occasion he acted directly and without the intervention of the trustee in disposing of some of the securities. And throughout the years following the 1920 agreement the petitioners and their brother, the trustee, followed exactly the same course in the management of their securities as that pursued for fourteen years prior to 1920, except that the task of transferring shares of stock was simplified by the agreement.
It was urged in the Stoddard case that the so-called trust agreements did not in fact work a severance of the trusteed securities from the corpus of the grantor's property; that those securities always remained assets of the grantor, and that losses sustained on their sale were properly deductible from his gross income. The *134 plaintiff further contended that the surrounding conditions, namely, the motivation, the reactions of the parties to the situation thus brought about, all have a significance which must be evaluated before the true relation of the transactions to the taxing act may be ascertained. This general statement meets our approval and is definitely*2472 in point in the present proceedings.
In reaching its conclusion that no real trust had been created in Stoddard v. Eaton, supra, the court said:
After all, the word "trust" as used in section 219 of the Revenue Act of 1918 (Comp. St. § 6336-1/8 ii), can hardly have been intended to comprehend every instance in which a trust is recognized in equity. A trust ex maleficio, a resulting trust, or a constructive trust are examples of trusts which do not fit into the frame of the statute. A trust, as therein understood, is not only an express trust, but a genuine trust transaction. A revenue statute does not address itself to fictions.
The policy of the law is now more clearly expressed in the language of the acts of 1924 and 1926, which provide (43 Stat. 275, and 44 Stat. 275, and 44 Stat. 32 [26 USCA § 960, subd. (g)] that, where a grantor of a trust reserves the power to revest himself with the title to any of the corpus of the trust, then the income of such part is the income of the grantor.
While the Act of 1924 is not applicable to the case at bar in the sense that the statute is not retroactive, nevertheless the action of*2473 Congress under the circumstances may well be regarded as a clarification of an originally obscure expression of legislative intent.
The strong similarity of facts in the Stoddard case and in the one before us, running, as they do, almost parallel, make the language above quoted especially applicable to these proceedings.
In the light of all the surrounding circumstances we are unable to agree with the respondent in his view of the question. It is our opinion that, following the decision in Stoddard v. Eaton, supra, the sales of securities during the years 1921, 1922, and 1923, were not sales of trust property under section 219 of the Revenue Act of 1921, and that the losses resulting from those sales were sustained by the petitioners and are properly deductible by them, respectively, from their gross incomes for the years involved. This conclusion renders unnecessary any consideration of the third question mentioned in the beginning of this opinion.
Reviewed by the Board.
Judgment will be entered under Rule 50.