*1420 1. The petitioner's distributive share of partnership income is taxable to him, notwithstanding his declaration of trust that he held such partnership interest in trust for the beneficiaries, where the trust was not a member of the partnership and all profits were paid to petitioner.
2. Held, losses sustained by an irrevocable trust are not deductible by the cestuis que trustent on their individual returns.
*1147 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income taxes, asserted by the respondent as follows:
| Year | Deficiency | Amount in controversy |
| 1922 | $4,742.78 | $4,742.78 |
| 1923 | 19,917.83 | 17,414.89 |
| 1924 | 6,734.97 | 6,353.70 |
| 1925 | 9,087.37 | 7,951.35 |
| 1926 | 8,232.75 | 8,232.75 |
| 1927 | 1 12,247.18 | 10,259.52 |
| 1928 | 16,112.01 | 15,981.75 |
The following errors are alleged: (1) Adding to petitioner's net income, as reported for each taxable year, amounts received by*1421 the petitioner as trustee during the respective years; (2) disallowing deductions for 1922, 1924 and 1925, of amounts representing petitioner's share of deductible losses sustained by a trust of which petitioner was a beneficiary; (3) disallowing deduction for a loss sustained in 1923 amounting to $14,540. Respondent now concedes error No. 3.
FINDINGS OF FACT.
On or about December 1, 1909, a partnership known as the Cleveland Steel Casting Company was organized by petitioner, his brother, *1148 Stephen Balkwill, and their father, W. W. Balkwill. On June 30, 1919, the father retired, giving the business and partnership property to his sons. Petitioner received a 45 per cent interest, and his brother the remainder.
On December 29, 1919, petitioner and one George C. Lucas formed a partnership under the firm name and style of the Cleveland Frog & Crossing Company, located in Cleveland, Ohio. Petitioner owned a 44 per cent interest given him by his father, and George C. Lucas a 56 per cent interest in the partnership and the property belonging thereto. The agreement provided that the partnership should continue for five years and should not be dissolved on the death*1422 of either or both partners, but should be continued in the same name by the survivor and the estate of the deceased partner for their joint benefit. On December 30, 1924, the terms of the partnership articles were extended for three years by mutual consent. Further extensions, each for one year, were made in 1927, 1928, 1929 and 1930.
Petitioner was also the owner of a one-half interest in the fee title to fifteen lots located in the city of Cleveland, Ohio, the other one-half being owned by George C. Lucas. Petitioner's interest in the lots was given him by his father. A considerable amount of stocks, bonds, and money in bank was owned by petitioner in common with his brother and two sisters. This property had been given them by their father, who received no payment from any of his four children for any part of the business interests, real estate, or personal property so given. Pursuant to the father's desire, all the above mentioned property interests were included in a trust agreement, the pertinent provisions of which are:
DECLARATION OF TRUST AND AGREEMENT
THIS INSTRUMENT, executed at Cleveland, Ohio, on the 29th day of December, 1921, which date is hereinafter called*1423 "the date of this instrument," by and between GEORGE W. BALKWILL, who, in his capacity as Trustee, as hereinafter set forth, is hereinafter called "the Trustee", which term includes also his successors in the trust created by this instrument, hereinafter called "this trust", STEPHEN BALKWILL, BEATRICE B. FISCHLEY and JESSIE B. ALBRACHT, the said George W. Balkwill, Stephen Balkwill, Beatrice B. Fischley and Jessie B. Albracht, with their respective heirs, executors, administrators and assigns, being collectively hereinafter called "the parties hereto."
* * *
WHEREAS, the parties hereto are related as brothers and sisters, and desire mutually to adjust their respective rights and interests in the real and personal property hereinbefore mentioned, a considerable portion of which property was received by the parties hereto from their father, W. W. Balkwill, or is the proceeds of property so received, and all of which property, including the individual interest of the Trustee therein, is hereinafter called "the trust estate," so that they shall become equal beneficial owners thereof and shall *1149 share equally in the benefits and profits derived therefrom, but so that the*1424 Trustee shall, for the duration of this trust, have the sole and entire management and control of, and the legal title to, all the trust estate, in trust, nevertheless, for the uses and purposes hereinafter stated, such management and control thereof by, and vesting of the legal title thereto in, the Trustee, being deemed by all the parties hereto to be for their best interests and mutual benefits:
NOW, THEREFORE, in consideration of the premises and of the mutual agreements, and the conveyances and assignments to the Trustee, hereinafter recited or contained -
I. The said Stephen Balkwill, has, by deed executed and delivered to the said George W. Balkwill, dated the 29th day of December, 1921, conveyed to the Trustee all his right, title and interest in the real estate described in "Schedule A", and does hereby sell, assign, transfer and set over to the Trustee, all his right, title and interest in and to any and all real and personal property now owned by said partnership of Cleveland Steel Casting Company, all in trust, nevertheless, for the uses and purposes hereinafter stated.II. The said Stephen Balkwill, Beatrice B. Fischley and Jessie B. Albracht to hereby sell, assign, *1425 transfer and set over to the Trustee, all of their respective rights, titles and interests in and to the personal property particularly described in "Schedule C" attached to and forming a part of this instrument, in trust, nevertheless, for the uses and purposes hereinafter stated.
III. The said George W. Balkwill hereby declares and acknowledges that from and after the date of this instrument he shall and will hold in trust for the equal benefit of the parties hereto his aforesaid interest in the partnership of Cleveland Frog & Crossing Company and in the real and personal property owned by it, and all his interest in all real estate, the legal title whereto is held by John G. White, as Trustee for the said George W. Balkwill and George C. Lucas, including the real estate more particularly described in "Schedule D" attached to and forming a part of this instrument; subject, however, to all the terms and conditions of his partnership agreement with the said George C. Lucas, the terms whereof are hereby represented by all parties hereto to be fully known to and understood by them, and to the terms and conditions of any renewal or extension thereof which shall be mutually agreed*1426 upon by and between the Trustee and the said George C. Lucas.
IV. The said George W. Balkwill hereby declares and acknowledges that from and after the date of this instrument he shall and will hold in trust for the equal benefit of the parties hereto his aforesaid interest in the partnership of Cleveland Steel Casting Company and in all the real and personalproperty owned by it; and all his right, title and interest in and to the personal property particularly described in "Schedule C" attached to and forming a part of this instrument. V. IT IS MUTUALLY AGREED by the parties hereto that the aforesaid conveyances and transfers of real and personal property to the Trustees are made to, and accepted by, him upon the terms and conditions, and upon the trusts, hereinafter set forth;(a) The parties hereto shall be, and from the date of this instrument are, equal beneficial owners of the trust estate, and the duration of this trust shall be until December 30, 1929, (unless sooner terminated by death or other disqualification of the trustee, as provided by this instrument) and thereafter until terminated in accordance with any provision of this instrument.
* * *
(d) *1150 *1427 Within sixty (60) days after the expiration of each and every year from the date of this instrument, the Trustee shall distribute in equal shares, among the parties hereto, the net proceeds resulting from the management of this trust; provided that the Trustee may, in his discretion, reserve from such distribution such sums as shall, in his judgment, be necessary or proper to pay current expenses (including payments hereinafter provided to be made to W. W. Balkwill), replace losses, provide renewals, replacements or extensions of, or additions to, any part of the trust estate, (including the purchase of the interest of said George C. Lucas in said Cleveland Frog & Crossing Company) or for reserves for the proper conduct of the business of this trust; and provided, further, that the Trustee shall pay out of the funds of the trust estate, as an expense of this trust, any and all sums of money which shall at any time be determined to be due to the United States of America for income taxes from any of the parties hereto, or from the aforesaid W. W. Balkwill, for the year 1921, or any prior year; and also, to the said W. W. Balkwill, during his life, such sums of money, not in excess of*1428 Eleven Thousand Four Hundred Dollars, ($11,400.00) in any one year, and the said W. W. Balkwill shall request of the Trustee.
The trust agreement has not been revoked or modified.
Petitioner's partner in the Cleveland Frog & Crossing Company had no knowledge of the trust agreement, and has not given his consent thereto. Distributions of income of that partnership were made to petitioner, individually, and none was ever made to the trust. Petitioner's interest in the real estate of the partnership was never transferred to the trust by deed. The books and records of the Cleveland Frog & Crossing Company do not disclose or reflect any entries or statements respecting the Balkwill Trust, or its provisions concerning petitioner's interest in the partnership. The trust was not responsible for any proportion of losses which might be sustained by the partnership.
For each of the years 1922 to 1928, inclusive, the Cleveland Frog & Crossing Company filed a partnership return of income wherein the net income reported was apportioned 56 per cent to George C. Lucas and 44 per cent to the petitioner.
For each of the years 1922 to 1928, inclusive, the petitioner, as trustee of the*1429 Balkwill Trust, filed a fiduciary return of income; and he also filed an individual return of income for each of those years. In his fiduciary returns petitioner reported as income the amount of his distributive share from the partnership of Cleveland Frog & Crossing Company for each taxable year, respectively, and did not report such amounts as income in his individual returns. The respondent eliminated those amounts from reported income to the trust and, after making adjustments, added the adjusted amounts to petitioner's individual income for the respective taxable years. The elimination from trust income of the amount of petitioner's partnership share from the Cleveland Frog & Crossing Company disclosed losses to the Trust for the years 1922, 1924, and 1925. Respondent *1151 disallowed petitioner's deductions representing his alleged share of losses reported by the Balkwill Trust, but allowed deductions representing 44 per cent of contributions made by the Cleveland Frog & Crossing Company. Respondent also eliminated from the individual returns amounts representing petitioner's alleged share of income reported in the fiduciary returns.
During 1923 petitioner suffered*1430 deductible losses amounting to $14,540, which were not allowed by respondent in determining net income for that year.
OPINION.
MARQUETTE: The first question here presented concerns the status, for income-tax purposes, of petitioner's distributive share of partnership income.
In 1919 petitioner and one George C. Lucas formed a partnership under the name of Cleveland Frog & Crossing Company. In 1921 the petitioner, his brother and his sisters entered into a trust agreement respecting the property owned by each. In that agreement petitioner declared that he held in trust, for the equal benefit of the beneficiaries, his interest in the partnership above named and in all the real and personal property owned by it. The agreement was irrevocable for a period of eight years, and was not terminated during any of the taxable years. George C. Lucas knew nothing of the trust agreement, and earnings of the partnership were distributed to the petitioner and his partner, individually. It is the petitioner's contention that his share of such partnership income did not constitute income to him, but to the trust. Respondent has determined otherwise.
The Revenue Acts of 1921, 1924, *1431 1926 and 1928 provide for the levy and collection of normal and surtaxes upon the net income of every individual on an annual basis. Each also provides, in substantially the same language, that:
* * * individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner, his distributive share, whether distributed or not, of the net income of the partnership for the taxable year.
The partnership, Cleveland Frog & Crossing Company, received a net income during each of the taxable years here involved. It is not contended that the Balkwill Trust was a member of the above partnership and the record negatives such membership. Petitioner does contend, however, that by virtue of his declaration of trust he thereafter held all of his interest in the corpus, or net worth of the partnership and the income therefrom only as trustee for the balkwill Trust.
*1152 The principle applicable in these proceedings is the same as that in *1432 ; affirmed by the Supreme Court March 14, 1932. In that case the taxpayer was a partner in a business firm. He made a written agreement with his wife declaring her to be a full equal partner with him in his interest in the business firm. She was not a partner in the firm itself, and its distributions of income were paid to her husband, who divided them with his wife. It was held that the husband was taxable upon the full amount of his distributable share of the partnership income. In affirming the Board's decision the Supreme Court said in part that the taxpayer:
* * * urges that the assignment to his wife was of one-half of the "corpus" of his interest and that this "corpus" produced the income in question. The characterization does not aid the contention. That which produced the income was not his individual interest in the firm, but the firm enterprise itself, that is, the capital of the firm and the labor and skill of its members employed in combination. * * *
The court further held that the wife had only a derivative interest in the firm's income, and that the taxing statute dealt explicitly with the liability of partners*1433 as such. Cf. .
In our opinion the present proceedings are not distinguishable in their facts from the Leininger case, supra. We conclude, therefore, that the distributive income from the Cleveland Frog & Crossing Company for the years in question constituted taxable income to the petitioner, individually.
The next question is whether the respondent properly disallowed deductions from petitioner's gross income of amounts representing his share of deductible losses sustained by the Balkwill Trust. Although petitioner has alleged error with respect to such disallowance, he does not mention it in his brief and has apparently abandoned the contention. It has been decided frequently that beneficiaries of a trust which has sustained net losses may not deduct such losses pro rata in their individual returns. Cf. ; ; ; affd., ; *1434 . Those decisions are controlling in these proceedings and we approve the respondent's determination respecting the deductions in question.
The third and last error alleged has been conceded by the respondent, and petitioner is therefore allowed a deduction of $14,540 for loss sustained during the year 1923.
Decision will be entered under Rule 50.
Footnotes
1. Includes penalty of $583.20. ↩