Boynton v. Commissioner

11 B.T.A. 1352, 1928 BTA LEXIS 3636

• Court: United States Board of Tax Appeals
• Decided: May 14, 1928
• Docket: Docket No. 9145.
• Status: Published

Opinions

OPINION.

ARundbbb:

The question involved is the proper treatment to be accorded the income derived from property placed with the Cleveland Trust Co. under the terms of the instrument quoted in the findings of fact, and particularly whether the petitioner is entitled to deduct from his gross income claimed losses on the sale of securities which were held by the Cleveland Trust Co. under that agreement.

A consideration of the agreement discloses that all income was reserved exclusively to the-petitioner; he had not merely the power to revoke but the power to modify the agreement; the duty of returning the property for taxation was expressly imposed on him and also the duty of insuring the buildings; he reserved the right to sell all real estate; title to stocks remained in his name and ho retained and exercised the voting power and the dividends were paid direct to him; he was compelled to see to the payment of all insurance premiums on policies deposited with the trust company; the trust company had no right to borrow money or to compromise claims without petitioner’s approval and it had practically no power to sell or purchase property without petitioner’s consent. Nor did the many powers expressly reserved to petitioner lie dormant, for the petitioner in fact exercised repeatedly many of the rights reserved by him in his agreement with the Cleveland Trust Co. Indeed the particular securities on which the loss is here claimed were sold by petitioner without consultation with the Cleveland Trust Co. through petitioner’s broker and the securities were thereafter delivered to the broker by the trust company on petitioner’s order. It is contended that this action on his part served to constitute, as to the particular securities, a revocation. Whether this be true or not is not necessary to decide as we do not base our conclusion on that ground.

Stated simply, as we view it, the question for us to decide is whether or not the instrument signed by petitioner and the Cleveland Trust Co. constituted a trust within the meaning of section 219 of the Revenue Acts of 1918 and 1921. Petitioner urges that the instrument constituted nothing more than an agency, and our attention is called to section 8617 of the General Code of Ohio (which was in effect at the time the agreement was made), which reads as follows:

All deeds of gifts and conveyances of goods and chattels, made in trust to the use of the person or persons making them, shall be void and of no effect.

The case of Worthington v. Redkey, 86 O. S. 128, is cited as authority for the proposition that the attempted creation of a revocable trust results in the creation of an agency only. Though petitioner’s argument in this connection is persuasive, we do not believe it necessary for us to decide whether the transaction constituted in law an agency and the argument is passed Avithout further comment.

Since these proceedings were taken under submission there has been decided the case of Stoddard v. Eaton, decided by the United States District Court for the District of Connecticut, 22 Fed. (2d) 184. The facts in the Stoddard case bear such a close parallel to those in the case at bar as to make the court’s opinion especially deserving of close consideration.

Stoddard was a donor of a revocable trust and also its beneficiary. He claimed tlie rig]it to deduct from his gross income losses from the sale of securities which were held by the trustee.. It appears that Stoddard, like Boynton, at all times retained control of the securities held by the trustees and directed and controlled their managerment, and under the trust agreement had power to retake the legal title at will. In spite of the large discretionary powers granted, no sale or other disposition of securities or of their proceeds was ever made or suggested except upon the direct order of Stoddard. In considering the contentions made by Stoddard the court stated:

The contention of tlie plaintiff is that the so-called “ Trust Agreements * worked no severance of the trusteed securities from the corpus of the plaintiff’s property and that these securities, whether in the hands of the trustees or not, were always his own assets, and, therefore, that the losses sustained on their sale were proper items of deduction from his gross income. He says that the verbal form of the transaction does not necessarily control the construction to be placed upon it; that the environing conditions — the motivation- — the reactions of the parties to the situation thus integrated and to its developing phases — all have a significance which the law must evaluate before the genuine relation of the transactions to the Income Tax Act may be ascertained. With this suggestion, stated in these general terms, I am disposed to agree. Tor, we are not here concerned with the rights of contracting- parties who may evoke a rule of estoppel to prevent the change of a comma in the written bond, nor are there innocent third parties involved who have relied upon a title or upon an authority expressed in writing.

*******

It may well be asked, — If the plaintiff intended to deliver nothing but a general power of attorney, why didn’t he employ the usual form? The explanation afforded seems cogent enough. A general power of attorney as ordinarily expressed, would, in order to be effective, either have to be too broad, or, if it were to be limited .to specific property, it would be in need of intermittent amendment. This would be simple enough if it were not for the plaintiff’s protracted absences in the south during the winter months.

That the equivocal formula accepted by the plaintiff has plunged him into more difficulties than those he avoided, seems to be the result of a shifting canon of interpretation in the Bureau of Internal Revenue. At one time the Bureau adopted the view that the income of a revocable trust under which the donor added or withdrew property at his will, was income of the donor regardless of the identity of the cestui que trust. If the plaintiff’s views were the same he might well fail to be meticulous as to the form into which he east his transaction.

After all the word “ trust ” as used in Section 219 of the Revenue Act of 1918, ean 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 defendant apparently relies upon Baltzell v. Mitchell, 3 Fed. (2d) 428 (5 Am. Red. Tax Rep. 5230). It does not appear that that case was one involving a revocable trust. Furthermore, it was not the donor of the trust corpus who was the plaintiff, but the beneficiary of the income. There was no identification of the settler and cestui, as is the case in the present instance. Furthermore, there was no question concerning the reality of the trust, and that is an important and material element in the case before me.

The reasoning in the Stoddard case seems to us to be sound. In every essential way, both by the terms of the instrument and in actual practice, Boynton reserved ownership and control of the property. To say that the income in question was that of the fiduciary rather than that of Boynton would be to let the form prevail over the substance. This we do not believe Congress intended. After a careful consideration of the terms of the agreement executed by petitioner, we are led to the conclusion that it did not serve to create a trust within the meaning of section 219 of the Revenue Acts of 1918 and 1921.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, . under Rule 50.

Milliken did not participate. Moeeis concurs in the result.