Opinion ID: 3010690
Heading Depth: 4
Heading Rank: 1

Heading: Transactions Involving the Mortgages

Text: Even if Berkley and BOP had recorded consistent, contemporaneous documents stating that the mortgages had been transferred to the trusts, such documents would be insufficient to establish the trusts' ownership of the mortgages for tax purposes unless the objective evidence as to the overt actions with respect to the mortgages, Cordes, 68 T.C.M. (CCH) at 358, demonstrated that the trusts enjoyed actual command over the mortgages and the right to receive the actual benefit of owning them. Frank Lyon Co., 435 U.S. at 572-73, 98 S.Ct. at 1298. The Tax Court, in relying on documents reflecting the purported mortgage transfer, did not analyze the significance of the numerous overt acts in which the mortgages were assigned, pledged and sold to third parties. The court thus failed to make the essential determination as to which party retained actual command over the mortgages and the right to receive the benefits of owning them. Upon examination of the overt acts involving the mortgages, it becomes apparent that, consistent with the schedule reflecting BOP's ownership of the mortgages, Berkley and BOP retained actual command over the mortgages and the benefits flowing therefrom. Within five days of the June 11, 1985 journal entry reflecting the purported mortgage transfer, BOP and Berkley, acting jointly, pledged the mortgages to Ohio Savings Bank to secure a loan and executed a Collateral Assignment of the mortgages dated June 16, 1985, which they recorded in public records. In the course of this transaction, Berkley and BOP held themselves out as the sole and lawful owners of the mortgagesfree and clear of any and all claims and possessing the full right and lawful authority to deliver, pledge, assign, grant, convey and transfer the mortgages. Berkley and BOP used the proceeds of the sums borrowed against the mortgages for 32 their own business activities, completing the process of hypothecating the mortgages with no participation or authorization from the trusts. See app. at 389-97, 133, 2936, 43, 63-68. One year later, Ohio Savings Bank reassigned the mortgages to BOP and Berkley in a written reassignment to them in their names, which they recorded in the public records with no mention of the trusts. Shortly thereafter, Berkley and BOP sold the mortgages to Horowitz Finance Corporation and Fleet National Bank, again representing themselves as the sole lawful owners, seeking no participation from the trusts, and using the proceeds for their own purposes. See app. at 29-38, 63-68, 41, 90, 398407.25 These transactions clearly demonstrate that, despite the adjusting journal entry stating that the trusts owned the mortgages, Berkley and BOP had full command over those assets and over the beneficial incidents of owning them, freely pledging them to obtain credit and selling them to raise cash for their own undertakings. Courts have refused to recognize purported asset transfers where the assets remain within the control of the purported transferor and remain subject to claims of the purported transferor's creditors, as was the case here where Berkley and BOP continued to enter into transactions with respect to the mortgages and pledged the mortgages to their creditors. See In re Johnson, 88 T.C. 225, 236-37 (rejecting assertion that estate had transferred assets where assets remained sufficiently within control of estate that theywould not be insulated from the claims of [its] creditors), aff 'd, 838 F.2d 1201 (2d Cir. 1987); Donisi v. Commissioner, 26 T.C.M. (CCH) 327, 331 (1967) (disregarding asset transfer recorded _________________________________________________________________ 25. Berkley and BOP used a large portion of the proceeds to satisfy their debt to Ohio Savings Bank and used the remainder to pursue their real estate endeavors. While one of the estate's representatives asserted that the trusts had authorized the various dispositions of the mortgages, he conceded that all relevant documents referred only to the estate, Berkley and BOP. See supp. app. at 12-16. In light of the substantial evidence of transactions carried out exclusively by Berkley and BOP, the record cannot support a finding that the trusts exercised any control over the decisions with respect to the mortgages. 33 on books where purported transferor subsequentlytook out two loans using the [assets] as collateral), aff 'd, 405 F.2d 481 (6th Cir. 1968).26 Because Berkley and BOP retained all incidents of beneficial ownership including the power to pledge the mortgages as collateral, sell them to third parties and retain the proceeds of these transactions while the trusts did not enjoy any of these incidents of ownership, we find that the objective evidence of actual control over the mortgages precludes a finding that the trusts were the true owners of the mortgages. See Frank Lyon Co., 435 U.S. at 572-73, 98 S.Ct. at 1298. 27 _________________________________________________________________ 26. The Commissioner contends, br. at 38, that this case is distinguishable from Johnson because Berkley paid the trusts $59,000 of the income generated by the mortgages, thus providing an objective act to corroborate the purported transfer of beneficial ownership. We disagree. The very issue in dispute is whether the $59,000 transferred to the trusts can be characterized as interest income generated by the mortgages, since in the absence of evidence that the trusts owned and controlled the mortgages, the transfers from the estate cannot be characterized as mortgage interest income. In this case, as in Johnson, there is no evidence that the trusts assumed the right to control the mortgages as suggested in book entries. Thus the transfer of $59,000 is immaterial. 27. The Commissioner argues, br. at 37-38, that the hypothecation and sale of the mortgages to third parties should be accorded minimal weight because they occurred after the end of the relevant tax year. We disagree, and find Berkley's and BOP's complete control of the mortgages as of June 16, 1985, highly probative of the locus of control during the tax year ended February 28, 1985, especially since the record contains no indication of any intervening change in the status of the mortgages. The Commissioner's argument is particularly unpersuasive in light of the Commissioner's extensive reliance on the journal entry dated June 11, 1985, as evidence bearing on ownership during the tax year ended February 28, 1985. The Commissioner also asserts that Berkley's and BOP's dispositions of the mortgages are irrelevant because they involved nothing more than transfer of bare legal title. Br. at 38. However, as the estate's representatives conceded, in pledging the mortgages as collateral to Ohio Savings Bank, Berkley and BOP placed the value of the mortgages directly at risk in the event of a default, see app. at 47, 6970, 123, 170-71, and in selling the mortgages Berkley and BOP relinquished all control over them. There is nothing in the record to support the assertion that these transfers involved only the bare legal title of the mortgages. 34