Opinion ID: 3010690
Heading Depth: 4
Heading Rank: 2

Heading: Control Over Mortgage Income

Text: Berkley's control over the revenues generated by the mortgages further demonstrates that the trusts did not hold the incidents of beneficial ownership of the mortgages. Contrary to the Tax Court's finding that Berkley merely serviced the mortgages by collecting mortgage payments and forwarding them to the trusts, see Geftman , 72 T.C.M. (CCH) at 821, the record clearly demonstrates that Berkley retained exclusive control over the mortgage payments which it collected without accountability to the trusts. The only document indicating that Berkley collected the mortgage payments on behalf of the trusts consists of a single page, which the court described as a work paper, id. at 822, listing cumulative totals of the payments made on the La Playa and Blue Grass mortgages through December 31, 1985, and through the end of fiscal year 1985, and attributing these cumulative amounts to the trusts. See supp. app. at 39. As one of the estate's representatives conceded, the cumulative nature of this document reveals that it could not have been prepared before December 31, 1985, see supp. app. at 33, ten months after the close of the trusts' fiscal year. In contrast to this document retrospectively attributing a cumulative amount to the trusts, the documents prepared during the tax year in the ordinary course of Berkley's business did not attribute to the trusts any of the mortgage payments which Berkley collected. See app. at 329-34. These documents accounting for each mortgage payment received, with no reference to the trusts' purported interest therein, undermine the Commissioner's assertion that Berkley accounted for the interest received on the La Playa and Blue Grass condominiums as having been received on account of the trusts. Br. at 37.28 In the absence of any _________________________________________________________________ 28. In support of this assertion, the Commissioner cites only the work paper prepared after the end of the tax year and the testimony of one of the representatives who conceded that he wasnot familiar with the books in which Berkley accounted for the mortgage payments it collected. App. at 78. This evidence cannot support a finding that Berkley accounted for the mortgage payments as having been received on behalf of the trusts, particularly since the documents recorded during the tax year do not reflect such a practice. 35 contemporaneous documents attempting to account for the trusts' purported mortgage income separately from Berkley's other income, the single document retrospectively characterizing a cumulative amount as income to the trusts fails to establish that the trusts enjoyed a beneficial interest in that income. Berkley's handling of the actual funds received further undermines the Commissioner's assertion that Berkley merely processed payments belonging to the trusts. While Berkley collected regular monthly mortgage payments whose total amount increased steadily as additional condominium units were sold at the La Playa and Blue Grass developments, see app. at 99, Berkley's transfers to the trusts did not correspond to the amounts purportedly received on their behalf, but rather occurred at irregular intervals and in haphazard, fluctuating, and sometimes nominal amounts, which, as Geftman accurately notes, bore no reasonable relationship to the regular remittance of monthly principal and interest payments which would have been received by a legitimate mortgage servicing company. Br. at 41.29 Significantly, Berkley forwarded to the trusts only $59,000 of the $90,596 which it later characterized as payments collected on behalf of the trusts. As representative Love explained, Berkley had no obligation to forward the mortgage payments to the trusts each month, but rather remitted the money as we saw fit, as we needed _________________________________________________________________ 29. The transfers occurred as follows: Oct. 17, 1984 $12,000 Nov. 9, 1984 $ 5,000 Jan. 4, 1985 $25,000 Jan. 29, 1985 $ 1,000 Feb. 5, 1985 $14,000 Feb. 14, 1985 $ 1,000 Feb. 20, 1985 $ 1,000 _______ Total $59,000. Although the trusts' ledger contained accounts for recording interest income, the trusts did not record the $59,000 as such, but rather recorded this sum in an account simply entitledBerkley Mtg. Corp. See app. at 384-85. 36 the cash to run the business. App. at 102. This testimony reveals that Berkley did not function merely as a nominee or agent processing payments on behalf of its principal, but rather was free to use the money it collected as it saw fit to further its own business purposes. Berkley's full control over the income from the mortgages demonstrates that Berkley, rather than the trusts, enjoyed this incident of beneficial ownership. As the Tax Court acknowledged, [t]he owner of property is the one who will reap the benefits of ownership. Geftman, 72 T.C.M. (CCH) at 822. In this case, the trusts did not hold title to the mortgages, did not participate in transactions pledging them as collateral and selling them, did not receive any of the proceeds from those transactions, and did not have control over the monthly mortgage payments which Berkley collected and retained for its own business purposes, forwarding funds to the trusts only when it chose to do so. In light of this evidence that the trusts did not enjoy any of the incidents of beneficial ownership of the mortgages and that the mortgages remained within the exclusive control of Berkley and BOP, we find that the Tax Court clearly erred in concluding, based on an adjusting journal entry and a work paper prepared well after the close of the tax year, that the trusts were the true owners of the mortgages. Because the trusts did not hold any beneficial interest in the mortgages, we must reject the Tax Court's conclusion that the $59,000 transferred to the trusts constituted taxable mortgage interest income earned by the trusts as owners of the mortgages rather than non-taxable transfers from an estate that had no distributable net income.