Court Opinion

ID: 4625426
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:11.37084+00
Date Added: 2024-06-11T07:56:42.230015
License: Public Domain

DETROIT TRUST COMPANY, JEANIE M. LOW AND FRANK C. PAINE, EXECUTORS OF THE WILL OF ALFRED M. LOW, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Detroit Trust Co. v. CommissionerDocket No. 70415.United States Board of Tax Appeals34 B.T.A. 586; 1936 BTA LEXIS 678; May 19, 1936, Promulgated *678  Installment obligations held by a trustee of an active express trust in Michiganheld not transmitted by the death of a beneficiary, and section 44(d), Revenue Act of 1928, does not operate to charge decedent's estate with taxable gain for the period prior to death.  Raymond H. Berry, Esq., and Arthur L. Evely, Esq., for the petitioners.  Harold D. Thomas, Esq., for the respondent.  STERNHAGEN *586  The Commissioner determined a deficiency of $8,356.32 in income tax of petitioners' decedent for the period January 1, 1930, to the date of his death, October 11, 1930.  The only issue remaining for decision is whether, as the Commissioner held, installment obligations on land contracts were owned by decedent and transmitted by death, involving taxable gain under section 44(d), Revenue Act of 1928.  *587  FINDINGS OF FACT.  The petitioners are executors of the will of Alfred M. Low, deceased, who died October 11, 1930.  On November 10, 1923, June 30, 1924, and December 19, 1924, decedent entered into agreements with several individuals which recited that he had purchased certain described lands in Detroit acting for and on behalf*679  of the contracting parties; that each had contributed a specified part of the down payment made.  It was provided that title to the lands was vested in him "in trust" for all the parties, each of whom was the owner of a stated undivided fractional interest in the lands and entitled to receive the same fraction of the net profits thereafter accruing from their sale.  It was agreed that each would pay specified amounts to make up the remainder due on the purchase price and that the lands should be improved, subdivided and offered for sale in lots on installment contracts under the direction of a corporate agent which was to receive a commission for its services.  In the event that sales proceeds were insufficient to cover cost of improvements and expenses, each party agreed to pay a proportion of the deficiency.  Decedent was given charge of all collections on land contracts and was required to keep proper books of account.  He was to receive a commission of 5 percent of the sale price of all lots sold, for his services in making collections, drawing deeds, delivering abstracts, keeping accounts and making all disbursements.  On May 29 and June 12, 1925, Leroy L. Maxam entered into*680  two agreements with decedent and others, which recited that Maxam had purchased for and on behalf of all the parties certain lands in Detroit, and had made an initial payment contributed in stated amounts by the parties; that title to the land was held by Maxam "in trust" for them.  It was provided that Maxam hold the lands "in trust" for the parties in accordance with specified undivided fractional interests; that each party was entitled to profits from the sale of the lands in proportion to his interest, and was liable to the same extent for the mortgage indebtedness.  It was agreed that Maxam, "the trustee herein", should have power and authority to improve and subdivide the tracts into lots, to enter into sale contracts and convey title "in his own name freed from the said trust the same as if he held title thereto absolutely, and not as trustee." A corporate real estate agent was given the supervision and direction of sales, and lots were to be sold: * * * at such prices and upon such terms as may be mutually agreed upon by all the parties hereto in accordance with the sales contract entered into by and between [Maxam] and [the agent].  *588  "The trustee" was charged*681  with the payment of "such obligations as may arise" from sales proceeds and with an accounting for receipts and disbursements.  He also agreed: * * * whenever requested by the parties hereto to surrender the said trust and to account to the parties according to their respective interests.  It was further provided that if the parties desired to terminate the trust or if Maxam became unable to continue to act as trustee, the lands should be conveyed to a specified corporation as successor trustee.  During his lifetime decedent received cash distributions of profits from the sales of land pursuant to the first three instruments.  Each year the sales profits made during the year were computed and each interest holder was informed of the amount of his share.  After decedent's death, a successor trustee of each of the three trusts was appointed by separate orders of the Wayne County Circuit Court, dated April 17, 1931.  In each instance the court ordered, adjudged, and decreed: * * * that Alfred M. Low, now deceased, held title to the property described in the Bill of Complaint, and was Trustee thereof for and on behalf of * * * in the proportions and under the terms and conditions, *682  as set forth in a certain Trust Agreement, copy of which is annexed to the Bill of Complaint, filed herein.  * * * The decrees recognize the trustee's authority to give conveyances of the trust property, to enter into contracts for the purchase and sale thereof, to make collections on land contracts, to sue therefor or for the forfeiture of purchasers' interest, to compromise and settle claims and disputes, to deliver abstracts, to make necessary disbursements for expenses incurred in the course of such duties, to pay taxes and assessments, and, after the deduction of expenses and retention of sufficient reserve, to distribute the net proceeds to the beneficiaries.  The trusts are still in existence, have never been amended, and are administered in the same manner as they formerly were by decedent.  The trustee has not distributed nor assigned the real estate or the land contracts to decedent's executors or to any other beneficiary, but has held them intact.  In respect of the two Maxam trusts, cash distributions of profits from the sales of land were made to decedent during his lifetime by the second trust but not by the first.  No distribution of any real estate, land contracts, *683  or installment obligations has been made to decedent's executors.  In the income tax returns profits from sales of land and land contracts were reported on the installment basis by all five trusts.  The first four filed partnership returns for 1930 and all years prior *589  to 1934.  In 1934, by direction of the Commissioner, they filed corporate returns as associations.  For purposes of the Michigan inheritance tax and inventory submitted to the probate court, decedent's property in respect of these trusts was treated as undivided interests in real estate syndicates.  OPINION.  STERNHAGEN: In determining the deficiency, the Commissioner included in the decedent's gross income for the period of 1930 ending with the date of death, $46,437.74, called "profit on the installment basis", citing section 44(d), Revenue Act of 1928. 1 For a consideration of this statutory provision, see ; ; . The petitioners assail this determination, contending that section 44(d) is not applicable since the decedent*684  did not own installment obligations at the time of his death and no such obligations were therefore transmitted or otherwise disposed of by him.  Petitioners say that the installment obligations which respondent attributes to decedent were in fact and in law owned by the five trusts, and that decedent's property was only his interest as a cestui que trust, which interest was legally distinct from the property owned by the trusts, whether it be land, land contracts or installment obligations.  The respondent would identify the trust with the beneficiary, thus treat the ownership of the installment obligations as directly in the decedent beneficiary, and upon this conception apply the logical theory that the installment obligations were transmitted and disposed of by the decedent's death.  This view is wholly theoretical, for the evidence shows without doubt that at decedent's death no installment obligations were transmitted to his executors directly or received by them from the trustee.  *685  The respondent's determination is, we think, clearly unfounded.  By the five instruments in evidence, express and active trusts were established in which was held the legal title to the lands and the obligations resulting from their sale, and to which were charged the duties of administration in accordance with fiduciary standards.  In each instance, including those in which decedent was trustee before *590  his death, there were beneficiaries other than himself to whom as trustee he owed substantial obligations sufficient to preclude control of the properties by himself.  He was but one of several persons whose relation to the properties was limited to that of trust beneficiary.  Without the consent of the other beneficiaries, he, as an individual, could take none of the installment obligations or direct their sale or other use or disposition, except by agreeing with the others to terminate the trust.  There was more than a mere agency.  The instruments themselves expressly characterized the organizations as trusts, the Wayne County Circuit Court recognized them as such, in practice they were administered as such, and we can find no justification for treating them otherwise*686  or ignoring them entirely with the result of taxing to the decedent amounts which were not in fact income or profits to him.  These installment obligations were, as shown by this record, continuously owned by the trusts from the time that the land contracts were made, and their ownership was not affected by the death of this beneficiary.  When the installments were received, they were income of the trusts and taxable when thus received in accordance with the proper provision of supplement E of the statute.  To the extent that they were within the taxable income of the decedent and his successors, it was because they were distributable to them as trust beneficiaries and not as owners of the obligations or direct recipients of the installments.  The trust was a "fiduciary to insulate the owners from direct taxation." : ; ; . Judgment will be entered under Rule 50.Footnotes1. SEC. 44.  INSTALLMENT BASIS.  * * * (d) Gain or loss upon disposition of installment obligations.↩ - If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange - the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange - the fair market value of the obligation at the time of such distribution, transmission, or disposition.  The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligaion satisfied in full.