Court Opinion

ID: 4629702
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:05:56.305786+00
Date Added: 2024-06-11T07:57:25.379937
License: Public Domain

A. M. ELLIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ellis v. CommissionerDocket No. 46586.United States Board of Tax Appeals25 B.T.A. 1195; 1932 BTA LEXIS 1411; April 20, 1932, Promulgated *1411  The assignment by petitioner of future profits to his sons does not divest the petitioner of the liability for the payment of tax thereon when realized.  A. E. James, Esq., for the petitioner.  Eugene Harpole, Esq., for the respondent.  TRAMMELL*1195  This proceeding is for the redetermination of a deficiency in income tax of $3,139.23 for the year 1927.  The petitioner alleges and contends that the respondent erroneously added to his income for the taxable period $24,664.82 representing the interest of his two sons, Martin B. and Herman M., in a certain trading account paid to or invested at their direction during said year.  FINDINGS OF FACT.  The petitioner, an individual, resident of Philadelphia, during the taxable year and for many years prior was engaged in the manufacture of hosiery, and his two sons, Martin B. and Herman M., twenty and twenty-four years of age, respectively, resided with and were supported by him during the taxable year.  On December 21, 1926, the petitioner opened a trading account in his own name with De Haven & Townsend, a brokerage concern in the city of Philadelphia, purchasing at that time 200 shares of stock*1412  of the By-Products Coke Corporation, and he deposited in the *1196  account on the following day, as margin or collateral to cover the purchase, $5,000 city of Berlin bonds which he owned, under an agreement with one Ullrich whereby the latter should receive 30 per cent and he himself 70 per cent of the prospective profits derived from the account.  The account was increased on December 28, 1926, by the further purchase of 500 shares of C.R.I. & P. stock and again on January 3, 1927, by the deposit thereto of $5,000 Hugo Stinnes, 7s, 1936.  On January 15, 1927, the account was composed of the foregoing purchases of stocks and the deposits of collateral.  Based upon the closing market quotations on that date the 200 shares of By-Products Coke and 500 shares of C.R.I. & P. had an aggregate market value of $50,900, as compared with a total cost to that date, represented by a debit in the account of $47,869.82, or a net paper profit of $3,030.18.  On Saturday, January 15, 1927, the petitioner's son Martin became twenty years of age.  At the celebration of the occasion, beginning in the afternoon of that day and continuing until some time later in the evening, the petitioner, in*1413  the presence of Mrs. Ellis, announced a birthday gift of $1,000 cash to Martin, which the son was to obtain by going to the petitioners' office on the following Monday afternoon.  Later in the evening of the same day, that is, January 15, the petitioner called his two sons and their mother into a separate room and related the facts respecting the trading account and his arrangement with Ullrich.  He told them that, if they would abandon their thought of quitting school and entering business and Herman would turn over to him a certain $1,000 Liberty bond which he, the petitioner, had previously given him upon the occasion of his graduation from Wharton School in July, 1925, and Martin would decide not to accept the $1,000 which the petitioner had promised to give him on the following Monday and, in addition, if they would come to the office every afternoon after school and assist in the work thereabout, he would assign to each of them a 17 1/2 per cent interest in the prospective profits accruing to his 70 per cent interest in the trading account as long as he continued to carry it with Ullrich and also a drawing account for both not to exceed $750 per annum.  He told Martin to think*1414  the matter over and to give him his answer and that if he should decide otherwise he would give him the $1,000 which he had promised instead.  They thanked him and promised that they would come to the office Monday afternoon, at which time Herman was to bring his Liberty bond and Martin was to give his decision.  Both of the sons called at their father's office on the following Monday and indicated their acceptance of his propositions, Herman surrendering the $1,000 Liberty bond and Martin renouncing the *1197  $1,000 gift offer of his father.  The bond was never returned to Herman.  The sons continued in the petitioner's office five afternoons each week during the year and they drew something over $650 from his hosiery business in small sums as they needed it.  At some time in or about July of 1927, when the trading account had increased in value, Ullrich approached the petitioner and requested a greater division of the profits than 30 per cent, whereupon the petitioner agreed that he would give him 50 per cent of the profits over and above $100,000 upon liquidation, the division to remain the same as theretofore agreed upon up to such figure.  While the petitioner did not*1415  consider it necessary to gain the consent of his sons to such an increase, he discussed the matter with them and they expressed entire satisfaction.  Neither Ullrich nor the petitioner's sons had any interest whatsoever in the securities deposited by the petitioner in his trading account as collateral.  Their interests pertained solely to prospective profits to be derived from the securities traded in.  The brokerage firm of De Haven & Townsend knew nothing at all about the understanding the petitioner had with his sons, nor was it apprised of his arrangements with Ullrich until in October, 1927, when the trading account was dissolved and a division of the profits made.  In October, 1927, arrangements respecting the trading account ended and liquidation of the securities therein was begun.  A division was first made to Ullrich as to his portion of the profits, which was accomplished primarily through distribution of stocks held in the account upon the basis of their market value.  The account continued in the petitioner's name for two or three weeks after the withdrawal of Ullrich, when liquidation was finally completed (the actual profit upon the petitioner's interest being*1416  around $69,000) and distribution between the petitioner and his sons effected.  In the final division with his sons, in addition to his interest in the profits, the petitioner also took the securities he had deposited as collateral.  Herman did not choose to have his name known in the transaction, so that at or about this time an account was opened with said De Haven & Townsend in the name of Martin Ellis in order that distribution of the profits might be made through that account.  That account was charged with $44,041.73 on October 20, 1927, with the explanatory note, "C. tr A. M. Ellis #2," which is the exact amount of said profit reported by the petitioner in his individual income-tax return for 1927.  Under date of December 27, 1927, $12,500, a portion of the profits from the petitioner's trading account, was charged to that account, which represented a loan of $4,100 to the petitioner, which he later repaid, and two sums of $4,200, which *1198  were invested by the petitioner and his sons, Herman and Martin, respectively, in the capital stock of Ullrich and Company, a corporation, organized pursuant to an agreement of December 12, 1927, between Ullrich and the petitioner, *1417  whereby they were to organize a corporation to engage in the brokerage business, with a capitalization of $25,000 at the beginning, $12,500 thereof being paid in by Ullrich and the remainder of $12,500 by the petitioner and his two sons in the proportions stated.  A balance of $12,960.43 remained in the Martin Ellis account at the end of December, 1927, and was brought down therein on January 1, 1928, which represented the remaining undistributed profit from the petitioner's trading account allocable to his two sons, Martin and Herman, in accordance with the arrangement hereinabove set forth and discussed.  The petitioner duly filed his individual income-tax return for 1927 and reported the aforesaid amount of $44,041.73 as "My share of profit realized on securities sold joint trading account with Henry Ullrich" and he paid the tax of $3,084.85 shown by the return.  The individual income-tax return of Herman Ellis for 1927 included income of $12,332.41, with the explanatory note "Share of profit realized on Securities sold joint trading account of Abraham M. Ellis and Henry L. T. Ullrich," and the return of Martin Ellis for the same period included a similar amount with the same*1418  notation.  The respondent has increased the petitioner's net income by $24,664.82 representing the two sums of $12,332.41 reported by his sons for the taxable year 1927, on the ground that the entire profit allocable to his interest on the trading account with Ullrich was taxable to him.  OPINION.  TRAMMELL: The sole question presented is whether the $24,664.82 which the respondent added to the petitioner's taxable income for 1927 was properly taxed to him, or whether, by reason of an alleged assignment of a portion of the trading account from which this income was derived to his two sons, the amount should have been taxed to them.  The petitioner contends that on or about January 17, 1927, his sons acquired a "present interest" in the "brokerage account owned by him in association" with Ullrich and, therefore, that the profits therefrom, which were later distributed to them, were their taxable income.  The respondent counters with the contention that the petitioner and Ullrich were partners in the conduct and operation of the trading account, each entitled to a stated percentage of its profits, and that the petitioner was taxable upon his distributive share of its income before*1419  any division was effected with the sons, and he cites in support of such contention Ormsby*1199 , and ; affd., ; certiorari denied, . ; affd., ; ; ; and . We can not agree with the petitioner that the transaction here effected the assignment of an interest, "present," future or otherwise, in the "brokerage account" itself, and we can not so find as a fact, notwithstanding the witnesses constantly referred to the account as the object of assignment.  The account was opened in the petitioner's own name and it continued in his name, in so far as the record discloses, until liquidation.  The brokerage firm with which the account was carried knew nothing whatsoever about the alleged interest of the sons in the account, nor was it even apprised of Ullrich's interest in or*1420  to the profits until dissolution of the existing arrangement was effected.  And, more important still, neither Ullrich nor the two sons had any interest whatsoever in the securities deposited by the petitioner in, and which became a part of, the trading account.  In fact, the securities themselves were the account - without them the account would have been a mere empty vault and, indeed, the account would not even have existed.  Therefore, what he purportedly assigned was not, as the petitioner contends, an interest in the trading account itself, but, as we have stated in our findings of fact, an "interest in the prospective profits accruing to his 70 per cent interest in the trading account." In other words, we believe the foregoing factors and the testimony of record are wholly inconsistent with the petitioner's contention and that the alleged assignment was not of an interest in the account itself, but an interest in the petitioner's interest in the profits, as, if, and when realized by him.  The principles involved here are squarely controlled by those laid down in many of the previous decisions of this Board and of the courts. *1421  In , a recently decided case, after thorough examination of the cases upon the subject, we said, "The rule is well established that notwithstanding the document of grant or assignment itself may be perfectly valid and enforceable between the parties thereto, the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the grant or assignment of such income or profits to another." ormsby McKnight Mitchel and ,; petition for review dismissed, ; ; ; *1200 ; and ; affirmed by the Court of Appeals, D.C., January 18, 1932, holding the assigned income taxable to the assignor or grantor.  This principle has been established by the U.S. Supreme Court. *1422 . Based upon the record made, we have found as a fact, speaking of the petitioner's two sons, that "Their interests pertained solely to prospective profits to be derived from the securities traded in." This finding is supported by the following testimony given by the petitioner himself: Q.  What was your conversation with your two sons on January 17, 1927; what was the actual arrangement that you made with them?  In other words, were they to have a portion of your original principal in that account?  A.  An interest of seventeen and a half per cent each in whatever profit the account may bring.  Q.  And that was just an interest in the profits that might arise?  A.  That is right, and each one I considered had $1,000 invested, and it was practically a gamble by them as to any amount that they might take out, if there should be a profit.  The petitioner, in our opinion, was the sole owner of the trading account, certainly in so far as his two sons were concerned, and of the securities deposited therein, and the income accrued to him by reason of such ownership.  His rights naturally arose before the rights of others could*1423  possibly have arisen.  The profits were his, accruing by virtue of such ownership of property, and the tax thereon can not be avoided by him through the medium of an assignment to his sons.  In the Leininger case, supra, petitioner assigned to his wife an interest in his partnership interest, but the court held that the profits arising from his interest were taxable to him and that he was not relieved therefrom by the assignment.  In this case the profits came in to the petitioner.  The tax is not to be avoided by what petitioner afterwards does with his profits.  Nor do we consider that any different rule should apply to the paper profit of $3,030.18 which had accrued to the account in January, 1927, but which had not been realized at the time of such assignment.  It was merely a prospective profit.  It had not been subjected to tax.  If and when realized it was no different from any other future profit.  For the above and foregoing reasons we are of the opinion that the respondent's determination should be approved.  In thus deciding we deem it unnecessary to consider whether or not there was a copartnership between the petitioner and Ullrich as the respondent urges. *1424  Reviewed by the Board.  Judgment will be entered for the respondent.