Court Opinion

ID: 4606192
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:37:58.631411+00
Date Added: 2024-06-11T07:53:19.722603
License: Public Domain

LEONARD MARX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Marx v. CommissionerDocket No. 106238.United States Board of Tax Appeals47 B.T.A. 204; 1942 BTA LEXIS 718; June 26, 1942, Promulgated *718  Petitioner was the beneficiary of one-third of the income from a trust under his father's will which provided that petitioner was to receive one-third of the corpus on becoming 30 years of age.  Petitioner became 30 years of age on October 4, 1934.  No distribution of petitioner's share of the corpus had been made up through the taxable years 1937 and 1938.  During such years the trustees derived capital gains as a result of the sale of trust property and reported these gains as taxable income to the trust.  Held, the evidence not establishing that the delay in distribution was not unreasonable, petitioner is taxable on the capital gains under section 22(a) of the Revenue Acts of 1936 and 1938.  Emily Marx, Esq., for the petitioner.  John W. Fisher, Esq., for the respondent.  VAN FOSSAN *204  The Commissioner determined deficiencies in income tax of petitioner of $481.32 and $188.95 for the years 1937 and 1938, respectively.  The sole issue is whether or not petitioner is subject to income tax for the years in question on one-third of the capital gains derived by a trust of which petitioner was a beneficiary.  The issue relating to the credit*719  for dependents for each of the taxable years in question has been settled by stipulation of the parties.  FINDINGS OF FACT.  We adopt the stipulated facts as part of our findings of fact.  The stipulation provides substantially as follows: Petitioner's returns for the taxable years were filed with the collector of internal revenue for the third district of New York.  For the taxable year 1937 the Commissioner determined a deficiency in petitioner's income taxes in the amount of $481.32, arising from the addition to petitioner's taxable income of $3,076.53.  This was one-third of the taxable capital gain from the sale of property held by the trustees of the trusts established under the last will and testament of Joseph *205  E. Marx, deceased.  For the taxable year 1938, the Commissioner determined a deficiency of $188.95, arising from the addition to petitioner's taxable income of $1,111.43.  This amount represents one-third of the taxable capital gain from the sale of certain property held by the trustees of the trusts (in the amount of $1,000.60) and other income in the amount of $110.84, which latter amount is not here in controversy.  Joseph E. Marx, the petitioner's*720  father, died December 22, 1929, a resident of the City, County, and State of New York.  His last will and testament, executed January 14, 1928, was admitted to probate by the Surrogate's Court of the County of New York on February 21, 1930.  On February 21, 1930, letters testamentary were issued to the executors named in the will by the Surrogate's Court of New York County, and on February 18, 1931, letters of trusteeship under the will were issued to Leonard Marx, the petitioner, and Emily Marx, the Chemical Bank & Trust Co. of New York having renounced and surrendered its right to qualify as testamentary trustee.  By the terms of his will decedent bequeathed his residuary estate to trustees, in trust, for the benefit of his wife, Regina Marx, and his two children, Leonard, the petitioner, and Emily.  The will provided in material part as follows: ARTICLE THIRD ALL THE REST, RESIDUE AND REMAINDER of my property, real and personal, of every kind whatsoever and wheresoever situated, I give, devise and bequeath to my Trustees, hereinafter named, IN TRUST, however to divide the principal thereof into three equal shares, one for my said wife, Regina Marx, one for my son, Leonard*721  M. Marx, and one for my daughter, Emily Marx, and to dispose of the principal and income of the said shares as follows: * * * II.  To apply the income of the share set apart for my said son, Leonard M. Marx, to his use, during his life or until he shall have attained the age of thirty years, and thereupon, to convey, transfer and pay over to him the principal thereof, or in case of his death before attaining such age or during my life, to convey, transfer and pay over the principal thereof to his lineal descendants then surviving, in equal shares, per stirpes and not per capita, or if none, to apply the income thereof to the use of my said daughter, Emily Marx, during her life, and upon her death, to convey, transfer and pay over the principal thereof to her lineal descendants then surviving, in equal shares, per stirpes and not per capita, or if none, to my said sister, Mathilde Emanuel, or in case she is not then living, to her lineal descendants then surviving, in equal shares, per stirpes and not per capita.  ARTICLE FOURTH II.  My Trustees shall not be required to make physical division of the funds held by them hereunder except when necessary for distribution of principal*722  but may, in their discretion, keep the trust property in one or more consolidated funds in which the separate shares shall have undivided interests.  *206  Decedent appointed Leonard M. Marx, the petitioner, and Emily Marx and the Chemical National Bank of New York as executors and trustees under his will.  The bank surrendered its right to qualify as testamentary trustee.  On December 9, 1930, an order was made by the Surrogate's Court fixing the transfer tax on the property left by the decedent.  The residuary estate bequeathed by article third of the will was valued in the taxing order at $508,998.90.  The bequests given to Regina Marx and Emily Marx were described in the taxing order as "life estate in $169,666.30." The bequest given to Leonard Marx was described as "temporary life estate in $169,666.30 until age 30." On March 26, 1931, the executors transferred to the trustees the residuary estate, consisting of stocks, bonds, accounts receivable, various claims, and cash.  The trustees did not make physical division of the property into three separate parts, but kept it in one fund, and have continued so to keep it through the taxable years.  Leonard Marx became*723  thirty years of age on October 4, 1934.  The property held by the trustees consisted of the following: Property Held by the Trustees as of October 4, 1934Cash in banks$134,282.64Cash for transfer taxes38,745.54173,028.18Listed stocks and bonds$54,597.423 shs Joseph E. Marx Co. Inc105,247.705 shs Happy Home Realty Co28,076.9518 shs Rembrandt Realty Co2 shs Marx Investing Corp5,273.61 $500 bond Met. Country Club193,195.68Accounts receivable:Relmar Holding Co195,790.42Gross assets562,014.28Liabilities:Transfer taxes on contingent remainders$38,745.54Due to beneficiaries' income accounts42,273.7981,019.33Net corpus (undivided)480,994.95Property Held by the Trustees as of January 1, 1937Cash in banks$18,898.09Cash for transfer taxes22,978.2441,876.33Listed stocks and bonds$17,972.883 shs Joseph E. Marx Co. Inc105,247.705 shs Happy Home Realty Co28,076.95 $500 bond, Met. Country Club18 shs Rembrandt Realty Co$151,297.53Accounts receivable:Relmar Holding Co361,958.21Leonard Marx20,000.00381,958.21Gross assets575,132.07Liabilities:Transfer taxes on contingent remainders$38,738.37Due to beneficiaries' income accounts51,042.9989,781.36Net corpus (undivided)485,350.71Property Held by the Trustees as of January 1, 1938Cash in banks$51,599.62Cash for transfer taxes22,978.2474,577.86Listed stocks and bonds$10,497.883 shs Joseph E. Marx Co. Inc105,247.705 shs Happy Home Realty Co28,076.9518 shs Rembrandt Realty Co143,822.53Mortgages receivable46,227.50Notes receivable3,000.00Accounts receivable:Miscellaneous3,622.50Relmar Holding Co209,822.01Leonard Marx119,000.00332,444.51Accrued interest receivable618.07Gross assets600,690.47Liabilities:Transfer taxes$38,738.37Discounts on mortgages727.50Due to beneficiaries' income accounts75,873.89115,339.76Net corpus (undivided)485,350.71*724 *208  At all times since December 22, 1929, and through the taxable years the outstanding and issued capital stock of the corporations was: Joseph E. Marx Co5 sharesHappy Home Realty Co5 sharesRembrandt Realty Co30 sharesMarx Investing Corporation5 sharesDuring the taxable year 1937 property held by the trustees was sold, and taxable capital gain was derived therefrom (gain to be taken into account under section 117 of the Revenue Act of 1938 in computing net income) as follows:  $500 bond, Met. Country Club$40.00Listed stocks and bonds8,008.37Capital loss recovered1,500.00Gross capital gain (taxable)9,548.37Capital expenses318.77Net capital gain (taxable)9,229.60None of this capital gain was included in petitioner's return for the said year.  The trustees filed an income tax return captioned "Estate of Joseph E. Marx-Leonard Marx, Discretionary Trust-Leonard and Emily Marx Trustees", and reported and paid a tax on capital gains of $3,076.53.  During the taxable year 1938, property held by the trustees was sold, and taxable capital gain was derived therefrom (gain to be taken into account under section*725  117 of the Revenue Act of 1938 in computing net income) as follows: 5 shares Happy Home Realty Co$506.48Listed stocks and bonds2,561.14Gross taxable capital gain3,067.62Capital expenses65.83Net capital gain (taxable)3,001.79None of this capital gain was included in petitioner's return for the said year.  The trustees filed an income tax return captioned "Estate of Joseph E. Marx-Leonard Marx, Discretionary Trust-Leonard and Emily Marx Trustees", and reported and paid a tax on capital gains of $1,242.59, which amount was later adjusted by the Commissioner to $1,000.60.  The will of Joseph E. Marx, and the trusts created thereunder, were before the Board of Tax Appeals in Leonard marx (1939), . During the taxable years the trustees kept a separate account in their ledger in the name of each beneficiary, which was credited with one-third of the ordinary net income derived from the property held *209  by the trustees.  One-third of the ordinary net income derived from the property held by the trustees was included in the petitioner's return for each of the taxable years.  No order for distribution or division*726  of the property held by the trustees has ever been made by the Surrogate of New York County or by any other judicial tribunal and no portion of the corpus or of the capital gains has ever been distributed or credited to the petitioner or to any of the other beneficiaries.  No application for a distribution or division of the property held by the trustees has ever been made to the Surrogate of New York County or to any other judicial tribunal.  The petitioner is entitled to a credit for dependents in each of the taxable years in the amount of $800 on account of his two children, Leonard and Ellen Marx.  The petitioner is not entitled to a credit for a dependent on account of his mother-in-law.  Claims for refund were filed by petitioner with the collector for the third district of New York on November 27, 1940, for the taxable years 1937 and 1938, claiming credit for three dependents.  In addition to the stipulated facts above, we find: During the taxable years in question the remaining two shares of Joseph E. Marx Co. stock not held in the trust were owned as follows: One-third by Emily Marx and Regina Marx, as trustees, under a trust which provided that the income be paid*727  to Virginia Wise for her life and on her death the remainder be conveyed to the children of petitioner; one-third by petitioner and Regina Marx, as trustees, under a trust which provided that the income be paid to Janet House for life and on her death the remainder be paid to the children of petitioner; one-third by petitioner and Emily Marx, as trustees, under a trust which provided that the income be paid to Regina Marx for life and on her death the remainder be conveyed in equal shares to the children of petitioner and Emily Marx.  Virginia Wise was the wife of petitioner.  Janet House was the daughter of Emily Marx.  OPINION.  VAN FOSSAN: The question for our determination is whether or not petitioner is taxable for the years 1937 and 1938 on one-third of the capital gains received in those years by the trust of which petitioner was the beneficiary of one-third of the income and where the trust provided that petitioner's share of the principal of the trust should be conveyed to him on reaching thirty years of age.  He became thirty years of age on October 4, 1934.  It is petitioner's contention that the trust continued in effect as to him through 1937 and 1938 because, *728  for legitimate reasons, his share of the corpus of the trust had not been distributed to him.  Respondent contends that the distribution *210  of petitioner's share of the corpus has been unreasonably delayed and that during those years petitioner was in substance the owner of the property and taxable on gains derived therefrom under section 22(a) of the Revenue Acts of 1936 and 1938. 1It is the law of New York State that the life of a trust does not automatically terminate with the death of the person by whose life the duration of the trust is measured.  *729 ; ; ; . It does not follow, however, that the parties can indefinitely postpone the winding up of a trust.  A reasonable time is permitted after the event which terminates the trust for the trustees to pay taxes and administration expenses, to have an accounting, and to perform other duties necessary to complete the administration of the trust.  See ; affd., . Thus, in this proceeding if the delay in the payment to petitioner of one-third of the corpus was not unreasonable, the trust remained fully effective so far as petitioner's control over the trust as beneficiary was concerned.  However, if and when the delay became unreasonable petitioner could have compelled the outright transfer to himself of his share of the corpus and different considerations become important.  The query then arises whether the failure of the beneficiary to compel distribution and the delay by the trustees are sufficient to*730  make the beneficiary the owner of the corpus for purposes of taxation under section 22(a), supra. Pronouncements of the Supreme Court shed light on this question.  In , the Supreme Court, speaking through Justice Holmes, in holding the grantor of a trust liable for income taxes on trust income paid to his wife, made this statement: But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed - the actual benefit for which the tax is paid.  * * * The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.  * * * In , the Court, in discussing section 22(a) of the Revenue Act of 1934, said: * * * the broad sweep of this language indicates the purpose of Congress to use the full measure of its taxing power within those definable categories.  *211  Cf. *731 . Hence our construction of the statute should be consonant with that purpose.  Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue.  * * * The following statement from ; affd., ; certiorari denied, , is also apropos: * * * Here, the property and the income therefrom is so clearly subject to the petitioner's unfettered command that they are, in substance, his and, even though he did not see fit to use the property or the income during the taxable year, the latter may be taxed to petitioner as his income under the broad general tax provisions of section 22(a) * * *.  As the above authorities indicate, it is the power which the taxpayer has over property which determines his taxability on income therefrom.  Here, the will directed distribution of petitioner's share of corpus when he reached thirty.  There was no*732  provision in the will preventing the distribution to petitioner.  Furthermore, there was little or no probability that the trustees would object to the distribution, since the petitioner himself and his sister were the sole trustees.  It is true that an accounting might have been necessary, but this should have been had during the lapse of a reasonable time after petitioner became thirty years of age.  The fact that petitioner was not the grantor of a trust or the assignor of income is not sufficient reason for distinguishing this proceeding from the above authorities.  See Nor is it material that the profits derived by the trust on the sale of part of the corpus were not actually turned over to petitioner.  See . If the delay in distribution was unreasonable, we are of the opinion that petitioner in substance became the owner of his distributive share of the trust corpus and therefore was taxable on the capital gains derived therefrom.  It can not be gainsaid that there has been delay in distribution of the corpus to petitioner.  He became thirty on October 4, 1934.  Whether*733  or not the delay was unreasonable is a question of fact, the burden of proof of its reasonableness resting on petitioner.  Petitioner has attempted to show that the delay was not unreasonable because a large part of the assets of the trust consisted of stock in real estate corporations which could not be liquidated.  He contends that, before applying for an order directing the distribution of the corpus to him, the trustees wanted to make the trust liquid.  At the hearing Emily Marx, one of the trustees of the trust here involved and attorney for petitioner, in answer to a question, directed by herself as attorney to herself as witness, testified that "the trustees believe that the nature *212  of the property held by them is still such as to make physical segregation and distribution among the three trustees inadvisable and in many cases impossible," and that "it would have been very poor business and detrimental to the beneficiaries to divide up that stock." No showing was made by petitioner why the trustees believed the distribution inadvisable during the taxable years in question or why it would have been "very poor business and detrimental to the beneficiaries" to divide*734  up the stock.  The record discloses that the stock of the real estate companies which it is claimed prevented the distribution to petitioner of his share of the corpus of the trust consisted of three shares in the Joseph E. Marx Co., Incorporated, valued at $105,247.70, and five shares in the Happy Home Realty Co., valued at $28,076.95.  All of the stock in the latter company was owned by the trust.  The only outstanding stock of the Joseph E. Marx Co., other than that held by the trust, was owned by the Relmar Holding Co.  The stock in the latter company was in turn owned by three trusts set up for members of the Marx family.  Petitioner and Emily Marx were trustees of one of these trusts for the benefit of petitioner's mother; Emily Marx and Regina Marx were trustees of another of the trusts for the benefit of petitioner's wife; and petitioner and Regina Marx were trustees of the third trust for the benefit of the daughter of Emily Marx.  Thus, petitioner, Emily Marx, and Regina Marx, as trustees, entirely controlled the Joseph E. Marx Co., and petitioner and Emily Marx as trustees entirely controlled the Happy Home Realty Co.  With such control distribution would apparently*735  have been an easy matter.  Nor can we perceive any disadvantage to the beneficiaries if one-third of the stock in the real estate companies had been transferred out of petitioner's name as trustee and into his name as an individual, in view of the fact that after such a transfer control of the stock by the Marx family would still have remained intact.  The task of proving that this would have been detrimental to the interests of the beneficiaries of the trust rested on the petitioner as part of his burden to show that the failure to distribute to petitioner his share of the corpus through 1937 and 1938 was not unreasonable.  We are of the opinion that petitioner has not sustained his burden of proving that the delay was not unreasonable and that the income was not taxable to him.  He must, accordingly, fail.  Decision will be entered under Rule 50.Footnotes1. SEC. 22.  GROSS INCOME.  (a) GENERAL DEFINITION. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.  * * * ↩