Court Opinion

ID: 4626218
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:46.255197+00
Date Added: 2024-06-11T07:56:50.579818
License: Public Domain

CHARLES KAPLAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kaplan v. CommissionerDocket No. 43472.United States Board of Tax Appeals26 B.T.A. 379; 1932 BTA LEXIS 1319; June 10, 1932, Promulgated *1319  1.  Petitioner was the settlor and also the trustee of a trust for his wife, but if he survived her the trust income was to be paid to him.  The trustee was given power to accumulate a reasonable portion of the trust income to be held for the benefit of those entitled to such income.  held, the trust income was taxable to the petitioner under section 219(h) of the Revenue Act of 1924.  2.  Petitioner paid $25,000 for one-fifth the common stock of a corporation.  It was mutually agreed that at the end of five years, at the option of either party, petitioner would return the stock and receive back his $25,000 plus one-fifth the net dividends for the period, or minus one-fifth the net losses.  The company sustained a net loss of $100,000 during the five years.  Held, petitioner sustained a capital net loss which should be computed under section 208(c) of the Revenue Act of 1924.  Allison L. H. Newton, Esq., for the petitioner.  Dean P. Kimball, Esq., and Edward C. Adams, Esq., for the respondent.  MARQUETTE *379  This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent in the amount of $2,271.85*1320  for the year 1924.  The errors alleged are (1) that respondent added to petitioner's individual income dividends received by him as trustee for the benefit of others, and (2) that respondent disallowed a deduction of $20,000 claimed as a loss by petitioner under an agreement between himself, the Eliot Mills, Inc., and Wolfe Finkel.  FINDINGS OF FACT.  Petitioner is an individual residing in Massachusetts.  His income-tax returns were filed upon the cash receipts and disbursements basis.  On July 21, 1923, petitioner executed a declaration of trust, the pertinent provisions of which are as follows: I, Charles Kaplan of Boston, Massachusetts, do herewith declare that I hold in trust an aggregate of three thousand sixty (3,060) shares of the *380  common and preferred stock of the Warren-Allen Carpet Company, a Massachusetts corporation, and one hundred and ninety-four (194) shares of the first preferred stock of that company in trust upon the trusts following: First: To hold said shares or to sell, convey and transfer the same as the Trustees may determine, and to invest and reinvest the proceeds of any sale or conveyance and to pay the income arising therefrom*1321  as follows: 1.  To pay the whole income quarterly or oftener to Sarah Kaplan, wife of said Charles Kaplan, during her lifetime; 2.  After the death of said Sarah Kaplan, if the said Charles Kaplan shall survive, to pay the income to the said Charles Kaplan so long as he shall be living.  Second: After the death of said Charles Kaplan and said Sarah Kaplan the Trustee shall divide and distribute the principal of said trust fund in equal shares to and among the children of said Charles Kaplan and the issue then living of any child of said Charles Kaplan who may theretofore have died, such issue taking their parent's share by right of representation.  Third: The number of Trustees hereunder may be increased by an addition of another Trustee, such addition to be made by instrument in writing under seal executed by said Charles Kaplan and duly acknowledged by him, and from and after the execution of such instrument the number of Trustees hereunder shall be two (2).  Fourth: The Trustee or Trustees hereunder for the time being shall have full power to deal with the trust property as if they were the beneficial owners thereof and shall, without restricting the foregoing*1322  generality, have power: 1.  To distribute the income arising from the Trust property from time to time in such amounts and at such times as they shall think fit, with power to reserve a reasonable portion of the income.  Any income accumulated by the Trustees under this Trust shall be held for the benefit of the particular persons who were entitled to such income, and on their death for the benefit of the person or persons who under this Trust become entitled to the share that such individual would have received if living.  The Trustees may, as to any income accumulated, at their discretion at any time or from time to time thereafter pay all or such part or parts as they think fit of such accumulations of income to or for the benefit of the person to whom or for whose benefit the income so accumulated was originally payable in the same manner as the current net income payable to or for the benefit of any such person.  * * * 6.  The Trustees may sell, negotiate and transfer, mortgage or pledge the lands and property, real or personal, held by them as Trustees, or any part thereof, free, discharged from all trusts, conveying said property in fee simple or for any less estate*1323  at public auction or at private contract or sale, at such times during the continuance of this trust, subject to such considerations, either for cash or on credit, and secured by mortgage or otherwise, as it may seem to them judicious, without the necessity of applying to any court or to the beneficiaries under the Trust for leave so to do; and they may hold and collect any notes, obligations, mortgages or other securities which they may take in making sales as aforesaid, or which they obtain otherwise, and transfer the same or assign the same with or without guaranty, binding by such guaranty only the property of the trust.  No grantee or transferee shall be obliged to see to the application of any consideration given, transferred or conveyed to the Trustees.  * * * *381 Fifth: The trust hereunder may be amended or revoked by instrument under seal executed by the Trustees at the time being in office and assented to in writing under seal by said Sarah Kaplan.  * * * The shares of stock involved in the trust remained in petitioner's name as an individual on the books of the issuing corporation.  During 1924 he received dividends on the stock in the amount of $4,592*1324  and he at once deposited the dividends in savings banks for the benefit of his wife.  She filed a separate income-tax return, reporting the dividends as income.  Respondent has determined that the dividends constituted taxable income to the petitioner.  On October 21, 1919, petitioner entered into an agreement with the Eliot Mills, Inc., and Wolfe Finkel, the pertinent provisions of which read as follows: WHEREAS said Charles Kaplan is desirous of investing certain sums of money in said Eliot Mills, Inc., NOW THEREFORE, it is agreed as follows: 1.  The said Wolfe Finkel and said Eliot Mills, Inc. severally agree with said Charles Kaplan that: (1) there are outstanding one hundred and forty-five (145) shares of common stock and one hundred and ten (110) shares of preferred stock of said Eliot Mills, Inc.  (2) The net worth of said corporation as of October 1, 1919, is fifty thousand dollars ($50,000), after making all due allowance for accrued liabilities, including also a proper allowance on account of income taxes assessable on account of the net earnings of said corporation for the period from January 1 to October 1, 1919, taking merchandise at cost except as hereinafter*1325  noted, eliminating from assets and liabilities the assets and liabilities connected with the litigation between the Town of Natick and the Commonwealth of Massachusetts, as hereinafter set out.  2.  The said Wolfe Finkel and the said Eliot Mills, Inc. covenant with said Charles Kaplan that in consideration of the payment by him of twenty-five thousand ($25,000) dollars to said Eliot Mills, Inc. they will cause to be issued to him forthwith such number of shares of the common stock of Eliot Mills, Inc. as shall be twenty (20%) per cent of the total number of shares of the common stock of said company outstanding after the issue of such shares to said Charles Kaplan, and should the number of shares of common stock be increased thereafter during the term of this agreement to issue to him twenty per cent (20%) of such additional stock.  * * * 5.  It is agreed that during the term hereof the interest of the said Charles Kaplan in the net earnings of said company, commencing as of October 1, 1919.  shall be twenty (20) per cent of the amount available for the common stock irrespective of the number of shares of the common capital stock of said Company notwithstanding.  * * * 10. *1326  At the expiration of five (5) years from the date hereof the said Wolfe Finkel or the said Eliot Mills, Inc. or the said Kaplan may cause a termination of the association of said Charles Kaplan with the said Eliot Mills, Inc., under the provisions hereof by four (4) months notice in writing at any time within three (3) months prior to or sixty (60) days after the end of said five (5) year period.  Said Finkel and said Eliot Mills, Inc., jointly and severally agree with said Kaplan that upon the giving of notice as aforesaid there will *382  be paid said Kaplan at the expiration of said notice twenty-five thousand (25,000) dollars plus so much of one-fifth (1/5th) of the net earnings of said Eliot Mills, Inc., from October 1, 1919, to October 1, 1924, as shall not have been already paid to said Kaplan as dividends, and less so much of one-fifth (1/5th) of the net loss if any suffered by said Eliot Mills, Inc., during period from October 1, 1919, to October 1, 1924, as shall not theretofore have been made up.  Said net earnings or loss to be determined by three appraisers within three months from the date of giving said notice, one to be appointed by said Eliot Mills, Inc., one*1327  by said Charles Kaplan, and the third by the two so chosen.  The decision of said appraisers, or a majority of them shall be final and binding upon the parties, but in the event that said appraisal shall fail for any reason, the amount to be paid at the expiration of said notice shall be determined according to what said earnings or loss fairly may be.  Upon such payment said Kaplan shall assign and transfer said shares as said Eliot Mills, Inc. and said Finkel may direct.  * * * In 1924, soon after October 1, an appraisement was made of the condition of Eliot Mills, Inc.  It was then found that the company's net loss for the period from October 21, 1919, to October 1, 1924, amounted to $100,000.  Pursuant to the provisions of paragraph 10 of the agreement, one-fifth of the amount of the loss was deducted from the $25,000 which petitioner originally paid in, and the balance, $5,000, was repaid to him.  At that time the company's stock had but little, if any, value.  Petitioner claimed deduction of the entire amount of $20,000 as a loss.  Respondent determined that only 12 1/2 per cent of that amount was deductible as a capital net loss.  OPINION.  MARQUETTE: Petitioner was*1328  both the grantor and the trustee of a trust of which his wife was the primary beneficiary.  Under the fourth provision of the declaration of trust the trustee is given full power to deal with the trust property as if he were the beneficial owner thereof, and to reserve a reasonable portion of the income.  The same provision also declares that: Any income accumulated by the Trustees under this Trust shall be held for the benefit of the particular persons who were entitled to such income, and on their death for the benefit of the person or persons who under this Trust become entitled to the share that such individual would have received if living.  By the first provision in the trust declaration the income of the trust property was to be paid to the petitioner, the grantor of the trust, if he survived his wife.  Section 219(h) of the Revenue Act of 1924, so far as pertinent, provides: Where any part of the income of a trust may, in the discretion of the grantor of the trust, * * * be distributed to the grantor or be held or *383  accumulated for future distribution to him, * * * such part of the income of the trust shall be included in computing the net income of the grantor. *1329  In our opinion the power reserved by petitioner to himself as trustee to accumulate the trust income for future distribution to himself as the grantor in case he survived his wife, brings the trust income within the scope of section 219(h), supra. The word "may" as used in that section clearly is used in a permissive sense only and is not equivalent to "shall." It contemplates a trust wherein the grantor retains dominion over the trust income to the extent of diverting it to himself.  The declaration of trust before us reserves to the petitioner, as grantor and trustee, full power to bring about exactly the possibility contemplated by the statute.  We find no error, therefore, in the respondent's determination that the trust income was taxable to the petitioner individually.  The remaining question is whether petitioner's loss of $20,000 is deductible in its entirety, or is to be treated as a capital net loss, with deductions accordingly.  In 1919 petitioner paid to the Eliot Mills, Inc., $25,000.  In return he received 20 per cent of the common stock of the company, but none of the preferred stock.  By mutual agreement petitioner's interest in the net earnings of the company*1330  was to be 20 per cent of the amount available for common stock.  It was also agreed that at the end of five years, at the option of either party, petitioner would surrender his stock and receive $25,000 plus so much of one-fifth of the company's net earnings or minus so much of one-fifth of its net losses for the five-year period as had not already been paid to or by petitioner.  It appears that the arrangeent was terminated in 1924, pursuant to the agreement, with a net loss for five years in the amount of $100,000.  Petitioner received $5,000 in cash and was charged with $20,000 of the loss.  Respondent contends that the deduction to be allowed is controlled by the following provisions of the Revenue Act of 1924.  SEC. 208. (a) For the purpose of this title - * * * (2) The term "capital loss" means deductible loss resulting from the sale or exchange of capital assets; * * * * * * (8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if*1331  on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.  * * * (c) In the case of any taxpayer * * * who for any taxable year sustains a capital net loss, there shall be levied, collected and paid * * * a tax determined as follows: *384  A partial tax shall first be computed upon the basis of the ordinary net income * * * and the total tax shall be this amount minus 12 1/2 per centum of the capital net loss.  The provisions of the contract between the petitioner and the corporation were perhaps unusual, but the fact remains that petitioner purchased the company's capital stock under the contract fixing a price for its resale to the company at a future date.  The contract was carried out and petitioner received the price agreed upon when five years later he resold the stock in 1924.  A loss of $20,000 was sustained.  Throughout the five years during which petitioner was a stockholder he was the owner of a definite property right in the company, evidenced by his shares of stock.  That property right clearly constituted a capital asset, the character of which was not changed by the provisions of*1332  the contract guaranteeing to petitioner a market for his stock at the end of five years.  As that capital asset was held by the petitioner for more than two years, it clearly comes within the scope of the statute, section 208, supra. In our opinion the respondent was right in computing petitioner's loss upon the basis of that provision of the statute.  Decision will be entered for the respondent.