Court Opinion

ID: 4593243
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:10:22.390828+00
Date Added: 2024-06-11T07:51:01.400378
License: Public Domain

CHAUNCEY B. BORLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Borland v. CommissionerDocket No. 93515.United States Board of Tax Appeals43 B.T.A. 332; 1941 BTA LEXIS 1517; January 15, 1941, Promulgated 1941 BTA LEXIS 1517">*1517  DEDUCTIONS - TAXES. - Prior to 1934 petitioner leased for a long term of years a residential apartment in a building the title to which was vested in a body of four, self-perpetuating trustees.  The trustees maintained and operated the building through agents, and were authorized to make all necessary expenditures, including those for taxes and other expenses.  In 1929 the trust indenture was amended to require each holder of a certificate of interest to pay to the collector his pro rata share of the general taxes levied on the real estate of the trust, and the annual rental of each certificate holder was thereby proportionately reduced.  Pursuant to such amendment to the trust instrument, petitioner made certain payments to the collector during the taxable years.  Held, the amounts so paid by petitioner are not deductible from his gross income under section 23(c), Revenue Acts of 1934 and 1936.  Charles R. Holden,27 B.T.A. 530">27 B.T.A. 530, followed.  Oscar D. Stern, Esq., Lincoln R. Clark, Esq., and Myron D. Davis, Esq., for the petitioner.  E. G. Sievers, Esq., and Gerald W. Brooks, Esq., for the respondent.  HILL 43 B.T.A. 332">*332  This1941 BTA LEXIS 1517">*1518  proceeding is for the redetermination of deficiencies in income tax for the years 1934, 1935, and 1936 in the respective amounts of $522.10, $322.12, and $854.64.  The issue for decision is whether or not the amounts paid in the taxable years by petitioner as his pro rata portion of taxes on real property, the title to which was held by trustees, constituted under the facts allowable deductions from gross income.  FINDINGS OF FACT.  Petitioner is an individual, residing at 2450 Lake View Avenue in the city of Chicago, Illinois.  For the taxable years he reported his income on the basis of cash receipts and disbursements.  The real property on which the amounts in question were paid by petitioner as his prorated portion of tax is the property located at the above named residence address of petitioner and consists of an apartment house and the land on which it stands.  Petitioner acquired an interest in such property under the following circumstances: He and a number of friends resided separately on the south side of Chicago.  By reason of deterioriation of the neighborhood, all of them decided to move to a better section of Chicago.  But, due to the friendship which existed1941 BTA LEXIS 1517">*1519  among and between these people, it was decided that all of them should live in the same neighborhood.  After consideration of the possibilities of acquiring detached homes, one of the group proposed that they purchase the site 43 B.T.A. 332">*333  at 2450 Lake View Avenue, tear down the building already thereon, and erect one large building in which each individual contributor might have a separate floor of his own.  This plan met with approval and was adopted.  The purchasing group consisted of eleven individuals, nine of whom participated in the purchase price, cost of destruction and construction on the basis of 10 percent each, and two on the basis of 5 percent each.  (These last two individuals had decided to share one floor between their respective families.) Title to the property was taken in the name of Noble B. Judah, one of the members of the group, and was so held November 17, 1921.  The purchasing group employed Howard Van Doren Shaw, one of its members, as general architect for the foundation and structural part of the building.  Each member chose his own architect, however, for the construction of his or her apartment, the architects chosen for this purpose being paid directly1941 BTA LEXIS 1517">*1520  by the individual who employed them.  Thus the building was constructed in a manner to permit each member of the group to build his home as he desired.  On July 1, 1922, the group members executed a trust indenture for the purpose of acquiring and maintaining the building to be erected at 2450 Lake View Avenue.  Construction operations commenced in December 1923, and in the following month the first payment therefor was made.  The purchasing group caused Judah to convey the legal title to the property to four members of the group as trustees, under the trust indenture above mentioned; and caused certificates of beneficial interest to be issued to each member of the group.  Upon construction of the building in May 1924, a form of lease was also executed between the trustees and each member of the purchasing group, the purpose of which was to set forth the floors allocated to each individual.  All these papers were prepared by Judah, as attorney for the group.  The trust indenture sets forth the purpose of their unification to be "for the purpose of acquiring, improving, renting and sharing in the profits and avails from and the proceeds of said real estate", and further states1941 BTA LEXIS 1517">*1521  that the trust itself is drawn up "to declare and effectuate the trusts for and under which the said parcels of real estate were so acquired * * *." Further material provisions of the trust agreement are as follows: Article I provides for forms of certificates of interest and that such certificates shall contain, among other provisions, the following clause: It is expressly agreed and made a condition hereof that the holder hereof has no claim or interest, legal or equitable, in or to any of the premises or properties in said Indenture described or referred to, but only an interest as herein and in said Indenture expressed in the net income, avails and proceeds 43 B.T.A. 332">*334  thereof, and that this certificate and all interest thereunder are and shall be personal property, and that on the death of any holder hereof his or her interest shall go to his or her personal representatives and not to his or her heirs at law.  This certificate and the interest represented thereby, but not less than all of said interest, is assignable only in person, or by attorney, on the books of the undersigned Trustees, on the surrender of this certificate duly endorsed, when a new certificate will be1941 BTA LEXIS 1517">*1522  issued to the transferee or transferees.  Article II declares that the certificates shall pass on death of the holders thereof to the holder's personal representatives and "not to his or her heirs at law, and no beneficiary under this Indenture, and no one claiming by, through or under him or her, has or shall have any claim, title or interest, legal or equitable, in or to the said premises hereinabove described, or in any property, real or personal at any time held in trust hereunder, but only an interest in the net income, avails, and proceeds of such premises and properties, the intention being that the entire legal and equitable title to all of said premises and properties shall be vested in the Trustees hereunder and in their survivors and successors as such Trustees." Article IV designates the persons beneficiary (eleven in number) and their respective percentages of interest in the avails and profits of the trust and provides for the issuance of certificates of interest on the basis of such percentages.  Petitioner is so designated as having a 10 percent interest.  Article V provides that "dividends from earnings or distribution of principal may be declared and made by1941 BTA LEXIS 1517">*1523  the Trustees at any time and times when in their discretion they think it best so to do," and that such distributions shall be made ratably to the holders of record of certificates of interest at the date of such distributions.  Article VI provides that unless sooner terminated under the provisions of the trust indenture the trust shall continue in force until, and shall be terminated at, the expiration of 20 years from the date of the death of the last survivor of certain named persons "now in life." Article VII provides that the trustees shall hold the premises and improve the same with buildings, improvements, and landscaping in accordance with such plans as to them seem best with such funds as may be supplied by the holders of certificates of interest, from the proceeds of mortgages or encumbrances which they may place on the premises, or from any other funds available for such purposes; that the trustees shall insure, preserve, protect, manage, operate, rent, and collect the rents and income from the premises and shall have power to improve, alter, remodel, repair, restore, rebuild, sell, lease, or sublease for a term of 99 years or less, all or any part of the trust property, 1941 BTA LEXIS 1517">*1524  terminate any lease or sublease, consent to the assignment of any lease or sublease and to any subletting of such property, partition or subdivide any of the premises or properties, and make dedications 43 B.T.A. 332">*335  of any part thereof for public uses; that the trustees may fix the amount of rent under any lease or sublease and that such rent may be fixed in a nominal amount to the holders of the certificates of interest under the trust indenture; that the trustees may borrow money for the purpose of carrying out any of the terms, provisions, and objects of the trust indenture and may mortgage or encumber part or all of the trust properties to secure the payment of money so borrowed; that the trustees shall have full authority to perform all acts and to execute all conveyances, contracts, and other instruments necessary or proper to effectuate any of the powers and duties given to or imposed upon them by the trust indenture.  Article IX provides: The Trustees are hereby authorized, from the trust properties at any time held hereunder, and from any other funds or property of whatsoever kind and nature at any time in their hands as such Trustees, to make the following payments: (1) 1941 BTA LEXIS 1517">*1525  General taxes * * *, and all other taxes, * * * upon any of such trust properties.  * * * Article X provides that the trustees may levy pro rata assessments upon the holders of the certificates of interest for the purpose of acquiring and disbursing funds for any of the purposes of the trust and that every such assessment shall be paid within 30 days after written notice calling for such payment; that such assessments shall be a lien on the certificate of interest of the person assessed and that if such assessments be not paid the certificate of interest may be sold and the proceeds applied to the payment thereof; that such certificate of interest may be bought at such sale by the trustees or any holder of certificate of interest and that upon such sale a certificate of interest representing the interest sold shall be issued to the purchaser, and that if such certificate of interest be sold to the trustees they shall hold it as an investment under the trust indenture.  Article XI provides that the trustees shall be four in number and shall keep records of all meetings, which shall be open to inspection, and provides for the appointment by the remaining trustees of a new trustee, 1941 BTA LEXIS 1517">*1526  from the members of the group, upon the death or resignation of one of their number.  The petitioner and Judah and two others were named as trustees.  Article XII provides, inter alia, that title to the trust properties shall always be in the trustees in office for the time being; that the trustees shall keep a set of books in which shall be entered a description and schedule of all the trust properties, the proceeds and avails thereof, the moneys received and expended, the moneys paid out in dividends or otherwise distributed, all assessments and payments on account thereof, the names and addresses of the holders of certificates of interest and the respective amounts contributed by each of them, and the percentage of interest represented by each of such certificates.  43 B.T.A. 332">*336  Article XIII provides for release of trustees from personal liability and specifically states that no trustee shall receive compensation for services as such, but only for services actually rendered.  Article XVII provides against termination of the trust due to death, resignation or withdrawal of any certificate holder.  Article XVIII provides that this indenture may be amended by the trustees1941 BTA LEXIS 1517">*1527  with assent of the holders of not less than a majority in amount of the outstanding certificates of interest.  Article XIX provides that the trust may be terminated at any time by an instrument in writing executed and acknowledged by all of the trustees, or a majority of them, in the manner required in the State of Illinois for the execution and acknowledgment of deeds of real estate and upon the recording of such instrument in the recorder's office of Cook County, Illinois; that upon the termination of the trust, either by lapse of time or otherwise, the trust properties shall be sold and the net proceeds thereof, less the debts and obligations of the trust, distributed to the then holders of the outstanding certificates of interest pro rata according to their respective interests.  No books were in fact kept directly by the trustees and no meetings were held by them.  The petitioner kept certain books of account, and also a bank account in the name of "2450 Lake View Avenue, C. B. Borland, Treasurer." This title was assumed in order to segregate the funds from the petitioners' other funds.  Petitioner was not treasurer by virtue of the indenture or any other instrument in accordance1941 BTA LEXIS 1517">*1528  therewith, but merely assumed this title for convenience in banking funds paid in prior to occupation of the apartments by the certificate holders, and now holds $1,000 in such account to take care of contingencies.  As of May 1, 1924, the trustees leased to each of the holders of certificates of interest for the term of 25 years, for residence purposes only, the particular floor or apartment space agreed upon and allocated by the purchasing group prior to the construction of the building.  The amount of rental was prorated to the percentages of interest.  Otherwise, the provisions of the lease contracts were identical.  A fixed amount of annual rental was specified in each lease ($3,600 in petitioner's lease) subject to the following provisions in paragraph 3 of article third of the lease: 3.  It is the intention of this instrument that the rents for the apartments in said building for each year whenever the same are leased to the registered owners of certificates of interest under said Trust Indenture, shall be limited, as nearly as may be, to the amount required for the carrying charges of the trust properties under said Trust Indenture, which carrying charges include, but are1941 BTA LEXIS 1517">*1529  not limited to, the payment of, all general taxes and current installments of special assessments, any Federal or State income taxes or special taxes, and the interest and serial payments or principal on any mortgage or incumbrance upon the trust properties, the cost of repairs and the necessary expenses 43 B.T.A. 332">*337  of maintenance and operation of said trust properties, and such costs and expenses of carrying out the provisions of said Trust Indenture as are properly chargeable to income.  The Lessors shall, on or before the fifteenth (15th) day of March in each year, or as soon thereafter as practicable, estimate and fix the amount of rent to be paid for all the said apartments in said buildings and improvements during the current calendar year, and the Lessee shall thereupon as provided in paragraph 6 of Article First hereof, pay the Lessors as rent for the demised premises for that calendar year (in addition to the Thirty Six Hundred Dollars ($3600) hereinabove in paragraph 1 of Article First specified) the excess of 9.83% of the amount so fixed and estimated by the Lessors over and above the amount of rent herein specified * * * Various requirements on the part of the respective1941 BTA LEXIS 1517">*1530  parties are enumerated in the lease.  Provision is made therein for the termination of the lease upon the happening of enumerated events and, thereupon, for the reentry of the demised premises by the lessors and the ejectment of the lessee therefrom.  The lease contract also provides in paragraph 5 of article third as follows: 5.  If the Lessee shall at any time abandon the demised premises, or if the Lessors shall at any time again take possession thereof by reason of any default of the Lessee under this lease, or for any other reason, the Lessors may, at their option, relet the demised premises as the agents of the Lessee, upon such terms, conditions and rentals as the Lessors shall deem advisable, and may make such repairs, decorations, improvements and alterations in the demised premises from time to time as may be reasonably necessary to secure and/or retain another tenant or tenants, and the Lessee shall be liable to the Lessors for * * * any amount by which the rental received from such new tenant or tenants, after deducting the expense of all such repairs, decorations, improvements and alterations, is less than the amount in dollars of rent for the corresponding period paid1941 BTA LEXIS 1517">*1531  by or chargeable to each registered holder of a certificate of interest under the Trust Indenture who shall lease one of the similar apartments in said building and if the amount of such rental received from such new tenant or tenants shall exceed the expense of all such repairs, decorations, improvements and alterations and the amount in dollars of rent for the corresponding period paid or chargeable to each registered holder of a certificate of interest under said Trust Indenture who shall lease one of the similar apartments in said building, then such excess shall be retained by the Lessors and shall become income under said Trust Indenture.  After the erection of the building and at the oral request of Judah, Paul Steinbrecher & Co., real estate agents, undertook to manage the property, and has continued so to do until the present time.  The company employed all the general help, purchased the coal and all supplies for the building, and took care of the general upkeep of the exterior.  The company contacted petitioner in the matter of funds necessary for these running expenses, and he in turn would notify the members of the group.  The members were assessed monthly in proportion1941 BTA LEXIS 1517">*1532  to their interest, and in the event that the total of the assessments on hand at the company at any time became more than adequate for purposes of current operations, the assessments were omitted until again necessary.  Petitioner notified the individuals when and how 43 B.T.A. 332">*338  much to pay, but all checks were sent by them directly to Steinbrecher's office.  The agents made quarterly reports to the petitioner, as representative of the group, and summarized the reports in an annual statement furnished to him at the end of each calendar year.  These annual reports were in turn relayed by petitioner to the several other occupants of the building.  On April 11, 1929, an amendment to the original trust indenture was executed, whereby there was added to article X thereof the following paragraph: Each holder of a certificate of interest hereunder shall pay to the County Collector of Cook County, Illinois, on or before the Fifteenth day of April in each year * * * that percentage of the general taxes levied on the real estate then held in trust under this Trust Indenture for the preceding calendar year which the percentage represented by the certificate of interest hereunder held by1941 BTA LEXIS 1517">*1533  such holder bears to one hundred per cent (100%).  The Trustees may, if they deem it best to do so, levy an assessment under this Article X of this Trust Indenture on the holders of the certificates of interest hereunder for the payment of their proportionate shares of said taxes, and in such case all of the provisions of this Article X of this Trust Indenture shall apply to such assessments for all purposes.  The general real estate taxes assessed against 2450 Lake View Avenue were paid in the following manner: The bills were received by the petitioner, who thereupon prorated the amount of the tax among the eleven certificate holders and advised them of the amounts owing from each.  The certificate holders thereupon drew checks for such amounts payable to the order of the county collector and sent them to petitioner, who delivered the eleven checks with the tax bill to Steinbrecher & Co.  One of the company's employees assumed the manual task of delivering these checks to the collector's office and obtaining a single receipt therefor.  The property was assessed on the county collector's books in the name of Noble B. Judah or C. B. Borland, and the receipt was made out to the person1941 BTA LEXIS 1517">*1534  in whose name the property was assessed on the books.  The amounts paid by petitioner in the taxable years to the county collector on account of his share of the general taxes, pursuant to the amendment of April 11, 1929, to the original trust indenture, and the amounts claimed in his returns as deductions for such payments, are as follows: YearAmounts paidAmounts claimed in returns as deductions for taxes paid1934$1,607.96$2,088.4019351,346.831,288.4519362,257.871,264.6743 B.T.A. 332">*339  Respondent disallowed the deductions as claimed by petitioner for the assigned reason that "such payment was in lieu of rent and, therefore, constituted a personal expense." Based upon such disallowance, which petitioner assigns as error, and other adjustments not here in controversy, respondent determined the deficiencies herein.  OPINION.  HILL: Petitioner assigned as error respondent's disallowance of a claimed "credit of $70.54 for taxes paid to a foreign country", but at the hearing petitioner abandoned such assignment and respondent's determination on this point, is, therefore, approved.  The issue submitted for decision is whether or not petitioner1941 BTA LEXIS 1517">*1535  is entitled to deduct from gross income for each of the taxable years the amounts paid by him as his pro rata portion of the general taxes on real estate, the title to which was held by trustees, under the circumstances set out in our findings of fact hereinabove.  There is much discussion in the briefs of both parties on the question of whether or not the trust involved was an association taxable as a corporation.  Respondent contends that the trust was such an association within the purview of sections 801(a)(2) and 1001(a)(2) of the Revenue Acts of 1934 and 1936 and, hence, since title to the property was in the trustees, that the deductions claimed by petitioner for taxes paid are allowable only to trust.  The petitioner urges the contrary contention.  The conclusions reached do not follow the premise assumed in either case.  Under some circumstances, either an association taxable as a corporation or a member of such an association might pay taxes or interest, if a primary obligation, and the amount so paid would be an allowable deduction to the payor.  Cf. 1941 BTA LEXIS 1517">*1536 ; affd., . In other circumstances, an amount so paid by a member of a taxable association might constitute an allowable deduction to the member as rental, if a business expense, and also be deductible by the association as taxes paid.  Or taxes paid by a member as rental, if the amount constituted living expense, might be an allowable deduction to the association but deduction would be prohibited to the member under section 24(a)(1) of the cited statutes.  Cf. . In any event, respondent is not here seeking to tax the trust as an association, and the answer to that question alone would not be decisive of whether or not petitioner is entitled to the deductions claimed by him.  Accordingly, we will undertake no further discussion of this point.  The issue presented for our decision must turn upon whether or not the amounts paid by petitioner represent payments of his own 43 B.T.A. 332">*340  taxes, that is, taxes imposed upon him by the taxing authority by reason of his ownership of the property.  It is not enough for him to show merely that he paid the taxes.  1941 BTA LEXIS 1517">*1537 ; . Petitioner argues in substance that he was in fact the beneficial owner of an undivided interest in the property proportionate to the amount of taxes paid; that the holders of the certificates of interest beneficially owned the property, since the trustees held only the legal title and there was no other person who could possibly have had any ownership interest therein; that the trustees as such did not maintain and operate the property, and performed practically none of the duties nor exercised any of the powers imposed upon or vested in them under the trust indenture, other than in connection with the original organization of the trust and the execution of certificates of interest; that petitioner, as part owner and not as trustee, looked after all matters of operation and maintenance either in person or through the firm of real estate agents; and that hence, because the amounts in controversy represent payments made by him for taxes levied on his undivided interest in the property, they are deductible under section 23(c) of the statutes, which provides that there shall be1941 BTA LEXIS 1517">*1538  allowed as deductions "taxes paid or accrued within the taxable year", with exceptions not material here.  Petitioner's contentions, we think, are not supported by the facts.  The trust instrument vested in the trustees both the legal and equitable title to the property, and conferred upon the trustees very wide powers in respect of the operation, maintenance, and final disposition of the trust properties.  Article I of the trust indenture provided for forms of certificates of interest, and that such certificates should contain the express agreement that the holder should have no claim or interest, legal or equitable, in the premises or properties of the trust, but only an interest in the net income, avails, and proceeds thereof, and that the certificates should be personal property.  Article Ii repeated substantially the same provisions, with the additional statement that the intention was to vest in the trustees the entire legal and equitable title.  It was provided in article XII that the title to the trust properties should always be in the trustees in office for the time being, and in article XIX that upon termination of the trust, either by lapse of time or otherwise, the trust1941 BTA LEXIS 1517">*1539  properties should be sold and the net proceeds thereof, less the debts and obligations of the trust, distributed pro rata to the then holders of the outstanding certificates of interest.  We also think that petitioner's contention that the apartment building was not operated by the trustees, as such, can not be sustained.  Plainly, petitioner in his individual and personal capacity had no authority to manage and operate the building.  In contemplation 43 B.T.A. 332">*341  of law, he acted impliedly in his fiduciary capacity and as agent of the other trustees.  The trustees, with full knowledge of petitioner's acts, long acquiesced therein, and such acquiescence is sufficient from which to imply authority as an agent.  See ; ; ; ; . In , the court points out that an owner of land who stands by and permits a trespasser to drill oil wells on his land, some of which resulted in dry holes, is liable to the trespasser for1941 BTA LEXIS 1517">*1540  such expenditures on the ground of implied agency.  Furthermore, in determining the status of the trust property involved here, the decisive factor is not the particular activities of the trustees in the taxable years, but rather the powers vested in the trustees.  Cf. , affirming on this point . Of course, it can not be said that petitioner in the present proceeding had no interest of any kind in the trust property.  He was entitled to receive his share of the net income and avails therefrom, and, upon termination of the trust, his share of the proceeds from the sale of the properties, after payment of the trust debts.  However, in our opinion, such interest did not amount to beneficial ownership entitling petitioner to deduct, as taxes paid on his own property, amounts which constituted in fact a part of the annual rental which he was obligated under the trust indenture to pay to the trustees for his use of a residential apartment in the building, the entire title to which was vested in the trustees and on which the taxes were assessed in the name of one or another of the trustees. 1941 BTA LEXIS 1517">*1541 The interest of petitioner was, in all material respects, the same as that of a stockholder in the property of a corporation.  In , we had before us the same question that it presented here, under similar facts, except that in that case the apartment building was operated by a corporation which held the title.  There the taxpayer, as part of the consideration for the lease of a residential apartment, agreed to and did pay his proportionate part of the annual interest and taxes on the building on the basis of stock ownership in the corporation.  We held that the amounts so paid were not deductible from gross income.  That decision, we think, must rule the present case.  See also ; affirmed per curiam without opinion, . Decision will be entered for respondent.