Gaylord v. Comm'r of Internal Revenue, Docket Nos. 109138
| Decision Date | 18 February 1944 |
| Docket Number | 109273.,Docket Nos. 109138 |
| Citation | 3 T.C. 281 |
| Parties | GEORGE S. GAYLORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.GERTRUDE H. GAYLORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. The Civil Code of California, by amendment made in 1931, provides that, unless expressly made irrevocable by the instrument creating it, every voluntary trust (not created prior to the amendment) shall be revocable by the trustor. In 1935 the petitioners, residents of California, decided to make gifts to their two daughters and to effectuate the gifts by creating an irrevocable trust of which the petitioners would be trustees and the daughters the beneficiaries. Petitioners requested their counsel to prepare an instrument to carry out their purpose. The instrument prepared and executed did not contain any provision respecting revocability or irrevocability. Neither petitioners nor their counsel was then aware of the above provision of the California Civil Code. As soon as he learned of the said provision, counsel drafted an instrument declaring that the trust is and was always intended to be irrevocable. This latter instrument was executed by petitioners on March 27, 1940. Held, that under the law of California the trust was revocable during the taxable years 1936 through 1939 and that the trust income for those years was taxable to the petitioners in the proportion that the amount of corpus contributed by each bore to the total corpus.
2. Basis determined for computing gain or loss on certain shares of corporate stock sold by petitioners and the trust during the years involved herein.
3. In 1938 the petitioners and the trust purchased a certain improved rental property without any intention of removing the building thereon and erecting a new structure. Thereafter during the year it was found desirable to remove the building and erect a new and larger one in order to obtain tenants, and the petitioners decided to do so. Early in the following year the building was removed and a new one erected. Held, that the amounts deducted by the petitioners and the trust as losses sustained on the removal of the old building are allowable.
4. Amount of loss determined with respect to the destruction of a pear orchard in order to devote the land to other uses.
Byron M. Coon, Esq., for the respondent.
The respondent determined the following deficiencies in income tax against the petitioners for the years indicated:
+----------------------------------+
¦ ¦George S. ¦Gertrude H. ¦
+----+--------------+--------------¦
¦ ¦Gaylord-Docket¦Gaylord-Docket¦
+----+--------------+--------------¦
¦Year¦No. 109138 ¦No. 109273 ¦
+----+--------------+--------------¦
¦ ¦Deficiency ¦Deficiency ¦
+----+--------------+--------------¦
¦1936¦$17,835.82 ¦$1,087.40 ¦
+----+--------------+--------------¦
¦1937¦12,033.50 ¦4,925.01 ¦
+----+--------------+--------------¦
¦1938¦10,442.62 ¦32.51 ¦
+----+--------------+--------------¦
¦1939¦9,206.82 ¦1,998.71 ¦
+----------------------------------+
The questions presented are the correctness of the respondent's action (1) in determining that the income for the years 1936 through 1939 of a trust created by petitioners, and of which they were trustees, was taxable to petitioners for said years; (2) in determining that the basis for computing gain on certain corporate stock sold by petitioners and the trust during 1936 through 1939 was $2.83542 per share; (3) in disallowing deductions of $5,076.11 taken by each of the petitioners and the trust for 1938 as losses sustained on demolition of a building; (4) in disallowing $3,456 of a deduction of $4,320 taken by George S. Gaylord in 1939, as a loss sustained on the removal of a pear orchard from a ranch owned by him; and (5) in disallowing $1,400 of the deductions of $2,650 taken by each of the petitioners as losses sustained on the destruction by storm of ornamental trees on property owned by petitioners and occupied by them as their residence. Issue No. 5 was abandoned by the petitioners at the time of the hearing, leaving the first four issues for determination.
For convenience, the discussion of each issue will follow immediately after the findings of fact relating thereto.
The petitioners are husband and wife, residents of Pasadena, California, and filed separate income tax returns for 1936 through 1939 with the collector of internal revenue for the sixth district of California.
As the issue of their marriage the petitioners have two daughters, Margaret and Gertrude. Margaret was born on November 10, 1905, and married Albert Brunker in 1923. Two children were born of that marriage; one on October 14, 1925, and the other on June 4, 1927, and both are still living. Subsequently Margaret divorced Brunker, and in 1931 married Frederick Ruppel. Both Margaret and Ruppel are still living. The petitioners' other daughter, Gertrude, was born on May 31, 1916, and on May 29, 1937, married Eugene L. Bruce. Gertrude and Bruce are still living, and have one child, who was born in April 1938.
Sometime prior to September 1935, the petitioners decided to set up a trust for the benefit of their two daughters, and in case of the death of a daughter, then for the benefit of the children of such daughter. On December 11, 1935, the petitioners signed and acknowledged a declaration of trust, dated November 7, 1935, in which they were designated both grantors and trustees and designated jointly as trustee. A trust, sometimes hereinafter referred to as the Gaylord trust, was declared with respect to 7,000 shares of the common capital stock of Marathon Paper Mills Co., 5,000 shares of which were contributed by Gaylord and 2,000 shares by Mrs. Gaylord.
The trust instrument did not contain any provision relating to its revocability or irrevocability.
When requesting counsel to prepare the trust instrument, Gaylord told him that he and Mrs. Gaylord desired to form an irrevocable trust with respect to the stock. At the time the petitioners signed the trust instrument, they were advised by counsel that the trust was irrevocable. After signing the instrument, they left it in the custody of counsel. On February 4, 1936, the petitioners filed gift tax returns, prepared by Gaylord, for 1935, in which they reported the creation of an irrevocable trust and the transfer thereto of the above mentioned shares of stock in Marathon Paper Mills Co., sometimes hereinafter called Marathon. Mrs. Gaylord reported the 2,000 shares of stock contributed by her as having a value of $50,000, but, by reason of exclusions and the specific exemption taken, she reported no gift tax liability. Gaylord reported total gifts in the amount of $140,278.08, of which $125,000 was reported as the value of the 5,000 shares of Marathon stock contributed by him to the trust. After taking exclusions totaling $15,000 and a specific exemption of $50,000, his return showed a gift tax liability of approximately $2,500, which he paid. Subsequently in 1936 Gaylord paid an additional gift tax of approximately $100 with respect to the said return. The certificates for the 7,000 shares of Marathon stock were placed in a safe deposit box in California, in the name of Gaylord and Mrs. Gaylord, as trustees, and remained there until the stock was sold. The trustees sold some of the stock in each of the years 1936 through 1939, the last of it being sold in the latter year. For convenience in making delivery upon sale, certificates were sent from time to time to a bank in Chicago, in which the proceeds of all sales were deposited in an account in the names of the petitioners as trustees.
In connection with the purchase of real property situated in Los Angeles County, California, the trustees, on September 23, 1937, had the trust instrument recorded in the office of the county recorder of that county. In 1938 the trustees made certain purchases of real estate situated in Texas, totaling about $90,000, and in connection therewith had the trust instrument recorded in four counties of that state.
For each of the years 1936 through 1939, a fiduciary income tax return was filed for the trust by the trustees, in which the daughters were shown as the beneficiaries of the trust, with each entitled to one-half of the income thereof. For each of the said years the daughters filed income tax returns and paid the tax shown to be due thereon. In their returns they reported as taxable income received from the trust the amounts shown by the fiduciary income tax returns as having been distributed to them during the respective years.
At the instance of their counsel, the petitioners on March 27, 1940, signed and acknowledged an instrument reading as follows:
THAT WHEREAS the undersigned, George S. Gaylord and Gertrude H. Gaylord, his wife, of the City of Pasadena, in the County of Los Angeles, State of California, do in and by an instrument of even date herewith entitled DECLARATION OF TRUST certify and declare and in and by said instrument have certified and declared that they hold and shall and will hold the following described personal property, to-wit: seven thousand (7,000) shares of the common capital stock of Marathon Paper Mills Company, a Wisconsin corporation, of the par value of Twenty-five Dollars ($25,00) per share, and any and all proceeds thereof, IN TRUST, NEVERTHELESS, for the uses and purposes and upon the terms and conditions set forth in said Declaration of Trust, reference to which Declaration of Trust is hereby made for further particulars thereof; NOW, THEREFORE, said George S. Gaylord and Gertrude H. Gaylord do further certify and declare that the trust created and provided for in...
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