Bush v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 06 November 1941 |
| Docket Number | Docket No. 99364. |
| Parties | IRVING T. BUSH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Arthur G. Hays, Esq., Alex M. Hamburg, Esq., James A. Cherry, Esq., and Bernard Tall, Esq., for the petitioner.
Benjamin M. Brodsky, Esq., for the respondent.
The respondent has determined deficiencies in income tax liability against this petitioner and has also determined 25 percent delinquency penalties due thereon in the following amounts for the years 1931, 1933, 1934, and 1935:
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Year | Deficiency | Penalty
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1931 ____________________________________________ | $13,537.45 | None
1933 ____________________________________________ | 13,622.58 | $3,405.64
1934 ____________________________________________ | 8,405.25 | 2,101.31
1935 ____________________________________________ | 33,116.17 | None
| __________ | _________
Total __________________________________ | 68,681.45 | 5,506.95
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Petitioner has instituted this proceeding for a redetermination of those amounts.
Petitioner filed his returns for the years in question with the collector for the second district of New York.
The questions presented for our solution are:
1. Did the respondent err in including in petitioner's taxable income for the years 1931, 1933, 1934, and 1935 the respective amounts of $59,819.51, $57,241.94, $52,990.78, and $57,355.65, representing payments made to petitioner's divorced wife pursuant to and because of the terms of a certain trust created by petitioner for her benefit?
2. Is the petitioner taxable on the capital gains realized by this trust in the amount of $25,109.08 in the year 1935?
3. Did the respondent err in including in the petitioner's taxable income for the years 1933 and 1935 the respective amounts of $16,497.01 and $51,670.15, alleged by the respondent to represent dividends received in the taxable years by petitioner from his wholly owned personal holding company, Shore Bungalows, Inc.?
Certain items in controversy in the pleadings of the parties have since been waived and are, therefore, no longer in dispute. Petitioner has withdrawn his contention that the Commissioner erred in disallowing a deduction in the sum of $7,010, claimed to represent charitable contributions made by the petitioner in the year 1931. Petitioner also concedes two issues raised by amendment to his original petition, namely, whether or not the respondent erred in treating as profit to petitioner in 1933 the entire proceeds on the sale of certain securities in that year of sufficient amount to offset certain losses sustained on the sale of other securities during the year; and, whether or not the respondent erred in disallowing a deduction of $9,199.15 in 1935, representing interest paid by the petitioner in that year.
Respondent has conceded that a deductible loss in the amount of $144,800, sustained by petitioner in 1934 by reason of the ascertained worthlessness of certain stock, is properly allowable. At the close of the hearing it was pointed out that there is no dispute as to the amount of credits allowed the petitioner for taxes paid at the source on tax-free Government bonds by the 1930 trust.
Exception was never taken to certain other items listed in the ninety day deficiency letter.
FINDINGS OF FACT.
Trust Issue.
Irving T. Bush, the petitioner herein, is an individual residing in New York, New York.
Petitioner was first married in 1891, to Belle B. Bush, which marriage was dissolved by divorce in 1907. There were two daughters from this marriage, Beatrice B. and Eleanor T. Bush. Petitioner remarried, his second wife's name being Maud H. Bush, and in May 1908 a son, Rufus T., was born to this second union.
In 1923 petitioner was president of the Bush Terminal Co. and owned a substantial block of stock in that corporation. Under date of January 15, 1923, he set up a trust for the benefit of his then wife, Maud H. Bush, and his two daughters. The corpus of this trust consisted of 10,000 shares of common stock of the Bush Terminal Co. of the par value of $100 per share. This trust was to continue during the lifetime of the grantor, and the net income was to be paid 60 percent to Maud H. Bush and 20 percent to each of the two daughters. Upon his death the daughters were each to receive 20 percent of the corpus and the remaining 60 percent was to go to his son, Rufus T. In the event of the death of any of the beneficiaries, including Rufus T. Bush, prior to petitioner's demise, petitioner had reserved the right of further disposition of the interest of that beneficiary, both principal and income. Petitioner further reserved the right during his lifetime to revoke the trust, to make changes in the securities constituting the corpus thereof, and to vote the trusteed shares. The 10,000 shares were transferred on the books of the Bush Terminal Co. to R. Gould Simonds, as trustee. This trust instrument was executed in New York State and on the date of execution the assets comprising the corpus thereof were in New York City.
Under date of May 3, 1923, petitioner notified the trustee by letter that he was renouncing the right to revoke this trust and, consequently, declared it to be irrevocable.
The income of the trust in the year 1929 was approximately $93,000. of which approximately $56,000 was paid to Maud H. Bush in that year, pursuant to the terms of the trust instrument.
Petitioner and Maud H. Bush continued to live together as man and wife until December 1929, when they separated. Petitioner went to Reno and instituted a suit for divorce on May 26, 1930, which action was contested by his wife, Maud H. Bush, who filed a cross-complaint on June 6, 1930. In this cross-complaint she recited that she had executed a written offer of agreement dated June 4, 1930, the terms of which, if accepted by petitioner, would make adequate provision for her.
In this offer of June 4, 1930, Maud H. Bush requested petitioner to alter the terms of the 1923 trust so that 60 percent of the trust corpus be segregated from the 40 percent in which petitioner's daughters had an interest. Prior to this offer Maud H. Bush had expressed the desire that her interest in the 1923 trust be separated and put under the supervision of another trustee since she considered Simonds too closely associated with Bush. Petitioner's daughters were not related to her and, apparently, she, therefore, wished to segregate her interest from theirs.
On June 4, 1930, Rufus T. Bush signed a release and disclaimer wherein he relinquished all rights he possessed under the terms of the 1923 trust. The release and disclaimer recited:
WHEREAS, said agreement has been heretofore revoked by said Irving T. Bush; and
WHEREAS, since such revocation your undersigned's mother, Maud H. Bush, has submitted to the said Irving T. Bush an offer in writing executed and acknowledged on June 4, 1930, in the form of a proposed Trust Agreement between the said Irving T. Bush, as party of the first part, Bank of Manhattan Trust Company, as Trustee, party of the second part, and the said Maud H. Bush, as party of the third part, * * *
Petitioner believed he had secured the consent of his daughters to the termination of the trust on or about June 6, 1930, to the extent to which such termination and revocation was effected by an agreement entered into on that date. A few years later some question was raised as to whether they had actually given their consent, but eventually the matter was settled and petitioner's action was ratified.
On June 6, 1930, the agreement mentioned above was entered into by the petitioner, the Bank of Manhattan Trust Co., and Maud H. Bush. After reciting that petitioner had sued for divorce and his wife had filed a cross-complaint, the agreement stated that, in the event there should be awarded to petitioner's wife a decree of divorce, this agreement should constitute a complete and absolute adjustment and settlement of all rights, claims, and interests, present or future, of Maud H. Bush, as wife of petitioner or otherwise, in or to the estate or any of the property of the petitioner, and that the agreement should stand in lieu of all claims for dower, maintenance, or support which might arise in futuro. The agreement then stated that the 1923 trust agreement was acknowledged by Maud H. Bush to be no longer of any force or effect but to have been revoked, and any rights or interest formerly held thereunder by Maud H. Bush were disclaimed. Further material provisions of the new agreement were as follows:
1. That the petitioner transfer to the bank, as trustee, all the securities listed in schedule A appended to the agreement. Schedule A contained a list of bonds and preferred stock which comprised a part of the trust corpus then held by R. G. Simonds under the 1923 agreement. As of June 6, 1930, R. G. Simonds held in his possession under the 1923 trust agreement:
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| | Estimated
Securities | Cost | income
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Common stocks ____________________________________ | $136,000.00 | $8,000
Preferred stocks _________________________________ | 246,015.50 | 17,228
Mortgage _________________________________________ | 25,000.00 | 2,000
Bonds ____________________________________________ | 1,230,848.00 | 63,665
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