Elbert v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 100497.
| Decision Date | 12 November 1941 |
| Docket Number | Docket No. 100497. |
| Citation | 45 BTA 685 |
| Parties | MARIAN BOURNE ELBERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
C. M. Charest, Esq., and John W. Fisher, Esq., for the petitioner.
Z. N. Diamond, Esq., for the respondent.
Respondent determined a deficiency of $13,431.80 in petitioner's income taxes for the fiscal year ended October 31, 1936. Petitioner contends that respondent erred in failing to allow as deductions from gross income $13,410 representing interest paid and $11,820.36 representing ordinary and necessary expenses incurred in carrying on a business.
FINDINGS OF FACT.
Petitioner is an individual residing with her husband at Miami Beach, Florida. Petitioner keeps her books on a cash receipts and disbursements basis and filed her return for the period in question on that basis with the collector of internal revenue for the second district of New York.
Petitioner is a woman of wealth, having assets of several million dollars and an annual income ranging from $150,000 to over $600,000. She derives the majority of her income from a trust or trusts established for her benefit by her father sometime prior to 1919. During 1935 petitioner received through the trust an extra dividend of $300,000 on stock of the Singer Sewing Machine Co.
On December 31, 1935, petitioner established a trust for her daughter, Patricia Bourne Elbert, who was at that time ten years old, and executed a check in the amount of $300,000 payable to herself and her husband, Robert G. Elbert, as trustees.
Petitioner filed a gift tax return reporting the transfer of $300,000 and paid a gift tax of $18,600 thereon.
By the trust instrument the trustees are given unlimited authority to invest and reinvest the trust fund, including the power to invest in corporations in which the trustees may be interested personally and to make direct loans to one or more of the trustees, provided the loans shall be properly evidenced by written documents for the protection of the trust. The trustees are directed:
* * * to apply so much of the net income as the Trustees, in their sole discretion, may deem necessary to the use, maintenance, support and education of Patricia Bourne Elbert, the beneficiary, until she shall attain the age of 21 years, and so long thereafter as this Trust shall be in existence to pay the net income thereof to said Patricia Bourne Elbert, the beneficiary, direct.
Surplus income accruing during the minority of the beneficiary at the discretion of the trustees may be added to the corpus or distributed to the beneficiary upon her reaching the age of twenty-one years. The trustees are given the authority to carry any or all of the property in the name of one or both of the trustees. Each of the individual trustees is empowered to appoint a substitute trustee to act in his or her place. Power to distribute the principal to the beneficiary or to use it for expenses of the trust is also granted.
The trust is to terminate upon the death of the beneficiary or upon her attaining the age of thirty years. On the termination of the trust by the beneficiary attaining the age of thirty years the trustees are to pay over the principal and any undistributed income to the beneficiary. On the termination by the death of the beneficiary the trustees are to pay over the principal and any undistributed income to such person or persons as the beneficiary may designate by last will and testament or, in the absence of any such designation, then to the person or persons who will inherit the estate of the beneficiary under the laws then in effect.
The power of the grantor to alter, modify, or amend or to revoke, cancel, or annul the trust is expressly denied.
On January 3, 1936, the trustees executed a check for $298,000, payable to petitioner in exchange for her unsecured promissory note for $298,000 with interest at 6 percent. The note is payable on demand and no time for payment of interest was specified. At the time the trust was established it was understood that petitioner and her husband as trustees would give petitioner a check for $298,000 in exchange for her promissory note payable to the trustees.
No part of the principal of the note has ever been paid.
On October 8, 1936, petitioner executed a check in the amount of $13,410, payable to the trustees in payment of interest on the note from January 3 to October 3, 1936. The trust in its Federal income tax return for the taxable year reported the amount of the check and paid the tax thereon. The interest was also reported as income to the trust for New York State income tax purposes.
Prior to the establishment of the trust petitioner's husband was primarily responsible for the support, maintenance, and education of Patricia Bourne Elbert out of his current income and a small trust established in 1926. At the time the trust was established petitioner had no reason to believe that she or her husband would not be able to continue to take care of their daughter who was at that time named a beneficiary in petitioner's will. No part of the income of the trust has ever been applied by the trustees in any year to the use, maintenance, support, and education of the beneficiary. Separate books which were regularly audited were kept for the trust. Those books show disbursements as follows:
Jan. 3, 1936, loaned to petitioner _______________________________________ $298,000.00
Dec. 2, 1937, premium on policy No. 12197331, issued by the New York
Life Insurance Co. on the life of Robert G. Elbert __________________ 4,279.00
Dec. 2, 1937, premium on policy No. 4799087, issued by the Mutual
Life Insurance Co. of New York on the life of Robert G. Elbert ______ 8,408.24
Jan. 19, 1939, premium on policy No. 12197331 ____________________________ 2,732.32
Jan. 19, 1939, premium on policy No. 4799087 _____________________________ 6,812.42
No payments were made from 1935 to the time of the hearing for any purpose except the above payments of premiums on life insurance policies on the life of Robert G. Elbert and income tax payments on the interest received from petitioner.
The trust instrument was deposited for safe keeping with the New York Trust Co. and was kept along with petitioner's other personal papers.
During the taxable year petitioner and her husband maintained an office at 599 Madison Avenue, New York, New York. The office had been located previously at 149 Broadway but prior to the taxable year it was moved uptown so that it could be reached more easily. When she was in town petitioner went to the office three or four times a week. During the time that they were away from the city, which was several months during the taxable year, petitioner and her husband kept in close touch with the office.
During the taxable year there was a stock ticker in the office and direct private wires to the office were maintained by several brokers at the brokers' expense. The office subscribed to a number...
To continue reading
Request your trial
-
THE SECURITY FLOUR MILLS COMPANY v. COMMISSIONER OF INTERNAL REVENUE
... ... COMMISSIONER OF INTERNAL REVENUE, RESPONDENT ... Docket No. 90137 ... Board of Tax Appeals ... Promulgated November 12, 1941. Robert ... ...