Fischer v. Comm'r of Internal Revenue

• Decision Date: 10 May 1950
• Docket Number: Docket Nos. 21153,21154.
• Citation: 14 T.C. 792
• Parties: L. M. FISCHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.PEARL FISCHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

14 T.C. 792

L. M. FISCHER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.PEARL FISCHER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 21153

21154.

Tax Court of the United States.

Promulgated May 10, 1950.

1. The petitioners, husband and wife, created four irrevocable long term trusts for the benefit of their two minor children. There was no reversionary interest in the grantors only in the event that both beneficiaries predeceased them. Held, the trust income is not includible in the petitioners' gross community income.

2. Held, the payment of $15,000 for one-fourth of Fischer's interest in certain leases resulted in a sale as of December 31, 1943, on which a gain was realized.

3. Held, the gain realized on the sale was a long term gain.

4. Held, the leases were not worthless on December 31, 1943.

5. On December 31, 1942, petitioner L. M. Fischer received a check in payment of legal services rendered. When he delivered the check to Fischer, the drawer stated that he was short of money at the time and would appreciate it if Fischer would hold the check for a few days, which petitioner agreed to do. Held, the check was net income in 1942. Charles B. McInnis, Esq., Carson Glass, Esq., and Warren Woods, Esq., for the petitioners.

J. Marvin Kelley, Esq., and Joseph P. Crowe, Esq., for the respondent.

The respondent determined a deficiency of $6,707.52 in the income tax liability for each of the petitioners in the year 1943. The year 1942 is involved in these proceedings because of the forgiveness provisions of the Current Tax Payment Act of 1943.

Two issues were settled by stipulation, leaving in controversy the following:

(1) Whether the income of four trusts created by the petitioners for the benefit of their two minor children is includible in the petitioners' gross community income.

(2) Whether the receipt by petitioner L. M. Fischer of the sum of $15,000 for an undivided one-fourth share of his interest in certain oil and gas leases constituted a sale which resulted in the realization of a gain, or whether the contribution of $15,000 represented a participation in a joint venture.

(3) In the event that the $15,000 payment resulted in the realization of a gain, whether or not the gain was a long term capital gain within the meaning of section 117 of the Internal Revenue Code.

(4) Whether the petitioners' investment in certain oil and gas leases had proved worthless by December 31, 1943.

(5) Whether a check in payment of legal services rendered, received by petitioner L. M. Fischer on December 31, 1942, but not deposited for collection until February 10, 1943, constituted taxable income to the petitioners for 1942.

The case was submitted upon a stipulation of facts, exhibits, and oral testimony.

FINDINGS OF FACT.

The facts as stipulated are so found. Other facts are found from the evidence.

The petitioners are individuals, husband and wife, residing in Corpus Christi, Texas. Their Federal income tax returns for the calendar years 1942 and 1943, the years here involved, were filed with the collector of internal revenue for the first district of Texas at Austin, Texas. Petitioner L. M. Fischer, during the taxable years, was engaged in the practice of law in Corpus Christ, Texas.

In 1941 Fischer acquired what was known as the Hugo Walters lease on some land in Nueces County, Texas. The Agua Dulce Co., with which petitioner had previous business relations, was located nearby. The Agua Dulce Co. was engaged in the business of extracting gasoline from natural gas. The Agua Dulce Co. agreed to buy the natural gas from any well which Fischer could ‘bring in‘ on the Hugo Walters lease. Fischer agreed with Tom Graham that if the latter would drill the well he would receive three-fourths of the production of the well until reimbursed for the cost of drilling and that then Fischer and Graham would each own one-half of the lease. The well drilled by Graham was productive and the Agua Dulce Co. purchased the gas extracted from it.

Fischer later acquired what was known as the Teachout lease on some property about a half mile from the Walters lease. Graham drilled a well for Fischer thereon the same terms. This second well was also productive and its output sold to the Agua Dulce Co.

The petitioners, Fischer and his wife, desired to provide for the future financial security of their two children, then nine and thirteen years of age. Pursuant to this plan, the petitioners each created two irrevocable trusts. Each child was the beneficiary of two trusts, one created by each parent. L. M. Fischer was the trustee for all four trusts. The res in each trust was an undivided one-fourth of the settlor's interest in the Walters and Teachout leases. The trust instruments were executed on December 31, 1941, and were recorded on December 31, 1942. In each of the trusts the trustee was given full and complete power to administer the trust as if he were the sole beneficiary owner. Each trust instrument contained a ‘spendthrift‘ clause, required the trustee to keep books and records, and contained the following provisions with respect to the distribution of income and corpus:

During the life of this trust the income from the interest herein placed in trust may be distributed to the beneficiary in whole or in part or may be withheld entirely, all within the uncontrolled discretion of the trustee. The corpus of the trust estate may also be distributed to the beneficiary prior to the termination of the trust within the uncontrolled discretion of the trustee. No part of the income from the trust herein placed in trust, nor the corpus thereof shall be used in any manner for the support, maintenance or education of the beneficiary hereunder.

Other pertinent portions found in each of the trusts are as follows:

Should the beneficiary die before the termination of this trust leaving child or children living, then the interest and property to which said beneficiary would have been entitled to receive had he lived, shall be paid over to his child or children, subject to all of the terms and conditions of this trust; should the beneficiary die before the termination of this trust, without living issue, then the interest and property to which he would have been entitled to receive had he lived, shall go to * * * (the other beneficiary), subject to all of the terms and conditions of this trust. In the event of the death of the above named beneficiaries before the termination of this trust, the corpus and accumulated income shall immediately go to grantor, if living, if not, to * * * (the grantor's spouse). In the event of the death of * * * (both of the grantors), and the above named beneficiaries before they have reached the age of twenty-one (21) years, the corpus, income and benefits of this trust shall go, to-wit:

(1) One-half interest to Mary Jane Maricle and/or Vera Maricle, if living.

(2) One-half interest to Anna Fischer, if living.

(3) If either or both, Mary Jane Maricle and Vera Maricle and Anna Fischer shall be dead at such time, then the interest and property to which they would have been entitled to receive shall go to J. Howard Williams, in trust, for the use and benefit of of (sic) Christian charities, which in his uncontrolled judgment are most effective.

This is an irrevocable trust, and shall terminate upon the death of both the grantor herein and * * * (the grantor's spouse) provided that at such time the beneficiary has attained the age of twenty-one (21) years. In the event both the grantor * * * (herein, and the grantor's spouse) die before the beneficiary has attained the age of twenty-one (21) years, then this trust shall terminate upon the day the beneficiary becomes twenty-one (21) years of age.

Separate books and bank accounts were kept for the trust and the income was placed in a single bank account designated as ‘L. M. Fischer, Trustee, for Betty and Jerry Fischer.‘ Subsequent to the taxable years, small distributions of the trust income were made in equal amounts to the two beneficiaries usually in the form of $100 payments made to each beneficiary at Christmas, to be used by them personally. Other distributions were made for the purchase, in equal amounts, of Government bonds for the account of each beneficiary.

In 1942 Fischer drew three checks in the total amount of $235 against the trust account in payment of the tuition of one of the beneficiaries. At about the same time, two checks were drawn against the trust account in the total amount of $1,000 in payment of one-half of the expense of reconditioning one of the wells on the leases in which the trusts held an interest.

Fischer's tax counsel advised him that as trustee he had no authority to make such payments from the trust accounts and Fischer reimbursed the trust account by his personal check in the amount of $1,235 for these withdrawals. No other use was made of the trust funds which involved payments for tuition or support of the children.

On another occasion, a check in the amount of $2,000 which Fischer had intended to draw against a special account which he maintained for a client was erroneously drawn on the trust account. When Fischer learned of the error he reimbursed the trust account.

In 1943 Fischer, as trustee, invested $7,000 for the trusts in a one-fourth of Fischer's interest in a block of leases, hereinafter referred to as the Banquette leases, which he had assembled at a net cost of approximately $28,000 and on which a well was about to be drilled. In 1944 Fischer, as trustee, paid $1,250 as a contribution by the trusts for their proportionate share of the cost of drilling another well on the same block of leases.

Separate tax returns were filed on behalf of the trusts for each year of their existence and any tax due thereon has been paid.

The respondent has taxed the income from the trusts to the petitioners for the taxable years of 1942 and 1943.

In 1943 the Agua Dulce Co. was in need...