Fleischmann v. Commissioner of Internal Revenue
| Decision Date | 12 October 1939 |
| Docket Number | Docket No. 90305. |
| Citation | 40 BTA 672 |
| Parties | RAOUL H. FLEISCHMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
L. L. Hamby, Esq., Elden McFarland, Esq., and Ellwood W. Kemp, Jr., Esq., for the petitioner.
George R. Sherriff, Esq., for the respondent.
The Commissioner determined the following deficiencies in the income tax of the petitioner:
1931 ____________________________________ $13,088.26
1932 ____________________________________ 16,588.17
1933 ____________________________________ 9,104.15
1934 ____________________________________ 81,803.06
The issues, excluding those conceded and abandoned, are as follows:
I. Whether the income of a trust created by the petitioner on March 19, 1931, is taxable to the petitioner for all or some of the four years.
II. (a) Whether the income of four trusts created by the petitioner on September 22, 1932, is taxable to him for 1932 and 1933.
(b) Whether the income of four trusts created by the petitioner on May 24, 1934, is taxable to him for 1934.
III. Whether the petitioner sustained a deductible loss of $3,872.90 in 1931 from his investment in the National Gift Guild.
IV. What the basis was for gain or loss of 1,300 shares of General Baking Co. common stock sold by the petitioner in 1932.
V. Whether the petitioner sustained a capital loss in 1932 from the sale of 1,449 shares of General Holding Co., Ltd., stock.
VI. Whether the petitioner sustained a deductible loss in 1933 of his investment in the Consolidated Connector Patent Corporation.
FINDINGS OF FACT.
The petitioner resides in New York City. He filed his Federal income tax returns for the years 1931 through 1934 with the collector of internal revenue for the third district of New York.
Ruth Gardner Fleischmann was the wife of the petitioner from 1920 until some time after 1935, when they were divorced. They had one son, Peter F. Fleischmann, who was born in 1923. Ruth Gardner Fleischmann had two sons of a former marriage, Stephen B. Botsford, born in 1919, and Robert Gardner Botsford, born in 1918. The Botsford decree of divorce provided that the older child should be supported by the parent who had custody of him and the father should contribute to the support of the younger child as the parties should agree upon from time to time. The two boys lived with the Fleischmanns from 1920 through the taxable years here in controversy. Their father made no contribution towards their support after 1923, although he was fully able to support them. Their mother, likewise, was fully able to support them. The petitioner became very fond of the two boys and treated them like his sons, although he never adopted them and they were at all times known under their own name as sons of Ruth Gardner Fleischmann by her former husband. The petitioner maintained the household in which he, his wife, and the three children lived, although his wife sometimes paid some of the expenses of the group.
The petitioner has been engaged in the publishing business for a number of years. He is president of the F. R. Publishing Corporation, which publishes the magazine "The New Yorker." About 80 percent of his property on March 19, 1931, consisted of 21,555 shares, a majority interest, of the stock of the F. R. Publishing Corporation. He decided to create a trust for the benefit of his son and the two Botsford boys so that their futures might be somewhat assured.
I. Trust of March 19, 1931. — Petitioner executed a trust agreement on March 19, 1931, and transferred to the trustee, his wife, 6,000 shares of stock of the F. R. Publishing Corporation. The trustee was directed to divide the fund into three separate equal parts "and to apply the net income of one (1) of such parts to the support, education, and maintenance" of each of the three boys, the son Peter and the two Botsford boys, "during their minority in such manner and amounts as she may in her sole discretion deem best." Then follows:
As each such child or stepchild attains the age of twenty-one (21) years the Grantor may, if he shall then be living, elect whether the trust for such child or stepchild shall terminate and the principal thereof, together with any accumulations of income, be paid over to the grantor's said wife, RUTH GARDNER FLEISCHMANN, absolutely, if she shall then be living, and if she shall not then be living to distribute the same in such manner as the Grantor may direct, or whether the trust shall continue and the income thereof be paid to such child or stepchild absolutely so long as he shall live, and the principal thereof distributed on the death of such child or stepchild in such manner as such child or stepchild may by his last Will and Testament direct, or such other final distribution or provision as the Grantor may at that time, namely, as each such child or stepchild attains the age of twenty-one years, direct.
In the event that the Grantor shall fail to make such election either by written notice to the Trustee or by proper provision in his last Will and Testament then the trust for each such child or stepchild shall terminate as each such child or stepchild attains his majority, and the principal thereof paid over to the said Ruth Gardner Fleischmann absolutely if she shall be then living, and if she shall not be then living the Trustee shall continue to hold said fund or funds and pay the income thereof to such child or stepchild so long as he shall live, and on his death shall distribute the same in such manner as he may by his last Will and Testament direct, and if he shall die without exercising the power of appointment given him hereunder then to distribute the same to such person or persons as would be entitled to take his estate had he died intestate under the laws of the State of New York.
In the event that any such child or stepchild shall die during his minority the principal of his trust as it shall then consist shall be paid over to the said Ruth Gardner Fleischmann absolutely.
A later provision is as follows:
(5) The Grantor reserves to himself the right of nominating at later dates the ultimate recipient of the principal of the three (3) separate trusts herein created and other discretionary powers as herein described, but the transfer of principal hereunder shall be absolute and irrevocable.
The grantor reserved the right to substitute other securities and the right to substitute another trustee. The trustee was not to sell trust property or reinvest trust funds except as directed by the grantor and was to furnish proxies as directed by the grantor.
The trustee continued to hold the certificates for the 6,000 shares of F. R. Publishing Corporation stock throughout the years here involved. No substitution was made. The trustee voted the stock. The corporation paid the following amounts to the trustee as dividends on the 6,000 shares during the taxable years:
1931 _______________________________________________ $39,000
1932 _______________________________________________ 18,000
1933 _______________________________________________ 17,325
1934 _______________________________________________ 61,500
The income of the trust was used by the trustee for the support, education, and maintenance of the three children. The petitioner has never received any of the income of the trust.
The Commissioner, in determining the deficiencies, included the following amounts in the income of the petitioner as representing the income of the trust:
1931 _____________________________________________ $23,023.94
1932 _____________________________________________ 18,000.00
1933 _____________________________________________ 17,325.00
1934 _____________________________________________ 61,500.00
Robert Gardner Botsford attained his majority in July 1938, and his one-third of the trust property was distributed to his mother at the direction of the petitioner, given pursuant to his right of election. The mother at that time was the wife of another, having obtained a divorce from the petitioner.
The petitioner intended to set aside the property for the three children permanently by the creation of the trust and he did not intend to reserve to himself any power to revest in himself title to any of the trust property.
II. Income from trusts of September 22, 1932, and May 24, 1934. — The petitioner, on September 22, 1932, entered into four agreements between himself, as settlor, and his wife, as trustee, for the establishment of four separate trusts. The agreements are identical, except as to the beneficiaries named therein. The petitioner, his wife, and his brother, Charles R. Fleischmann, were beneficiaries of each trust. The petitioner's son, his two stepsons, his two sisters, and his niece and two of her children were also beneficiaries, but none was a beneficiary of all four trusts. Some of the beneficiaries were minors when the agreements were made. Each agreement states that the "settlor hereby assigns, transfers and sets over unto the Trustee" 3,000 shares of stock of the F. R. Publishing Corporation, and that such property:
* * * is now in the hands of F. R. Publishing Corporation * * * and Charles Russell Fleischmann * * * as collateral for certain loans heretofore made by the settlor with the aforementioned. The trustee shall not be obligated to pay said loans either as to interest or principal or to relieve the said securities from their liability as collateral for the aforementioned loans or to withdraw such securities as such collateral, it being the specific intention of this agreement to convey to the trustee the settlor's equity in said property for the purposes herein expressed.
The trusts were to terminate upon the death of the settlor and the principal, together with any additions thereto, was to be paid over to his estate. The trustee was authorized to take control and management of the...
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