FRANK TRUST OF 1927 v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 09 July 1941 |
| Docket Number | Docket No. 98274. |
| Parties | ISAAC W. FRANK TRUST OF 1927, WM. K. FRANK, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
S. Leo Ruslander, Esq., Samuel Kaufman, Esq., and Louis Caplan, Esq., for the petitioner.
Orris Bennett, Esq., Frank Donohoe, Esq., and J. Harrison Miller, Esq., for the respondent.
This proceeding involves the redetermination of a deficiency of $333,710.75 in income tax for 1936. The stipulation of facts is incorporated herein by reference as part of our findings of fact. Pertinent parts of the stipulation will be set forth in the findings of fact to be made from other evidence of record. The general issue is whether the respondent erred in including in gross income the amount of $542,802.07 as gain alleged to have been realized from the liquidation of the Frank Securities Corporation, all of the stock of which was held by a partnership having as its members petitioner and two other trusts. Collateral questions are (1) whether the partnership should be recognized as a tax computing unit, and, if so, (2) whether gain should be computed on an aggregate of all of the bases of the partners or only the basis of petitioner, (3) whether the distribution was a liquidating dividend, and (4) the fair market value of the securities received in the distribution.
FINDINGS OF FACT.
The petitioner, an irrevocable trust created by Isaac W. Frank on January 3, 1927, with securities as corpus, filed its return for 1936 with the collector for the twenty-third district of Pennsylvania. The trust provided for the distribution of not to exceed $60,000 annually to the grantor for life and for the accumulation, as principal, of any income in excess thereof. Upon the death of the grantor the income of the trust was distributable in equal shares to his daughter and two sons for life and, after the death of any child, to his or her surviving spouse or issue, if any, under certain contingencies. Upon the termination of the trust the corpus was to be divided into three equal shares and each share distributed among the children of each child of the grantor in accordance with the last will of the parent, unless a majority of the grandchildren elected to continue the trust. The grantor and a bank were named trustees of the trust.
I. W. Frank, Inc., was organized April 28, 1930, under the laws of Delaware by Isaac W. Frank and his wife, Tinnie K. Frank, to whom the corporation issued three shares of its 1,000 shares of stock, par value $100 per share, for $300 cash. Of the remaining 997 shares of the corporation's stock, 648 and 349 were issued on May 20, 1930, to Isaac W. Frank and his wife, respectively, for all of the corpus of petitioner, and securities removed by the individuals from revocable trusts created by them on May 4, 1928. Petitioner's share of the stock was issued to Isaac W. Frank by mistake. Decedent's son, William K. Frank, was president of the corporation.
On May 21, 1930, Isaac W. Frank and his wife each created irrevocable trusts, the corpora of which consisted of all of the stock of I. W. Frank, Inc., 650 shares held by the former and 350 shares held by the latter. A bank and the grantor's two sons and his son-in-law were named cotrustees of the trusts. The trustees of the husband's trust were directed to pay annually to the grantor's wife $50,000 during his life and $75,000 thereafter. The balance of the income during the life of the wife, and after her death all of the income, was to go in equal shares to the three children for their respective lives. Upon the death of any child the share of income he or she would have received, if living, was to go to his or her surviving spouse and issue, if any. Other provisions were made for distribution of income among children and grandchildren under specified conditions. Upon the termination of the trust the corpus was to go to the issue of each child, provided, however, that the children of the grantor could, by their last will, change the distribution of their share of the income and principal and the trustees could, after the death of the grantor and his wife, distribute the corpus to the three children in the event all of them agreed thereto. The income of the trust of Tinnie K. Frank was payable in equal shares to the three children for life. Other provisions of the trust were similar to the trust of Isaac W. Frank.
On May 22, 1930, the Frank Securities Corporation, a Delaware corporation organized May 9, 1930, with an authorized capital stock of 20,000 shares without par value, issued 1,449 and 722 shares of its stock to Isaac W. Frank and his wife, respectively, for cash. Four days later 7,829 shares of the stock were issued to I. W. Frank, Inc., in exchange for the securities which the latter had acquired on May 20, 1930. I. W. Frank, Inc., distributed, in liquidation proceedings, the 7,829 shares of stock, its sole asset, to its stockholders, 5,089 shares to the Isaac W. Frank trust of 1930 and 2,740 shares to Tinnie K. Frank's trust. Of the shares issued to the former, 3,261 should have been issued to petitioner. The error was corrected in September 1930. I. W. Frank, Inc., was dissolved July 12, 1930. The Frank Securities Corporation was a personal holding corporation as defined in section 351 of the Revenue Acts of 1934 and 1936.
On June 23, 1930, Isaac W. Frank and his wife transferred to the trusts created by them on May 21, 1930, the shares of stock they acquired from the Frank Securities Corporation for cash. The petitioner in December 1931 acquired 260 shares of stock of the Frank Securities Corporation for cash. Thereafter and on October 4, 1935, 3,521 shares of the 10,260 shares of outstanding stock of the Frank Securities Corporation were held by petitioner and the trusts executed by Isaac W. Frank and his wife in 1930 held 3,315 and 3,424 shares, respectively.
Isaac W. Frank died December 1, 1930. At all times important after September 21, 1931, his two sons and his son-in-law were cotrustees of the three trusts and directors of the Frank Securities Corporation.
From the date of its organization to October 4, 1935, the Frank Securities Corporation distributed to its stockholders $459,519.52 in excess of its earnings and profits. In 1931 the corporation had income of $183,000 from dividends and interest and distributed $160,000 to the trusts as dividends. In 1932 it distributed $141,000 and had like income of $126,000. In 1933 it had income, exclusive of capital losses, of $114,000 and distributed $123,120. A like amount of dividends was paid in 1934, when the income of the corporation, exclusive of capital losses, was $122,000. In and after 1931 the trustees had doubt about their power to distribute to life beneficiaries of the trusts dividends paid by the Frank Securities Corporation out of capital.
On October 4, 1935, the petitioner and the trusts created by Isaac W. Frank and his wife in 1930 formed a partnership known as the Frandel Partnership, and contributed thereto the shares of stock they held in the Frank Securities Corporation. The articles of copartnership provided, among other things, that title to any securities might be taken in the name of some one of the trustees of the trusts or some other person or other partnership; that the profits and losses of the partnership would be shared in proportion to the capital contributions of the partners; that the partnership would continue until December 31, 1935, and thereafter from year to year unless written notice was given at least 30 days prior to the expiration of any year of a desire to terminate the partnership; and that the partnership was formed in the State of Delaware for the purpose of transacting its affairs in that state and that the articles of copartnership should be construed under the laws of Delaware. On the same day the certificates evidencing the stock contributed by the partners were surrendered to the corporation and reissued in one certificate in the name of the partnership.
The shares of stock contributed to the capital of the partnership had the following adjusted bases in the hands of the respective contributors on the date of contribution:
------------------------------------------------------------------------
| Shares of |
Contributor | stock | Basis
--------------------------------------------|-----------|---------------
Petitioner ________________________________ | 3,521 | $570,388.99
Isaac W. Frank Trust of 1930 ______________ | 3,315 | 1,561,093.57
Tinnie K. Frank Trust of 1930 _____________ | 3,424 | 1,304,088.65
| _________ | ______________
Total _____________________________________ | _________ | 3,435,571.21
------------------------------------------------------------------------
The business of the Frank Securities Corporation, including the securities owned by it, was transferred from Pennsylvania to Delaware in October 1935. This transfer of location of the corporation and its assets was made for the purpose of avoiding new personal property and income tax laws enacted prior thereto in 1935 by the State of Pennsylvania.
On October 5, 1935, the Frank Securities Corporation, pursuant to a resolution adopted by its board of directors on that date, distributed shares of stock of eight corporations, including 7,200 shares of stock of the General Motors Corporation, to the Frandel Partnership. At that time there was no plan to make further distributions to the partnership. This distribution was made for the purpose of placing in the hands of the partnership assets with which to conduct business, and with the view of reducing potential liability of the trustees of the trusts to remaindermen thereof on account of distributions made to beneficiaries in excess of earnings of the Frank Securities...
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