Landau's Estate v. COMMISSIONER OF INTERNAL REVENUE, 11335.

• Decision Date: 10 February 1955
• Docket Number: No. 11335.,11335.
• Citation: 219 F.2d 278
• Parties: ESTATE of Philip LANDAU, Deceased, Herbert Landau and Sidney Landau, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Third Circuit

219 F.2d 278 (1955) ESTATE of Philip LANDAU, Deceased, Herbert Landau and Sidney Landau, Executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 11335.

United States Court of Appeals, Third Circuit.

Argued October 12, 1954.

Decided February 10, 1955.

Sidney B. Gambill, Pittsburgh, Pa. (Robert F. Banks and Reed, Smith, Shaw & McClay, Pittsburgh, Pa., on the brief), for petitioners.

Alonzo W. Watson, Washington, D. C. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before MARIS, GOODRICH and KALODNER, Circuit Judges.

KALODNER, Circuit Judge.

This is a petition to review the decision of the Tax Court, which upheld the Commissioner's determination of a deficiency in decedent-taxpayer's income tax for the calendar year 1948. 21 T.C. 727.

The question presented is whether the petitioners, the executors of the decedent-taxpayer's estate, have established that an ordinary loss was sustained in the taxable year here involved. The Tax Court held they did not, and we agree.

The decedent had reported as a capital loss in 1948 an amount representing the difference between what had previously been deposited in a mortgage pool and what had been returned as "principal" over a period of years during which the pool was being liquidated. The Commissioner, in disallowing a substantial portion of the long term capital loss deduction, characterized the mortgage pool as a partnership, 26 U.S.C., 1952 ed., Section 3797(a) (2), and determined that the losses were capital losses deductible in the year of occurrence only. In their petition to the Tax Court for review of the Commissioner's action, the petitioners claimed that the decedent sustained an ordinary loss in 1948. This contention, reiterated here, is premised on the characterization of the mortgage pool as an ordinary trust originally or in liquidation, as a consequence of which the total loss would be deductible in 1948, when the final distribution was made rendering the loss certain in amount. It is contended the loss was ordinary since it does not come within the statutory description of capital losses.

The mortgage pool referred to is that which the Bank of Pittsburgh National Association ("Bank") was operating in 1930.¹ While no trust agreement, rule or regulation of the Bank was shown as the creating source of the mortgage pool, it was apparently authorized by a since-repealed Pennsylvania statute.² This statute enabled banks to maintain general trusts of mortgages on real estate to which could be assigned participating interests on behalf of trust estates held by such banks. It provided that no participant should be deemed to have individual ownership in any mortgage; that the bank had the right at any time to repurchase at market, but not less than face, value any mortgages from the fund, with the right to substitute therefor other mortgages. In this instance, Bank was itself an investor in the pool. Apparently it issued transferable certificates showing the participation of various trust estates, but it does not appear that such certificates left the Bank. The Bank never distributed any principal to the trust, known as the Landau Trust, referred to in footnote 1. The record does not show whether the Bank ever filed an income tax return for the mortgage pool.

In 1931, the Bank was taken over by the Comptroller of Currency and a receiver appointed. In 1932, upon the petition of one of the participants in the mortgage pool, the Orphans' Court of Allegheny County accepted the resignation of the Receiver as custodian of the mortgage pool, removed Bank as the trustee, and appointed the Commonwealth Trust Company of Pittsburgh ("Commonwealth") "to succeed as Trustee therefor."

When Commonwealth assumed its duties as successor trustee, in excess of five million dollars had been invested by Bank in about 450 real estate mortgages on behalf of more than 400 beneficiaries. It issued certificates of participation on request.

Commonwealth accepted no new investments and made no new investments, nor was a participant permitted to withdraw anything from the pool except as distributions were made by Commonwealth. Commonwealth proceeded to liquidate the pool by distributing pro rata to the participants all money received by it in excess of expenditures. Liquidation was completed in 1948. The total distributions from Commonwealth to the Landau Trust were $40,472.58 designated as principal and $14,928.82 designated as income, or a total of $55,401.40, of which $773.84 was distributed in 1948.³

Commonwealth did not file income tax returns for the mortgage pool. It filed accounts with the Orphans' Court showing receipts and disbursements. Receipts of interest and rent on properties acquired by foreclosure were accounted for as income and the excess over expenses charged against income was distributed as income. Receipts of principal and net proceeds from sales of real estate were accounted for as principal, and the excess thereof over expenses and expenditures charged against principal were distributed as principal. The accounts, five of which were filed, were approved by the Orphans' Court; the foreclosures and distributions were authorized by the said Court. Commonwealth made 50 distributions designated income, and 34 designated principal. It did not include gains from sales in the income distributions, deduct losses from income, or take depreciation into account in any way. Properties acquired by foreclosure were entered on its books at the amount due on the mortgage, plus foreclosure costs.

The Tax Court, noting the paucity of evidence on what it deemed critical facts, particularly as to the creation of the mortgage pool, held that the petitioners had not sustained their burden of establishing error of the Commissioner's determination; that they had not shown the mortgage pool was or became an ordinary trust, or that the loss must be treated as an ordinary loss. The Commissioner points out, too, that the petitioners have not established the amount of the loss. The Tax Court determined that the mortgage pool was justifiably treated as a partnership, since it was a financial operation in which capital was the material income-producing factor; accordingly, losses would be deductible by the partners annually and no such loss as petitioners claim would be allowable in 1948. Heiner v. Mellon, 1938, 304 U.S. 271, 58 S.Ct. 926, 82 L. Ed. 1337. It further determined that the mortgage pool might be an association taxable as a corporation, Morrissey v. Commissioner of Internal Revenue, 1935, 296 U.S. 344, 56 S.Ct. 289, 80 L. Ed. 263, and that the pool had many such characteristics, but that the evidence was too meager to justify an affirmative finding that it was or was not an association.⁴...