Paster v. Commissioner
| Decision Date | 24 August 1961 |
| Docket Number | Docket No. 75409,78178. |
| Citation | 1961 TC Memo 240,20 TCM (CCH) 1239 |
| Parties | Herman Paster and Celia Paster v. Commissioner. |
| Court | U.S. Tax Court |
Maurice Weinstein, Esq., 623 N. Second St., Milwaukee, Wis., for the petitioners. Delman H. Eure, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
This consolidated proceeding involves deficiencies in income taxes and additions to tax determined against petitioners as follows:
Additions to Tax
Sec
Docket Deficiency 294(d) Sec
No. Year (1)(A) 294(d)(2)
75409 1947 .... $ 2,814.52 .......
1948 .... 4,101.12 .......
1949 .... 7,932.77 .......
1950 .... 5,404.54a ....... .......
78178 1952 .... 12,804.80 ....... $ 670.26
1953 .... 11,569.66 ....... 1,250.26
1954 .... 13,171.28 $2,422.15 1,050.58a
1955 .... 14,888.28 ....... ........
The issues to be decided are: (1) Whether petitioners are subject to tax on the income credited to three trusts allegedly created by Herman Paster; (2) whether petitioners sustained a loss or incurred an expense which was deductible for the year 1952 with respect to an alleged payment to Fritz Eichinger; and (3) whether petitioners are liable for additions to tax under section 294 (d) (2) of the 1939 Code for the years 1952 and 1953 and section 294(d) (1) (A) for the year 1954.
Issue I. Paster Trusts
Some of the facts are stipulated and are incorporated herein by reference.
Petitioners, Herman and Celia Paster, are husband and wife and during the periods in question resided at 1752 Pinehurst Avenue, St. Paul, Minnesota. They filed joint Federal income tax returns, using a cash basis method of accounting, with the collector of internal revenue for the years 1947, 1948 and 1949, and with the director of internal revenue, St. Paul, Minnesota, for the years 1952 through 1955, inclusive.
Celia is named a petitioner herein only because she filed a joint return with Herman for the years involved.
Herman Paster (hereinafter sometimes called petitioner or Herman) is the same individual as the taxpayer in Paster v. Commissioner 57-2 USTC ¶ 9774, 245 F. 2d 381 (C. A. 8, 1957), certiorari denied 355 U. S. 876 (1957) affirming a Memorandum Opinion of this Court Dec. 21,800(M).
During the years involved herein, Herman was engaged in the operation of about 12 businesses, all located on the same premises. Two of these businesses were Paster Enterprises and Progress Finance.
Paster Enterprises is a partnership consisting of Herman and Celia Paster as partners. It is engaged in the business of owning and renting commercial and residential properties. Progress Finance is a corporation all of the stock of which is owned by petitioner. It is engaged in the business of purchasing or discounting conditional sales contracts and other commercial paper. Both businesses were controlled by Herman.
Walter Johnson was employed by petitioner in 1946 as an accountant and bookkeeper for his business and personal affairs.
On December 29, 1942, petitioner executed three instruments designated "Trust Agreement for the Benefit of Celia Paster," "Trust Agreement for the Benefit of Donald Joseph Paster," and "Trust Agreement for the Benefit of Edward Jacob Paster." Except for the designation of the beneficiaries and the dates of termination, these three instruments are identical. They are the same instruments considered in Paster v. Commissioner, supra. Manley Frisch (now deceased), an attorney, drafted said indentures.
Donald Joseph Paster and Edward Jacob Paster are sons of Herman and Celia. Donald was born about 1940 and Edward in 1942.
Herman Paster and Sam Walzer were named as trustees in each of the three aforesaid agreements. Walzer, who died in 1955, was petitioner's brother-in-law.
The Paster trust agreements provided, inter alia, as follows:
The trust agreements provided that the trustees should distribute annually to the beneficiaries at least 15 percent of the income of the trust and that the remaining 85 percent of the income could be distributed or retained in the corpus of the trust in the trustees' discretion.
The trust agreements also provided that in the event of the death or disability of the trustees the District Court of the County of Ramsey, State of Minnesota, should have the sole right to name the successor trustee as in the discretion of the court should appear just and proper.
The trust agreements contained provisions against the assignments, encumbrance, or anticipation of income by the beneficiaries. In the event of an attempt by a beneficiary to assign or encumber, or the like, or in the event of bankruptcy or judgment, levy of execution or similar circumstance, the trustees were given the discretion to apply directly to maintenance and support of the beneficiary any amount or amounts which could have been distributed to such beneficiary or his family.
The trust agreements also provided that the trusts were declared and intended to be "irrevocable" by the settlor, and that they were not capable of modification in any manner, except as specifically authorized and directed by the trust agreements.
The trust indentures provided that in the case of Donald Joseph and Celia the trusts would terminate on November 18, 1960, at which time all funds, both principal and accrued income then in the hands of the trustees of their respective trusts, were to be paid over to the beneficiaries. In the case of Edward Jacob said trust was to terminate on August 22, 1962, and he was to receive all funds therefrom.
Each of the trust agreements provided for the transfer by Herman to himself and Walzer, as trustees, as follows:
A Ten Thousand ($10,000.00) Dollar interest in the proceeds due Herman Paster as earnings for services rendered to the Mayflower Novelty Company of St. Paul, Minnesota, and now held by the Mayflower Novelty Company.
Mayflower Novelty Company (hereinafter sometimes referred to as Mayflower) was a partnership of which Herman was general manager from 1937 until 1946. Johnson was also employed by Mayflower.
In 1942, Mayflower was indebted to Herman in the approximate amount of $50,000. Herman designated $30,000 of said amount, or $10,000 each, as corpus of the three trusts mentioned above. The $30,000 was retained by Mayflower with the understanding that the three trusts should receive a percentage of the profits of that company. Likewise, said profits were retained by Mayflower, being accrued and credited on its books to an account for the trusts. Prior to 1947, Mayflower held the complete corpus of the trusts.
The taxability of the accrued profits of Mayflower credited to the trusts for the years 1944, 1945, and 1946 was the subject of the previous Paster case. The income was held taxable to Herman.
In 1946, Herman purchased Mayflower, acquiring all of its assets and assuming all of its liabilities including the amounts shown on its books to be due to the three Paster trusts.
As of December 31, 1946, the books of Mayflower showed a debt due the trusts in the total amount of $110,735.41. Said amount represented the original $30,000 due Herman which he had designated as the corpus of the trusts, plus the portion of the net profits of Mayflower which had accrued and had been credited on its books to the accounts maintained for the trusts.
According to the records of the trusts, the assets as of December 31, 1946, consisted of the $110,735.41 due on the Mayflower account and $17,188.56 in United States Series E bonds. The same records show a liability to Herman in the amount of $7,047.01.
According to the books of the trust, Herman, after assuming the liabilities of Mayflower on...
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