Scofield's Estate v. CIR, 13095-13103.

• Court: U.S. Court of Appeals — Sixth Circuit
• Writing for the Court: McALLISTER, Circuit , and MATHES
• Citation: Scofield's Estate v. CIR, 266 F.2d 154 (6th Cir. 1959)
• Decision Date: 03 April 1959
• Docket Number: No. 13095-13103.,13095-13103.
• Parties: ESTATE of Levi T. SCOFIELD, Douglas F. Schofield, Trustee, Mary Jane Scofield Demmon (nee Mary Jane Scofield), Roy C. Demmon and Mary Scofield Demmon, Josephine Schofield Thompson, Edward W. Thompson and Josephine S. Thompson, Douglas F. Schofield Trust, Douglas F. Schofield, Trustee, Douglas F. Schofield and Mary D. Schofield, Schofield Building Land Trust, Douglas F. Schofield, Trustee, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE of Levi T. SCOFIELD, Douglas F. Schofield, Trustee, Respondent.

266 F.2d 154 (1959) ESTATE of Levi T. SCOFIELD, Douglas F. Schofield, Trustee, Mary Jane Scofield Demmon (nee Mary Jane Scofield), Roy C. Demmon and Mary Scofield Demmon, Josephine Schofield Thompson, Edward W. Thompson and Josephine S. Thompson, Douglas F. Schofield Trust, Douglas F. Schofield, Trustee, Douglas F. Schofield and Mary D. Schofield, Schofield Building Land Trust, Douglas F. Schofield, Trustee, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE of Levi T. SCOFIELD, Douglas F. Schofield, Trustee, Respondent.

Nos. 13095-13103.

United States Court of Appeals Sixth Circuit.

April 3, 1959.

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Robert F. Lee, Cleveland, Ohio, Jamison, Ulrich, Hope, Johnson & Burt and Philip J. Wolf of Hahn, Loeser, Keough, Freedheim & Dean, Cleveland, Ohio, on the brief, for Estate of Levi T. Scofield, et al., appellants and cross-appellee.

Helen A. Buckley, Washington, D. C., Charles K. Rice, Lee A. Jackson and Harry Baum, Dept. of Justice, Washington, D. C., on the brief, for Com'r of Internal Revenue, respondent.

Before McALLISTER, Circuit Judge, and MATHES, District Judge.

McALLISTER, Circuit Judge.

Petitioners in these cases, consolidated on appeal from decisions of the Tax Court, are, with one exception, trustees and beneficiaries of trusts, who severally complain of the disallowance to a testamentary trust of loss deductions to which they claim to be entitled under Section 23(e) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 23(e) refusal of the Tax Court to allow certain trustee's fees as "back pay" within the meaning of Section 107(d) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 107(d); and the taxation by the Commissioner of Internal Revenue of a certain land trust as an association, at corporate rates, rather than taxing it as a trust. The Commissioner of Internal Revenue appeals from the decision that a certain notice of deficiency was invalid and, therefore, deprived the Tax Court of jurisdiction in that case.

The controversy, as colorful as it is complicated, can best be understood by a brief statement of the facts, which largely concern four generations of the Scofield family, of Cleveland, Ohio, commencing at the turn of the century.

In 1901, Levi T. Scofield built the Schofield Building, at that time, a large office building, in the City of Cleveland, Ohio. He died on February 25, 1917. He was survived by a daughter, Harriet Scofield Bushnell; two sons, William M. Scofield and Sherman W. Scofield; and two grandchildren, Douglas F. Schofield and Josephine Schofield Thompson, who were the children of his deceased son, Douglas, who died in 1912. The widow of Douglas married her brother-in-law, the above mentioned William M. Scofield, in 1916, and of that marriage, a daughter, Mary Jane Scofield Demmon, was born after the death of Levi T. Scofield.

When Levi T. Scofield died in 1917, he left a will by which he established a testamentary trust. The corpus of the trust was the Schofield Building. The beneficiaries of the trust were his two sons, his daughter, and his two grandchildren. The will provided that the son, William M. Scofield, was to be trustee of the trust; that each of the three surviving children of the grantor, Levi T. Scofield, was to be a one-fourth beneficiary of the trust income; and that each of his two grandchildren, as well as the widow of Douglas, was to be a one-twelfth beneficiary of the trust income. The corpus of the trust was to vest in the beneficiaries on September 14, 1942, when Josephine S. Thompson, his youngest grandchild at the time of the grantor's death, attained the age of thirty years.

The will of Levi T. Scofield was duly admitted to probate, and his son, William, was appointed executor, thereafter filing his final account, as such, on March 8, 1918, at which time the account was allowed and the executor discharged. William did not file his application for appointment as trustee of the testamentary trust until March 15, 1926, when the Probate Court of Cuyahoga County entered the order appointing him trustee of such trust, to serve without bond; and he served, in fact, as such trustee, from the death of Levi T. Scofield in 1917 until April 22, 1935, when his resignation as testamentary trustee was filed and accepted by the court. William's brother, Sherman, had acted as manager of the Schofield Building from a time prior to the death of his father, Levi T. Scofield, and he continued to act in that capacity until 1932. The real operating manager of the building, however, from May 1, 1928, to September 12, 1935, was Carlton Schultz, Inc., which had been so appointed upon the insistence of the mortgagee of the building, The Northwestern Mutual Life Insurance Company.

In 1934, Levi T. Scofield's only grandson, Douglas F. Schofield, graduated from law school and was admitted to practice at the Ohio bar. At that time, The Northwestern Mutual Life Insurance Company was demanding approval of a new, and larger, mortgage on the Schofield Building. This demand for a new mortgage led Douglas, who had just been admitted to the bar, to read, for the first time, the will of his grandfather, Levi T. Scofield, and to inquire about the trust. The investigation led to his discovery, in the early part of 1935, that large amounts of the trust funds had been used by his uncles, William, the trustee, and Sherman, the manager of the building, for their own purposes. He also discovered that, although The Northwestern Mutual Life Insurance Company had a mortgage of $504,000.00 on the building at the time of the death of his grandfather, nevertheless, his uncle, William, had given additional mortgages on the building in excess of $100,000.00, which were completely unauthorized. Douglas, upon ascertaining these facts, refused to consent to the execution of the new mortgage which was demanded by Northwestern Company in the amount of approximately $800,000.00, which was to replace the former mortgages and to secure additional funds for the installation of new elevators. Upon the refusal of Douglas to consent to the new mortgage, Northwestern brought suit to foreclose its mortgages. William thereupon resigned as trustee, and the young lawyer, Douglas, was appointed successor trustee. After four weeks of trial of the foreclosure proceedings, a settlement was made, by which Northwestern was obliged to reduce its claim by $105,000.00, at the same time receiving a new mortgage, approved by the Probate Court, dated January 1, 1937. Douglas, as successor trustee, then obtained full control of the management of the Schofield Building.

In his investigation with regard to the misuse of the assets of the trust, Douglas discovered that during the period from 1917 to 1932, a total of $453,939.10 of testamentary trust funds had been disbursed by his uncles, William and Sherman, for non-trust purposes, mostly for their personal use in the way of investments for themselves, advancing of grubstakes in gold mining ventures, payment of personal bills, and gifts to certain relatives. In addition to contesting Northwestern's foreclosure proceedings and reducing its claim by $105,000.00, Douglas filed actions against his uncles William and Sherman, seeking recovery from them for upwards of two million dollars for breaches of trust, diversions of trust funds, and interest wrongfully paid on the unauthorized mortgages. At that time, William and Sherman had no assets of any importance other than their contingent interests in the corpus of the trust, which would vest in them if they should live until September 14, 1942.

In 1940, Douglas secured judgments against William in the amount of $2,541,939.31, and against Sherman in the amount of $2,464,928.70. He further sued, on December 5, 1935, The Cleveland Trust Company, seeking recovery of $1,069,306.08 on the ground that it had participated with William and Sherman in breaches of the testamentary trust. In this case, the trial court rendered a judgment in favor of the trustee against the bank in the principal amount of $10,000.00. Com.Pl., 9 Ohio Supp. 159. On appeal to the Supreme Court of Ohio, the trustee there received, in 1948, an additional judgment against the bank in the amount of $31,606.11, which, together with interest and costs, aggregated $90,326.76. Schofield v. Cleveland Trust Co., 1948, 149 Ohio St. 133, 78 N.E.2d 167.

After the above decision in the Supreme Court of Ohio, the trustee proceeded against sixty-two defendants whom he had sued in 1936 for the aggregate sum of $48,128.84; and in 1948, he received $5,465.99 on fifty-eight of those claims. Two of the remaining claims were settled in 1949 for $1,750.00; one was settled in 1953 for $500.00; and the last claim was abandoned in 1953.

William M. Scofield, the first trustee, died on July 3, 1942, approximately two months before his interest in the corpus of the trust would have vested in him; and Sherman Scofield died on August 4, 1942, approximately one month before his interest in the corpus of the trust would have vested in him. The interests of William and Sherman in the corpus of the trust would have aggregated one-half of the value of the Schofield Building; and if they had lived until September 14, 1942, this interest could have been appropriated by their nephew, Douglas, as trustee, in satisfaction of the large judgments he had previously obtained against them for breach of trust and diversions of trust assets; and the interests of William and Sherman that could have been thus appropriated would have approximated the principal amounts of the diversions of trust property of which they had been guilty. The deaths of the two uncles within two months of the date their interests in the corpus of the trust would have vested in them, thus deprived the trustee of securing their shares for the trust, in an amount of many hundreds of thousands of dollars.

As trustee of the estate of ...