Security First National Bank of Los Angeles v. Commissioner of Internal Revenue
| Citation | 28 BTA 289 |
| Decision Date | 06 June 1933 |
| Docket Number | Docket No. 45429. |
| Parties | SECURITY FIRST NATIONAL BANK OF LOS ANGELES AND CAROLINE H. HOLLADAY, EXECUTOR AND EXECUTRIX OF THE LAST WILL AND TESTAMENT OF HENRY E. HUNTINGTON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Thomas G. Haight, Esq., Roswell Magill, Esq., James O. Wynn, Esq., J. Marvin Haynes, Esq., Robert H. Montgomery, Esq., and E. H. Conley, Esq., for the petitioners.
M. B. Leming, Esq., and J. R. Gaskin, Esq., for the respondent.
The Commissioner determined deficiencies in Henry E. Huntington's income tax for 1925, 1926, and the period ending May 23, 1927, of $334,297.66, $259,474.18, and $223,054.12, respectively. A number of errors originally assigned have been either waived or settled by stipulation and need not be set forth here. The petitioners' assignments of error which are urged for our decision are:
1. The Commissioner erred in including in the income of Henry E. Huntington for each period the income of the trust which the latter had established for the Henry E. Huntington Library and Art Gallery.
2. If (1) is decided adversely to the petitioners, then the Commissioner erred in failing to allow deductions from the income of Henry E. Huntington for losses incurred by the trust in 1925 and 1926 in the operation of a ranch for profit.
3. If (1) is decided adversely to the petitioners, then the Commissioner erred in including in income for the period ended May 23, 1927, $509,600 as a dividend, representing the value of certain land transferred to the trust by the Huntington Land and Improvement Co. at the request of its sole stockholder, Henry E. Huntington.
4. The Commissioner erred in failing to allow proper deductions for each period on account of contributions to the Henry E. Huntington Library and Art Gallery, a trust, organized and operated exclusively for scientific, literary, and educational purposes.
5. The Commissioner erred in including in income for each period amounts representing interest on coupon bonds of the Los Angeles Railway Corporation and the City Railway Corporation of Los Angeles which became due in these periods but were not paid to the taxpayer.
6. The Commissioner erred in including in income for 1925 and 1926 certain amounts representing gain from the sale in 1925 of Old Dominion Land Co. stock instead of allowing a loss in 1925 from this sale.
7. The Commissioner erred in failing to allow a deduction for 1925 of $12,500 as an ordinary and necessary expense of the taxpayer's business, being the amount charged to him in that year by the Huntington Land and Improvement Co. to recompense it for amounts paid in 1923, 1924, and 1925 to an employee of the Standard Felt Co.
8. The Commissioner erred in failing to offset 1925 and 1926 income with a net loss of 1924 resulting from a debt of H. Knickerbacker & Co. ascertained to be worthless and charged off in that year.
The respondent claims an increase in the deficiencies for 1925 and the period ended May 23, 1927, alleging affirmatively in this connection that:
(A) There should have been included in income for 1925, interest from the preceding interest date to January 2, 1925, on Pacific Electric Railway Co. bonds given by the taxpayer to the Henry E. Huntington Library and Art Gallery;
(B) Henry E. Huntington did not sustain a capital net loss in the amount of $440,530 or any other amount on the sale of bonds of the Los Angeles Railway Corporation during the period ended May 23, 1927.
FINDINGS OF FACT.
Henry E. Huntington was a wealthy man who died on May 23, 1927. He was then 77 years of age and a resident of San Marino, California. His books of account were kept and his income tax returns were made on the basis of cash receipts and disbursements. The Security First National Bank of Los Angeles and Caroline H. Holladay are, respectively, executor and executrix of his estate.
The decedent had collected about 175,000 rare books and about 1,000,000 manuscripts. This collection was very valuable. From the standpoint of quantity and quality of rare materials, it had few equals in the world. Prior to 1919 most of this collection was in storage, uncatalogued, and not readily available for inspection or use.
In 1904 the decedent employed a landscape gardener, who thereafter planned and developed a botanical garden on a tract of about 175 acres in San Marino, California. This garden was developed into one of the finest collections of cacti and succulent plants in the world. The land belonged to the Huntington Land and Improvement Co. The decedent owned all of the stock of that corporation. In 1911 he completed a residence on this land. He occupied the residence until his death. The building was designed to house and display a valuable art collection which he owned. In 1917 the Huntington Land and Improvement Co. conveyed to the decedent about 445 acres known as the San Marino ranch, which included the above described tract. In 1919 he began the construction of a library building on this land near his residence. This library was intended to house his collection of rare books and manuscripts.
About this time the decedent consulted his attorney as to the creation of a trust to own and operate the library with the right reserved to the decedent and his wife to act as trustees, to withdraw and substitute securities, and to change or enlarge the purposes of the trust. He was advised that such a trust could be created under the California Act of March 9, 1885, but that from such a trust property could not be withdrawn for the grantor's own use.
The decedent and his wife executed a deed of trust dated August 30, 1919, conveying a few acres, the library site, to five trustees and their successors, who were to serve without compensation. That deed is in part as follows:
WHEREAS, said Henry E. Huntington desires, in his lifetime, to promote and advance learning, the arts and sciences, and to promote the public welfare by founding, endowing and having maintained a library, art gallery, museum and park within this state;
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Here follows the conveyance "for such purposes, and acting in pursuance of an Act of the Legislature of the State of California, hereinafter mentioned."
TO HAVE AND TO HOLD the above granted premises unto the said parties of the second part, and to their successors in trust nevertheless, and to and for the uses and purposes herein mentioned and above referred to, and in pursuance of the provisions in that behalf, of the Act of the Legislature approved March 10th, 1885, and known as Chapter XLVII of the Statutes of California of 1885, entitled:
I.
THE NATURE, OBJECT AND PURPOSES OF THE INSTITUTION HEREBY FOUNDED AND ENDOWED, AND TO BE MAINTAINED HEREUNDER.
Its Nature: A free public library, art gallery, museum and park, containing objects of artistic, historic or literary interest.
Its Object: Advancement of learning, the arts and sciences, and to promote the public welfare.
Its Purposes: To provide the means for encouraging and carrying on the above mentioned work within the State of California, and by otherwise doing such things as may be necessary to fully carry out the object of this grant.
THE POWERS AND DUTIES OF THE TRUSTEES, AND THE MANNER IN WHICH THEY SHALL ACCOUNT AND TO WHOM.
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Providing for a board of five trustees to act affirmatively by a majority of three.
The trustees (subject to the reservations and to the rights to alter and amend hereinafter contained) shall have power, and it shall be their duty:
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To meet and organize on September 18, 1919, to manage and control the institution and the present and future trust property, to receive, in their discretion, property from others, upon terms harmonious with the purposes of this trust, to receive other property from the grantors subject to the same trust, to make by-laws consistent with law and the trust, to make rules and regulations for management of the property, to keep full records, to employ a librarian, an assistant, cataloguers, superintendent, and others, to use the income in executing the trust and to invest or deposit the excess, and, with a portion of it, buy additional material, to keep the property in good repair, to do all necessary things, and after the death of both grantors to make an annual report to the Secretary of State of the State of California.
THE MODE AND MANNER AND BY WHOM THE SUCCESSORS TO THE TRUSTEES NAMED IN THE GRANT ARE TO BE APPOINTED.
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The grantor may remove any trustee for good cause and may fill vacancies. After both grantors have died, trustees may be removed by equity proceedings and successors elected by the other trustees.
THE ELECTION OF THE GRANTOR TO PERFORM, DURING HIS LIFE, ALL DUTIES AND EXERCISE ALL THE POWER WHICH, BY THE TERMS OF THIS GRANT, ARE ENJOINED UPON AND INVESTED IN THE TRUSTEES.
The grantor herein does hereby, in accordance with the provisions of the aforesaid Act of the Legislature, elect:
First: In relation to the property hereby conveyed, and in relation to such other property as may hereafter be given or granted by said grantor, or given or granted, bequeathed or devised by any other person or persons to said trustees for the purpose of this trust, and in relation to the erection, maintenance and management of the institution hereby founded, to perform, during his life, all...
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