Tobin v. Comm'r of Internal Revenue

• Decision Date: 30 November 1948
• Docket Number: 13612.,Docket Nos. 13611
• Citation: 11 T.C. 928
• Parties: MARGARET BATTS TOBIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.EDGAR G. TOBIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

11 T.C. 928

MARGARET BATTS TOBIN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.EDGAR G. TOBIN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 13611

13612.

Tax Court of the United States.

Promulgated November 30, 1948.

1. Petitioners are husband and wife, domiciled in Texas. On November 14, 1935, each petitioner created a trust having a corporate trustee and an advisory committee of three persons and provided that the net income of each trust was to be paid to the other as the advisory committee might direct for life, with remainder over to others. On June 14, 1935, each petitioner created a trust having a corporate trustee and an advisory committee of three persons and provided that the net income of each trust was to be paid to the other as the advisory committee might direct for life, and upon the death of the life beneficiary the corpus was to become a part of the life beneficiary's estate, distributable in accordance with his or her will or, in case of intestacy, under the Texas law of descent and distribution. Held, under the principles enunciated in Lehman v. Commissioner, 109 Fed.(2d) 99, these four trusts are reciprocal trusts and the net income therefrom is taxable to petitioners under section 167(a)(2) of the Internal Revenue Code and as community income under the laws of Texas. Commissioner v. Porter, 148 Fed. (2d) 566.

2. On June 14, 1935, petitioner Edgar Tobin created three trusts, each having a corporate trustee and an advisory committee of three persons. The net income was payable in the discretion of the advisory committed to the primary beneficiaries, consisting of his mother, daughter, and son, for life, with remainder over to others. On June 14, 1935, petitioner Margaret Batts Tobin created a trust having a corporate trustee and an advisory committee of three persons. The net income of this trust was payable in the discretion of the advisory committee to her son for life, with remainder over to others. All trusts were irrevocable and no part of the corpus or income could revert to the respective grantor. Each petitioner was a member of each advisory committee. Held, the net income of these four trusts is not taxable to petitioners under section 22(a) of the Internal Revenue Code.

3. Upon the evidence, held, petitioners have failed in their proof to show error on the part of the respondent in disallowing certain deductions claimed for farm expenses.

4. Petitioners in 1943 deducted as a community business expense certain amounts paid to four trusts for storage of equipment used in petitioners' business. The respondent did not disturb the deduction taken, as such, but did include the income of the trusts, including the storage charges paid to the trusts, in petitioners' community income. Under issue 1 we held such inclusion was proper except for one trust. Petitioners have as error the disallowance by respondent of the entire amount paid to the four trusts. Held, since under issue 1 three of the trusts are not recognized as valid trusts for income tax purposes, the respondent's determination as to such trusts, including the storage charges involved, is sustained; held, further, that the storage charges paid to the fourth trust are deductible by petitioners as an ordinary and necessary business expense.

5. Held, petitioners are not entitled to a credit against the deficiencies for the tax paid for the years 1940 to 1943, inclusive, by the trustees of the trusts the income of which we held under issue 1 was taxable to petitioners. Leslie H. Green, 7 T.C. 263;affd., 168 Fed.(2d) 994, followed. Leroy G. Denman, Esq., Leroy G. Denman, Jr., Esq., and B. F. Irby, C.P.A., for the petitioners.

Allen T. Akin, Esq., and D. Louis Bergeron, Esq., for the respondent.

These consolidated proceedings involve deficiencies in income tax for the calendar years 1940 to 1943, inclusive, as follows:

+-----------------------------------------------------+
                ¦                    ¦1940      ¦1941      ¦1943      ¦
                +--------------------+----------+----------+----------¦
                ¦Margaret Batts Tobin¦$19,356.25¦$26,275.42¦$42,883.15¦
                +--------------------+----------+----------+----------¦
                ¦Edgar G. Tobin      ¦19,356.25 ¦26,275.42 ¦42,879.62 ¦
                +-----------------------------------------------------+
                

The deficiencies are due to numerous adjustments made by the respondent in the net community income as reported by petitioners in their returns, some of which were contested by appropriate assignments of error and some of which were not contested. The noncontested adjustments need not be considered.

The principal adjustment contested by petitioners is a holding by the respondent that the income of three trusts created in 1935 by Margaret Batts Tobin and the income of five trusts created in 1935 by Edgar G. Tobin represented taxable community income to petitioners for the taxable years 1940 to 1943, inclusive, in the total amounts of $64,021.28, $79,751.86, $51,424.37, and $89,602.76 (consisting of net income of $73,575.37 and capital gain of $16,027.39), respectively. The other adjustments contested by petitioners consisted of holdings by the respondent that certain amounts claimed as net farm expenses by the community for the taxable years 1940 and 1941 and by four of the trusts to which the farm was transferred during 1943 for the taxable year 1943 did not represent allowable deductions for those years; that an amount of $1,840 claimed as storage and care of equipment on the Oakwell farm by the community for the taxable year 1943 did not represent an allowable deduction for that year; and that an amount of $8,225 claimed as a loss from storm and flood damage by the community for the taxable year 1942 did not represent an allowable deduction for that year. Petitioners, by appropriate assignments or error, also allege that they are entitled to a deduction of $8,753.98 as net farm expenses by the community for the taxable year 1942 in addition to the amounts disallowed by the respondent for the years 1940, 1941, and 1943.

By a first amendment to the original petitions, petitioners plead in the alternative that, if the income from trust property is held to be taxable to petitioners, then the tax paid thereon by the trusts should be credited upon any deficiency assessed against petitioners as of the dates of payments thereof.

The issues thus raised in both dockets may be summarized as follows:

1. Is the income of the eight trusts for the taxable years 1940 to 1943, inclusive, taxable to petitioners as community income under the provisions of either section 22(a) or section 167 of the Internal Revenue Code?

2. Are petitioners entitled to deduct from their community income for the taxable years 1940, 1941, and 1942 certain amounts as farm expenses, and, if taxable on the trust income under issue 1, are they also entitled to deduct from their community income for the taxable year 1943 certain amounts as farm expenses paid by four of the trusts to whom the farm was transferred during 1943?

3. Are petitioners entitled to deduct from their community income for the taxable year 1943 an amount of $1,840 claimed as storage and care of certain equipment during that year?

4. If the income of the trusts is held to be taxable to petitioners, are they entitled to a credit against the deficiencies for the tax paid by the trustees for the years 1940 to 1943, inclusive?

5. Are petitioners entitled to a loss on account of flood damage in 1942 to the Oakwell farm?

Petitioners in their brief concede the fifth issue, and no further reference will be made to that issue.

FINDINGS OF FACT.

Petitioners are husband and wife and are domiciled in the State of Texas. During the taxable years 1940 to 1943, inclusive, they filed separate returns on the community property basis with the collector at Austin, Texas.

Issue 1.— Petitioner Edgar G. Tobin, hereinafter sometimes referred to as Tobin, was born and lives in San Antonio, Texas. During World War I he was a commissioner officer in the aviation section of the Signal Corps of the United States Army and flew as a pilot throughout the war. After the war he started selling automobiles in San Antonio. He built up this business to where, after a few years, he had an agency of his own and an income of about $500 a month. After Lindbergh flew to Paris in 1927, Tobin purchased a few surplus airplanes that were left over from World War I. About this time he was approached by an individual with a camera who asked Tobin if he would take some aerial pictures of Devil's River for a certain power company which was considering building a dam on the river. Tobin consented to do this, and thereafter he conceived the idea of making aerial photographs for use in the petroleum industry. He interviewed the officials of several of the oil companies, who began to purchase photographs from him spasmodically. About 1929 or 1930, Tobin obtained a contract from the Humble Oil Co. to make an aerial map of the land between the Rio Grande and Sabine Rivers extending inland from the Gulf of Mexico approximately 100 miles, from which contract Tobin received about $1,200,000.

As Tobin's business of aerial photography developed, he organized different corporations to perform different functions, so that in 1935 his business was conducted by himself as an individual and by the Edgar Tobin Aero Co., the Tobin Map Co., and Tobin Aerial Surveys, Inc.

Petitioners were married in 1926. They have one son, Robert Batts Tobin, who was born March 12, 1934. Tobin had been married before and had a daughter, Katharine, by his previous marriage. His father had died sometime before 1935, but his mother, Ethel Murphy Tobin, was still living. His parents had always been people of small financial means. Petitioner Margaret Batts Tobin was the daughter of Judge Robert L. Batts of the United States Circuit Court of Appeals for the Fifth Circuit (1917-1919) and Harriet Fiquet Batts of Austin, Texas. Batts...