Opinion
Docket No. 23363.
1951-02-26
MARIE E. MEIER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John W. Giesecke, Esq., for the petitioner. E. L. Corbin, Esq., for the respondent.
John W. Giesecke, Esq., for the petitioner. E. L. Corbin, Esq., for the respondent.
In June 1933, petitioner's mother created a trust naming herself as sole beneficiary during her lifetime. After her death the income was to be distributed between her two daughters. The mother died in 1934. One of the surviving daughters died in 1944 and petitioner is now the sole remaining beneficiary under the trust with testamentary power of appointment.
1. Trust assets were sold at a loss in 1945 and petitioner deducted such loss as a capital loss in computing her taxable net income for 1945. Respondent disallowed the deduction. Held: respondent did not err. Petitioner does not exercise such control over the trust corpus as to constitute her the virtual owner and, therefore, taxable on all of the income received by the trustee. Accordingly, she would not be entitled to a deduction for any loss chargeable to corpus.
2. Held, further, the 1942 amendment to the Internal Revenue Code making all property subject to a general power of appointment part of the donee's estate for estate tax purposes, does not indicate a Congressional purpose that such property should be a part of the donee's estate for income tax purposes also.
This case involves a deficiency of $259 in Federal income tax determined against petitioner for the year 1945.
The question presented is whether the losses sustained on the sale of real estate in which the trust had fractional interests are deductible by the life beneficiary with a general power of appointment.
FINDINGS OF FACT.
The facts stipulated are so found and made a part hereof.
The petitioner, Marie E. Meier, is an unmarried individual. She filed her income tax return for the calendar year 1945 with the collector of internal revenue at Augusta, Maine.
On June 22, 1933, petitioner's mother, Annie E. Meir, hereinafter sometimes called Grantor, entered into a trust indenture wherein the Central Hanover Bank and Trust Company was named as trustee. The trust was an inter vivos trust for the life and the Grantor, and for the lives of her two daughters, Betty Marie Meier and Marie E. Meier. The former was an inmate of the asylum at Stephansfeld, Alsace, France, and the latter is the petitioner herein.
The trust agreement provided, inter alia, that:
The Grantor hereby reserves the right and power at any time and from time to time during her life, by deed or other instrument executed and acknowledged in the form required by law to entitle a conveyance of real property to be recorded, to revoke in whole or in part this Trust Indenture or to alter or amend any term or provision thereof in any way and to any extent that may seem to her desirable, except that the Grantor shall have no power to diminish the compensation of the Trustee. Upon delivery to the Trustee by the Grantor of such deed or other instrument, this Trust Indenture shall be deemed to have been revoked, altered or amended in the manner and to the extent therein set forth.
The Grantor died on March 10, 1937. The trust was held to be a revocable trust and the trust estate of the deceased paid the Federal estate tax thereon.
Betty Marie Meier died on March 29, 1944. The only beneficiary now living is the petitioner, Marie E. Meier, a life beneficiary. She has a general power of appointment as set forth in the trust indenture in part as follows:
Upon the death of Betty, she having survived the Grantor, the Trustee shall hold the principal of Betty's trust estate or the balance thereof then remaining on hand, in trust for Marie, in case she shall survive Betty, and shall pay over to Marie or apply for the use and benefit of Marie, in case she shall survive Betty, the entire net annual income therefrom and so much of the principal, if any, as it may deem advisable for the care, support, maintenance, comfort and welfare of Marie in each year during her life, and upon the death of Marie the Trustee shall transfer, assign and pay over the principal of said fund, or the balance thereof then remaining on hand, to such persons and upon such estates as Marie shall be her last will and testament validly limit and appoint, and in the event that Marie shall be her last will and testament fail to validly dispose of the whole or any part thereof, the Trustee shall transfer, assign and pay over the same as follows:
This general power of appointment is a power which can be released under the laws of the State of New York, 1943, Chapter 476, the law being effective March 8, 1943.
Petitioner has not, up to this time, executed any release of the power of appointment in her favor as contained in the trust indenture and had made her affidavit that she does not intend hereafter to do so. petitioner has executed her will by the terms of which she has made an appointment of the remainder estate in the trust pursuant to its terms and to her own estate.
The trustee was authorized in the trust agreement to distribute a part or all of the corpus of the trust as his discretion. The provisions setting forth this authority follow:
If at any time the net annual income from the trust estate shall, in the opinion of the Trustee, be insufficient for the care, support, maintenance, comfort and welfare of the Grantor, the Trustee may transfer, assign and pay over to the Grantor, or apply for her use and benefit, such sums from the principal of the trust estate and at such times as the Trustee may deem advisable. There shall be included in the amount necessary for the support, care, maintenance, comfort and welfare of the Grantor, the amount necessary for the care, support, maintenance, comfort and welfare of her daughters, MARIE E. MEIER and BETTY MARIE MEIER, and payments of principal for the care, support, comfort, welfare and maintenance of said daughters, or either of them, may be made either to the Grantor for their use and benefit or for the use and benefit of either of them, or to said daughters or either of them, or may in the discretion of the Trustee be used and applied for the benefit of said daughters or either of them. The decision of the Trustee as to the amount or amounts necessary for the care, support, maintenance, comfort and welfare of the Grantor and her said daughters, or either of them, shall be final, conclusive and binding upon all persons now or hereafter interested in the trust estate * * * .
In case the net income from the fund held in trust for Marie shall be insufficient, in the opinion of the Trustee, for her support, care, comfort, welfare and maintenance, the Trustee may transfer, assign and pay over to Marie, or apply for her use and benefit, such sums from the principal of the trust estate and at such times as the Trustee may deem advisable. The decision of the Trustee as to the amount or amounts necessary for the care, support, maintenance, comfort and welfare of Marie shall be final, conclusive and binding upon all persons now or hereafter interested in the trust estate and shall not be subject to review by any court, tribunal or other authority, and the Trustee shall be fully protected in any payments of principal so made and shall not be further responsible for the same but its whole duty and responsibility shall cease upon the making of any such payment.
The Trustee may make distribution of the trust estate in kind or in cash, or partly in kind and partly in cash, and the determination of the Trustee as to the fairness and equality of any such distribution shall be conclusive upon all persons now or hereafter interested in the trust estate, whether for life or in remainder.
On November 23, 1934, the trustee named in the trust indenture resigned and the Grantor duly appointed John W. Giesecke as successor trustee under the indenture. Giesecke accepted the appointment, became the successor trustee, and is now serving as such and served as such at all times herein involved.
Part of the loss incurred by the trust estate and asserted to be deductible on the return of petitioner, the life beneficiary, resulted from the sale of real estate, a participating interest in which was held by the trust. This represented a fractional ownership of the property, title to which was vested in the Fidelity-Philadelphia Trust Company of Philadelphia, Pennsylvania, as trustee. The fractional interest in the real estate came into the trust by reason of the Grantor having purchased, as an investment, mortgage loan participations secured by the aforementioned real estate. These mortgages were subsequently foreclosed by the trustee, title taken by it, and the property held until liquidated. The mortgage loan participations and fractional interests were held in the trust but the trustee of the trust of Annie E. Meier had no power or control over the foreclosure of the mortgage securing the mortgage participation, nor any power or control over the operation of the property after it was acquired by the trust company as trustee for the participation holders. Giesecke, trustee under the indenture of Annie E. Meier, had no power or control over the sale or retention of the real estate. Its subsequent sale by the trustee bank was without the approval of and over the objection of Giesecke, as trustee.
Of the item of $1,140.75 included by the Commissioner as income from the trust, taxable to the petitioner in this cause, the sum of $140.75 was properly included by the Commissioner in his determination.
The fractional interest in the real estate sold in June of 1945 for $4,024.29 was purchased as a mortgage participation by the Grantor of the trust on April 6, 1927, from the Fidelity-Philadelphia Trust Company of Philadelphia, Pennsylvania, and was foreclosed by that company on November 4, 1932. Grantor's interest was a $10,000 participation in a mortgage of $200,000. Thereafter, the Grantor received a certificate for a fractional interest in the real estate, which was then transferred by her to the trust herein. The real estate was subsequently sold by the trustee bank on August 22, 1945, without the consent and over the objection of Giesecke, the trustee herein.
The fractional interest in real estate shown as having been sold in 1945 at a price of $1,405.90 was also purchased by the Grantor as a mortgage participation from the Fidelity-Philadelphia Trust Company, Philadelphia, Pennsylvania, on May 23, 1923. This mortgage participation was still in force at the date of the execution of the trust indenture, and was transferred to the trustee thereunder. The premises securing this mortgage participation were foreclosed on August 5, 1940 by the Trust Company. Grantor's interest was a $2,000 participation in a mortgage of $273,000. The property was taken over by the Fidelity-Philadelphia Trust Company, Philadelphia, Pennsylvania, as trustee, and was sold by them in 1945, without the consent and over the objection of the trustee, John W. Giesecke.
The basis for the Commissioner's increase in the amount of income taxable to the petitioner in this cause is the change in net income shown by the revenue agent's report of March 2, 1949, upon examination of the return of Giesecke, the trustee under the indenture. The parties herein are in agreement as to the figures used in the report, but differ as to the law as applicable thereto.
OPINION.
VAN FOSSAN, Judge:
In these proceedings petitioner seeks to deduct from gross income the losses sustained in the taxable year on the sale of two pieces of real property. This property was part of the corpus of a trust of which petitioner is sole beneficiary.
In June of 1933, petitioner's mother, Annie E. Meier, created a trust naming herself as sole beneficiary during her lifetime and reserving to herself the right to alter, modify or revoke. After her death the income was to be distributed between her two daughters. Annie E. Meier died in 1937 without having exercised her right to revoke. One of the surviving daughters died in 1944 and petitioner is now the sole remaining beneficiary under the trust with a testamentary general power of appointment.
Some years prior to the creation of the trust the grantor had purchased a participating interest in two mortgages. In 1932 one of the mortgages were foreclosed, grantor receiving a fractional interest in the real property which had secured it. This fractional interest, together with the participating interest in the second mortgage, was turned over to the trustee as part of the original assets of the trust. Subsequently, the second mortgage was also foreclosed and the trust received a fractional interest in the real property that had been security for it. In the taxable year both fractional interest were sold over the objection of the trustee, Giesecke. In each instance a loss was sustained. These losses totaled $3,660.87, and petitioner, on her individual income tax return for 1945, claimed a deduction for $1,000 of the amount as a capital loss. The respondent disallowed this deduction.
Although the parties have stipulated that one of the questions involved is the determination of ‘Whether the losses on the sale of the real estate in which the trust had fractional interest are capital or ordinary losses,‘ the respondent asserts on brief that he ‘ * * * has made no contention whatever with respect to whether the loss was a capital loss or an ordinary loss; nor is he making any such contention now.‘ Rather, respondent takes the position that petitioner sustained no loss at all on the sale of the trust assets and is entitled to no deduction therefor in computing her taxable net income. He argues that the losses sustained upon property held in trust are deductible, if at all, by the trust estate and not by the beneficiary.
It is beyond dispute that a trust estate is a distinct tax entity, e.g., Anderson v. Wilson, 289 U.S. 20 (1933), sections 161 and 162, Internal Revenue Code. However, where a grantor retains such powers of revocation and control as to constitute him still the virtual owner he has been held to be taxable on the income of the trust under section 22(a), Internal Revenue Code.
Helvering v Clifford, 309 U.S. 331. This doctrine has been extended to include others than the grantor where such others have power to appoint the corpus to themselves, or have such control as would render the grantor taxable. H. S. Richardson, 42 B.T.A. 830, affd., 121 Fed.(2d) 1, certiorari denied, 314 U.S. 684, rehearing denied, 314 U.S. 714; Jergens v. Commissioner, 136 Fed.(2d)497, affirming a Memorandum Opinion. See, also, Regulations 111, section 29.22(a)- 22. Under these circumstances the taxpayer is allowed such deductions with respect to the corpus as he would have been allowed had the trust not been created. See Regulations 111, section 29.166-2(c).
SEC. 22. GROSS INCOME.(a) GENERAL DEFINITION.— ‘Gross income‘ includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an office or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the United States and judges of courts of the United States taking office after June 6, 1932, the compensation received as such shall be included in gross income; and all Act fixing the compensation of such Presidents and judges are hereby amended accordingly. In the case of judges of courts of the United States who took office on or before June 6, 1932, the compensation received as such shall be included in gross income.
This brings us to the specific question of whether the petitioner, in view of the trust provisions set out above, may be treated as the owner of the corpus, taxed under section 22(a), supra, on the income received by the trustee during the taxable year, and hence be entitled to the deduction here in dispute.
The answer to this question must be in the negative. In the Clifford case, supra, the court laid considerable stress on the relative factor that the grantor reserved broad powers of management and control. That is not the case here as respects the taxpayer-beneficiary. The management and control of the trust corpus were reposed exclusively in the trustee. The beneficiary was not, as a matter of right, entitled to any part of the corpus excepting that part which, in the sole discretion of the trustee, was necessary to augment the income of the trust to provide for her ‘ * * * care, support, maintenance, comfort and welfare * * * .‘ That no part of the corpus was to be paid out to the petitioner without the trustee exercising independent judgment as to the necessity for such action is further indicated by the purposes of the trust. The trust was created not only for the benefit of the grantor but for her two daughters, one of whom was an inmate of an asylum in Alsace. True, the trust indenture was drawn in contemplation of the fact that the grantor might have occasion to withdraw part or all of the corpus. This power of revocation reserved by the grantor was personal to her and exercisable, solely by her. Inasmuch as she died without having exercised it, this power of revocation died with her. Petitioner's rights under the trust did not come into existence until her mother's death. She took the benefits of the trust stripped of the right of revocation. She received the right to the income for life and a power of appointment exercisable by will to designate the remainderman who would take upon the termination of the trust. While petitioner, as donee of the testamentary power of appointment has as full control over the property upon her death to dispose of it by will as if she had been the owner, it does not follow that she possesses such control during her lifetime as would be equivalent to full ownership. Commissioner v. Bateman (CCA-1, 1942),127 Fed.(2d)266. Furthermore, the fact that she has exercised the power in favor of her own estate does not enhance her position with respect to the trust assets, nor give her any more attributes of present ownership. In short, having in mind the broad powers possessed by the trustee under the trust, it cannot be said that petitioner is able to exercise such control over the corpus as to justify disregarding the separate taxable entity of the trust and to warrant taxing her under section 22(a), supra, on the income of the trust as the virtual owner of its assets. Therefore, it does not appear that she would be entitled to deduct the losses sustained by the trust in computing her personal net income subject to tax.
Petitioner cites respondent's Regulations 111, section 29.166-2(c), supra, for the proposition that bare legal title such as that of a trustee is never a title of such adverse substance as to defeat the tax liability of the grantor on the income of a revocable trust. Petitioner reasons that she should be taxable under Regulations 111, section 29.22(a)-22 for the income of the trust and hence entitled to deductions for all losses incurred by it. Admitting the existence and validity of the Regulation, we are unable to agree that petitioner comes within its scope.
Petitioner also argues that, since the 1942 amendment of the Internal Revenue Code,
the trust corpus which is subject to her general power of appointment has become a part of her estate for estate tax purposes, and that this indicates the intent of Congress that the property should be a part of her estate for purposes of both the income tax and the estate tax. The claimed consequence does not necessarily follow. Such an important matter would not be left to inference or conjecture. So to interpret the estate tax law would take us beyond the field of construction or interpretation into the field of legislation.
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, whereever situated, except real property situated outside of the United States—(f) POWERS OF APPOINTMENT.—(1) IN GENERAL.— To the extent of any property (A) with respect to which the decedent has at the time of his death a power of appointment, or (B) with respect to which he has at any time exercised or released a power of appointment in contemplation of death, or (C) with respect to which he has at any time exercised or released a power of appointment by a disposition intended to take effect in possession or enjoyment at or after his death, or by a disposition under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth.
The respondent did not err in his disallowance of a deduction in petitioner's gross income for the loss sustained on the sale of trust assets.
Decision will be entered for the respondent.