Opinion
Docket No. 31320.
1952-12-4
LILLIAN S. PROCTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Kenneth M. Spence, Esq., Paul Van Anda, Esq., and Arthur Windels, Esq., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent.
Kenneth M. Spence, Esq., Paul Van Anda, Esq., and Arthur Windels, Esq., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent.
Held, petitioner is not entitled to deductions on account of amounts paid to acquire defeasible remainder interests of her son in certain trusts which interests were divested by reason of her son's death during the taxable year. The remainder interests were not acquired in transactions ‘entered into for profit‘ within section 23(e)(2), I.R.C., nor was the son's death an ‘other casualty‘ within section 23(e)(3), I.R.C.
The respondent determined a deficiency in income tax of the petitioner for the year 1947 in the amount of $50,778.13.
The issue is whether the petitioner is entitled to a deduction for the year 1947 of $175,378.44, representing amounts paid by her to or on behalf of her son in consideration for his assignments to her of certain defeasible remainder interests in certain trusts, which interests were divested because of his death in 1947.
FINDINGS OF FACT.
A stipulation of facts filed by the parties is hereby adopted as part of our findings and incorporated herein by reference.
Petitioner is now a resident of New York City. She filed her income tax return for the year 1947 with the collector of internal revenue for the district of Massachusetts.
Petitioner was divorced from one Frederick Hoeninghaus in 1918, and she was permitted to resume her maiden name, which was also simultaneously conferred upon her son and only child Frederic William Proctor (hereinafter referred to as ‘Frederic‘).
On December 30, 1902, Harley T. Procter, petitioner's father, transferred certain property located at 27 West Fifty-second Street, New York City, to trustees to pay the income to petitioner during her lifetime, and upon her death to convey the property in fee simple to ‘those of her children, or, if but one, to her child, who may survive her, and to the issue who may survive her of any of her children who may die before her, as tenants in common, in shares equal per stirpes * * * .‘ The trustees were given the power, by and with the consent of petitioner, to sell the West Fifty-second Street property and to invest the proceeds in other property selected by petitioner, and they were authorized to permit her to occupy free of rent any dwelling house belonging to the trust.
On December 29, 1914, Harley T. Procter created a second trust to which he conveyed certain shares of the common capital stock of the Procter & Gamble Company to pay the income to petitioner during her lifetime, and upon her death to transfer the corpus to her only child, Frederic, if he survived her, and if he predeceased her, to divide the corpus among the issue of Frederic in equal shares per stirpes.
By Article ‘Third‘ of his will, probated June 4, 1920, Harley T. Procter bequeathed seven-sixteenths of the residue of his estate in trust as follows: to pay the income therefrom to his widow for life;
then to distribute one-third of the corpus outright to his son William; another third outright to his son Rodney; the last one-third to remain in trust, the income to be paid to his daughter, the petitioner herein, for life, and upon her death the corpus to be transferred to her son Frederic, and to his issue, if he should predecease his mother, and if no such issue, then to the testator's sons or their issue. By Article ‘Sixth‘ Harley bequeathed three-sixteenths of the residue of his estate in trust to pay the income to his daughter, the petitioner herein, for life; the remainder to her son Frederic, if he be living at her death and of the age of 40 years or over at that time; but should he predecease his mother, then to his issue.
His widow died in 1922.
Specific provision was made for the distribution of income and corpus in the event he should not have reached 40 years of age at her death.
Petitioner's son Frederic was born on August 23, 1902. He was married in 1920, at the age of 18 years, to one Marjorie Woodhouse. As a result of the marriage two children were born, Frederic William, Jr., on November 29, 1921, and Patricia, on February 7, 1926. Marjorie divorced her husband in Paris in 1927. Later, in 1927, Frederic married one Elizabeth Laing, who divorced him in 1930. In January 1931 Frederic married one Dorothy Stokes. They were separated in the spring of 2934, and divorced in 1936. In June of 1937, Frederic married one Ivis Goulding who divorced him in 1941. Later in the year 1941 he married one Harriet Harriman, with whom he was living at the time of his death in 1947. He had no children other than Frederic William, Jr., and Patricia.
At the time of the divorce proceedings brought by the first wife, Marjorie, the custody of the two children of that marriage was granted to her. Marjorie was killed in an automobile accident in the spring of 1933, and petitioner took over the care and custody of the children. Frederic William, Jr., was placed in various private schools. Patricia resided with petitioner, who employed a governess for her. Petitioner legally adopted Patricia some time early in 1939.
In 1936, while both petitioner and Frederic were living abroad at Cannes, France, he was called to New York by his attorney, who advised him that his wife, Dorothy, had instituted a separation proceeding, had attached his remainder interests in the four trusts, and that there was danger that they might be sold to satisfy the judgment she might secure. By this time the petitioner had made advances to Frederic since he attained his majority totalling nearly $500,000 and their relations had become strained because of his continued demands for money and his desire to live abroad and not assume any responsibility toward his children. She urged him to make some arrangement whereby she would have security for her advances. She was willing to make additional advances if she received this security, and she did not want to see his remainder interests sold or otherwise dissipated. His attorney drafted an agreement which Frederic took to petitioner in France. This agreement was signed by them on March 17, 1936. Therein Frederic acknowledged his indebtedness to petitioner in the amount of $483,805.72 for advances she had theretofore made to him or on his behalf, and agreed to give her promissory notes bearing interest at 5 per cent, payable on demand, for past and future advances, and to assign to her, as security for such notes, all his right, title and interest in the four trusts. In return therefor, petitioner agreed to take care of back and future alimony due his former wife, Elizabeth; to advance the money required to settle pending litigation with Dorothy; to pay for the support and education of his two children until they were 25 years of age; to pay any final judgment the estate of his former wife, Marjorie, might obtain against him on a 10-year note for $20,000, plus interest; and to make advances to enable him to pay certain debts.
On August 26, 1937, another agreement was entered into between petitioner and Frederic. Therein, after reciting that an action had been instituted against Frederic on behalf of the estate of Marjorie to recover on the note for $20,000, with interest thereon from November 19, 1926, at 6 per cent annually, and costs, amounting in all to approximately $33,000, and that counsel had advised that there was no defense to such action, it was agreed that petitioner would pay to the estate of Marjorie in installments the amount for which judgment could be entered, and petitioner released Frederic of his obligation under the terms of the 1936 agreement to deliver to her demand promissory notes evidencing the payments made. In consideration therefor, Frederic agreed to give petitioner an assignment, outright, of his interest in the December 30, 1902, trust. Frederic represented that the present actuarial value of his interest in the trust was $33,000. The 1937 agreement provided that, except as modified above, all the terms of the 1936 agreement remained in full force and effect.
Frederic executed the assignment mentioned in the above agreement to petitioner, her heirs, executors and assigns on August 26, 1937, and therein directed and empowered the trustees of the 1902 trust, upon the death of petitioner, to transfer to her, her heirs, executors, and assigns, the entire corpus of that trust.
Pursuant to the terms of the agreement of August 26, 1937, petitioner paid to the estate of Marjorie E. Procter during the period October 21, 1937, to September 3, 1940, the total amount of $35,054.50.
At the time of the agreement of August 26, 1937, the value of the corpus of the trust fund therein referred to was $101,000. On that date the then actuarial value of the right of Frederic, born on August 23, 1902, to receive $101,000 upon the death of petitioner, born November 22, 1875, if he survived her, was $36,266.78.
The petitioner and Frederic entered into a third agreement under date of January 13, 1939. Therein, after reciting the provisions of the agreement of March 17, 1936; the outright assignment on August 26, 1937, to petitioner by Frederic of his rights in the trust created December 30, 1902; the receipt by petitioner from Frederic of seven promissory notes aggregating $610,875.65 secured by the pledge of the four trust funds; the assignment by Frederic by instruments dated March 17, 1936, and December 31, 1938, of an undivided one-tenth of all his rights in the remainder created by Article ‘Third‘ of his grandfather's will to each of his former wives, Dorothy Stokes and Ivis Goulding; the desire of Frederic to establish a trust for himself and his heirs with respect to his rights in the trusts of December 29, 1914, and under Article ‘Sixth‘ of his grandfather's will; that the giving of additional notes, secured by the pledge of the remainders, for future advances by petitioner under the agreement of March 17, 1936, would encumber and embarrass such proposed trust; that petitioner desired to facilitate the execution of such indenture by Frederic whereby upon his death the corpus of the two trusts would be distributed to his issue, and for that purpose was willing to terminate certain provisions of the agreement of March 17, 1936, and substitute new provisions therefor; and that Frederic had incurred various obligations which petitioner was willing to assume upon certain terms stated in the agreement, provided Frederic assigned to her his rights in the trust created by Article ‘Third‘ of his grandfather's will; it was provided in substance as follows:
1. The agreement of March 17, 1936, was declared terminated.
2. The trust created by Article Third of the will of Harley T. Procter was released from any pledge as security for seven promissory notes aggregating $610,875.65, so that henceforth these seven notes should be secured solely by the pledge of two remaining trusts, namely, that of December 29, 1914, and that created by Article Sixth of the will of Harley T. Procter.
3. The above notes were to bear no further interest, the principal and interest then due on them being $686,300.03. Thereafter petitioner was to have recourse only to the trusts of December 29, 1914, and that created by Article Sixth of the will of Harley T. Procter as security for these notes.
4. Petitioner agreed as follows:
a. To pay Dorothy on behalf of her son $4,000 per year for life or until remarriage, in accordance with the separation agreement between them, dated March 17, 1936, the obligation to bind both petitioner and her executors, heirs and assigns;
b. To pay during petitioner's lifetime to Ivis, on behalf of petitioner's son, $50 per week, through March 30, 1939, and thereafter $3,900 per year on account of payments due to Ivis from Frederic under the separation agreement between them, dated December 31, 1938;
c. To pay during her lifetime at least $2,000 a year toward the support, maintenance and education of Frederic's son until he reached 25 years of age;
d. To pay during her lifetime to her son, Frederic, if he was alive, $100 per week, to be increased to $125 per week, if certain of his former wives remarried, and his indebtedness to the estate of a third wife became satisfied;
e. To pay certain debts of former wife Ivis;
f. To pay certain attorneys' fees for Frederic.
5. In consideration of the above, Frederic assigned to petitioner absolutely, all his right, title and interest as remainderman in the trust created by Article Third of his grandfather's will, except
a. The sum of $300,000 which he reserved to himself;
b. The undivided one-tenth interest therein previously assigned to Dorothy;
c. The undivided one-tenth interest therein previously assigned to Ivis.
6. Frederic covenanted that no other liens, pledges or other charges existed against the interests assigned to his mother except those above mentioned.
7. Frederic directed the trustees of the trust, created under Article Third of his grandfather's will, to transfer and deliver to the executors, administrators or assigns of his mother the entire corpus of such trust, either in cash or securities.
8. Frederic agreed to execute a trust for his two children, assigning thereto all his remaining interest in the trust of 1914 and under Article Sixth of his grandfather's will.
The 1939 agreement was precipitated by litigation brought by one of Frederic's former wives against him. An attachment against his trust interests had been instituted.
At the time of the execution of the agreement of January 13, 1939, the corpus of the trust created by article ‘Third‘ of the will of Harley T. Procter amounted to $692,000. On that date the then actuarial value of the remainder right of Frederic to receive $692,000, less the two-tenths interest and less the interest of $300,000 theretofore reserved to himself, upon the death of petitioner, if he survived her, was $145,235. The value as of January 13, 1939, of the obligations assumed by petitioner pursuant to the agreement of that date, was $157,127.60. The actual payments made by petitioner pursuant to the terms of the agreement totaled $140,323.94.
At the time the 1937 and 1939 agreements were executed, the petitioner was concerned over the possibility that all or part of Frederic's remainder interests in the trusts might be sold or otherwise dissipated. Her intention at the time she acquired them was to make them part of her estate and to transfer them under her will to her grandchildren when she died. It never occurred to her that her son would predecease her.
In her will, executed in Paris on March 26, 1936, petitioner provided, after a certain specific bequest, that the residue and remainder of her estate should be placed in trust for the following uses:
The net income from one-half thereof to be paid to her grandson, Frederic William Procter, Jr., until he arrived at the age of 30 years, thereafter the principal to be paid to him outright; if he died before that date, to her granddaughter; or if the trust should have ceased, then the principal to her heirs at law and next of kin under the laws of New York, as though she had died intestate.
The net income from the other half thereof to be paid to her granddaughter, Patricia Marise Procter, until she arrived at the age of 25 years, thereafter the principal to be paid to her outright; if she died before that date, to her grandson; or if the trust should have ceased, then to her heirs at law and next of kin under the laws of New York, as though she had died intestate.
By a codicil to this will, dated September 9, 1937, as well as in a will executed on March 2, 1939, petitioner devised the corpus of the December 30, 1902, trust to her granddaughter Patricia. In the latter will, she directed that the residue of her estate be placed in trust, two-thirds thereof for the benefit of her adopted daughter and granddaughter, and the remaining third for the benefit of her grandson, or their respective issue. Thereafter, and from time to time, petitioner made successive wills, none of which made any provision for her son, and by which she gradually limited and finally completely eliminated the interest of her grandson Frederic W. Procter, Jr., bequeathing and devising all her interest in and to the trusts hereinabove referred to, to her granddaughter Patricia. In the current will of petitioner at the date of the death of Frederic W. Procter, petitioner bequeathed her entire estate to said granddaughter.
In 1943, Frederic instituted an action in equity against the petitioner in the Superior Court, Commonwealth of Massachusetts, County of Berkshire, to enjoin the petitioner from collecting certain promissory notes issued by Frederic to the petitioner pursuant to the 1936 agreement. This action was contested by petitioner. On August 3, 1945, the Court rendered a decision in favor of petitioner and ruled that there was a present consideration for the 1936 and subsequent notes and the 1936 agreement, and for the 1939 agreement; that Frederic was indebted to petitioner in the amount of $686,303.03, and that there was no fraud, misrepresentation, mistake, or undue influence.
From early infancy Frederic suffered from hip trouble for which he was last operated on when he was 20 years of age. Except for this hip condition, he appeared to be in good health in 1939 and prior years and in 1942 and 1943 during the trial of the proceeding which he instituted against petitioner. Except for a casual connection with a brokerage firm in England in 1939, he did very little work during his lifetime. He lived on the money he received from petitioner. He was her only son and she wanted him to have money to live on. The provision for the allowance to him of $100 per week for life was inserted in the 1939 agreement because by that time she had lost hope that he would secure employment and support himself, and she did not want him to be destitute.
Frederic died on February 18, 1947. The cause of death was leukemia, which he was known to have had a few months prior to his death. On the date of his death the value of the corpus of the 1902 trust was not less than $101,000, and of the trust created by article ‘Third‘ of the will of Harley T. Procter not less than $692,000.
In her income tax return for the year 1947, the petitioner reported income in the amount of $91,820.52, and claimed as a deduction for ‘Losses sustained by divestment of two remainder interests purchased from Frederic W. Procter‘ the amount of $175,378.44. This amount consisted of payments made by petitioner to Marjorie's estate pursuant to the 1937 agreement of $35,054.50, and payments of $140,323.94 made by her pursuant to the 1939 agreement. The respondent disallowed the claimed deduction.
The petitioner did not acquire the remainder interests from Frederic in a transaction or transactions entered into for profit.
OPINION.
RAUM, Judge:
Petitioner's principal contention is that she is entitled to a deduction of $175,378.44 under section 23(e)(2) of the Internal Revenue Code as a loss sustained in a ‘transaction entered into for profit.‘ The amount in question represents her aggregate expenditures to acquire remainder interests of her son in two trusts.
Petitioner was the life beneficiary of these trusts, and her son's remainder interests could take effect in possession or enjoyment only if he survived petitioner; otherwise, the remainders were to go to her son's issue. The son died in 1947, during petitioner's lifetime, and she seeks to deduct as a loss in that year the total expenditures which she had made to obtain the remainder interests.
The statutory provisions involved allow the loss only where the transaction is ‘entered into for profit,‘ and there is no dispute between the parties that petitioner's motive in acquiring her son's remainder interests is crucial. Cf. Early v. Atkinson, 175 F.2d 118, 133 (C.A. 4).
We have examined the entire record with care, and are fully convinced that petitioner's acquisition of the defeasible remainder interests was not a transaction entered into for profit. Although she no doubt could have sold these interests, we are satisfied that she never intended to do so, and that her only intention was to prevent them from being sold or otherwise dissipated and to make them part of her estate so that she could transfer them to her grandchildren at her death.
Petitioner's contention that these remainder interests had a speculative value from which she might have derived a profit is wholly irrelevant on the facts of this case. The point is that such speculative possibility played no part whatever in her motive in acquiring these interests.
The fact that by successive subsequent modifications of her will she diminished the share going to one grandchild, while increasing the share going to the other, does not detract from her basic intention, as it then existed, to provide for the devolution of the property to her grandchildren.
Petitioner argues that she acquired each remainder interest in an arm's-length transaction. Although such was no doubt true, at lease in a qualified sense,
it does not affect our ultimate conclusion that the transaction was not entered into for profit. For example, although the purchase of a house for one's personal occupancy may well be made at arm's length, it is nevertheless clear that the transaction is not one entered into for profit.
Petitioner's relations with her son had become quite strained, and the negotiations relating to the transfers of his remainder interests were carried on between lawyers who undoubtedly undertook to safeguard the interests of their respective clients. In that sense, the transactions were certainly at arm's length. Yet, it is difficult to believe that, notwithstanding the strained relations between petitioner and her son, she would have even remotely considered entering into such transaction but for the fact that he was her son.
We conclude that if petitioner sustained any loss as a result of her son's death, it cannot be deductible under section 23(e)(2), since it did not arise from a transaction or transactions entered into for profit. Cf. Thomas v. Commissioner, 100 F.2d 408, 411 (C.A. 2); Frederic A. Seidler, 18 T.C. 256. In the circumstances, it becomes unnecessary to consider respondent's alternative contention that petitioner sustained no loss at all; that she received exactly what she paid for, namely, a right to have her estate receive the full value of the assigned remainders if she died before him. Cf.
Petitioner's contention that the deduction is allowable alternatively under section 23(e)(3) is without merit. Section 23(e)(e) permits a deduction for losses arising from ‘fires, storms, shipwreck, or other casualty, or from theft.‘ It is plan that these provisions have no application here. Petitioner's position that her son's death falls within the term ‘other casualty‘ would stretch the statutory language far beyond its intended coverage. The term ‘other casualty‘ has been consistently treated as referring to an event similar in character to a fire, storm, or shipwreck. See Waddell F. Smith, 10 T.C. 701, 705. The death of petitioner's son was certainly not such an event.
Decision will be entered for the respondent. 5. Moreover, the loss provisions of section 23(e)(2) may be inapplicable here by reason of the fact that the remaindermen who were designated to take in the event of her son's prior death were his issue, the very persons that petitioner wished to benefit at her death. Her objective was thus achieved at least in part, and a serious question arises whether in these circumstances petitioner sustained the kind of loss contemplated by the statute.