Webster
v.
Comm'r of Internal Revenue

Tax Court of the United States.May 27, 1946
6 T.C. 1183 (U.S.T.C. 1946)
6 T.C. 1183T.C.

Docket No. 7023.

1946-05-27

ARTHUR WEBSTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Thomas G. Long, Esq., for the petitioner. William F. Robinson, Esq., for the respondent.


Petitioner contributed in 1931 $17,000 to a fund of $126,325 with which three apartment buildings, each subject to a mortgage, were purchased and conveyed to a trustee to be operated for the benefit of the thirty contributors to the fund. In June 1936, after two of the properties were lost by mortgage foreclosure and the third sold, all the remaining assets of the trust were distributed except $1,583.94, which was impounded in a closed bank. While in 1936 it appeared reasonably certain that petitioner would receive additional distributions, the total amount was not determinable prior to 1940. In November 1940 petitioner received $213.15, his pro rata share of $1,583.94, and thereupon assigned his interest in the trust. Held, petitioner sustained a deductible loss on his investment in the trust in 1940. Thomas G. Long, Esq., for the petitioner. William F. Robinson, Esq., for the respondent.

The Commissioner determined a deficiency in income tax of $1,093.88 for the year 1940. The deficiency resulted from the disallowance of a net long term capital loss of $6,682.17, which action on the part of the Commissioner the petitioner assails as erroneous.

FINDINGS OF FACT.

The petitioner is a resident of Detroit, Michigan. His income tax return for the year 1940 was made on the cash receipts and disbursements basis and filed in the district of Michigan at Detroit.

Bankers Trust Co., prior to 1931, had issued real estate bonds which it had guaranteed as to principal and interest. In January 1931 its financial condition was such that it was unable to pay the principal on such bonds in advance of collections from the underlying mortgages and it determined to avail itself of a protective clause in the bonds which allowed the trust company 18 months within which to perform the guarantee as to principal. There was no such protective clause as to interest on the bonds. As it was deemed inadvisable to discontinue payment of the interest coupons, the trust company negotiated with certain banks for additional credit. Such banks, in addition to certain assets which the trust company had available, required $125,000 in cash as collateral. In order to obtain the cash stockholders of the trust company determined to raise such amount of cash by the purchase from the company of some of its real property. In January 1931 30 shareholders of the trust company united in creating a fund of $126,325. Three parcels of real estate in the city of Detroit, upon which apartment buildings were located, known as 3311 West Chicago Boulevard, 15805 Baylis Avenue, and 1383 Cadillac Avenue, were purchased from the trust company and conveyed by the trust company to John C. Bills, as trustee, by deed dated January 22, 1931, recorded in the office of the Register of Deeds for Wayne County, Michigan. Each parcel was subject to a mortgage which was of record in the office of the Register of Deeds for Wayne County. On February 4, 1931, John C. Bills executed a declaration of trust setting forth by legal description the properties acquired, the mortgages thereon, and the persons in interest under the trust, and that interest expressed in dollars of each being the amount paid by each person named respectively into the fund of $126,325. Such list of persons in interest shows that $17,000 was paid in by petitioner. The declaration of trust also contained the following:

The circumstances under which this trust was created were that in the conduct of the affairs of the Bankers Trust Company of Detroit, Michigan, it became expedient that the stockholders of that Company supply to the Company cash in an amount equal to the contributions to this trust; and to take for such cash the title to the incumbered property above described.

The Trustee shall hold the legal title to the property conveyed to him as above stated; shall have the right to employ the Property Management Department of the Bankers Trust Company to manage said properties in behalf of the Trustee and may, in his discretion, employ, instead of the Bankers Trust Company, any other agent to perform the same service. The Trustee shall devote the income of the property to the payment of the operating expenses there of, including taxes; to the payment of interest and installments of principal on the mortgages now outstanding against the property, and shall have authority to make any disbursements required for the maintenance and protection of the trust estate and the management of the trust; also the right to borrow money for that purpose on the security of the assets of the trust estate. The Trustee is under no obligation to advance any funds of his own to the trust estate. He shall have the right to disburse to the beneficiaries hereunder any net profits from this property, if such distribution in his judgment can be made with safety to the trust estate.

The Trustee shall have the right to sell this property, in whole or in part, to the Bankers Trust Company of Detroit, Michigan, or to any other purchaser for such a price and on such terms as his discretion approves.

In the event of the inability of the Trustee, from any cause, to act, or his resignation, his successor shall be appointed by Messrs. Harmon, Eaman, Lothrop and Teahen, above named, or a majority thereof; they being the finance committee appointed from the directors of the Bankers Trust Company to arrange for this trust.

The properties were operated by the trustee through managing agents, who reported monthly. John C. Bills resigned as trustee on December 31, 1932, and George V. N. Lothrop was appointed successor trustee on the same day and so continued to and through the year 1940.

The mortgages on the properties were foreclosed. The properties known as 15805 Baylis Avenue and 1383 Cadillac Avenue were lost to the trust by expiration of the redemption period on December 17, 1935, and January 15, 1936, respectively. The property known as 3311 West Chicago Boulevard was sold by the trustee April 1, 1936, for the sum of $10,000.

On April 1, 1936, the assets of the trust consisted of the following:

+-----------------------------------------------------------------------------+ ¦Cash in bank: ¦ ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦From operation of 1383 Cadillac Ave ¦ ¦$8,288.85¦ +----------------------------------------------------------+--------+---------¦ ¦From operation of 15805 Baylis Ave ¦ ¦5, 087.51¦ +----------------------------------------------------------+--------+---------¦ ¦From sale of 3311 West Chicago Blvd ¦ ¦10,000.00¦ +----------------------------------------------------------+--------+---------¦ ¦Refund from Equitable Trust Co., trustee of mortgage on ¦ ¦ ¦ ¦3311 West ¦ ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦Chicago Blvd., of interest on cancelled bond ¦ ¦20.78 ¦ +----------------------------------------------------------+--------+---------¦ ¦Dividend from receiver of closed First National Bank upon ¦ ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦impounded fund ¦ ¦2,044.13 ¦ +----------------------------------------------------------+--------+---------¦ ¦ ¦ ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦ ¦ ¦25,432.27¦ +----------------------------------------------------------+--------+---------¦ ¦Balance impounded in closed First National Bank in account¦ ¦ ¦ ¦of John C. ¦ ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦Bills as trustee ¦$427.68 ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦Bankers Trust Co., agent ¦1,092.76¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦Uncollected rents ¦63.50 ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦ ¦ ¦1,583.94 ¦ +----------------------------------------------------------+--------+---------¦ ¦ ¦ ¦ ¦ +----------------------------------------------------------+--------+---------¦ ¦Total ¦ ¦27,016.21¦ +-----------------------------------------------------------------------------+

In June 1936 distribution was made of the cash on hand in the sum of $25,432.27, each participant received 20.1324 percent of the amount paid in. The petitioner in such distribution received $3,422.51. Twenty of the participants after such distribution assigned their remaining interest to Bankers Trust Co. Petitioner and nine other participants did not make such assignments. While in 1936 it appeared reasonably certain that petitioner would receive additional distributions, the total amount thereof was not determinable prior to the year 1940. The amount of $1,520.44 impounded by the receiver of the First National Bank was paid by the receiver on the dates and in the amounts as follows:

+---------------------------------------------+ ¦May 27, 1938, John C. Bills account ¦$142.56 ¦ +------------------------------------+--------¦ ¦Nov. 15, 1940, John C. Bills account¦285.12 ¦ +------------------------------------+--------¦ ¦June 3, 1938, Trust Co. account ¦364.25 ¦ +------------------------------------+--------¦ ¦Nov. 18, 1940, Trust Co. account ¦728.51 ¦ +------------------------------------+--------¦ ¦ ¦ ¦ +------------------------------------+--------¦ ¦Total ¦1,520.44¦ +---------------------------------------------+

Upon receipt on November 18, 1940, from the receiver of the bank of the final dividend of principal of the impounded fund, distribution was made to petitioner of $213.15, being his pro rata share of $1,582.94. On December 18, 1940, petitioner assigned all his interest in the trust remaining after the distribution on November 18, 1940, to Bankers Trust Co. The trust has not been closed, as some of the remaining beneficiaries who died had not assigned their interests or received any pro rata distribution. Income tax returns were made by the trust.

In his return for 1940 the petitioner reported a long term capital loss on his investment in the ‘John C. Bills Trust‘ held for more than 24 months of $13,364.34 and claimed a deduction of 50 percent thereof, or $6,682.17. The Commissioner disallowed the deduction on the ground that the capital loss claimed in the return ‘was not sustained during the taxable year 1940.‘

OPINION.

HILL, Judge:

The only error assigned by petitioner is that the Commissioner erroneously allowed a deduction of $6,682.17 ‘representing a capital loss of investment in a trust.‘ He alleges in his petition that, having received only $3,635.66 of his original investment of $17,000, the balance of $13,364.34 is deductible as a capital loss in 1940. Thus, we have presented for decision the question whether or not the long term capital loss claimed by petitioner was sustained in 1940.

The facts are not in dispute. On April 1, 1936, all of the assets of the trust to which petitioner had contributed $17,000 amounted to $27,016.21. In June 1936 such assets, to the extent of $25,432.27, were distributed, petitioner receiving as his share thereof $3,422.51. At that time the remaining assets of the trust consisted of:

+-----------------------------------------------------------------------------+ ¦Balance impounded in closed First National Bank in account of John ¦ ¦ ¦C. ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦Bills as trustee ¦$427.68 ¦ +--------------------------------------------------------------------+--------¦ ¦Bankers Trust Co., agent ¦1,092.76¦ +--------------------------------------------------------------------+--------¦ ¦Uncollected rents ¦63.50 ¦ +--------------------------------------------------------------------+--------¦ ¦ ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦Total ¦1,583.94¦ +-----------------------------------------------------------------------------+

After the June 1936 distribution 20 of the 30 beneficiaries of the trust assigned their interest therein to Bankers Trust Co. upon receipt on November 18, 1940, from the receiver of the First National Bank of the final dividend of principal of the impounded fund, apparently consisting of the items of $427.68 and $1,092.76, distribution was made to petitioner of $213.15, being his pro rata share of the remaining trust assets of $1,583.94. On December 18, 1940, petitioner assigned his interest in the trust to Bankers Trust Co.

It is contended by petitioner that the loss was sustained in 1940, the assignment of his interest in the trust in 1940 being the identifiable event which constituted the transaction closed and completed. It is argued by petitioner that, since the property was held in trust, the fact that the trust lost the real estate in 1936 is not at all conclusive or determinative of the time of the loss of petitioner, a beneficiary of the trust.

In general, a loss to be deductible must be evidenced by a closed and completed transaction fixed by an identifiable event. United States v. White Dental Mfg. Co., 274 U.S. 398, and United States v. Sentinel Oil Co., 109 Fed.(2d) 854; certiorari denied, 310 U.S. 645. An ‘identifiable event‘ has been defined as ‘an incident or occurrence that points to or indicates a loss.‘ The evidence may ‘vary according to circumstances and conditions‘ and may ‘appear in the assets of a business depreciated to exhaustion. ‘ Industrial Rayon Corporation v. Commissioner, 94 Fed.(2d) 383; certiorari denied, 304 U.S. 572. In determining whether losses are deductible, substance, and not mere form, governs. North Jersey Title Insurance Co. v. Commissioner, 84 Fed.(2d) 898. ‘The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal, test.‘ Lucas v. American Code Co., 280 U.S. 445. In June 1936 all of the assets of the trust except $1,583.94, were distributed by the trustee to the beneficiaries. It was testified that in 1936 it was common knowledge that the receiver of the band had further assets, but it was not generally known what he would ultimately pay on claims, and that at that time ‘it was anybody's view what kind of recovery‘ might be had ‘on assets such as he (the receiver of the bank) had in Detroit.‘ At that time and under all the circumstances, although there was expectation of some recovery, it could not be ascertained with reasonable certainty what the amount of such recovery would be. The fact of the extent of the loss herein was not established ‘beyond possibility of doubt by event occurring,‘ in 1936 as was the case in Commissioner v. Winthrop, 98 Fed.(2d) 74, wherein stockholders had surrendered their stock in 1932 and received bonds having a definite market value and a liquidation certificate having an estimated value, which turned out to be correct, and representing an interest in cash retained by the company in excess of estimated amount necessary for payment of taxes, expenses, and costs of dissolution. It was held therein that, although the taxpayer did not actually receive the estimated value of the liquidation certificate until 1934, he sustained a loss in 1932, as the amount of his loss was then determinable with reasonable certainty, since the bonds and liquidation certificate had a value susceptible of determination. ‘Partial losses are not allowable as deductions from gross income so long as the stock has a value and has not been disposed of.‘ Dresser v. United States, 55 Fed.(2d) 499. Herein the amount of further distributions could not be determined with reasonable certainty.

It would serve no useful purpose to discuss the other cases cited by the parties. When a loss is sustained is a question of fact and the determination in each case depends upon its own peculiar facts. Since our conclusion, based upon all the evidence presented, is that petitioner sustained the loss on his investment in the trust in 1940,

Decision will be entered for the petitioner.