1925 BTA LEXIS 2187 | B.T.A. | 1925
Lead Opinion
Two questions are presented by these appeals: First, whether or not the trust under the will of Clement Studebaker in respect of the residuum of his estate terminated on the death of his wife, Ann M. Studebaker, and thereby vested the said property in the beneficiaries as tenants in common; second, whether or not, assuming that the trust was not terminated on the death of Ann M. Studebaker, the beneficiaries are entitled to deduct in their individual income-tax' returns, pro rata shares of net operating losses suffered by the trust during the taxable years 1918, 1919, and 1920. If the trust did terminate on the death of Ann M. Studebaker and the property vested in the beneficiaries as tenants in common, the taxpayers operated in their own rights with respect to the property thus acquired, and no question could arise as to their right to deduct in their individual tax returns the losses resulting from such operations.
It is contended by counsel for the taxpayers that when, on the death of Ann M. Studebaker, the obligation to pay the annuity provided for her under the will ceased there remained no further duties to be performed by the taxpayers as trustees, and the trust became a dry trust from that date, and further," that when the trust became dry the legal and beneficial titles to the trust property merged and the trust ceased to exist. If it were true that no further duties remained to be performed by the trustees after the death of Ann M. Studebaker, there might be a legal basis for the taxpayers’ contention. The facts in the case, however, do not support this assumption. By section 6 of his will the testator devised to each of his grandchildren living at the time of his death the sum of $10,000 when the said grandchildren should respectively reach the age of 25 years. He further directed that the trustees under the will should use out of his estate such funds as were necessary to provide for the education or establishment of each of his grandchildren in the same manner that the testator had previously provided for George M. Studebaker, Jr. Under section 9 the testator directed that the trustees should also pay the sums named in the will to each of the grandchildren in accordance with the terms of section 6 of said will. With reference to the education of the children, as directed in section 6, the record is silent. It does not appear whether this duty of the trustees has been performed or not. As to the payment of the specific legacies of $10,000 to each of the
It is also contended on behalf of the taxpayers that under the provisions of the will the trust could not continue after the death of Ann M. Studebaker, unless the remaining trustees mutually agreed to continue the same, and that there is no evidence to show that there was such mutual agreement between the trustees. In this respect it may be stated that, from the facts, it appears that the trustees continued the operation of the trust property in the same manner and under the same conditions as it had been operated prior to the death of Ann M. Studebaker, and there is nothing in the record to show any intention on their part to consider it in any other manner than trust property. Since all their actions were such as would indicate that the trust was continued, the burden is upon the taxpayer to show affirmatively that they did not mutually agree to continue the trust.
Even though the trustees might have mutually agreed to terminate the trust, it is doubtful if they could have done so, so long as the duties imposed upon them as trustees had not been fully performed, and in this case we have seen that the legacies to the grandchildren of the testator had not been paid during or prior to the taxable years in question. Although there may have been considerably more than enough trust property to pay these legacies, the record does not show it.
The remaining point to be determined is, whether or not the taxpayers, as beneficiaries under the trust, are entitled to claim, as deductions in their individual returns, fro rata shares of the net operating losses of the trust during the taxable years in question. The provisions governing the allowance of deductions on account of losses for these years are found in section 214 of the Revenue Act of 1918. So much of that section as applies to this discussion reads as follows:
Sec. 214. (a) That in computing net income there shall be allowed as de ductions:
* * * * * * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
■ (5) Losses sustained during the taxable year and not compensated for .by insurance or otherwise, if incurred in any transaction entered into for profit,*1026 though not connected with the trade or business; but in the case of a nonresident alien individual only as to such transactions within the United States;
(6) Losses sustained during the taxable year of property not connected with the trade or business (but in the case of a nonresident alien individual only property within the United States) if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise.
Under these provisions a taxpayer is entitled to deduct losses sustained during the taxable year, if incurred in trade or business, or if incurred in any transaction entered into for profit though not connected with the trade or business, or arising from fires, storms, etc. There are no further provisions in the Act which allow deductions for losses sustained in any other manner. It is difficult to see how a taxpayer can claim a loss for something that was never his, or a loss from a transaction in which he as an individual was not interested, even though at some future date it might affect the income or the capital distributed to him from the trust. With reference to the losses here in question it can hardly be argued that they were sustained by the taxpajmrs in their trade or business, or in any transaction entered into by them for profit. Acts done by the taxpayers in their individual capacities and those performed by them as trustees are separate and distinct, and losses sustained by them as trustees can not be claimed as losses sustained as individuals. In Baltzell v. Casey, 1 Fed. (2d) 29, the court said:
There is no legal identity between a trustee and a cestui que trust * * *.
See also Merchants’ Loan & Trust Co. v. Smietanka, 255 U. S. 509.
In support of the contention that Congress intended that beneficiaries under a trust should be permitted to deduct their share of net losses suffered by the trust, taxpayers’ counsel have referred to section 204 of the Revenue Act of 1918, which prescribes the manner in which taxpayers may claim deductions on account of net losses. Subdivision (c) of that section reads as follows:
The benefit of this section shall be allowed to the members of a partnership and the beneficiaries of an estate or trust under regulations prescribed by the Commissioner with the approval of the Secretary.
It is argued that the refusal to permit deductions by beneficiaries on their individual returns on account of net losses suffered by the trust will nullify the provision quoted above. How this conclusion was reached does not appear, for it seems quite clear that this provision permits the application of a net loss suffered by a trust in one year to be applied against the net income of the trust in another year for the purpose of determining the shares of
