Falk v. Commissioner , 24 B.T.A. 299 ( 1931 )

OTTO H. FALK, JOSEPH E. UIHLEIN, CHARLES P. VOGEL, AND LOUIS QUARLES, EXECUTORS OF THE LAST WILL AND TESTAMENT OF CHARLES F. PFISTER, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

IDA LANE SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JOHN W. MARINER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ELMWOOD COMPANY OF DELAWARE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Falk v. Commissioner

Docket Nos. 28070, 34678, 34758, 34759, 35815, 40426, 41089.

United States Board of Tax Appeals

24 B.T.A. 299; 1931 BTA LEXIS 1662;

October 7, 1931, Promulgated

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">*1662 The beneficiaries of a trust who, as such, have no remainder interest in the trust corpus, are not entitled to depletion deductions because of the removal of iron ore from properties forming a part of the trust corpus.

Charles F. Fawsett, Esq., and Richard S. Doyle, Esq., for the petitioners.

P. A. Bayer, Esq., for the respondent.

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MCMAHON

">*299 These proceedings, which were consolidated for hearing, involve but one issue, namely, whether the beneficiaries of a trust are entitled to a pro rata deduction for depletion of the trust corpus. All other errors alleged in the several petitions were expressly waived and abandoned.

">*300 The calendar years involved and the deficiencies determined for each year are as follows:

Docket No.	Year	Deficiency
28070	1922	$848.30
34678	1923	2,065.93
34758	1923	7,590.58
34759	1923	6,281.54
35815	1923	941.27
	1924	1,049.53
40426	1925	1,701.43
	1926	2,806.45
41089	1926	280.93

Upon suggestion of death of the petitioner in docket numbered 28070, a motion was granted substituting the executors of the last will and testament of Charles F. Pfister as the">*1663 party petitioner in this proceeding, being the same party appearing as petitioner in docket numbered 34678.

The proceedings were submitted upon the admissions of the pleadings and an agreed statement of facts.

FINDINGS OF FACT.

On or about November 29, 1916, the Pfister Land Company, a Wisconsin corporation, pursuant to authority of its stockholders and directors, executed a trust conveyance whereby for a nominal consideration of one dollar and other valuable consideration it granted to Charles F. Pfister, Jesse Hoyt Smith and John W. Mariner, certain real property as therein described. The designated individuals were to hold the property in trust during the lives of said Smith and Mariner, and for twenty-one years thereafter, and, as trustees, they were given full power to sell, lease, mortgage or otherwise dispose of the trust property, and had full management and control thereof. After providing for the payment of taxes and necessary expenses incident to administration, including compensation for the trustees, the trust deed provided:

Except as above authorized to be expended, paid out or retained, all proceeds which shall come to the hands of the Trustees from said">*1664 property or from any use which may be made thereof, or from any source whatsoever hereunder as received by the Trustees shall belong to and be the property of the beneficiaries hereunder to be distributed and paid over to them in proportion to and in accordance with their respective interests as shown herein, or as the same shall from time to time appear as hereinafter provided.

The beneficiaries named in the trust deed and their respective interests as created by said instrument were as follows:

Jesse Hoyt Smith	one-fourth
Lucinda W. Mariner	one-eighth
John W. Mariner	one-eighth
Charles F. Pfister	one-eighth
Louise F. Vogel	one-eighth
Executors of and trustees	one-fourth
under last will and testament
of Jesse Hoyt, deceased

">*301 Upon the expiration of the trust by lapse of time or upon the happening of certain contingencies prior to such expiration, which said contingencies did not occur before or during the years in question and thus are not here material to the issue, the trustees were to convey and property remaining in the trust corpus back to the grantor corporation, Pfister Land Company.

At the time of the execution of said trust">*1665 conveyance, to wit, November 29, 1916, the Bristol Mine referred to therein was subject to a mining lease for a term of upwards of fourteen years. The royalty rate reserved in said lease was 19 cents per ton.

The stipulated facts, omitting the numbering and changing the order of the paragraphs, read in part as follows:

If as a matter of law the petitioners are entitled to any deduction from taxable income received during the years in question under the provisions of this trust for depletion of the ore reserves in said mine, the basis of such determination is correctly stated as follows:

Ore reserve, March 1, 1913, 3,556,732 tons.

Mined March 1, 1913, to November 29, 1916, 1,392,806 tons.

Ore reserve November 29, 1916, 2,163,926 tons.

Royalty rate $0.19 per ton.

Gross expected royalty, $411,145.94.

Less 3% expected expense, $12,334.37.

Net expected profit, $398,811.57.

Rate 6%, and 4% life 9 years, Factor, 0.719198.

Present worth as of November 29, 1926, $286,824.48.

Depletion unit per ton, $0.13255.

In the following schedule is shown the tons mined from the said Bristol mine during the years in controversy, the royalties received by the trustees">*1666 and the depletion sustained resulting from the application of the rate of $0.13225 per ton applied to said production and income.

Depletion Schedule
Year	Tons	Royalty	Depletion
	mined	earned	sustained
1922	115,996	$23,528.70	$15,375.27
1923	453,803	130,898.66	60,151.59
1924	110,489	26,031.39	14,645.32
1925	270,649	50,837.10	35,874.52
1926	378,878	68,890.53	50,220.28

">*302 The proportional interest of the petitioner beneficiaries in the trust income was as follows:

	Year
Beneficiary	1922	1923	1924	1925	1926
Ida Lane Smith	1/4	1/4	1/4	1/4	1/4
John W. Mariner	1/4	1/4	1/4	1/4	1/4
Charles F. Pfister	1/8	1/8	1/8	1/8	1/8
Elmwood Company of Delaware	1/8	1/8	1/8	1/8	1/8

Since the execution of said trust conveyance it has been the practice of the trustees thereunder as authorized and required by the terms thereof to make distribution of the entire royalties received by them under said lease from time to time among the beneficiaries of said trust in accordance with their respective interests * * *, after paying or reserving costs of administration and prior">*1667 charges, but without otherwise reserving from such distribution any portion of such royalties as a depletion reserve.

The petitioners waive all other issues or questions raised in their respective petitions in the above-entitled cases except the question of their right to deductions as claimed by them from taxable income on account of depletion.

Ida Lane Smith, the petitioner in Docket Nos. 34758 and 40426, is the successor in right, title and interest under the trust deed to Jesse Hoyt Smith, a beneficiary under the trust deed of a one-quarter interest.

Elmwood Company, the petitioner in Docket No. 41089 and Docket No. 35815, is the successor in right, title, and interest to Louise F. Vogel, a beneficiary under the trust deed of a one-eighth interest.

John W. Mariner, the petitioner in Docket No. 34759, in addition to the interest which he originally had under the trust deed, has succeeded to the right, title and interest of Lucinda W. Mariner of one-eighth, and the distributions under the trust deed have been made accordingly since such succession, which was prior to the year 1922.

For the calendar years 1922 to 1926, inclusive, the fiduciary returns claimed depletion">*1668 deductions based on a depletion rate of 13.255 cents per ton. The respondent increased the distributive share of each beneficiary by disallowing the depletion deductions and determined the deficiencies hereinbefore set forth.

OPINION.

MCMAHON: The sole issue presented by these proceedings is whether the beneficiaries of a trust are entitled to deductions for depletion because of iron ore removed from properties forming a part of the trust corpus.

The principle is well established by decisions of this Board and the Circuit Courts that beneficiaries of a trust are not entitled to ">*303 reduce their distributive share of trust income because of depletion or depreciation of the trust corpus. ; ; ; ; ; certiorari denied, ; ">*1669 ; affirming ; ; ; affirming ; ; sections 214(a)(10) and 234(a)(9) of the Revenue Act of 1921; sections 214(a)(9) and 234(a)(8) of the Revenue Acts of 1924 and 1926; and section 215(b) of the Revenue Acts of 1921, 1924, and 1926.

The petitioners base their claims for depletion deductions upon the decision of the Circuit Court for the Second Circuit in , overruling our decisions in , and . This Circuit Court decision was considered by the Board in the Rita M. Kohler White case, supra, in determining that the petitioners therein, who were beneficiaries of a testamentary trust, were not entitled to depreciation deductions because there was no provision in the will authorizing the trustees">*1670 to retain a portion of the income to replace wasting assets. The distinction between this Circuit Court case and the Board case is that in the former the beneficiaries had an interest in the trust corpus as remaindermen, whereas in the latter, the beneficiaries had an interest only in the income.

In the instant case, as in the White case, the beneficiaries had no remainder interest in the trust corpus, because under the terms of the trust deed the trustees, upon the termination of the trust, were to convey back to the grantor corporation any remaining assets in the corpus.

The petitioners also contend that the trustees were merely agents of the beneficiaries in administering the trust and paying over the proceeds. This argument is rebutted by the trust instrument, which in clear and unambiguous terms creates the trust, names the trustees, specifies in detail their duties, powers, and authority, and provides for the distribution of the proceeds to the beneficiaries in accordance with their respective interests.

In view of the foregoing discussion and the authorities cited we approve the action of the respondent.

Reviewed by the Board.

Judgment will be entered">*1671 for the respondent.