Bush v. Commissioner , 45 B.T.A. 609 ( 1941 )

IRVING T. BUSH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Bush v. Commissioner

Docket No. 99364.

United States Board of Tax Appeals

45 B.T.A. 609; 1941 BTA LEXIS 1099;

November 6, 1941, Promulgated

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1. Petitioner in 1923 created a trust, later made irrevocable, the income of which was payable 60 percent to his wife and 40 percent to his two daughters by a prior marriage. In 1930 petitioner filed suit for divorce in Reno, Nevada, and his wife filed a cross-complaint in the action. By way of property settlement and satisfaction of mutual claims and obligations and in lieu of support and maintenance, petitioner created another trust, naming his wife as life beneficiary, with remainder in fee to her son by him. There was no possibility of any reversion of the trust property to petitioner. As a preliminary to the creation of this trust petitioner, with the consent of his wife and son, revoked the 1923 trust and sometime later his two daughters, the only other beneficiaries of this trust, ratified his revocation. Petitioner granted to the 1930 trust property formerly constituting part of the corpus of the 1923 trust and as such representing 68 percent of its value and producing 66 percent of its income. In the agreement creating the 1930 trust petitioner promised to pay annually to the trustee all amounts necessary to make up any difference between the trust income and $60,000. In order to insure the highest possible income to the trust, petitioner retained the power of directing trust investments. Held, income from the trust is taxable to petitioner under Helvering v. Leonard,310 U.S. 80">310 U.S. 80; held, further, capital gains of the trust are not taxable to petitioner, in view of impossibility of reversion to him.

2. A corporation the stock of which was owned by petitioner made certain advances to his credit. Held, under facts presented, these advances were loans and not dividends.

Arthur G. Hays, Esq., Alex M. Hamburg, Esq., James A. Cherry, Esq., and Bernard Tall, esq., for the petitioner.

Benjamin M. Brodsky, Esq., for the respondent.

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KERN

The respondent has determined deficiencies in income tax liability against this petitioner and has also determined 25 percent delinquency penalties due thereon in the following amounts for the years 1931, 1933, 1934, and 1935:

Year	Deficiency	Penalty
1931	$13,537.45	None
1933	13,622.58	$3,405.64
1934	8,405.25	2,101.31
1935	33,116.17	None
Total	68,681.45	5,506.95

Petitioner has instituted this proceeding for a redetermination of those amounts.

Petitioner filed his returns for the years in question with the collector for the second district of New York.

The questions presented for our solution are:

1. Did the respondent err in including in petitioner's taxable income for the years 1931, 1933, 1934, and 1935 the respective amounts of $59,819.51, $57,241.94, $52,990.78, and $57,355.65, representing payments made to petitioner's divorced wife pursuant to and because of the terms of a certain trust created by petitioner for her benefit?

2. Is the petitioner taxable on the capital gains realized by this trust in the amount of $25,109.08 in the year 1935?

3. Did the respondent err in including in the petitioner's taxable income for the years 1933 and 1935 the respective amounts of $16,497.01 and $51,670.15, alleged by the respondent to represent dividends received in the taxable years by petitioner from his wholly owned personal holding company, Shore, bungalows, Inc.?

Certain items in controversy in the pleadings of the parties have since been waived and are, therefore, no longer in dispute. Petitioner has withdrawn his contention that the Commissioner erred in disallowing a deduction in the sum of $7,010, claimed to represent charitable contributions made by the petitioner in the year 1931. Petitioner also concedes two issues raised by amendment to his original petition, namely, whether or not the respondent erred in treating as profit to petitioner in 1933 the entire proceeds on the sale of certain securities in that year of sufficient amount to offset certain losses sustained on the sale of other securities during the year; and, whether or not the respondent erred in disallowing a deduction of $9,199.15 in 1935, representing interest paid by the petitioner in that year.

Respondent has conceded that a deductible loss in the amount of $144,800, sustained by petitioner in 1934 by reason of the ascertained worthlessness of certain stock, is properly allowable. At the close of the hearing it was pointed out that there is no dispute as to the amount of credits allowed the petitioner for taxes paid at the source on taxfree Government bonds by the 1930 trust.

Exception was never taken to certain other items listed in the ninety day deficiency letter.

FINDINGS OF FACT.

Trust Issue.

Irving T. Bush, the petitioner herein, is an individual residing in New York, New York.

Petitioner was first married in 1891, to Belle B. Bush, which marriage was dissolved by divorce in 1907. There were two daughters from this marriage, Beatrice B. and Eleanor T. Bush. Petitioner remarried, his second wife's name being Maud H. Bush, and in May 1908 a son, Rufus T., was born to this second union.

In 1923 petitioner was president of the Bush Terminal Co. and owned a substantial block of stock in that corporation. Under date of January 15, 1923, he set up a trust for the benefit of his then wife, Maud H. Bush, and his two daughters. The corpus of this trust consisted of 10,000 shares of common stock of the Bush Terminal Co. of the par value of $100 per share. This trust was to continue during the lifetime of the grantor, and the net income was to be paid 60 percent to Maud H. Bush and 20 percent to each of the two daughters. Upon his death the daughters were each to receive 20 percent of the corpus and the remaining 60 percent was to go to his son, Rufus T. In the event of the death of any of the beneficiaries, including Rufus T. Bush, prior to petitioner's demise, petitioner had reserved the right of further disposition of the interest of that beneficiary, both principal and income. Petitioner further reserved the right during his lifetime to revoke the trust, to make changes in the securities constituting the corpus thereof, and to vote the trusteed shares. The 10,000 shares were transferred on the books of the Bush Terminal Co. to R. Gould Simonds, as trustee. This trust instrument was executed in New York State and on the date of execution the assets comprising the corpus thereof were in New York City.

Under date of May 3, 1923, petitioner notified the trustee by letter that he was renouncing the right to revoke this trust and, consequently. declared it to be irrevocable.

The income of the trust in the year 1929 was approximately $93,000. of which approximately $56,000 was paid to Maud H. Bush in that year, pursuant to the terms of the trust instrument.

Petitioner and Maud H. Bush continued to live together as man and wife until December 1929, when they separated. Petitioner went to Reno and instituted a suit for divorce on May 26, 1930, which action was contested by his wife, Maud H. Bush, who filed a cross-complaint on June 6, 1930. In this cross-complaint she recited that she had executed a written offer of agreement dated June 4, 1930, the terms of which, if accepted by petitioner, would make adequate provision for her.

In this offer of June 4, 1930, Maud H. Bush requested petitioner to alter the terms of the 1923 trust so that 60 percent of the trust corpus be segregated from the 40 percent in which petitioner's daughters had an interest. Prior to this offer Maud H. Bush had expressed the desire that her interest in the 1923 trust be separated and put under the supervision of another trustee since she considered Simonds too closely associated with Bush. Petitioner's daughters were not related to her and, apparently, she, therefore, wished to segregate her interest from theirs.

On June 4, 1930, Rufus T. Bush signed a release and disclaimer wherein he relinquished all rights he possessed under the terms of the 1923 trust. The release and disclaimer recited:

WHEREAS, said agreement has been heretofore revoked by said Irving T. Bush; and

WHEREAS, since such revocation your undersigned's mother, Maud H. Bush, has submitted to the said Irving T. Bush an offer in writing executed and acknowledged on June 4, 1930, in the form of a proposed Trust Agreement between the said Irving T. Bush, as party of the first part, Bank of Manhattan Trust Company, as Trustee, party of the second part, and the said Maud H. Bush, as party of the third part, * * *

Petitioner believed he had secured the consent of his daughters to the termination of the trust on or about June 6, 1930, to the extent to which such termination and revocation was effected by an agreement entered into on that date. A few years later some question was raised as to whether they had actually given their consent, but eventually the matter was settled and petitioner's action was ratified.

On June 6, 1930, the agreement mentioned above was entered into by the petitioner, the Bank of Manhattan Trust Co., and Maud H. Bush. After reciting that petitioner had sued for divorce and his wife had filed a cross-complaint, the agreement stated that, in the event there should be awarded to petitioner's wife a decree of divorce, this agreement should constitute a complete and absolute adjustment and settlement of all rights, claims, and interests, present or future, of Maud H. Bush, as wife of petitioner or otherwise, in or to the estate or any of the property of the petitioner, and that the agreement should stand in lieu of all claims for dower, maintenance, or support which might arise in futuro. The agreement then stated that the 1923 trust agreement was acknowledged by Maud H. Bush to be no longer of any force or effect but to have been revoked, and any rights or interest formerly held thereunder by Maud H. Bush were disclaimed. Further material provisions of the new agreement were as follows:

1. That the petitioner transfer to the bank, as trustee, all the securities listed in schedule A appended to the agreement. Schedule A contained a list of bonds and preferred stock which comprised a part of the trust corpus then held by R. G. Simonds under the 1923 agreement. As of June 6, 1930, R. G. Simonds held in his possession under the 1923 trust agreement:

Securities		Cost	Estimated income
Common stocks		$136,000.00	$8,000
Preferred stocks		246,015,50	17,228
Mortgage		25,000.00	2,000
Bonds		1,230,848.00	63,665
Cash - Principal	$11,258.31
Cash - Principal	$11,258,31
Income	1,835.19	1 13,093.50
Total		2 1,670,957.00	90,893

Schedule A contained a listing of certain of these bonds and preferred stocks with an estimated income of $60,083, originally purchased at a cost of $1,118,870.75. Thus securities originally comprising 67 percent of the original cost and returning 66 percent of the estimated income were transferred from the trustee under the 1923 trust to the bank under this new agreement.

2. That the bank should collect the dividends, income, and profits from the securities listed in schedule A and be empowered to invest and reinvest the principal.

3. That the bank should pay over the income of the trust quarterly up to $60,000 per annum (subject to certain deductions) to Maud H. Bush; except that the bank should, on receipt of the corpus, pay over to petitioner or R. G. Simonds that portion of the income held in trust which might have accrued and not have been paid out on June 6, 1930; and pay over to petitioner's son any excess income remaining after making the fourth quarterly payment in any twelve-month period.

4. That upon the death of Maud H. Bush, the income should be paid to Rufus T. Bush for life, and that upon his death the principal should be paid over in equal shares per stirpes to the living issue of Rufus T. Bush. Provision was also made for distribution of principal to others (not the petitioner or his estate), in the event of the death of Rufus T. Bush without living issue. In the event that Rufus T. Bush predeceased his mother, the principal was to be paid over on her death to the living heirs of Rufus T. Bush, if any, and, if not, to certain named remaindermen (not including petitioner or his estate).

5. That, in the event the trust income in any twelve-month period commencing June 6 of any year should not amount to $60,000 (before certain deductions), the petitioner should pay to the bank, upon notice of such deficiency, an amount sufficient to make up the difference.

6. That petitioner might at any time, in his discretion, add to the trust corpus.

7. That the trustee should sell, purchase, or exchange the securities constituting the trust corpus upon the written direction of and as instructed in writing by petitioner. In the event of petitioner's death prior to the termination of the trust, this power conferred on petitioner was to be vested in such person or persons as the party of the first part should by his last will and testment appoint.

8. In the event of the resignation or removal of the bank as trustee, or of any successor trustee, the petitioner, or his appointee by will, should have the power to appoint a successor trustee, which should be a trust company organized under the laws of the State of New York.

9. Provision was also made for compensation of the trustee; and a final clause provided that the instrument should bind the heirs, executors, administrators, successors, and assignees of the respective parties.

The 10,000 shares of stock of Bush Terminal Co. which constituted the corpus of the 1923 trust had a market value of approximately $800,000 in 1923. Some of these shares were sold at considerable profit after 1925 and the cash was reinvested, so that by this method and other sales and purchases, the corpus had increased by June 6, 1930, to a value of over $1,600,000. There were never any additional contributions to the corpus of this trust.

When the corpus of the 1930 trust was transferred from the hands of the former trustee to the bank, the remaining assets in the hands of Simonds were retained by him in trust for petitioner's daughters.

On June 9, 1930, the Nevada court awarded petitioner's wife, Maud H. Bush, an absolute decree of divorce on her cross-complaint. Among the clauses in the decree of that court were the following:

(8) That since the commencement of this action, and during the pendency thereof, and for the sole and only purpose of settling and adjusting their respective property rights, and in lieu of provision for the future support and maintenance of the defendant herein, the defendant executed a written offer of agreement, acknowledged by her on the 4th day of June, A.D. 1930, * * * the terms of which agreement, if accepted by the plaintiff would make adequate provision for the future support and maintenance of the defendant; that thereafter, and on the 6th day of June A.D. 1930, the said written offer of agreement, and the said agreement itself, was accepted by the plaintiff and by him duly signed, executed and acknowledged * * *.

That the said offer and the said agreement is in all respects fair, just, reasonable and equitable, and was not made, for the purpose of expediting or facilitating a divorce, but for the sole and only purpose of settling and adjusting the respective property rights of the parties hereto, and in lieu of providing for the future support and maintenance of the defendant, and by the terms thereof, and by reason of the said plaintiff having accepted, signed, executed, and acknowledged the said agreement, the said defendant waives any and all claims for alimony and/or maintenance now or hereafter, and any and all claims of every kind, nature and description to any or all of the property of the said plaintiff, except as provided for in the said agreement, as aforesaid.

That at the time the said written offer was made and at the time the said agreement was accepted, signed, executed, and acknowledged by the said parties, and for several months prior thereto, the said plaintiff and defendant were living separate and apart.

From its findings of fact the Nevada court drew the following conclusions of law:

That defendant is entitled, on her cross-complaint, to the judgment and decree of this court for an absolute divorce from the plaintiff; that the agreement of the parties hereto, in writing, and in the findings of fact hereinbefore referred to, acknowledged by the party of the second part, the Trustee, and the party of the third part, on the 4th day of June, A.D. 1930, and signed, executed and acknowledged by the party of the first part on the 6th day of June, 1930, settling and adjusting the respective property rights of the parties hereto and making provision for the future support and maintenance of the defendant herein, should be adopted, approved, confirmed and ratified by this court.

Inter alia, the decree ordered:

* * * that in lieu of any alimony, and to provide for the future support and maintenance of the defendant, that certain agreement between the parties hereto * * * be, and the same is hereby, adopted, approved, confirmed and ratified, to the same extent and in all particulars as though it were herein set forth in haec verba.

Pursuant to the provisions of the agreement of June 6, 1930, Maud H. Bush has never made any further demand upon petitioner, other than the rights granted by that trust, with respect to maintenance or support or any property rights flowing from her marriage to him.

The decree of June 9, 1930, contained no reservation of power or right in the court to modify, alter, or amend the provisions thereof.

The tax on the income of the 1923 trust was paid by the beneficiaries from 1923 to June 6, 1930, when the new agreement was established.

Petitioner always directed the bank with respect to any buying and selling of securities constituting the corpus of the June 6, 1930, trust, and also with respect to voting any stock by proxy. Certain investments directed by petitioner were in securities not regarded by the bank as sound for trust purposes. Petitioner, nevertheless, urged these purchases for the stated reason that he wanted the trust to produce at least $60,000 income annually.

In at least one year, upon notification that the trust income had fallen below the specified yield of $60,000, petitioner made up the difference by check. Maud H. Bush, as beneficiary of the 1930 trust. received from the bank, as trustee, in the years 1931, 1933, 1934, and 1935, the sums of $59,819.51, $57,241.94, $52,990.78, and $57,355.65, respectively, which amounts were not included by petitioner in his taxable income for those years.

In the return for the year 1935 (Form 1040) filed by the bank as trustee of the 1930 trust fund, the capital gains of the trust for that year were reported to be $25,109.08.

Holding Company Issue.

Shore Bungalows, Inc. , a New York corporation, was organized in 1919 for the purpose of developing and selling real estate. The corporation purchased over 100 bungalows which had been built by the Government for one of its cantonments, moved them, and sold them at a profit after making certain improvements thereon. Petitioner and his brother were the principal stockholders of this corporation. Prior to the taxable years the corporation had wound up its real estate ventures and was investing in securities for profit, and it was customary for the petitioner to direct the purchases and sales for Shore Bungalows, Inc. R. G. Simonds, hereinbefore mentioned, was president of the corporation, and A. Paul Timmerman was treasurer. Both men had been closely associated with petitioner for a number of years.

From time to time in the period from 1926 to 1931 the corporate books disclosed debits and credits to the account of petitioner. At no time were any notes signed by either petitioner or the corporate officers for any of these amounts, nor was formal corporate action ever taken declaring a loan to petitioner or his right to maintain an open account with the corporation. No interest was ever paid by petitioner on amounts borrowed from the corporation.

In 1930 Bush engaged in certain transaction connected with speculation in wheat, as the result of which total profits of $855,976 resulted. The corporation carried this figure on its books as profit of the corporation, and in its corporate tax return for that year the corporation reported all this profit as as gross income realized by the corporation on the theory that petitioner entered into the transactions on its behalf. Subsequently the respondent claimed that the profits on the wheat transactions were petitioner's personal profits and not those of the corporation and determined a deficiency in income tax against petitioner. This matter was settled without litigation by stipulation and it was agreed that two-thirds of that profit arose from personal transactions of the petitioner and should have been included in the gross income shown on his personal tax return for 1930. This Board gave effect to that stipulation by its decision entered pursuant thereto.

As a result of this settlement the books and balance sheets of the corporation were changed in 1936, with the result that the two-thirds (less certain taxes paid thereon by the corporation and credited to the taxes due from petitioner) was credited to petitioner, as of 1930, since the corporation had formerly carried the entire profit on its books as its own.

During the years 1931 and 1932 numerous transactions were entered into in which petitioner used securities belonging to Shore Bungalows, Inc., as collateral for obligations incurred by him; and in some instances the corporation pledged petitioner's securities to secure corporate debts. For example, certain securities belonging to the corporation were deposited with the Irving Trust Co. and with the National City Bank as security for loans to petitioner; and some of the petitioner's securities were deposited with the Title Guarantee & Trust Co. to secure an obligation of the corporation. Petitioner also had a margin account with the brokerage firm of Charles D. Barney & Co., through which he bought and sold securities. From time to time additional collateral was required for this account and the collateral, naturally, had to be of a sort acceptable to the brokers. For this purpose securities were sometimes taken from the portfolio of the corporation and put on deposit with the brokers. All these transactions were evidenced by a running account in the name of petitioner on the books of the corporation. Petitioner never withdrew the securities physically himself, nor was any formal authorization received from the corporation for their withdrawal.

When securities of Shore Bungalows, Inc., were used for petitioner's benefit on various occasions during 1931 and the early part of 1932, it was intended that they should be returned to the corporation, and no entries were made on the corporation's books at the time of withdrawal. However, when these securities were sold by the pledgees, subsequent to April 1932, they were charged against petitioner on the corporation's books. Also, whenever dividends or interest became payable on the corporation's securities pledged by petitioner, the amounts were applied by the pledgees against petitioner's accounts; and these amounts were charged against petitioner on the books of the corporation.

The sales of securities in the petitioner's account with the National City Bank were made voluntarily; but sales in the accounts with C. D. Barney & Co., the Irving Trust Co., and the Title Guarantee & Trust Co. were mandatory, due to a demand for further margin or reduction of indebtedness.

Petitioner's financial condition was sound throughout the year 1931. Up to May 1932 it was largely a matter of convenience that securities belonging to Shore Bungalows, Inc., were used for the petitioner's benefit. Subsequent to April 1932 no securities were withdrawn from the Shore Bungalows, Inc., portfolio for Bush's benefit.

The following gives an indication of the manner in which the balance favored petitioner and the corporation in the years prior to those in controversy here:

Date	State of account
June 21, 1926	Petitioner owned corporation	$20,978
Dec. 31, 1926	Corporation owned petitioner	11,700
Dec. 31, 1928	No balance either way
Dec. 31, 1929	Petitioner owned corporation	41,697
Jan. 19, 1930	Corporation owned petitioner	58,302
April 7, 1930	do	218,000
April 9, 1930	Petitioner owned corporation	81,697
Sept. 18, 1930	Corporation owed petitioner	270,302
1 Dec. 31, 1930	do	252,302

In the course of the year 1931 there were payments back and forth between petitioner and the corporation, resulting in a balance at the end of 1931 of $303,000 in favor of the corporation, before the aforementioned adjustment for wheat profits. In the course of the year 1932 there were further charges against petitioner in the amount of $339,960 and credits in the amount of $401,550, so that at the close of the year there was a balance in favor of the corporation in the amount of $241,410, before adjustment for wheat profits.

After 1932 the securities belonging to the corporation were sold and applied to discharge the petitioner's personal obligations. In the course of the year 1933 petitioner was charged with interest and dividends on the corporation's securities pledged for his benefit, and with the sale of certain of the securities pledged for his benefit in the total amount of $22,326; and he was credited with the proceeds of the sale of certain of his securities pledged for the benefit of Shore Bungalows, Inc., in the amount of $33,956. As hereinbefore stated, all of these securities had been pledged prior to May 1932. The 1933 transactions resulted in a reduction of the balance due the corporation to $229,779, without taking into consideration any adjustment for wheat profits. During 1934 there were additional charges against petitioner on account of dividends and interest on securities pledged, amounting to $16,100, and a credit of $350 for cash advanced, resulting in a balance in favor of the corporation of $245,529 at the close of 1934, without considering the adjustment for wheat profits. In 1935 petitioner was charged with dividends, interest and sales of pledged assets in the total amount of $51,719, making the balance in favor of the corporation at the close of that year $297,248, before any adjustment.

In 1936 petitioner transferred to the corporation certain assets, primarily realty, valued by the petitioner and the corporation at $909,229.72 gross and $480,760 net, and received credit therefor, the corporation assuming petitioner's indebtedness to the National City Bank, to secure which these assets had been pledged. Following this transfer the corporation was indebted to petitioner in the approximate amount of $183,512, not yet considering any adjustment for wheat profits.

During the year 1936 the following entry was made on the corporation's books concerning petitioner's account:

To transfer to account of Irving T. Bush proportion of Wheat Profit for the year 1930 previously taken into Shore Bungalows. Inc. Accounts but credited to Irving T. Bush by the Treasury Department and taxable to him in accordance with Settlement by stipulation dated Nov. 30, 1936 Docket No. 77547 before the U.S. Board of Tax Appeals. This entry is made on advice of and with the approval of L. M. Birrel counsel to the corporation.

Wheat Profits Year 1930	$855,976.02
Two Third (2/3) taxable to Irving T. Bush	570,650.68
Less Tax Paid by Shore Bungalows, Inc. and Credited to Tax due from Irving T. Bush	58,849.94
	511,800.74

The foregoing entry represented the interpretation of the corporation and the petitioner of the rights of the parties in the wheat profits, as indicated by the stipulation filed with this Board, and they agreed to act accordingly. The retroactive effect of this agreement was to change the balances in the account between petitioner and the corporation to read as follows on the books:

Date	Balance after adjustment
Dec. 31, 1930	Corporation owed petitioner	$764,102
Dec. 31, 1931	do	208,800
Dec. 31, 1932	do	269,390
Dec. 31, 1933	do	282,021
Dec. 31, 1934	do	266,271
Dec. 31, 1935	do	214,552

The balance sheets of the corporation which were appended to the income tax returns for the years 1933 and 1935 showed surpluses for those years in the amounts of $1,843,222.73 and $925,837.90, respectively, before adjustment of security values. The securities held by the corporation were all listed at cost in arriving at these figures. After the 1936 settlement concerning the taxes on wheat profits, the corporation drew up pro forma balance sheets for each of the years 1933 and 1935 disclosing that, after taking into consideration the adjustment on the wheat profits and after scaling down the value of the securities to the average price of sales of the stocks and bonds during the respective years, as disclosed by financial periodicals and brokers' information, there actually existed deficits of $180,111.98 and $385,067.85, respectively, in those two years.

No dividends were declared or paid by the corporation at any time subsequent to May 1932.

OPINION.

KERN: As set forth above, there are three issues presented in this proceeding for our determination. The first two issues pertain to the trust of 1930 described in the findings of fact; more specifically, as to whether (1) the income paid to petitioner's wife in the years 1931, 1933, 1934, and 1935 from the trust should be included in petitioner's taxable income, and (2) whether petitioner is taxable on a capital gain realized by the trust in 1935. The third issue, unrelated to these first two, demands our determination of whether petitioner received certain amounts as dividends from a personal holding company in the years 1933 and 1935, and is therefore taxable on those amounts. We shall consider the issues in the order presented.

Trust Issue.

Petitioner argues that he was never taxable on any income received by his wife from the 1923 trust and, inasmuch as the 1930 trust is no more than a continuation of the 1923 trust, the corpus from which the wife's income is derived merely having been segregated from the remainder of the corpus, that therefore petitioner is not taxable on the income received by the wife under the 1930 trust agreement either.

We can not agree with the basic hypothesis of this argument; that the 1930 trust was merely a continuation of the 1923 trust and that petitioner's wife merely continued to be the equitable owner of property which she already equitably owned.

In the first place, the wife's rights under the 1930 agreement were different from those enjoyed under the 1923 agreement. Whereas under the first trust she had been entitled to receive only 60 percent of the income for life from 100 percent of the trust corpus, in 1930 under the second trust she became entitled to receive 100 percent of the income from the trust corpus, the value of which was 68 percent of the corpus of the 1923 trust, and which had produced, when it was a part of the corpus of the 1923 trust, approximately 66 percent of the entire trust income.

In the second place, the wife secured an important right under the 1930 trust which she had not had under the 1923 trust, i.e., the obligation on the part of petitioner to pay to the trustee an amount sufficient to make up any difference between the annual trust income and the amount of $60,000, the petitioner thereby in effect guaranteeing an annual income to his wife of $60,000, less certain deductions. The wife in return surrendered certain rights which she had not surrendered under the 1923 trust, i.e., any and all rights in and to the estate or property of petitioner, including dower and maintenance or support.

In addition it is obvious that the occasion and purpose of the two trusts were different. The first was merely for the purpose of providing an independence and security to petitioner's wife and two daughters and was occasioned, we may assume, by his tender solicitude for their happiness and welfare. The second, negotiated during the pendency of the Reno divorce proceedings, had as its purpose the adjustment of rights and obligations of the two adverse parties in a divorce action who were bargaining with each other at arm's length.

An insuperable objection to petitioner's hypothesis is that it ignores the legal steps taken in connection with the creation of the 1930 trust. The second trust does not purport to be merely a modification of the first trust. In the agreement pursuant to which this trust was created it is recited that the 1923 trust had been effectually revoked and that petitioner's wife acknowledges it to have been revoked and no longer of any force or effect, and further that she disclaims any right or interest held thereunder. In the release signed by Rufus T. Bush, one of the beneficiaries under the 1923 trust, whereby he relinquished all rights thereunder, it was recited that the 1923 trust had been revoked. Petitioner believed at the time the 1930 trust was established that his two daughters had likewise consented to the termination of the 1923 trust. A question later arising as to whether they had in reality given their consent, proper ratifications of his actions in revoking the 1923 trust were obtained from them. We must consider, therefore, that the 1923 trust was terminated by consent of all the interested parties and the property of the trust in legal effect was restored to petitioner free from the burdens of the trust. For immediately thereafter the petitioner, according to the recitations of the trust agreement of 1930, assigned, transferred, set over, and delivered unto the trustee named therein the securities which were to be the corpus of the new trust and had been part of the corpus of the terminated trust of 1923. The fact that his friend and business associate, Simonds, who had been trustee under the 1923 trust and retained physical possession of the securities, was the one who actually handed them over to the corporate trustee under the 1930 trust, does not affect our conclusion that in contemplation of law the petitioner was at the time again the owner of these securities, free from the trust created in 1923, and as such owner granted them to another trust, of which he was the settlor and which had purposes and terms far different from those of the first trust.

The mere fact that the wife would not have consented to the termination of the first trust if the second trust had not been established does not make the second trust as a matter of law only a modification or continuation of the first trust.

Petitioner also contends that after the execution of the trust agreement of 1930 there was no obligation on his part which was or would be satisfied by the trust income, pointing out that the law of Nevada, as construed by the Supreme Court in , is to the effect that "the wife's allowance once made is final" unless the court granting the divorce expressly reserves the power to modify it or approves a settlement which provides for its modification. In the instant proceeding the Nevada court granting the divorce approved the trust agreement as fair and reasonable and in lieu of support and maintenance, and reserved no power to modify it. It therefore appears that under the local law of Nevada there remained no obligation on petitioner which was discharged by the trust income.

But this is not enough. The petitioner must show not only that he had no obligation under local law which was satisfied by the trust income, but also that he had no obligation, even contingent, arising by reason of contract. This the petitioner has not done and can not do. The trust agreement itself imposes on him a contingent obligation in lieu of the preexisting obligation of supporting his wife. The obligation is to pay annually to the trustee of the trust under which his wife is beneficiary an amount sufficient to make up any difference between the annual trust income and $60,000, contingent upon such income not amounting to $60,000. Thus in effect petitioner guaranteed that the income from the trust available for distribution to his wife would be the sum of $60,000. The record shows that in one year at least the petitioner recognized this obligation by paying to the trustee an amount necessary to bring the income of the trust to $60,000. Because of this obligation, petitioner retained broad powers over the corpus of the trust and insisted on investments paying large returns, even though the trustee protested that they were not investments proper for a trust to make. In our opinion the situation here present falls squarely within the rule laid down by the Supreme Court in , and the income of the trust is taxable to petitioner under . See also ; affirmed on this issue, .

Petitioner has made some argument to the effect that such a decision would result in the short-sighted neglect of the public aspects of taxation. This is obviously an argument to be properly presented to the legislative branch of the Government. See Report of Senate Finance Committee on the Revenue Bill of 1941.

In view of our conclusion that the income of the 1930 trust was taxable to petitioner under the rule of , we deem unnecessary an extended consideration of respondent's argument that it is taxable under the rule of . In this proceeding the trust was irrevocable and petitioner retained not even the possibility of reversion either to himself or his estate. Under these circumstances we can not feel that the facts disclosed by the record bring this proceeding under the rule of the Clifford case. ; .

The second issue before us in connection with this 1930 trust is whether certain capital gains realized by the trust in 1935 should be taxable to petitioner. A determination of this point requires few words. The capital gains are not taxable to petitioner. Inasmuch as there was no reserved power of revocation, no reversion, and the remaindermen are named in the agreement, we fail to see any theory under which respondent can earnestly urge his contention. Capital gains in New York State are added to corpus unless the trust instrument directs otherwise. ; ; ; . In the instant case the trust instrument did not direct otherwise.

In the case of , we held capital gains of a trust taxable to the settlor under section 22(a) of the Revenue Acts of 1934 and 1936, but there the settlor had the power to dispose of the corpus by will. We said there that the taxpayer must be regarded as in substance the owner of the trust corpus. In the instant case, where the petitioner retained no reversionary interest whatsoever, we can arrive at no such conclusion. We, therefore, resolve this issue in favor of the petitioner.

Holding Company Issue.

The final issue for our determination herein is whether certain amounts allegedly borrowed by petitioner in 1933 and 1935 from Shore Bungalows, Inc., all of whose stock was then held by petitioner, should be treated as dividends instead of loans and therefore be added to petitioner's taxable income for those years. This is a question of fact and, as we have indicated in our findings of fact, we believe that these amounts were actually considered by both the petitioner and the corporation as loans, to be repaid in the future. The books of the corporation so treat these amounts. Respondent points out that bookkeeping entries, though in some circumstances of evidential value, are not determinative of tax liability, citing ; and also that lack of formal declaration of dividends is not controlling, citing ; certiorari denied, . While we agree with respondent on these points, we must point out that complementary evidence, whether oral or documentary, may serve to bolster the weight to be given bookkeeping entries and the lack of dividend declarations.

In the instant case we are convinced by the oral testimony and documentary evidence in the record that the sums charged to petitioner by the corporation in the taxable years were truly considered by him and all other parties concerned as loans, to be repaid. The fact that no interest was ever charged by the corporation on these loans is understandable, inasmuch as the stock of the corporation was wholly owned by petitioner. Cf. . That there were no formal authorizations of loans is evidence, at most, here of loose corporate procedure. But the evidence shows that the loans were not made without the knowledge and consent of the corporate officers. Respondent points out that repayment was made only after petitioner had become apprised of the Government's position in this matter. That is a fact which is of weight only circumstantially. We have found that the weight of the evidence favors petitioner's contention.

Petitioner claims that the pro forma balance sheets show a deficit in each of the years 1933 and 1935, and that under New York law no dividends could be paid while a deficit existed. Because of our disposal of this issue on the facts set forth above, we need not go into this contention. Petitioner is not taxable, as determined by respondent, on those amounts claimed to have been received as dividends in 1933 and 1935.

Decision will be entered under Rule 50.

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Footnotes

• 1. This figure is given as $12,093.50 in petitioner's Exhibit 8. Obviously a mistake in addition was made in preparation of that exhibit. ↩

• 2. Petitioner's Exhibit 8 states this amount to be $1,669,957, due to error. ↩

• 1. Before adjustment on corporate books acknowledging $511,800 of wheat profits (credited in 1930 to the corporation) to be property of petitioner. This adjustment was made retroactively in 1936. ↩