Taylor v. Commissioner , 27 T.C. 361 ( 1956 )

Amelia J. Taylor, Petitioner, v. Commissioner of Internal Revenue, Respondent

Taylor v. Commissioner

Docket No. 54131

United States Tax Court

27 T.C. 361; 1956 U.S. Tax Ct. LEXIS 32;

November 27, 1956, Filed

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Decision will be entered under Rule 50.

1. Petitioner established commodity trading accounts in the names of three relatives. She advanced all sums required, and, under powers of attorney granted by the nominal owners, she exercised complete control over deposits and withdrawals and over the operation of the accounts. It was her intention to develop the accounts until there was $ 100,000 in each, and, at that time, to turn them over to the nominal owners. Respondent determined that the income from the accounts was taxable to the petitioner. Held, the nominal owners of the accounts neither contributed nor acquired any part of the capital advanced for their operation, and the profits earned thereon are taxable to petitioner.

2. Two of petitioner's relatives included the profits from the commodity accounts maintained in their names on their returns for 1947. Held, petitioner and her relatives are not related taxpayers as provided by section 3801 (a) (3), and she is therefore not entitled to credit the taxes which her relatives paid on the commodity profits for 1947 against the deficiency determined against her for that year.

3. Petitioner's niece Pauline gave her a note as evidence of a loan which petitioner had purportedly made to Pauline in the operation of the accounts. In 1947, Pauline paid petitioner the sum of $ 100 as "interest" on this note. Held, since the parties did not regard this "loan" as requiring a fixed obligation to repay, a valid loan did not exist for income tax purposes, and the $ 100 paid to petitioner as "interest" was not reportable by her as interest income.

4. In preparing petitioner's return for 1947, her accountant failed to fill out the alternative tax schedule, thus resulting in a larger tax than would have been payable had such schedule been completed. Held, under section 117 (c) (2) of the 1939 Code, a taxpayer whose net long-term capital gains exceed his short-term capital losses is entitled, as a matter of right, to the benefit of this computation.

I. Newton Brozan, Esq., and Aaron Holman, Esq., for the petitioner.

William G. O'Neill, Esq., for the respondent.

Rice, Judge.

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RICE

This proceeding involves deficiencies in income tax determined against Amelia J. Taylor (hereinafter referred to as petitioner) for the calendar years 1946 and 1947 in the amounts of $ 8,169.19 and $ 101,892.14, respectively.

The issues to be decided are: (1) Whether petitioner is taxable upon the profits from commodity trading accounts which were maintained by her in the names of relatives during the years 1946 and 1947; (2) if so, whether petitioner is entitled to receive, under section 3801 of the 1939 Code, a credit against the deficiency determined for 1947 by reason of the taxes paid by her relatives when they reported, on their separate returns for 1947, the profits from the commodity trading accounts maintained in their names for such year; (3) whether respondent properly excluded from petitioner's income for 1947, an item of $ 100 which she reported as interest received during that year; and (4) whether petitioner is now entitled to the benefits of the alternative computation under section 117 (c) (2) with respect to her capital transactions for the year 1947, although such computation was not claimed on the return filed by her for that year.

Another issue raised by petitioner in her pleadings with respect to the treatment of concurrent long and short positions in the same commodity has been conceded by respondent. Such concession will be taken into account under a Rule 50 computation.

Some of the facts were stipulated.

FINDINGS OF FACT.

The stipulated facts are so found and are incorporated herein by this reference.

Petitioner resided in New York, New York, during the years 1946 and 1947, filing her returns for such years with the former collector of internal revenue for the second district of New York. ^{*36 Petitioner is the widow of Leslie D. Taylor who died on October 31, 1945. After her husband's death, petitioner became an active trader in the commodities market. She went to the brokerage office early in the morning and remained there until closing time. She engaged in a great many brokerage transactions and for a time had considerable success in her trading.}

The decedent, Leslie D. Taylor, was survived by a nephew, William L. Newcombe, who resided in Boston, Massachusetts, with his wife, Pauline M. Newcombe, and by a niece, Roberta Taylor, later known as Roberta Taylor Forbes, who resided at Freetown, Prince Edward Island, Canada. (They will hereafter sometimes be referred to as William, Pauline, and Roberta, respectively.) Petitioner and her husband enjoyed a very warm, close relationship with the Newcombes and Roberta Taylor, and that relationship continued with the petitioner after the death of her husband. Petitioner had inherited her husband's entire estate and she wished to do something for his relatives. Early in 1946, she decided to open commodity trading accounts for each of them. They were in modest economic circumstances and she felt that she could aid them in this manner. Her aim was to build up the accounts to a point where there was a profit of $ 100,000 for each, and, at that time, to turn the accounts over to them.

Accordingly, after having requested and received permission from each of these three individuals to open accounts in their names, petitioner opened various such accounts at a New York City brokerage firm. Upon the opening of each of the commodity trading accounts, a revocable power of attorney was in each instance executed by the person in whose name the account was opened and filed with the brokerage house. The powers of attorney executed by Roberta, William, and Pauline gave complete control over the conduct of the accounts to petitioner, as exemplified by the following excerpt from one of the powers:

I hereby authorize Amelia Taylor (whose signature appears below) to buy, sell and trade in for my account and risk in my name, stocks, bonds, and any other securities and/or commodities on margin or otherwise and in accordance with your terms and conditions; and I hereby agree to indemnify and hold you harmless from and to promptly pay you on demand any and all losses arising therefrom or debit balance due thereon. You will kindly follow his instructions in every respect concerning my account with you, and make payments of moneys and deliveries of securities to him or otherwise as he may order and direct. In all matters and things aforementioned he is authorized to act for me and in my behalf in the same manner and with the same force and effect as I might or could do. In all transactions in connection with my account, it is understood that he is acting as my agent and not as your agent.

* * * *

This authorization is a continuing one and shall remain in full force and effect until you receive from me written notice of my revocation thereof, * * *

In each instance, all sums invested in the accounts were furnished by petitioner. She executed numerous commodity transactions in the accounts and they showed the following net profits and net losses for the years 1946 and 1947:

Accounts maintained
in the names of	1946	1947
Roberta Taylor	$ 470.10	$ 59,536.48
William L. Newcombe	6,477.62	12,055.00
Pauline M. Newcombe	(1,869.65)	56,125.25

In addition, on June 12, 1946, petitioner effected a transaction for the account of William, purchasing 200 shares of Alleghany Corporation common stock in his name for the sum of $ 1,424. A stock account was opened for him at that time with a transfer thereto of $ 1,424 from the Regulated Commodity Account maintained in his name. William received the certificates of stock, which were issued by Alleghany Corporation in his name, and he was still the holder thereof at the time of the hearing herein.

For all practical purposes, petitioner exercised complete control over all transactions consummated in the accounts. She did not consult with the Newcombes or with Roberta as to the conduct of the accounts and they did not attempt to offer their advice. She also exercised complete control over the transfer of funds in the accounts, and, during the years 1946, 1947, and 1948, she made the following deposits and withdrawals from these commodity accounts:

Accounts maintained
in the names of --	Date	Deposits	Date	Withdrawals
William L. Newcombe	June   3, 1946	$ 2,000	Jan.  14, 1947	$ 7,043.62
	Sept.  3, 1947	1,500	Dec.  15, 1948	1,698.48
	Sept. 11, 1947	10,000
		$ 13,500		$ 8,742.10
Pauline M. Newcombe	July   2, 1946	$ 1,200	Jan.  14, 1947	$ 2,541.33
	July   9, 1946	4,000	Jan.  27, 1947	776.52
	May   23, 1947	10,000	Dec.  15, 1948	677.63
		$ 15,200		$ 3,995.48
Roberta Taylor	Apr.   8, 1946	$ 2,000	July  24, 1946	$ 5,000.00
	Apr.  10, 1946	5,200	July  21, 1947	5,000.00
	Jan.  17, 1947	7,000	Aug.  28, 1947	6,000.00
	Sept. 26, 1947	4,500	Sept. 10, 1947	10,000.00
	Oct.   2, 1947	4,600
	Feb.   4, 1948	6,500	Dec.  24, 1948	7,000.00
	Feb.   6, 1948	10,000	Mar.  10, 1948	15,000.00
	Feb.   9, 1948	5,100	Oct.  28, 1948	7,100.00
		$ 44,900		$ 55,100.00
Total deposits in all
accounts				$ 73,600.00
Total withdrawals
from all accounts				67,837.58

None of the foregoing withdrawals were ever turned over to any of the aforementioned individuals. The excess of withdrawals over deposits from the accounts maintained in the name of Roberta, amounting to $ 10,200, was not turned over to Roberta. Roberta never received any money from petitioner or the brokerage firm in connection with the accounts maintained in her name.

Sometime during the month of May 1947, petitioner and William met in New York and had a conversation with respect to the brokerage accounts. Petitioner informed him that she had put $ 10,000 of her funds into Pauline's commodity account just a few days before. She subsequently mailed to the Newcombes a demand note drawn to her own order in the amount of $ 10,000, payable with interest at 4 per cent quarterly, to be signed by Pauline. Upon its receipt, Pauline signed the note and sent it back to petitioner. William executed and delivered to petitioner his own promissory notes for $ 1,500 and $ 10,000, dated September 3, 1947, and September 11, 1947, respectively, payable to petitioner on demand, for funds deposited by petitioner in his brokerage accounts. When the interest for the first quarter on Pauline's promissory note to petitioner became due on August 26, 1947, a check for $ 100 was sent to petitioner. Pauline claimed a deduction for this $ 100 payment on her return for 1947 and petitioner included such amount as interest income on her return for that year. No further payments of interest were made on these notes.

During 1946 and 1947, Roberta Taylor and the Newcombes received periodic statements and notices from the brokerage houses in which petitioner had established accounts in their names. At the close of the year 1946, William made no inquiries as to what the net profit or loss had been in the accounts maintained in his name. He felt that his aunt was doing him a favor and that he, therefore, did not have the right to put pressure on her. He did not report on the return which he filed for that year the profit shown on the accounts maintained in his name, and Pauline did not file a return for 1946. Roberta Taylor is a Canadian citizen and she did not file United States Federal income tax returns for 1946 or 1947.

On her return for 1946, petitioner included the profits from the accounts maintained in the name of William and the losses from the accounts maintained in the name of Pauline during the year 1946. She did not include the profits from accounts maintained in the name of Roberta. Petitioner's return for 1946 was prepared for her by an accountant on the basis of brokerage statements and other records which she submitted to him. The statements which she gave him included not only the accounts in her own name but also those accounts in the names of the Newcombes and Roberta. Petitioner neglected to sign this return and it was subsequently filed, unsigned, by the accountant. It also included an arithmetical error overstating petitioner's taxable income for 1946 by $ 10,000. Respondent has given petitioner credit in the deficiency notice for such arithmetical error.

In preparing their income tax returns for 1947, the Newcombes included the net profits earned in 1947 in the commodity accounts maintained in their names by petitioner. After taking into account the amount of $ 863.80 which had been withheld from his salary during 1947, William's return showed $ 4,679.27 as due on his 1947 taxes. Pauline had no income from wages during 1947 and consequently the tax shown on her return was due entirely to the income from the commodity accounts maintained in her name. In order to pay the taxes shown on his return and that of his wife, amounting to $ 4,679.27 and $ 28,060.11, respectively, William requested petitioner to have the broker issue its checks for these amounts to him and to his wife and to charge their respective accounts therewith. At petitioner's direction, checks were sent to the Newcombes by the broker and charged to the accounts maintained in their names. *44 In 1948, a drastic drop in prices of commodities on the commodities exchanges occurred, and the various accounts which petitioner was maintaining in her relatives' names were wiped out. At that time, petitioner had withdrawn from the account in Roberta's name a total of $ 10,200 more than she had advanced to it. As of the time of the hearing herein, petitioner had not paid this amount to Roberta. Neither William nor Pauline have ever paid to petitioner any of the principal of the promissory notes signed by them in 1947. Pauline's understanding as to the $ 10,000 promissory note signed by her was that it would be paid if the market were good and she and her husband came out with a profit. Petitioner still holds the notes but has not asked for payments on them. She had planned to recover her deposits in the various commodity accounts out of the profits which she hoped to make on the accounts. When the market failed, however, she did not expect Roberta or the Newcombes to make good these deposits, and she did not expect the Newcombes to make payments on the notes they had given her.

On her income tax return for 1947, petitioner did not report the profits from the commodity trading accounts which she maintained in the names of Roberta Taylor and the Newcombes. Respondent determined that the profits and losses from these accounts, for the years 1946 and 1947, were properly reportable by her.

The profits and losses from the commodity accounts maintained in the names of Roberta Taylor and the Newcombes, during 1946 and 1947, were those of petitioner and are taxable to her for Federal income tax purposes.

OPINION

The principal issue to be decided herein is whether petitioner is taxable upon the income of various commodity trading accounts which she maintained in the names of three relatives during the years 1946 and 1947.

Petitioner contends that each of these accounts was owned by the person in whose name it had been established, that she simply acted as their agent, and that she is not taxable on the income therefrom since her only function was that of manager of the accounts. She argues that the various cash advances which she made in order to establish the accounts, and later, to increase the volume of trading being conducted in the accounts, constituted loans to the individuals in whose names the accounts had been established, and that such individuals were the beneficial owners of the accounts. After careful study of the record, however, we are not convinced that petitioner's relatives can be regarded as having contributed any capital to the accounts which would justify attributing all or part of the profits to them rather than to petitioner. See Clay H. Brock, 22 T. C. 284 (1954). It is our opinion that the purported loans to petitioner's relatives did not create bona fide obligations, that petitioner not only contributed the initial capital but the capital investments in the accounts continued to be hers, and that her dominion and control over each of the accounts was such that the income therefrom must be taxable to her.

There was no written agreement between the parties. In fact, there appears to have been merely a vague understanding that petitioner was expressing her love for her relatives by establishing these accounts and that they would, in some manner, profit thereby. The relatives appear to have known little, if anything, about trading in commodities, and they had no participation whatsoever in the conduct of the accounts. Their concept of the situation was that their aunt was doing them a favor and they felt that they were not in a position to ask questions or make suggestions. Thus, William explained that although he had received periodic statements from the broker showing profits from the various trades conducted in the accounts maintained in his name, he did not report the net profit from such accounts on his return for 1946 because he hesitated to ask his aunt about it.

Petitioner, herself, has made it quite clear that, although her nieces and nephew were nominally the owners of these accounts, it was her intention to maintain complete control over the accounts until she had built them up to a point where there was a $ 100,000 profit in each, and only at that time did she intend to transfer the accounts to them. The extent of petitioner's control over the accounts, and her intention that the nominal owners were not to acquire a fixed right to them until the $ 100,000 objective had been reached, is evidenced by the fact that petitioner made withdrawals at will, even withdrawing amounts in excess of her total advances to the accounts. Although she had withdrawn out of the profits in the Roberta Taylor account some $ 10,200 more than she had advanced to it, this sum had not been repaid to Roberta Taylor 8 years after the account had been closed.

The fact that the Newcombes included the profits from the accounts on their income tax returns for 1947, that funds from the accounts were used to pay their tax for that year and also had been used to purchase stock in the name of William at a cost of $ 1,424, and that they paid petitioner $ 100 in "interest" on these purported loans fails to convince us that they are to be regarded as the true owners of the accounts for income tax purposes. The placing of legal title to property in the name of another does not, of itself, control the determination as to the ownership of the income of the property. David J. Pleason, 22 T. C. 361 (1954), affd. 226 F. 2d 732 (C. A. 7, 1955), certiorari denied 350 U.S. 1006">350 U.S. 1006 (1956). In order for the income from such property to be taxable to the nominal owner, it must be clear that the parties intended that such owner, even though not actually involved in the management of the property, have the right to demand the income or the property itself should he so wish. Here there was complete subservience on the part of the nominal owners and they appear to have been completely dependent upon their aunt for a decision as to when income from the accounts would be distributed to them. Whatever petitioner's intentions regarding the taxation and ultimate ownership of the accounts may have been, it is clear that she retained control over them during the years in issue and had no intention of relinquishing such control during these years. It was petitioner's capital, effort, and constant attention to the accounts that was responsible for the income in question, and until such time as she would, in fact, transfer the accounts to the nominal owners, the income is taxable to her.

Petitioner contends that the notes given her by the Newcombes evidence loans which she had made to them in the operation of the accounts and that, therefore, it was their capital which earned the income in issue. However, the repayment of such alleged loans appears to have been conditional upon the profitable management of the accounts. When a sharp break in the commodity markets caused the accounts to be wiped out, petitioner made no effort to enforce the collection of these purported loans. The testimony of the Newcombes regarding the notes which they gave to petitioner fails to convince us that they truly regarded themselves as debtors with a fixed obligation to repay the amounts advanced by petitioner. Petitioner, herself, testified that she did not expect the loans to be repaid. A valid loan does not exist where there is a conditional obligation to repay. See William Francis Mercil, 24 T. C. 1150 (1955). Accordingly, we must view the sums of cash deposited in these accounts as petitioner's capital rather than her relatives'.

Moreover, the record indicates that on January 14, 1947, petitioner withdrew $ 7,043.62 from William's account although her total prior advances to such account had been but $ 2,000. We must assume that sufficient profits had been earned on this $ 2,000 investment to permit so substantial a withdrawal. Under petitioner's theory, these profits would belong to William and this withdrawal would leave her indebted to him in the amount of $ 5,043.62. Yet, when on September 3 and 11 of that year she made additional deposits of $ 1,500 and $ 10,000, respectively, in that account, William gave his aunt notes for $ 1,500 and $ 10,000. If he and his aunt truly regarded the accounts in his name, and the profits thereon as his own, surely they would have deducted this $ 5,043.62 from the notes given for the subsequent deposits. These notes were mere tokens to lend form to the transaction, and in the final analysis, petitioner never relinquished control over her capital investments in the accounts.

The powers of attorney which each of the three relatives gave to petitioner to enable her to establish and conduct trading in accounts in their names specified that they were liable to the broker for losses or debit balances due on the accounts. However, though the nominal owners may have thus incurred a contingent liability with regard to the accounts, petitioner's conduct indicates that she regarded them as her own and accordingly she is taxable on the profits therefrom.

Petitioner relies strongly on our opinion in Clay H. Brock, supra. In that case, the taxpayer had entered into agreements with certain relatives to conduct commodity trading accounts in their names, with the understanding that the profits would be divided equally. All amounts required for the operation of the accounts were to be contributed by the taxpayer and he was to bear the loss if such amounts were lost. We held that the taxpayer was accountable in full for the profits derived from the capital furnished by him, but, that to the extent that profits were allowed to remain in the accounts and be reinvested, such amounts represented additional capital contributed by the taxpayer and the relatives. Subsequent profits derived from such additional capital were held to be chargeable to the taxpayer and the relatives in accordance with their respective interests in such subsequent profits. The basis of our decision in the Brock case was the existence of a definite contract between the parties specifying the manner in which funds were to be supplied, profits divided and, most important, giving the nominal owners of the accounts the right to receive and withdraw profits. In fact, with the exception of one of the accounts involved in that case, the taxpayer therein had no power to withdraw funds from the accounts, and he at no time made withdrawals from the one account where he was empowered to do so. All withdrawals were made by the nominal owners of the accounts and they shared parts of such withdrawals with the taxpayer who was managing their accounts.

In the instant case, there was no such contract with clearly definable terms. The three relatives appeared to have regarded themselves more as ultimate beneficiaries of a gift rather than as the owners of the accounts. They felt that they were in no position to influence petitioner in the conduct of the accounts and not entitled to demand the profits until such time as petitioner desired to have them distributed. Clearly, this situation is substantially different from that in Clay H. Brock, supra.

The facts of this case show merely an intent at some future time (when the accounts reached a certain figure) to make a gift thereof to the three relatives, and, until that time arrived, the property was, for tax purposes, that of the petitioner, and income therefrom was properly taxable to her.

The next question to be decided is whether petitioner is entitled to receive, under section 3801 of the 1939 Code, a credit against the deficiency determined for 1947 because of the taxes which the Newcombes paid when they reported on their returns for that year the profits in the commodity accounts maintained in their names. Since the Newcombes did not have the funds to pay the taxes due on the $ 68,180.25 profit which they included on their returns, they requested petitioner to have the broker issue them its checks for the required amounts. At petitioner's direction, two checks aggregating $ 33,571.96 were sent to them by the broker for their Federal income taxes and charged to the accounts maintained in their names.

Petitioner contends that the circumstances of this case come within the following provisions of section 3801 (b) (1):

SEC. 3801. MITIGATION OF EFFECT OF LIMITATION AND OTHER PROVISIONS IN INCOME TAX CASES.

(b) Circumstances of Adjustment. -- When a determination under the income tax laws --

(1) Requires the inclusion in gross income of an item which was erroneously included in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer; * * *

* * * *

and, on the date the determination becomes final, correction of the effect of the error is prevented by the operation * * * of any provision of the internal-revenue laws other than this section * * * then the effect of the error shall be corrected by an adjustment made under this section. * * *

Although this section clearly appears to have been intended to prevent the double taxation of some item of income, we are unable to find that petitioner and the Newcombes qualify as "related taxpayers" as defined in section 3801 (a) (3), which reads as follows:

(a) Definitions. -- For the purpose of this section --

* * * *

(3) Related taxpayer. -- The term "related taxpayer" means a taxpayer who, with the taxpayer with respect to whom a determination specified in subsection (b) (1), (2), (3), or (4) is made, stood, in the taxable year with respect to which the erroneous inclusion, exclusion, omission, allowance, or disallowance therein referred to was made, in one of the following relationships: (A) husband and wife; (B) grantor and fiduciary; (C) grantor and beneficiary; (D) fiduciary and beneficiary, legatee, or heir; (E) decedent and decedent's estate; or (F) partner.

Petitioner argues that her relationship with the Newcombes should be regarded as either "grantor and beneficiary" or as that of "fiduciary and beneficiary." However, this presupposes that the dealings between the parties had given rise to a trust and we are unable to find that this occurred. Even if we were to regard the Newcombes as having borrowed money from petitioner and given it to her to invest on their account, this would not give rise to a trust relationship but, rather, that of principal and agent. In re Arons' Estate, 121 N. Y. S. 2d 512 (1953); 3 Scott, Trusts, sec. 227.15. The powers of attorney which the Newcombes gave to petitioner to permit her to conduct the commodities accounts in their names simply created an agency relationship. Although an agent may occupy a fiduciary relationship to the principal, without the transfer of legal title to the property, the relationship does not transcend that of agency and the principal may not be termed a beneficiary. See John M. Aufiero, 43 B. T. A. 753 (1941). Although this result may appear harsh, we are bound by the specific enumeration of related taxpayers which Congress has seen fit to designate as entitled to relief under section 3801.

An examination of the legislative history of section 3801 (a) (3) discloses that, as originally proposed for enactment into law as part of the Revenue Act of 1938, ^{Lovering v., 49 F. Supp. 1">49 F. Supp. 1 (D. Mass., 1943); I. T. 3986, 1949-2 C. B. 108. Since a trust relationship in the instant situation did not exist under the law of New York, In re Arons' Estate, supra, petitioner must be denied the benefit of section 3801.}

The third issue relates to the $ 100 purported payment of interest which was made to petitioner by Pauline in 1947. Since we have found that the amounts advanced by petitioner for the operation of the accounts did not constitute bona fide loans, this $ 100 was not properly reportable by petitioner as interest income on her return for 1947.

In preparing petitioner's return for 1947, petitioner's accountant failed to fill out the alternative tax schedule, thus showing a larger tax than would have been payable had such schedule been completed. Under section 117 (c) (2) of the 1939 Code, ^{*59 Decision will be entered under Rule 50.}

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Footnotes

• 1. Although petitioner's "return" for 1946 was not signed by her, the parties have treated it, for the purpose of the instant proceeding, as her return for such year.↩

• 2. Although the return of William for 1947 disclosed a total tax of $ 5,543.07, the check sent to him by the broker was in the amount of $ 5,511.85. No explanation is given for this in the record.↩

• 3. This appears as section 819 (a) (2) of H. R. 9682, 75th Cong., 3d Sess.↩

• 4. SEC. 117. CAPITAL GAINS AND LOSSES.

  (c) Alternative Taxes. --

  * * * *

  (2) Other taxpayers. -- If for any taxable year the net long-term capital gain of any taxpayer (other than a corporation) exceeds the net short-term capital loss, there shall be levied, collected, and paid, in lieu of the tax imposed by sections 11 and 12, a tax determined as follows, if and only if such tax is less than the tax imposed by such sections:

  A partial tax shall first be computed upon the net income reduced by the amount of such excess, at the rates and in the manner as if this subsection had not been enacted, and the total tax shall be the partial tax plus 50 per centum of such excess.↩