On Petition to Review the Decision of the United States Board of Tax Appeals.
Before PHILLIPS, BRATTON, and HUXMAN, Circuit Judges.
This is a petition to review a decision of the Board of Tax Appeals and involves income taxes for the years 1934 to 1937, inclusive, assessed against James A. Hogle, petitioner. The Board held that all of the income in question was taxable to Hogle under § 22(a) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int. Rev. Acts, pages 669, 825.
Hogle and Mary C. Hogle, his wife, reside in Salt Lake City, Utah. They have three children, Mary Katharine Hogle McTernan, born June 5, 1911, James E. Hogle, born September 16, 1912, and George H. Hogle, born April 10, 1915.
In 1911, Hogle purchased a seat on the Salt Lake City Stock Exchange. In 1914, he began a local brokerage business under the name of J. A. Hogle & company. In 1917, he expanded his activities after taking over the Salt Lake City branch of Logan & Bryan. In 1919, he made his wife an equal partner. She never became active in the business, but contributed to the partnership some securities which in 1918 had been given to her by Hogle and placed in a trading account in her name. James E. and Mary Katharine became members of the partnership in 1934 and George H. became a member in 1936. The partnership engages in the stock and bond brokerage business, with its principal office at Salt Lake City and branch offices in New York, Los Angeles, and other cities. Its income is derived from commissions and interest on accounts.
On October 7, 1922, Hogle, Mrs. Hogle, and Ed. S. Brooke executed an instrment which stated that it was an "irrevocable trusteeship," and designated Ed. S. Brooke as trustee thereunder for the three minor children. The instrument recited that "this is a trading account in stocks, bonds and/or real estate, managed and operated under the direction of James A. Hogle for the benefit of his three children."
It provided that the corpus and income of the trust should be divided among the three children on April 15, 1945, in the following proportions: Mary Katharine, one-fitth; James E., two-fifths; and George H., two-fifths.
If further provided that any losses resulting from trading in excess of the "profits and various income returns thereof" should be made good by Hogle, and that any such losses should not become an indebtedness of the trustee or the beneficiaries, but that any such losses made good by Hogle should be returned to him out of the first profits that accrued from further transactions.
It further provided that in case Hogle should incorporate his real estate holdings or the partnership, he could require the trustee to transfer the trust assets for bonds or stock in the corporation and could name a secretary or treasurer of the transferee as successor trustee, but that the new securities thus traded for former assets should be worth not less than the amount of the assets traded for such new securities in the corporations.
It further provided that upon Hogle's death, trading should cease "and all other agreements, circumstances, and conditions" of the "trusteeship" should devolve on Mrs. Hogle, or if she be then dead or should thereafter die before the termination of the trusteeship, on Hogle's executor.
It further provided that in case of a beneficiary's death, his benefits and rights should pass to the surviving children, and in the event of the last surviving child's death, to Mrs. Hogle, and if she should be dead, to the children's living children.
It made no provision for the removal of the trustee but provided in the event of his death, resignation, or removal, Hogle might appoint the successor trustee.
There was no provision whereby Hogle might share in the corpus of the trust or the income therefrom and Hogle reserved no power whatsoever to alter the provision respecting distribution of the corpusor the income therefrom.
On February 5, 1927, Brooke resigned as trustee and an identical trust agreement was executed by Hogle and Mrs. Hogle designating George H. Copley as trustee. The trust was thereafter known as the Copley Trust. Both instruments were drawn by Hogle without consulting an attorney.
On October 7, 1922, at Hogle's direction, a margin account was opened for the trust with the partnership.It was carried on the partnership books in the name of Ed. S. Brooke, Agent, and later was continued in the name of George H. Copley, Trustee. The account was treated by the partnership like the account of any other trading customer.
At Hogle's direction, a short sale of 1,000 shares of Tintic Standard Mining Company was made on October 7, 1922, and covered by purchases on October 10 of 600 shares and on October 21 of 400 shares at a profit of $209.91. There were no further transactions during 1922, and after an interest credit of $2.08 by the partnership, the trust account on December 21, 1922, showed a credit balance of $211.99.
Sales and purchases on margins were made for the account during the succeeding years. With the exception of the years 1928 and 1929, when losses were sustained, the trust realized profits in every year, including the taxable years.*fn1
At the end of 1927, the trust account showed a balance of $157,122.04, representing accumulated profits after deduction of insurance premiums and income taxes paid out of the fund. In 1928 and 1929, at Hogle's direction, securities were credited to the trust and charged to individual accounts of Hogle and Mrs. Hogle and a joint account of Hogle and Mrs. Hogle on the books of the partnership.*fn2 The trust account was short in respect of the shares transferred. The transferor accounts were long.After the transfers, the trust account was short 600 shares of Tintic Standard, 300 shares of American Smelting, Refining & Mining Company, and 1,200 shares of Park Utah. None of the securities transferred was at any time in the name or custody of either Hogle or Mrs. Hogle. However, they were carried on the books of the partnership as belonging to them and were held in the name of a nominee for their benefit. Stocks of customers generally were carried in the name of a nominee, and beneficial ownership thereof was reflected on the books of the partnership.
The net asset or liquidating value of this account was minus $668,838.02 on December 31, 1927, minus $786.735.61 on December 31, 1928, and $363,132.73 on December 31, 1929.
During the years 1923 to 1934, the partnership disbursed $11,280.48 for premiums on insurance policies on Hogle's life, under which his three children were beneficiaries, and disbursed $20,807.29 for the children's school expenses, and charged them to the trust account. These disbursements were contrary to the provisions of the trust agreement. Hogle was unaware of these charges. On December 31, 1940, the amounts were credited on the partnership books to the trust account, the school expenses were charged to Hogle's account, and the amount of the insurance premiums was charged to the children's personal accounts. All other disbursements from the trust account since it was opened have been for taxes.
A separate set of books has been kept for the trust which conforms with the account on the partnership's books.
The trust books show that the net asset or liquidating values of the trust account count and its debit or credit balances with the partnership at the end of each of the following years, respectively, were:
1933 $473,627.35 9,640.88
1934 507,446.54 $53,763,06