BERTRAM A. DRUKER vs. STATE TAX COMMISSION.

LIACOS, J. This case involves consolidated appeals taken by the State Tax Commission (commission) from decisions of the Appellate Tax Board (board) granting abatements of the taxpayer's income tax for the years 1971 and 1972. We affirm the decisions of the board.

The pertinent facts may be summarized from the board's finding of fact and report; we will recite here only those facts relative to the 1971 tax because the issues presented for the two years are identical. In 1971 the taxpayer had income from interest, dividends, and capital gains in the amount of $135,576. The Commissioner of Corporations

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and Taxation assessed a tax on this amount, less an exemption of $3,394, at the rate of 9% and in the amount of $11,896.38 plus interest. See G. L. c. 62, Section 4, as appearing in St. 1971, c. 555, Section 5. The taxpayer also reported net 5% income in the negative amount of ($1,110,119) for the same year. Included in this negative amount were a loss of $37,415 sustained by "the Westberk Trust," a loss of $669,548 sustained by "the Colonnade Trust," and a net operating loss carryover from 1970 of $278,560. The taxpayer filed petitions for abatement of the assessed 1971 tax and the 1972 tax with the commission. Following denial of his petitions, the taxpayer brought formal appeals to the board, framing the following three issues: (1) was the taxpayer entitled to offset a negative amount of 5% income against a positive amount of 9% income in order to reduce or eliminate the taxable 9% income; (2) was the taxpayer entitled to the deduction for losses attributed to the "Westberk Trust" and "Colonnade Trust"; and (3) was the taxpayer entitled to take as a deduction a net operating loss carryover. The board found in favor of the taxpayer on all three issues, whereupon the commission brought this consolidated appeal. Only the first two issues are pressed before us by the commission; we treat them seriatim.

First, the commission argues that there is no provision in the income tax laws as in effect at the relevant time, G. L. c. 62, as amended by St. 1971, c. 555 (hereinafter referred to as c. 62), for a deduction from 9% income of losses sustained in conducting a business for which the income derived would be taxed at 5%. Because of the then existing nature of c. 62, we believe this poses the wrong question. Section 2 of that chapter begins with an inclusive definition of gross income, Section 2 (a), and then introduces the term "adjusted gross income" to represent gross income less allowable deductions, Section 2 (b). Section 3 then introduces a further refinement by defining the term "income subject to taxation" as adjusted gross income less certain exemptions. It is not contested that the losses attributed to the two "trusts," as well as the other items associated with the negative 5%

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income, fall within the Section 2 (b) category of allowable deductions. Assuming that such losses are properly applied to the taxpayer as an individual rather than as trustee, an issue we shall address shortly, it is therefore clear under the scheme of Sections 2 and 3 that the income subject to taxation in this case is zero. The fact that Section 4 goes on to divide "income subject to taxation" into the two categories of 5% income and 9% income is thus of no import to the computation of tax in this case. See Barnes v. State Tax Comm'n, 363 Mass. 589 (1973). We do not reach this conclusion as a matter of policy, but simply as the necessary result of the application of the unambiguous statutory language. Subsequent to the Barnes case, the Legislature changed the formula so that gross income is divided into the two subclasses of "Part A" and "Part B" gross income prior to the calculation of adjusted gross income. Under that revision deductions under "Part A gross income" shall not "exceed the amount of Part A gross income which is effectively connected with the active conduct of a trade or business of the taxpayer." St. 1973, c. 723, Section 2, amending G. L. c. 62, Sections 2-4. Because this amendment was not effective for the tax years in question, we cannot apply retroactively the change in the statutory scheme so as to achieve the social policy results advocated by the commission and ultimately embraced by the Legislature.

The second issue argued before us is whether the taxpayer is entitled to deduct in his personal tax returns the losses experienced by the two "trusts." Some additional facts are required in making this determination. The taxpayer, at all material times, was engaged in the real estate business. By a declaration of trust dated October, 1969, he established the "Colonnade Trust" with the taxpayer as the sole trustee and holder of a 95% beneficial interest. The remaining 5% beneficial interest was held by one other individual. The taxpayer established the "Westberk Trust" by declaration of trust in June, 1971, naming himself as sole trustee and sole beneficiary. Both declarations provided, inter alia, that the trustee was to hold the property conveyed to him, and receive

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profits for the benefit of the beneficiaries; make distributions pursuant to the directions of the beneficiaries; and have full power, subject to the consent of the beneficiaries, to deal with the conveyed property. Except as expressly provided in the declaration, the trustee was to have "no power" to deal with the property "except as so directed by the beneficiaries." The "trusts" could be terminated at any time by the beneficiaries, at which time the trustee was to convey the assets to the beneficiaries. Based on these powers, the board found as a question of fact that the taxpayer, as 95% beneficiary of the "Colonnade Trust," was in "complete" or "practical" control of the trust property, funds and income involved. The board therefore concluded, as matter of law, that "the extreme degree of control exercised by beneficiaries in this case is clearly inamicable [sic] with the concept of and vitiates the creation of a trust for purposes of taxation." It followed that the losses of the "Colonnade Trust" were available as deductions on the taxpayer's personal tax returns. With respect to the "Westberk Trust," the board was of the opinion that no trust was ever created because the taxpayer was the sole settlor, sole trustee, and sole beneficiary -- an identity of interests fundamentally incompatible with the recognition of a trust as a separate entity. See Kaufman v. Federal Nat'l Bank, 287 Mass. 97 (1934); Cunningham v. Bright, 228 Mass. 385 (1917). Thus, the taxpayer held the property in Westberk free of any trust, and the losses associated with the Westberk business were the taxpayer's personal losses. We find no error in the board's application of the law of trusts to the facts presented by the Colonnade and Westberk "trusts." Moreover, we believe that the board has correctly distinguished the case of Dexter v. State Tax Comm'n, 350 Mass. 380 (1966), decided prior to the 1971 revision of our income tax laws, wherein the existence of the revocable trust was not questioned.

Nor does the commission's reliance on G. L. c. 62, Section 10 (a), seem persuasive. The commission's claim that G. L. c. 62, Section 10 (a), provides that income received by a trustee and payable to or accumulated for the benefit of

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Massachusetts inhabitants is generally taxed to the trustee may be generally valid but is inapplicable here. Where there is no trust there is no "trustee" within the meaning of that section. The conclusion that no true trusts were created in the instant case is sufficient to sustain the taxpayer's argument that the Westberk and Colonnade losses were personal to him; we need not discuss the tax consequences of a determination that a partnership or some other entity had been created. [Note 1] Nor need we embark on a general discussion of the business or legal advantages and disadvantages of so called "nominee trusts," see Birnbaum & Monahan, The Nominee Trust in Massachusetts Real Estate Practice, 60 Mass. L.Q. 364 (1976). The decisions of the board granting abatements to the taxpayer in accordance with agreements as to computation are therefore affirmed.

So ordered.

BRAUCHER, J. (dissenting). I find G. L. c. 62, Section 4, as appearing in St. 1971, c. 555, Section 5, clear on its face, and the taxpayer's interpretation seems to me to be a perverse misreading. Under Section 4 (a) interest, dividends, and capital gains were taxed at 9% if "included in the income subject to taxation." The taxpayer received such income, and it was so included. Other income, taxable at 5% under Section 4 (b), was also included in "income subject to taxation," but the net balance of other income was negative. Most of the taxpayers of the Commonwealth understood the principle and paid their taxes accordingly, and I cannot join in a special windfall to an ingenious taxpayer who claims not to understand

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negative or minus numbers. I also disagree with the court's disregard of trusts deliberately set up by the taxpayer to enable him to claim that there was or was not a trust, whichever might be to his advantage.