27 T.C. 361">*362 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 as1956 U.S. Tax Ct. LEXIS 32">*35 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. ¹

1956 U.S. Tax Ct. LEXIS 32">*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 27 T.C. 361">*363 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 aid1956 U.S. Tax Ct. LEXIS 32">*37 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. 1956 U.S. Tax Ct. LEXIS 32">*38 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: 27 T.C. 361">*364

In addition, on June 12, 1946, petitioner effected a transaction for the account of William, purchasing 200 shares of Alleghany1956 U.S. Tax Ct. LEXIS 32">*39 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:

1956 U.S. Tax Ct. LEXIS 32">*40 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 27 T.C. 361">*365 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 1956 U.S. Tax Ct. LEXIS 32">*41 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 maintained1956 U.S. Tax Ct. LEXIS 32">*42 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. 27 T.C. 361">*366 Pauline had no income from wages during 1947 and consequently the tax shown on her return was due entirely to the income from the 1956 U.S. Tax Ct. LEXIS 32">*43 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. ² William deposited the checks in his bank account and then issued his checks to the collector of internal revenue in payment of their taxes for 1947. The broker also issued to the Newcombes its checks payable to the order of the Department of Taxation of the Commonwealth of Massachusetts in the amounts of $ 1,902.64 and $ 447.11 in payment of the taxes owed to the State of Massachusetts on the earnings reflected in the accounts of Pauline and William, respectively.

1956 U.S. Tax Ct. LEXIS 32">*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 trading1956 U.S. Tax Ct. LEXIS 32">*45 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.

27 T.C. 361">*367 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 individuals1956 U.S. Tax Ct. LEXIS 32">*46 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 doing1956 U.S. Tax Ct. LEXIS 32">*47 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 27 T.C. 361">*368 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 advanced1956 U.S. Tax Ct. LEXIS 32">*48 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. Here1956 U.S. Tax Ct. LEXIS 32">*49 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 purported1956 U.S. Tax Ct. LEXIS 32">*50 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 27 T.C. 361">*369 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 his1956 U.S. Tax Ct. LEXIS 32">*51 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 required1956 U.S. Tax Ct. LEXIS 32">*52 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 27 T.C. 361">*370 withdrawals from the one account where he was empowered to do so. All withdrawals were made by the nominal owners1956 U.S. Tax Ct. LEXIS 32">*53 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 that1956 U.S. Tax Ct. LEXIS 32">*54 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; * * *

* * * *