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Ditmars v. Commissioner of Internal Revenue

decided: April 13, 1962.

WALTER E. DITMARS AND JENNIE J. DITMARS, PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.



Author: Friendly

Before FRIENDLY, KAUFMAN and MARSHALL, Circuit Judges.

FRIENDLY, Circuit Judge.

From 1932 to 1938 Walter E. Ditmars (sometimes hereafter "the taxpayer") acted as a stock broker, financial adviser, and speculator. After 1938 he served Gray Manufacturing Company (formerly Gray Telephone Pay Station Company and hereafter "Gray"), first as president and later as a consultant. The instant controversy relates to deductions for 1955 and 1956 which Ditmars asserts to relate to the profit-making and the Commissioner to the personal side of his life.

We begin the history in 1932, because in that year May M. Johnson, Ditmars' mother-in-law, became sole trustee of a substantial testamentary trust established some years earlier under her husband's will. In 1953 one of the remaindermen under the trust - a brother of Mrs. Ditmars - seems to have concluded that a large measure of Ditmars' financial success since 1932 had been due to having gained practical control over trust assets and having used them for personal advantage. This remainderman petitioned the Surrogate's Court for Bronx County to compel his mother to furnish an account of the trust's activities, something she had not done since she became sole trustee. In July, 1953, she rendered an accounting; in January, 1954, the Surrogate's Court revoked her letters of trusteeship and permitted her to resign.

Six months later the substituted trustee, the Bronx County Trust Company, filed a petition in the Surrogate's Court seeking discovery, as authorized by New York Surrogate's Court Act, ยง 205. Specifically, the trustee asked that inquiry be made as to Ditmars' part in certain transactions, hereafter summarized, and that Ditmars be directed "to deliver over to your petitioner any trust property or assets whch he may have, or to impress upon any property or assets of his, or any other person holding through him, which was acquired by the improper use of the property and assets of this trust, a trust for the benefit of this estate." The items as to which inquiry was demanded included the following:

(1) Approximately $200,000 which had been paid to Mrs. Johnson "as life beneficiary in excess of income from the trust * * *" The trustee elsewhere alleged that Mrs. Johnson had paid this money to herself "with the knowledge and assistance of" Ditmars.

(2) The sale of securities that had been in the trust's portfolio when Mrs. Johnson became sole trustee, and the loss to the trust estate caused thereby. Ditmars, said the trustee, had "contrary to the provisions of the will of the decedent, * * * converted the property and assets of the trust from sound investment securities held for the purposes of income to securities of a wholly speculative and risky character, all to the detriment of the trust, causing losses in excess of $1,000,000."

(3) The use of the trust assets to maintain the speculative trading account just referred to, and the commissions, taxes, and other charges incurred in such trading. The trustee asserted Ditmars had traded "in excess of $30,000,000 of securities" in the period from 1932 to 1939, repeatedly turning over a trust principal which on February 18, 1932 had amounted to $1,327,898.72. Commissions of "approximately" $200,000 had been paid on these transactions; "stamp taxes, bank charges and other fees" amounting to over $50,000 had also been paid.

(4) The number of shares of stock held by Ditmars in Gray and in Colt's Manufacturing Company and the consideration paid thereon. Ditmars, according to the trustee, had used trust assets "in a wholly speculative manner to secure personal control of Gray Manufacturing Company * * * and has derived and is deriving great personal financial advantage and income, and has been unjustly enriched, all to the detriment of the trust estate."

(5) The fees received by Ditmars from managing the estate property. It was later determined that Ditmars had, between 1932 and 1938, been paid $15,800 for acting as investment adviser to the trust.

(6) The benefits received by Ditmars and his wife, alleged to amount to over $100,000, from use of trust assets for payment of personal obligations, namely mortgage interest and tax payments on a property and residence in the Bronx. Moreover, Mrs. Johnson, who previously owned the premises, was said to have borrowed $90,000 secured by a mortgage thereon, and then to have conveyed the property to Ditmars for consideration unknown.Ditmars then sold the house to a Marquesa Cuevas, and the trustee demanded inquiry as to any possible benefits received by him from such transfer.

(7) The principal losses sustained by the estate as a result of investment in securities of corporations in which Ditmars "was personally interested."

(8) All transactions by Ditmars involving trust property during the period covered by the accounting.

Ditmars objected to the jurisdiction of the Surrogate's Court. The objection was overruled, the order affirmed, 285 App.Div. 1138, 141 N.Y.S.2d 86 (1st Dept.1955), and leave to appeal denied, 286 App.Div. 801, 143 N.Y.S.2d 616 (1st Dept.1955). He thereafter testified before the Surrogate for several weeks. Later in 1955, he was advised to settle both by his own counsel and by counsel for Gray, and agreed in open court to pay $50,000 in settlement.In that year he paid fees of $16,279.17 to his attorneys for representing him in the proceeding before the Surrogate. On May 23, 1956, ...


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