author: Mellott:

text:
    Central Hanover Bank and Trust Company, as Executor of the Estate of Edward L. Norton, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88451.
    Promulgated July 25, 1939.

      Ruth Lewinson, Esq., for the petitioner.

      Harold F. Noneman, Esq., for the respondent.
   OPINION.

Mellott:

The Commissioner determined a deficiency in estate tax in the amount of $1,655.98, all of which is in issue. The sole question is whether or not the sum of $20,000 received by the guardian of decedent’s only child is includable in decedent’s gross estate. The salient facts, all of which were stipulated, may be summarized.

The petitioner, a corporation having its principal place of business in New York City, is the duly qualified and acting executor under the last will and testament of Edward L. Norton, deceased, who died prior to January 28,1985. Pauline H. Norton, as general guardian of Edward L. Norton III, the only child of the decedent, who at the time of decedent’s death was three years of age, received the sum of $20,000 by check dated September 30, 1935, issued by the trustees of the gratuity fund of the New York Stock Exchange. The Commissioner has included said sum in decedent’s gross estate “on the ground that it is insurance taken out by the decedent on his own life and payable to beneficiaries other than the estate within the meaning of section 302 (g) of the Kevenue Act of 1926.”

The constitution of the New York Stock Exchange provides that before one may be admitted to the privileges of membership he shall pay to the trustees of the gratuity fund, consisting of the president and treasurer of the exchange and five others, the sum of $15. By signing the constitution he also “pledges himself to make, upon the death of a member of the Exchange, a voluntary gift to the family of each deceased member in the sum of fifteen dollars, which shall be paid by the member at quarterly periods on the dates on which dues to the exchange are paid.” The faith of the exchange is pledged to pay, within one year after the proof of death of any member, out of the moneys so collected, the sum of $20,000 which, in the language of the constitution, “shall be a voluntary gift from the other members of the Exchange, free from all debts, charges or demands whatever”; that the obligation to make payment shall not be construed as a joint liability of the exchange or its members, “the liability of each member, at law or equity, being limited to the payment of fifteen dollars only on the death of any other member, and the liability of the Exchange being limited to the payment of the sum of twenty thousand dollars, or such part as may bo collected * * *”; that nothing contained in the agreement shall be construed “as constituting any estate in esse ■which can be mortgaged or pledged for the payment of any debts”; and that it shall be construed “as the solemn agreement of every member of the Exchange to make a voluntary gift to the family of each deceased member, and of the Exchange, to the best of its ability, to collect and pay over to such family, the said voluntary gift.”

The constitution designates the beneficiaries to whom payment of said sum shall be made, other beneficiaries may not be selected or designated by a member, and the payment in issue here was made to and for the benefit of the beneficiary described in the constitution. Other sections provide that a member who shall neglect to make “a contribution to the Gratuity Fund for 45 days after the same shall become payable * * *, after due notice, shall be suspended until payment is made”, and if payment is not made within one year after payment is due, the membership of the delinquent may be disposed of by the committee on admissions.

In the year 1934 there were approximately 1,374 members of the exchange, so the amount collected by the treasurer pursuant to bills rendered was in excess of the $20,000 payable by the trustees to the family of any deceased member. Gratuity fund payments made by the members of the exchange pursuant to bills rendered, in excess of the amount payable to the family of a deceased member, were accumulated by the trustees of the gratuity fund in a reserve fund, interest on which was credited pro rata annually to the members of the exchange.

The petition alleges that since the decedent had no interest in the gratuity fund of the exchange, exercised no control over it during his lifetime, and had no power to designate the beneficiary upon his death, the $20,000 payment was a gift from the members of the exchange to the decedent’s next of kin and therefore not includable in his gross estate. (No brief was filed by petitioner.) The respondent contends, as set out above, that the amount is includable in decedent’s gross estate as insurance taken out by the decedent on his own life and payable to beneficiaries other than the estate.

It is apparent from a reading of the constitution of the exchange that a studious effort was made to avoid setting up the gratuity fund in such a way that either the exchange itself or its members could be construed to be engaged in the business of life insurance. Thus the amount to be paid is several times characterized as “a voluntary gift” or “contribution”, the fund is designated as a “gratuity”, the members agree “to contribute to the provision for the families of deceased members”, the exchange agrees “to collect and pay over to such family the said voluntary gift”, and it is provided that the obligation shall never be construed to be a joint liability of the exchange and its members or a liability of the exchange to do more than pay over the amount “after it shall have been collected from the members, and not otherwise.” Other facts and circumstances tending to support the view that the amount in question was not paid “as insurance under policies taken out by the decedent upon his own life” are, that no policy was ever issued, the deceased made no application for insurance there is nothing to indicate that an insurance or investment risk was undertaken by the exchange or its members, the amount of the individual contribution was not determined by reference to tables of experience and mortality customarily used in insurance, no definite sum was agreed to be paid unless collected, the member could not designate the beneficiary, no medical examination or personal history statement was required, and neither the member nor the beneficiary had any property right in the fund until collection, subsequent to the death of the member, was made. Reasoning somewhat along this line, the Supreme Court of California, in Swift v. San Francisco Stock & Exchange Board, 67 Cal. 567; 8 Pac. 94, held that the exchange board was not engaged in the business of insurance even though its constitution required the member to file with its secretary a medical certificate attesting his fitness to be a participant in what was designated by the constitution as the “Life insurance fund.” Cf. Old Colony Trust Co. et al., Executors. 37 B. T. A. 435; affd., 102 Fed. (2d) 380; Donald v. Chicago, B. & Q. Ry., 93 Iowa, 284; 61 N. W. 971; Ballou v. Gile, 50 Wis. 614; 7 N. W. 561; Smith's Administrator v. Hathe, 115 Va. 230; 78 S. E. 584.

But even though the exchange did not issue a policy of insurance it did make a “promise or agreement with its members whereby, upon the decease of a member, * * * money or other benefit, charity, relief or aid is to be paid, provided or rendered * * * derived from voluntary donations or from admission fees, dues or assessments.” The quotation is from section 201 of the New York Insurance Law, which concludes that any corporation, association or society so doing “shall be deemed to be engaged in the business of life insurance upon the co-operative or assessment plan * * If the contract is to be construed and interpreted under the laws of New York, Liverpool & Great Western Steam Co. v. Phenix Insurance Co., 129 U. S. 397; Mutual Life Insurance Co. of New York v. Cohen, 179 U. S. 262; Louise C. Moore, Executrix, 33 B. T. A. 108; cf. Lyeth v. Hoey, 305 U. S. 188, the following cases tend to support the view that the exchange may have been “engaged in the business of life insurance upon the co-operative or assessment plan” within the purview of the New York statute. Commonwealth v. Wetherbee, 105 Mass. 149, 160; Sauerbrunn v. Hartford Life Ins. Co., 220 N. Y. 363; 115 N. E. 1001; Evans v. Supreme Council of Royal Arcanum, 223 N. Y. 497; 120 N. E. 93; Massey v. Mutual Relief Society of Rochester, 102 N. Y. 523; 7 N. E. 619; Alden v. Supreme Tent of the Knights of the Maccabees of the World, 178 N. Y. 535; 71 N. E. 104; Sims v. Commonwealth, 114 Ky. 827; 71 S. W. 929; Cosmopolitan Life Insurance Association v. Koegel, 104 Va. 619; 52 S. E. 166; State v. Willett, 171 Ind. 296; 86 N. E. 68; Robinson v. Brotherhood of Railroad Trainmen, 80 W. Va. 567; 92 S. E. 730, and Sheridan v. Thibodaux Benevolent Association (La.), 134 So. 360.

But the issue before us may be determined without deciding whether the exchange was, or was not, engaged in the business of insurance or whether the amount was received by the beneficiary “as insurance under policies taken out by the decedent upon his own life”; for, while the amount is not includable unless it was received “as insurance”, it does not necessarily follow that it is includable merely because it was so received.

It has been pointed out in many cases that the inclusion in gross estate of the proceeds of contracts or policies of insurance depends primarily upon whether or not the decedent retained a legal interest in the contract or policy giving him a power of disposition; for it is the termination at death of that power and the passing to the designated beneficiary of all rights under the policy, which subjects it to the estate tax. Chase National Bank v. United States, 278 U. S. 327; Bingham v. United States, 296 U. S. 211; D. W. Blacksher et al., Executors, 38 B. T. A. 998 (on appeal, 5th C. C. A.); Thomas C. Boswell et al., Executors, 37 B. T. A. 970 (petition to review dismissed); Keefe v. Broderick, 25 Fed. Supp. 957; Ballard v. Helburn, 9 Fed. Supp. 812; affd., 85 Fed. (2d) 613. An estate tax is an excise tax upon the privilege of transferring property by reason of death and is not a tax on the property itself. Knowlton v. Moore, 178 U. S. 41; Tyler v. United States, 281 U. S. 497. Therefore, “unless there is such transfer from the decedent — unless there was something which passed from the decedent upon death — there has been no transfer; no privilege of transfer has been exercised; and there is nothing which can be subject to an excise tax on such privilege.” Walker v. United States, 83 Fed. (2d) 103, 106. Cf. Old Point National Bank, Executor, 39 B. T. A. 343.

Legal incidents of ownership in a policy of insurance presupposes that the insured or his estate has a right to some of the economic benefits flowing from it such as the power to change the beneficiary, to surrender and cancel the policy, to assign it, to pledge it as security for a loan, to dispose of it and its proceeds for his own benefit during his life, or to subject it, during his life, to the payment of his debts. Chase National Bank v. United States, supra. The decedent had no such powers or rights under the constitution of the exchange. The beneficiaries were designated by it and he had no right to change them. He had no rights under the agreement which could be “mortgaged or pledged for the payment of any debts” and the constitution specifically provided that he had no estate in esse. No matter how long he remained a member, or how many contributions he made to the fund, he never acquired any interest which could be likened to a cash surrender value of a policy of insurance. Cf. McCord v. McCord, 40 App. Div. 275; 57 N. Y. S. 1049; Kemp v. New York Produce Exchange, 34 App. Div. 175; 54 N. Y. S. 678; Holmes v. Seamen, 184 N. Y. 486; 77 N. E. 724.

[Respondent contends that decedent possessed certain legal incidents of ownership at the time of his death in that he had the power, prior to his death, to dispose of his seat on the exchange with all of its attending benefits, including the right of his next of kin to share in the gratuity fund; that a beneficial interest in the fund passed to his son since he was a member of the exchange at his death; and that the termination of the power to dispose of such fund by ceasing to be a member of the exchange operates as an effective transfer and therefore justifies the inclusion of the $20,000 under section 302 (g) of the Bevenue Act of 1926, supra.

We do not agree with this contention. The constitution of the exchange provides that if a member dies leaving a widow and no issue, the whole sum of $20,000 shall be paid to her. If he leaves both a widow and issue, one-half is payable to the widow and one-half to the issue. If he leaves issue but no widow, the whole is payable to tne issue. The present record indicates that the last clause was found to be applicable in connection with the death of the decedent. It is apparent therefore that the rights of any beneficiary in the gratuity fund became vested prior to the time of the decedent’s death and that it was beyond his power, as long as he remained a member of the exchange, to affect the interest of such a beneficiary. His death merely put an end to the possibility that he, prior thereto, might cease to be a member of the exchange and that the vested interest of any beneficiary in the gratuity fund might thus become divested. In our opinion this right to terminate the interest of any beneficiary was not such an interest or incident of ownership as the Supreme Court had reference to in Chase National Bank v. United States, supra. It is our conclusion, therefore, that decedent had no legal interest in the contract or policy which terminated at his death. Bingham v. United States, supra; Industrial Trust Co. v. United States, 296 U. S. 220; Walker v. United States, supra; Guaranty Trust Co. of New York et ad., Executors, 33 B. T. A. 1225; Pennsylvania Co. for Insurances on Lives & Granting Annuities v. Commissioner, 79 Fed. (2d) 295.

The respondent erred in including the sum in issue in decedent’s gross estate.

Eeviewed by the Board.

Judgment will he entered for the petitioner.

KeRn concurs only in the result.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—

      (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.


source: Caselaw Access Project

author: MtjRdock:

license: Public Domain

text:
    Floyd W. Jefferson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93586.
    Promulgated July 25, 1939.
   OPINION.

MtjRdock:

The Commissioner determined a deficiency in income tax of $1,773.09 for the year 1935. The only issue for decision is whether the petitioner is entitled to deduct, as an ordinary and necessary expense, a part of $7,769.54 paid as premiums on insurance upon his own life. The facts are found as stipulated by the parties.

The petitioner, an individual, was a member of the partnership of Iselin-Jefferson Co., during 1935 and for several years prior thereto. The other partner, William Iselin & Co., likewise a partnership, furnished most of the capital, while the petitioner furnished valuable personal service and contacts with textile mills. The partnership acted as selling agent for textile mills, including the Fitzgerald Cotton Mills and Cochran Cotton Mills. These two mills were heavily indebted in 1931 to William Iselin & Co. and to a bank. The mills needed additional funds to operate. The “petitioner’s relationship as a partner in Iselin-Jefferson Company had also become involved” so that the other partner was considering a dissolution. The petitioner had to furnish some additional guarantee in order to retain the accounts of the two mills and thus continue the partnership, which was his only source of livelihood. He, therefore, guaranteed the debts of the two mills to his partner and the bank, assigned a life insurance policy on his life for $78,000 to the bank, and named his partner as beneficiary in policies on his life for $100,000. He agreed to pay the premiums on the policies. No change was made in the policies thereafter through 1935. The petitioner paid the premiums on those policies and also on another policy during 1935. The petitioner does not contend that the premium upon the latter policy is deductible. The total premiums paid on all policies in 1935 was $7,769.54, of which $314.40, apparently, is not now claimed as a deduction. The assets of the petitioner in 1935 were worth about $161,-388.36, excluding the policies for $178,000, above mentioned, and his interest in the partnership. The debts of the two mills which he had guaranteed amounted to $544,938.88 in 1935. He also owed $159,000 to his partnership and about $20,000 to others in 1985. The financial condition of the two mills is not disclosed in this record. The petitioner deducted $7,769.54 on his return for 1985 as an ordinary and necessary expense of his business and the Commissioner disallowed the deduction in determining the deficiency. Other adjustments are not contested.

Section 24 (a) of the Revenue Act of 1934 provides that no deduction shall be allowed for “premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.” The petitioner cites some departmental rulings which, if they were not distinguishable, would only show inconsistency upon the part of the Commissioner and would not be authority for requiring the Commissioner to allow the deduction claimed here. Furthermore, the cases ruled upon are distinguishable. Two of them involved premiums upon surety bonds given to indemnify an employer in case of loss suffered as a result of the employment. In none of the cases could the proceeds of the bonds or insurance benefit the taxpayer by satisfying his debts or otherwise. The cases of Omaha Elevator Co., 6 B. T. A. 817, and L. Hyman & Co., 21 B. T. A. 159, mentioned in the petitioner’s brief, do not help him.

The petitioner attempts to show some analogy between his case, where he was trying to protect his source of livelihood, and cases where an employer pays premiums upon life insurance for employees. Cf. Berizzi Brothers Co., 16 B. T. A. 1307; art. 24-3, Regulations 84. The analogy is not apparent to the Board.

The respondent contends that the deduction is expressly denied by section 24 (a) (4). He argues that the petitioner would be benefited directly or indirectly within the meaning of the act if the proceeds of the policies were used to discharge the indebtedness of the petitioner. Edwin M. Klein, 31 B. T. A. 910; affd., 84 Fed. (2d) 310; Rieck v. Heiner, 25 Fed. (2d) 453; certiorari denied, 277 TJ. S. 608. See also Benjamin Barron, 14 B. T. A. 1022. Cf. Joseph Nussbaum, 19 B. T. A. 868. The policies in the Klein, Rieele, and Barron cases were used as collateral by a primary debtor, while here the petitioner used them to support his guarantee. This difference may or may not be important. A better case for the respondent is that of J. H. Parker, 13 B. T. A. 115. The record does not indicate that the two mills would never be able to discharge their own debts and thus relieve the petitioner from his guarantee. If he were thus relieved, could he contend that these premiums were paid upon policies under which he would not benefit? This record does not show that he would not benefit directly or indirectly from these policies. Since be has failed to show that section 24 (a) (4) is inapplicable, consideration of whether the payments were ordinary and necessary expenses of any business of the petitioner becomes unnecessary. Cf. Joseph Nussbaum, supra.

Decision will be entered for the respondent.


author: Akttndell :

text:
    Estate of Joseph B. Dabney, Deceased, M. H. Philleo, Former Administrator thereof, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96877.
    Promulgated July 25, 1939.

      Llewellyn A. Luce, Esq., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Akttndell :

The respondent has moved to dismiss this proceeding for lack of jurisdiction. The specific ground for the motion is that there is no showing that the individual who verified the petition has at this time any authority to act on behalf of the estate of Joseph B. Dabney. The petitioner resists the motion to dismiss.

The notice of deficiency, dated November 8, 1938, is addressed:

Estate of Joseph B. Dabney, Deceased,
Mr. M. H. Philleo, Administrator,
620 West Olympic Boulevard,
Los Angeles, California.

In the petition filed on January 23, 1939, the petitioner is named in the caption as “Estate of Joseph B. Dabney, Deceased, M. H. Philleo, former Administrator thereof.” Among the facts alleged in the petition are the following:

(b) On October 25, 1932, Louise E. Dabney, M. H. Philleo and A. S. Johnston, were duly appointed administrators of the Estate of Joseph B. Dabney, Deceased, by the Superior Court of the State of California, in and for the County of Los Angeles. On or about July 15,1936, Louise E. Dabney and A. S. Johnston were duly discharged as administrators of said Estate. Thereafter petitioner, M. H. Philleo, continued as solé administrator of said Estate until the distribution thereof. M. H. Philleo was duly discharged as administrator of said estate by order of the court on October 16, 1937.

The petition is verified as follows:

M. H. Philleo, of the Oity of Los Angeles, State of California, being first duly sworn, deposes and says: that he was one of the duly appointed, qualified and acting administrators of the Estate of Joseph B. Dabney, Deceased, and is the petitioner in the foregoing petition; that he is familiar with the facts stated therein and that the facts so stated are true and correct, except such facts as are stated upon information and belief and those facts he believes to be true.

In the case of Hulburd v. Commissioner, 296 U. S. 300, the Commissioner sent a notice of transferee liability to the estate of the decedent in care of an individual who had been one of the executors. The former executors filed a petition with the Board disclaiming liability on the grounds that the estate had been wholly distributed and settled and that they had been duly discharged as executors. The Supreme Court examined the decisions and statutes of a number of jurisdictions with reference to the liability of executors after discharge. It concluded that under the law of Illinois, in the absence of a showing that the executor has failed to inventory or report assets, “the discharge when decreed upon a finding of full administration will relieve the executor for the future of responsibility and power.” The opinion reads in part:

* * * jn thought of many judges, an executor discharged after a full and fair accounting is no longer to be vexed by the annoyance and expense of defending fruitless suits with assets no longer available for reimbursement or indemnity. If suitors or taxgatherers wish to go against the estate or against those who have shared in it, they must either vacate the decree upon a showing of assets unaccounted for, or procure upon a showing of necessity the appointment of an administrator, or pass over the estate and its representatives and pursue the legatees to the extent of benefits received. There was no attempt to tread those paths, though the last at all events was open.
The controversy in this aspect is one of local law, which, once it is ascertained, must be accepted as controlling.

Earlier in the opinion, the Court referred to the diversity of doctrine as to the continuing liability of executors. Some states, it is said, including New York, although they make provision for an accounting, make none for a discharge and hold the executor suable after the estate has been distributed on the chance that other property may be discovered later on. This view of the New York law' was followed by the Circuit Court of Appeals for the Second Circuit in Olsen v. Helvering, 88 Fed. (2d) 650, where a notice of deficiency was addressed to a deceased taxpayer, and received by his administrator after his discharge as administrator. In the Hulburd case the Supreme Court said further:

♦ * * On the other hand, there are states where by express provision of the statutes the executor is to be discharged upon a showing of full administration, and others where the requirement of a discharge has been read into the statutes by a process of construction.

Among the citations following this quotation are Willis v. Farley, 24 Cal. 490, 502; In re Clary's Estate, 112 Cal. 292, 294; 44 Pac. 569; Probate Code (Calif.), 1933, § 1066.

Section 1066 of the California Probate Code provides that upon complete administration of an estate and performance of all acts required by the executor or administrator, “the court must make a decree discharging him from all liability to be incurred thereafter.” Upon the entry of such a decree the executor becomes fwnctus officio. State v. District Court (Mont.), 245 Pac. 529, citing 12 Cal. Jur. 232; Estate of Burton, 93 Cal. 459; 29 Pac. 36.

Upon the above authorities we are of the opinion that when M. H. Philleo was discharged by order of the Superior Court, as he alleges, he lost all power to act for the estate against which the respondent is proceeding as the taxpayer. Consequently, the petition filed is not the petition of a taxpayer and does not serve to initiate a proceeding within our jurisdiction.

There are cases, some of which are cited by the petitioner, in which we have expressly taken jurisdiction of proceedings instituted by executors after discharge. In Jessie Smith, Executrix, 24 B. T. A. 807, we held that we had jurisdiction under section 281 (b) of the Revenue Act of 1926, which provides that, upon notice to the Commissioner of a fiduciary relationship, the powers and liabilities of such fiduciary shall continue until notice of termination of the fiduciary capacity. In Charles Hallock Whitehead, Executor, 24 B. T. A. 1111, we took jurisdiction of a proceeding initiated by a discharged executor who was also the residuary legatee and the distributee of the bulk of the estate. We thought that, despite his discharge, he met the definition of “executor” given in section 400 of the Revenue Act of 1921 as one “in actual or constructive possession of any property of the decedent.” In Waldemar B. Helmholz, Executor, 28 B. T. A. 165, the petition was filed by a discharged administrator who was also the sole devisee and legatee of the decedent. KTo jurisdictional question was raised by either party; the question was raised by the Board. We accepted jurisdiction largely on the ground of the failure of the administrator to give notice of termination of his fiduciary capacity. The Whitehead and Eelmholz cases involved estate tax liability. The estate tax statutes provide for notice of deficiency to the “executor.” The definition of the executor includes a provision that “if there is no executor or administrator appointed, qualified, or acting within the United States, then any person in actual or constructive possession of any property of the decedent”; Sec. 300 (a), Revenue Act of 1926. No corresponding provisions are contained in the income tax sections. In Ruth Mintz Sack, 86 B. T. A. 595, an income tax case, a notice of deficiency was mailed to Louis Mintz, and a petition was filed by Ruth Mintz Sack, who was not the executrix (no executor or administrator had been appointed), but she held a power of attorney from all the children and heirs at law of Louis Mintz. We granted the respondent’s motion to dismiss, saying:

Where the Board’s jurisdiction has been challenged as to the proper parties, the general rule is that the party petitioner must he the taxpayer to whom the deficiency notice was directed. William A. Matern, 21 B. T. A. 384, and cases there cited. An exception exists, and jurisdiction has been taken, where the deficiency notice was mailed to a deceased taxpayer and the appeal was brought by the executors of his estate. Edwin W. Eisendrath et al., Executors, 28 B. T. A. 744. An exception has also been recognized where the person filing the petition has actual authority to represent the taxpayer and no one has been misled as to the liability asserted. Corinne Porter Scruggs, Administratrix, 29 B. T. A. 1102, and cases cited. But here the petitioner had no actual authority. No deficiency has been asserted against her or the individuals she allegedly represents. The Board has no jurisdiction, therefore, to determine a deficiency against her as an individual, as a fiduciary, or in any other capacity.

Petitioner relies largely on the case of Marie Minor Sanborn, 39 B. T. A. 721, in which a transferee questioned our jurisdiction in the case of her transferor, decided prior to the initiation of the transferee proceeding. The facts in the transferor case were similar to those in this proceeding and we said, admitting it was diotum, that there is a possibility that in such cases “the executor has an election whether to accept the jurisdiction of the Board and litigate the substantive question of estate liability, or to challenge the authority of the Commissioner to proceed further.” That holding was premised on the lack of any issue concerning jurisdiction in the proceeding brought by the discharged executor. Whether it is sound need not be decided here, inasmuch as we have the question of jurisdiction squarely raised. Under the decision of the Hulburd case, we must decide the jurisdictional question raised by the pleadings. As the Hulburd case expressly holds that the question of liabilities and powers of a discharged fiduciary “is one of local law, which, once it is ascertained, must be accepted as controlling”, and as local law has stripped this petitioner of all power to act for the taxpayer, we must hold that he is without authority to file a petition on behalf of the taxpayer. Consequently, there is no proper petition before us and the respondent’s motion to dismiss will be granted.

Reviewed by the Board.

Order will be entered dismissing the proceeding.


author: Black:

text:
    S. W. O’Brien, Former Executor of Estate of Samuel Roy Hawthorne, Deceased, and the Liquidator of the Community Property of the Conjugal Partnership of the Late Samuel Roy Hawthorne and His Deceased Wife, Ethel M. Hawthorne; Fred W. Hawthorne, Orrin B. Hawthorne and Myrtle Hawthorne Hughes, Duly Represented by Fred W. Hawthorne, Their Attorney-in-Fact, as the Heirs of the Said Samuel Roy Hawthorne, Deceased, under His Last Will and Testament, and Claus J. Lambrecht and Anna P. Lambrecht, as the Heirs-at-Law of the Said Ethel M. Hawthorne, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97365.
    Promulgated July 27, 1939.

      Olarh J. MUliron,, Esq., for the petitioners.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Black:

This proceeding is before us on the respondent’s motion to dismiss for lack of jurisdiction. For the purposes of this motion, the facts as alleged in the petition are taken as true, and only those facts which are necessary to a proper disposition of the motion will be noted here.

Samuel Roy Hawthorne, hereinafter sometimes referred to as the decedent, died November 16,1936, a citizen of the United States and a resident of the city of Manila, Philippine Islands. At the time of his death he had no property situated in the United States.

On August 2, 1922, the decedent and Ethel M. Lambrecht were married in Richmond, California. They lived together as husband and wife until May 11, 1931, when Ethel died in the city of Manila, leaving as her only heirs at law her father and mother, Claus J. Lam-brecht and Anna P. Lambrecht, and her husband to the extent of his usufructuary right in one-third of her intestate estate, under the provisions of the Civil Code in force in the Philippines.

During their marriage the decedent and his wife acquired by their own efforts community property of the value of about 132,500 pesos, and upon the death of Ethel all of this property passed into the hands of her husband and was administered and profitably used, invested, and reinvested by him up to the time of his death on November 16,1936, together with the income therefrom, without any liquidation and settlement thereof being made by him with the other heirs of his wife.

In his will the decedent gave, devised, and bequeathed to each of the parents of his deceased wife one-fifth of the property held by him at the time of his death, in lieu of their interest as heirs at law in the intestate estate of his wife, but the parents would not accept such testamentary disposition, and elected to have and receive their rightful share under the Philippine law.

Upon the death of the decedent, the Court of First Instance of Manila duly appointed S. W. O’Brien the executor of the decedent’s estate under his last will and testament, and as such he took over, liquidated, and distributed the community property of the conjugal partnership of the decedent and his wife, with the consent and agreement of all the parties interested therein and with the express approval of the court.

On or about December 17,1937, S. W. O’Brien filed under protest a Federal estate tax return showing a Federal estate tax due in the amount of $2,315.54, which was paid under protest. At the same time he caused the heirs of the decedent’s estate, namely, Fred W. Hawthorne, Orrin B. Hawthorne, and Myrtle H. Hughes to file a claim for refund of the entire tax paid in the amount of $2,315.54, which claim was rejected by the Commissioner in a separate letter addressed to “S. W. O’Brien, Executor,” dated December 6,1938.

On November 22,1937, S. W. O’Brien was discharged by the Court of First Instance of Manila, and the estate was declared closed and filed as of that date. O’Brien did not notify the Commissioner of this discharge.

On December 6,1938, the Commissioner mailed a deficiency notice to “S. W. O’Brien, Executor Estate of Samuel Boy Hawthorne, P. O. Box 703, Manila, Philippine Islands,” advising him of a deficiency in Federal estate tax of the estate of Samuel Boy Hawthorne in the amount of $20,998.35. On March 6, 1939, a petition, captioned the same as the caption of this opinion, was filed contesting the entire deficiency and asking for a refluid of $2,315.54, the amount already paid.

Paragraph I of the petition alleges jurisdictional facts as follows:

That the petitioner, S. W. O’Bbihn, was formerly and up to the time of the closing of said estate by the Probate Division of the Court of First Instance of Manila the duly appointed, qualified and acting executor of the estate of Samuel Roy Hawthorne, deceased, and the liquidator under the laws of the Philippines of the community property of the conjugal partnership of the late Samuel Roy Hawthorne and his deceased wife, Ethel M. Hawthorne, and is a resident of the City of Manila, Philippines; that the petitioners, Ered W. Hawthorne, who resides in the City of Manila, Philippines, Oerin B. Hawthorne and Myrtle Hawthorne Hughes, who reside in the City of Saint Louis, in the State of Missouri, are the heirs of the said Samuel Boy Hawthorne, deceased, under his last will and testament, and the said Orrin B. Hawthorne and Myrtle Hawthorne Hughes are duly represented by the petitioner, Ered W. Hawthorne, their attorney-in-fact; and that the petitioners, Claus J. Lambrecjht and Anna P. Lambreoht, are the heirs-at-law of the said Ethel M. Hawthorne, the deceased wife of the said Samuel Roy Hawthorne, and reside in Richmond, State of California;

TRe respondent lias filed a motion to dismiss for lack of jurisdiction “for the reason that the petition has not been filed by the taxpayer to whom the notice of deficiency was mailed * *

Section 808 (a) of the Revenue Act of 1926, as amended by section 501 of the Revenue Act of 1984, provides in part as follows:

Sec. 308. (a) If the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the Commissioner is authorized to send notice of such deficiency to the executor by registered mail. Within 90 days after such notice is mailed (not counting Sunday or a legal holiday in the District of Columbia as the ninetieth day), the executor may file a petition with the Board of Tax Appeals for a redetermination of the deficiency. [Italics supplied.]

In Title III of the 1926 Act, Congress defines the term “executor” as follows:

Sec. 300. When used in this title—
(a) The term “executor” means the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent;

The same title of the same act also provides:

Sec. 315. (a) Unless the tax is sooner paid in full, it shall be a lien for ten years upon the gross estate of decedent * * *.

S. W. O’Brien was the duly appointed and qualified executor of the estate of Samuel Roy Hawthorne, but he is no longer acting in that capacity. He was discharged by the Court of First Instance of Manila on November 22, 1937. No allegation is made in the petition that, under the law of the jurisdiction where he was formerly acting, he any longer has the authority to act for the estate. Cf. Olsen v. Helvering, 88 Fed. (2d) 650; Hulburd v. Commissioner, 296 U. S. 300.

The persons now in actual or constructive possesion of decedent’s property are the heirs of the decedent, to wit, Fred W. Hawthorne, Orrin B. Hawthorne, and Myrtle Hawthorne Hughes. These are the persons who now come within the term “executor” as defined in section 300 (a), supra, and referred to in section 308 (a), supra, and are the proper persons to file the petition. Charles Hallock Whitehead, Executor, 24 B. T. A. 1111; affirmed on the merits, 64 Fed. (2d) 118; certiorari denied, 290 U. S. 690; Waldemar B. Helmholz, Executor, 28 B. T. A. 165; affirmed on the merits, 75 Fed. (2d) 245; 296 U. S. 93.

The fact that the respondent did not address the deficiency notice to these parties is not controlling, since the deficiency was determined against Samuel Eoy Hawthorne, deceased, and the proper parties, representatives of the estate, have received the notice and have invoked the jurisdiction of this Board. Haag v. Commissioner, 59 Fed. (2d) 516. The case of Ruth Mintz Sack, 36 B. T. A. 595, relied upon by the respondent involved income taxes for the year 1934 rather than estate taxes and was not controlled by the sections of the statute which are controlling here. Since the respondent’s notice was issued under section 308 (a), supra, rather than section 311 (a) (2) of the Eevenue Act of 1938, and was not intended as any notice of the liability of a fiduciary under section 3467 of the Eevised Statutes as amended by section 518 (a) of the Eevenue Act of 1934, we are not called upon nor do we have jurisdiction to determine O’Brien’s possible personal liability as a fiduciary under section 3467. Cf. Newton H. Neustadter et al., Executors, 15 B. T. A. 839; Lillia L. Morris, 36 B. T. A. 516.

We hold, therefore, that the Board does not have jurisdiction in so far as the petition pertains to S. W. O’Brien, because he is no longer acting in a fiduciary capacity for the estate and was not a beneficiary of decedent’s will.

Petitioners Claus J. Lambrecht and Anna P. Lambrecht were made beneficiaries of decedent’s will to the extent of one-fifth each of the property bequeathed and devised by the will, but they renounced the will and elected to take as the heirs of their deceased daughter, Ethel M. Hawthorne. No deficiency in estate tax has been determined against the estate of Ethel M. Hawthorne and we hold that, under the facts alleged in the petition, petitioners Claus J. Lambrecht and Anna P. Lambrecht are not “executors” of the estate of Samuel Eoy Hawthorne, deceased, as defined by section 300 (a) of thp Eevenue Act of 1926, as amended, and are not proper parties to contest an estate tax deficiency determined against the estate of Samuel Eoy Hawthorne. The petition and caption should be amended so as to conform to this opinion.

Eeviewed by the Board.

An order will be entered dismissing the proceeding for lack of jurisdiction as to S. W. HBrien, former executor of estate of Samuel Roy Hawthorne, and as to Claus J. Lambrecht and Arma P. Lambrecht, heirs at lana of Ethel M. Hawthorne; and denying respondent motion to dismiss as to Fred W. Hawthorne, Orrin B. Hawthorne and Myrtle Hawthorne Hughes.


author: Smith:

text:
    Crawford Music Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85389, 88290.
    Promulgated July 27, 1939.

      Harry J. Stein, Esq., for the petitioner.

      Benjamin M. Brodsky, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income and excess profits taxes as follows:

The income tax deficiency determined for the fiscal year ended August 31, 1933, is shown by the deficiency notice as $400.99 and penalty for delinquency $100.25. This amount is eight-twelfths of the true deficiency and penalty as shown in another part of the deficiency notice. An error in the determination of the deficiency and delinquency penalty is apparent on the face' of the notice. At the hearing counsel for the respondent moved to correct the deficiency notice, which motion was granted, to show a deficiency in income tax of $601.48 and a delinquency penalty of $150.37.

As stated by the petitioner in its brief, tbe questions in issue in Docket No. 85389 are (1) whether the respondent erred in disallowing the deduction of $5,194.90 for advance royalties written off for the period September 1, to December 31, 1933, and (2) whether the petitioner is entitled to credit against taxes due the United States the amounts of $3,199.87 and $926.80 paid to the Government of Great Britain for the year ended August 31,1933, and the period September 1 to December 31, 1933, respectively. In Docket No. 88290 the question is “Whether the petitioner is entitled to the sum of $2,611.10 as credits against tax, for taxes paid to the Governments of Great Britain and the Dominion of Canada, for the year ended December 31st, 1934.”

DeSylva, Brown & Henderson, Inc., is a New York corporation, incorporated in September 1926. The Crawford Music Corporation is a New York corporation, which was incorporated in November 1928.

On September 3,1934, DeSylva, Brown & Henderson, Inc., lawfully owned all of the capital stock of the Crawford Music Corporation. The two corporations were merged pursuant to section 85 of the Stock Corporation Law of the State of New York on or about September 3,1934, under the name of CrawTford Music Corporation, the petitioner herein. The petitioner took over all of the assets and assumed all of the liabilities of DeSylva, Brown & Henderson, Inc.

Both corporations from the dates of incorporation have been engaged in the business of publishing sheet music.

In July 1931 the petitioner entered into a contract with Chappell & Co., Ltd., of London, England, which is stated in a letter addressed to that concern by DeSylva, Brown & Henderson, Inc., and reads in part as follows:

This is to confirm our understanding in reference to our catalog.
We hereby give to you the sole and exclusive publication, mechanical, radio and public performing rights, except as hereinafter reserved, for the British Empire excepting Ganada and Australasia, and for the Continent of Europe, of all popular numbers the rights of which for said territory shall be owned by us, and the sole and exclusive publication, mechanical, radio and small performing rights, except as hereinafter reserved, for the British Empire excepting Canada, and for the Continent of Europe, of all the operatic numbers the rights of which for said territory shall be owned by us, published by us during the period of three (3) years commencing on the 20th day of June, 1931, and ending on the 19th day of June, 1934.
You agree to pay us the following royalties:
You agree to furnish us with semi-annual statements for the periods ending June 30th and December 31st in each year, statements and accompanying checks in New York Exchange (less deduction for British Income Tax on royalties earned in the British Isles, and Australasian Income Tax on royalties earned in Australasia) to be delivered to us within forty-five days after such dates.
You are to pay us upon the execution and delivery of this agreement the sum of Twenty-five thousand (§25,000) dollars as an advance of royalty, against which you may apply all royalties earned by us pursuant hereto on numbers placed with you hereunder, and in addition all royalties earned on numbers of our catalog published by you or Victoria Music Publishing Company, Ltd. prior to June 20, 1931, on copies sold and on mechanicals, performing and broadcasting fees received subsequent to June 20, 1931, during the life of the respective copyrights and renewals thereof. * * *

The letter containing the contract was agreed to and accepted by Chap-pell & Co., Ltd., and the $25,000 advance royalty paid.

The petitioner also had an oral contract with Gordon V. Thompson, Ltd., of Toronto, Ontario, Canada, for the publication and distribution of songs in Canada, the copyright of which was owned by the petitioner.

Pursuant to the contract with Chappell & Co., Ltd., the petitioner received periodic statements from Chappell & Co., Ltd., showing the gross royalties for which the London distributor was liable, pursuant to the contract. These semiannual statements were made to the petitioner several months after the close of each six-month period. They show the gross royalties to be accounted for in pounds, shillings, and pence, and the amount of the United Kingdom income tax deducted therefrom. The statements are captioned: “Certificate of Deduction of Income Tax from Royalties, etc., in Respect of Copyright. Finance Act, 1927, Section 25.” They show the United Kingdom income tax deducted “in accordance with the requirements of the Finance Act, 1927, Section 25, and I further certify that this tax has been or will be paid by me to the proper officer for the receipt of taxes.” The taxes shown to be due at the rates of exchange prevailing at the times when the statements were made are as follows:

United Kingdom Tax
Six-month period ended June 30, 1932-$2, 219. 24
Do. Dec. 31, 1932_ 980.63
Do. June 30, 1933_ 926.80
Do. Dee. 31, 1933_ 611.90
Do. June 30, 1934_ 1,687.98

Under its oral contract with Gordon Y. Thompson, Ltd., Toronto, Canada, the petitioner received a statement showing gross royalties earned for the six-month period ended December 31, 1933, of $1,605.54 less a tax paid to the Dominion of Canada with respect to the royalties of $200.69, and for the three-month period ended March 31, 1934, of $889.06, less a tax paid in respect of the royalties to the Dominion of Canada of $111.13.

Petitioner kept its books of account upon the accrual basis. Inasmuch as its books of account for each reporting period had been closed and income tax returns to the collector of internal revenue were due or made prior to the date of the receipt of statements from Chap-pell & Co., Ltd., and from Gordon V. Thompson, Ltd., the petitioner reported the accrual of royalties from these two distributors as falling within the taxable period for which the books were open at the time. Thus the statement from Chappell & Co., Ltd., for the six-month period ended June 30, 1932, was not received until after its books of account bad been closed for the fiscal year ended August 31, 1932. The gross royalties reported for such six-month period were therefore taken up as income by the petitioner for its subsequent taxable period or the fiscal year ended August 31, 1933. The respondent has accepted the books of account as correctly representing the time of accrual.

In its books of account the petitioner has recorded as gross income the gross royalties reported by Chappell & Co., Ltd., and has credited such gross royalties less United Kingdom income tax against the $25,000 advance royalties.

In the determination of the deficiency the respondent has not given the petitioner credit for any portion of the United Kingdom income 1 ax paid to the Crown by Chappell & Co., Ltd., or any portion of the tax paid to the Receiver General of Canada by Gordon Y. Thompson, Ltd., but has allowed the deduction of those taxes in his determination of the net income.

The question for consideration is whether the petitioner is entitled to a credit against income and profits taxes due the United States for the fiscal periods under review of the United Kingdom income taxes paid by Chappell & Co., Ltd., in respect of gross royalties earned upon its contract with that company. The respondent has denied the claim for credit and in lieu thereof has permitted the petitioner to deduct from gross income United Kingdom income taxes paid by its distributors.

United Kingdom income tax is assessable under schedule D of the English income tax acts, providing in material part as follows:

1. Tax tinder this Schedule shall be charged in respect of—
(a) The annual profits or gains arising or accruing—
(i) to any person residing in the United Kingdom from any hind of property whatever, whether situate in the United Kingdom or elsewhere; and
(ii) to any person residing in the United Kingdom from any trade, profession, employment, or vocation, whether the same be respectively carried on in the United Kingdom or elsewhere; and
(iii) to any person, whether a British subject or not, although not resident in the United Kingdom, from any property whatever, in the United Kingdom, or from any trade, profession, employment, or vocation exercised within the United Kingdom; and
(b) All interest of money, annuities, and other annual profits or gains not charged under Schedule A, B, 0, or E, and not specially exempted from tax; * * *.
2. Tax under this Schedule shall be charged under the following cases respectively ; that is to say,—
Case III. — Tax in respect of profits of an uncertain value and of other income described in the rules applicable to this Case;
Case VI. — Tax in respect of any annual profits or gains not falling under any of the foregoing Cases, and not charged by virtue of any other Schedule; and subject to and in accordance with the rules applicable to the said Cases respectively.

Other material statutes involved are as follows:

Section 18, Finance Act, 1880
18.— (1) Whore any payment to which section twenty-five of the Finance Act, 1927, applied (which section provides for the taxation of copyright royalties by deduction in cases where the usual place of abode of the owner of the copyright is not within the United Kingdom) is made through am, agent resident in the United Kingdom, and that agent is entitled as against the owner of the copyright to deduct any sum by way of commission in respect of services rendered, the amount of the payment shall for the purpose of Rule 21 of the general rules be taken to be the amount thereof as diminished by the sum which the agent is so entitled to deduct;
Provided that, where the person by or through whom any such payment is made does not know that any such commission is payable or does not know the amount thereof, any tax deducted by or assessed and charged on him shall be computed in the first instance on, and the account to be delivered of the payment shall be an account of, the total amount of the payment without regard being had to any diminution thereof, and in that case, on proof of the facts to the satisfaction of the special commissioners, there shall be made to the agent on behalf of the owner of the copyright such payment of tax as is proper in respect of the sum deducted by way of commission.
(2) Subsection (1) of this section shall apply to payments made after the fifth day of April, nineteen hundred and thirty, and any tax deducted in relation to any such payment made before the passing of this Act in excess of the tax which it would have been proper to deduct if this section had been in force shall be made good, and, on proof of the facts to the satisfaction of the special commissioners, any corresponding excess of tax which has been paid shall be repaid.
(3) The time of the making of a payment to which section twenty-five of the Finance Act, 1927, applies shall, for all the purposes of the Income Tax Acts, be taken to be the time when it is made by the person by whom it is first made and not the time when it is made by or through any other person. [Italics supplied.]
25. — (1) Where the usual place of abode of the owner of a copyright is not icithin the United Kingdom, Rule 21 of the General Rules shall apply to any payment of or on account of any royalties or sums paid periodically for or in respect of that copyright as it applies to annual payments not payable out of profits or gains brought into charge.
(2) In this section the expression “copyright” does not include a copyright in any dramatic work being a cinematograph production, or in any artistic work being a photograph intended to be used for the purpose of the exhibition of pictures or other optical effects by means of a cinematograph or other similar apparatus.
(3) This section shall apply to all payments of or on account of any royalties or sums made on or after the first day of July, nineteen hundred and twenty-seven, for or in respect of any such copyright as aforesaid, and to any payments made between the eleventh day of April, nineteen hundred and twenty-seven, and the said first day of July on account of any such royalties or sums payable in respect of any matter arising on or after the said first day of July.
(4) In this section, the expression “owner of a copyright” includes a person, who, notwithstanding that he has assigned a copyright to some other person, is entitled to receive periodical payments in respect of that copyright, and the reference to royalties or sums paid periodically for or in respect of a copyright shall not include royalties or sums paid in respect of copies of works which are shown to the satisfaction of the Special Commissioners to have been exported from the United Kingdom for distribution outside of the United Kingdom.
(5) Rule 23 of the General Rules shall be extended so as to apply to all payments to which this section applies. [Italics supplied.]

Rule 21 of Income Tax Act, 1918, so far as material, provides as follows :

21.— (1) TJpon payment of any interest of money, annuity, or other annual payment charged, with tax under Schedule D, or of any royalty or other sum paid in respect of the user of a patent, not payable, or not wholly payable, out of profits or gams brought into charge, the person by or through whom any such payment is made shall deduct thereout a sum representing the amount of the tax thereon at the rate of tax in force at the time of payment.
(2) Where any such payment as aforesaid is made by or through any person, that person shall forthwith deliver to the Commissioners of Inland Revenue, for the use of the Special Commissioners, an account of the payment, or of so much thereof as is not made out of profits or gains brought into charge, and of the tax deducted out of the payment or out of that part thereof, and the Special Commissioners shall assess and charge the payment of which an account is so delivered on that person. [Italics supplied.]

Section 131 of the Revenue Acts of 1932 and 1934 provides in material part as follows:

(a) Allowance of Cbedit. — If the taxpayer signifies in his return his desire to have the benefits of this section, the tax imposed by this title shall be credited with:
(1) Citizen and Domestic Corporation. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; * * *.

It is the respondent’s contention herein that, since the petitioner did not pay United Kingdom income taxes upon the gross royalties payable to it by Chappell & Co., Ltd., it is not entitled to a credit against the income and profits taxes due the United States of the amounts paid to the British Crown representing United Kingdom income taxes. In support of his position he cites Mary Duke Biddle, 33 B. T. A. 121; affd. (C. C. A., 2d Cir.), 86 Fed. (2d) 118; affd., 302 U. S. 573. The question presented in the Biddle case was whether the taxpayer was entitled to a credit against her income taxes due the United States of the amount of the United Kingdom income tax paid to the Crown by the British corporations from which she received dividends. It was the holding of the Board in that case that a resident of the United States receiving dividends from a corporation chartered under the laws of the United Kingdom of Great Britain and Ireland is not entitled under section 131 of the Revenue Act of 1928 to a credit of the amount of United Kingdom income taxes “appropriate” to the dividends received, nor is such taxpayer required to include in gross income as a part of the dividends received from foreign corporations the amount of United Kingdom income tax “appropriate” to the dividends. The Supreme Court in its opinion stated:

The tax “appropriate” to the dividend is computed by applying the standard rate for the year of distribution, to the value of the money or other property distributed. The amount so computed will equal the tax paid at the standard rate by the corporation on its profits if, but only if, the tax rate is the same in the year when the profits are earned as in the year when they are distributed.

The Court further stated:

Hence the Board’s finding, supported as 'it is by much expert testimony, that “the stockholder receiving the dividend is regarded in the English income tax acts as having paid ‘by deduction or otherwise’ the tax ‘appropriate’ to the dividend,” is not conclusive. At most it is hut a factor to be considered in deciding whether the stockholder pays the tax within the meaning of our own statute. That must ultimately be determined by ascertaining from an examination of the manner in which the British tax is laid and collected what the stockholder has done in conformity to British law and whether it is the substantial equivalent of payment of the tax as those terms ewe used m our own statute. [Italics supplied.]

There can be no question but that in the instant proceedings the petitioner was entitled to the gross royalties computed under the contract with Chappell & Co., Ltd., reduced by the amount of United Kingdom income tax. That tax had to be paid by Chappell & Co., Ltd. It was not assessed and was not assessable under the British income tax acts against the petitioner.

It seems plain, however, from a reading of the British income tax acts, quoted in material part above, that the person who pays United Kingdom income tax upon the royalties of petitioner pays those as the taxes of the petitioner. The tax paid upon the royalties is subject to no deduction whatever by Chappell & Co., Ltd.

In these circumstances we are of the opinion that the petitioner is entitled to a credit against the taxes due the United States of the amounts of United Kingdom income tax paid upon the royalties by Chappell & Co., Ltd.

The income tax imposed by Canada upon royalties due from Gordon Y. Thompson, Ltd., is imposed directly upon the petitioner. See section 27 of the Income War Tax Act of Canada. The tax is, however, collected from the Canadian corporation as a withholding agent. On brief the respondent does not argue that petitioner is not entitled to the credit claimed in respect of Canadian income taxes paid.

As will be noted from our findings of fact the petitioner keeps its books of account upon the accrual basis, but, due to the fact that the statements from Chappell & Co., Ltd., were not received in some cases until after the petitioner’s books of account for the fiscal year had been closed, they were returned as being income of the succeeding fiscal period. In a recomputation under Rule 50 the gross royalties should be accounted for as of the date on which they are earned and credits for taxes should be made accordingly.

In Docket No. 88290 the petitioner claimed that it is entitled to a credit against the tax due the United States for the fiscal year ended in 1934 of $311.82 paid to the Canadian Government. It appears, however, that $200.69 of the claimed credit was a tax due and payable in respect of sheet music sold in Canada for the six-month period ended December 31, 1933, and that $111.13 was a tax for the period ended March 31, 1934. The Canadian income tax paid for the petitioner by Gordon Y. Thompson, Ltd., will be credited accordingly under Rule 50 of the Board’s rules of practice, the petitioner having moved at the conclusion of the hearing to conform its pleadings to the proof.

Decisions will T>e entered under Bule 50.

       This issue was waived by the petitioner at the conclusion of its brief.


text:
    Keystone Automobile Club Casualty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Keystone Automobile Club Fire Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Keystone Automobile Club Acceptance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90931, 90932, 90933, 91484, 91485, 91486.
    Promulgated July 27, 1939.

      R. Lester Moore, Esq., for the petitioners.

      Lloyd W. Greason. Esq., for the respondent.
   OPINION.

Smith:

1. The Casualty Co. and the Fire Co. claim to be exempt from income tax under section 103 of the Revenue Acts of 1928 and 1932 and section 101 of the Revenue Act of 1934, which provide in identical terms as follows:

SEC. 103. [REVENUE ACT OF 1928]. EXEMPTIONS PROM TAX ON CORPORATIONS.
The following organizations shall be exempt from taxation under this title—
(11) Farmers’ or other mutual hail, cyclone, casualty, or fire insurance companies or associations (including interinsurers and reciprocal underwriters) the income of which is used or held for the purpose of paying losses or expenses. [Revenue Act of 1928.]

Although the two insurance companies were incorporated under the laws of the Commonwealth of Pennsylvania as stock companies, and although each has a capital stock which was contributed by the Keystone Automobile Club, which at all times has owned all of the outstanding shares of stock of each, they claim to be exempt from income tax upon the ground that they operate as mutual companies.

They further contend that the respondent has erred (1) in applying the doctrine of law to the effect that exemptions are not favored and that in cases of doubt an exemption provision in a general tax law is to be construed strictly and the doubt to be resolved in favor of the taxing power, and (2) in not applying the universal rule that one who would claim the benefits of a statute need bring himself only substantially within its terms.

We think it plain that the above allegations of error on the part of the two insurance companies are without any legal support. The universal rule is, as stated by the United States Circuit Court of Appeals for the Ninth Circuit in Retailers Credit Association of Alameda County v. Commissioner, 90 Fed. (2d) 47:

It should be noted that a statute creating an exemption must be strictly construed, and any doubt must be resolved in favor of the taxing power. Sun-Herald Corporation v. Duggan (C. C. A. 2) 73 F. (2d) 298, 300, and cases cited.

Under the first Income Tax Act of October 3, 1913, mutual insurance companies were not exempted from tax. All were required to file income tax returns. Special provisions of the act were designed, however, to give them certain relief.

By the Revenue Acts of 1916, 1917, 1918, and 1921 certain mutual insurance companies “of a purely local character” were exempted from income tax. By section 231 (10) of the Revenue Act of 1924 certain mutual insurance companies were exempted from income tax “but only if 85 per centum or more of the income consists of amounts collected from members for tbe sole purpose of meeting losses and expenses.” The phrase “of a purely local character” does not appear in the 1924 Act.

A change was made with respect to the exemption of mutual insurance companies by the Revenue Act of 1926. Section 231 (11) of that act is identical with section 103 (11) of the Revenue Acts of 1928 and 1932 and section 101 (11) of the Revenue Act of 1934, quoted above.

Senate Report No. 52 of the Sixty-ninth Congress, first session, explains section 231 (11) of the Revenue Act of 1926 as follows:

It was believed that tbe provisions of existing law exempted this class of corporations from tbe necessity of making income tax returns, but experience has shown that such was not tbe case. An examination of subdivision (10) will show that tbe various corporations named therein are exempted only if 85 per centum or more of tbe income consists of amounts collected from members for tbe sole purpose of meeting losses and expenses. It so happens that in tbe case of insurance companies of a type covered by tbe new subdivision (11) of this section, tbe losses vary from year to year, and consequently, in certain years, the assessments collected are not used up in tbe payment of losses and expenses, and no additional money is required to be collected for tbe payment of losses in tbe succeeding year. It is only natural that these companies should keep these assessments in banks and obtain from 3 to 4 per centum interest thereon. It is clear that if no assessments are required to be made in any year that tbe company is not exempted for such year. In order to clear up this situation, assessments of tbe type mentioned are exempted by tbe House bill in a separate subdivision, without the 85 per centum limitation imposed by subdivision (10).
The Committee recommends that tbe complete exemption be confined to farmers’ or other mutual bail, cyclone, or casualty companies or associations and that fire insurance companies enjoy such benefits only as now are provided under existing law.

The only inference that can be drawn from the legislative history of the provisions exempting from income tax certain mutual insurance companies is that Congress was particularly desirous of exempting mutual insurance companies which received most of their income from deposits or from assessments upon their members. There is not a particle of evidence that Congress ever intended that stock insurance companies should be exempted from tax, regardless of how they conduct their business.

Since by section 103 (11) of the Revenue Acts of 1928 and 1932, and section 101 (11) of the Revenue Act of 1934, Congress intended to exempt only certain mutual insurance companies, the question arises as to what is a mutual casualty insurance company and a mutual fire insurance company.

In Ohio Farmers Indemnity Co., 36 B. T. A. 1152, we said:

* * * An insurance company is mutual when there is no group but the policyholders who have interest in it or power over it. Equitable Life Assurance Society of the United, States v. Bowers, 87 Fed. (2d) 687. “The theory of a mutual insurance company is, that the premiums paid by each member for the insurance of his property constitute a common fund, devoted to the payment of any losses that may occur. * * * The cash premium may as well represent the insured in the common fund asl the premium note” and the mutual principle is not abrogated by the taking of cash premiums. Union Insurance Co. v. Soge, 62 U. S. 85, 65; State v. Manufacturer's Mutual Fire Insurance Co., 91 Mo. 311, 818. A person paying a cash premium to a mutual insurance company at the time a policy is issued becomes a member of the company and interested in its fund in proportion to the amount of the policy, and to the extent of that interest he is an insurer of all other members. The term “mutual” as applied to an insurance company “does not import any peculiar or exact method of producing mutuality in the sense of equality among its members, but * * * is simply significant of an association for the purposes of insurance, whose fund for the payment of losses consists, not of a capital mutually contributed by any uninsured parties, but of the premiums mutually contributed by the persons insured. * * Mygatt v. New York Protection Insurance Co., 21 N. Y. 52; Schimpf & Son v. Lehigh Valley Mutual Insurance Co., 86 Pa. 373. A mutual insurance company issuing policies providing for the payment of a cash premium does not lose its identity asi a mutual company. * * » [Citing eases.]

We must assume that, by the phrase “mutual * * * insurance companies or associations” used in the exemption provision of the statute, Congress intended it to have the same meaning that it has in ordinary speech. Under the laws of most states, insurance companies, other than life insurance companies, are classified as stock companies or mutual companies. Different provisions of law apply to each. The statutes of the Commonwealth of Pennsylvania provide for the incorporation of both stock companies and mutual companies. The pertinent part provides:

Subject to the provisions of this Act, insurance companies of any of the following classes may be incorporated:
(a) Stock Life Insurance Companies;
(b) Mutual Life Insurance Companies;
(c) Stock Fire, Stock Marine, and Stock Fire and Marine Insurance Companies ;
(d) Stock Casualty Insurance Companies; and
(e) Mutual Insurance Companies of any kind other than mutual life insurance companies. (1921, May 17, p. 1, 682, Art. II, sec. 201.)

It is manifest from the above that the Casualty Co. and the Fire Co., petitioners herein, are not mutual insurance companies under the laws .of the Commonwealth of Pennsylvania.

The insurance companies contend, however, that during the taxable years 1929 to 1935 they were operated as mutual companies, and, hence, are entitled to be classed as mutual companies under the statute.

It is true that the evidence shows that they have not been operated for the profit of their sole stockholder. All of the policyholders have been treated exactly alike. The same premium has been charged to each and the same refund, the amount of which has been determined by the board of directors, has been made to each.

It is not true, however, that the companies have been operated in all respects as mutual insurance companies which have no shares of capital stock outstanding. The policyholders are not the owners of the companies’ capital. They do not elect the officers and directors of the companies. The entire capital stock of each company is owned by the Keystone Automobile Club — not only the $450,000 paid in by that club originally, but also the amount capitalized by the stock dividends in 1930. The board of directors of each company has authority under the charter and bylaws to pay dividends upon the shares of stock outstanding.

We think it immaterial that up to the present time the companies have never paid dividends upon their shares of stock and that it is the intention of the present officers and directors of the Keystone Automobile Club never to seek a recovery from the companies of more than the original investment of $450,000, and the repayment of that only upon a liquidation of the companies.

In National Grange, Mutual Liability Co., 31 B. T. A. 666; affd. (C. C. A., 1st Cir.), 80 Fed. (2d) 316, the Board held that where an otherwise mutual insurance company had a guaranty capital, exemption was not to be denied the company because of its outstanding guaranty capital. The evidence in that case, however, showed that the policyholders were in complete control of the company. There was no capital stock. The company was operated on a strictly mutual basis and the policyholders were the owners of the assets except that they had an obligation to pay the persons who had loaned the insurance company the money called a guaranty capital. Those facts do not obtain in the instant case.

The two insurance companies are not mutual companies and the respondent did not err in denying them exemption.

2. The second contention of the Casualty Co. and the Fire Co. is that deficiencies claimed to be due from the compames for the calendar years 1929 to 1933, inclusive, are barred from assessment and collection by the statute of limitations. The basis for this claim is that the notices of deficiency were not sent out by the Commissioner until July 10,1937, and that under the statute of limitations the respondent has only two years from the date when returns are filed for the making of such determinations and that the Commissioner had determined that the petitioners were exempt from income tax and therefore not required to file income tax returns for those years.

The two insurance companies filed no income tax returns for the years 1929 to 1933, inclusive, until July 25, 1935. It is the respondent’s contention that the notices of deficiency were sent out within two years from the date of the filing of the returns and that therefore the deficiencies are not barred.

The Insurance Exchange of Keystone Automobile Club made application for exemption from income tax under the provisions of the Revenue Act of 1926. The respondent in a letter addressed to the collector on March 5,1928, advised him as follows:

The additional evidence submitted shows that the insurance referred to above provides indemnity for liability incurred by the insured with respect to the injuries or death of third persons as the result of the negligent operation of an automobile by the insured or his agent, excluding liability for injuries or death sustained by the insured, employees of the insured or members of his family.
Based upon the foregoing, it is held that the exchange is entitled to exemption under Section 231 (11) of the Revenue Act of 1926. In accordance with this ruling, based on the evidence submitted, you are requested to notify the exchange that it will not be required to file returns under the Revenue Act of 1926, so long as there is no change in its organization, purpose or method of operation.
Any changes in the form of organization or method of operation of the exchange, as shown by the evidence submitted, must be immediately reported to you in order that the effect of such changes upon its present exempt status may be determined.

The collector sent to the Insurance Exchange or to its attorney a copy of the letter. At that time the Keystone Automobile Club was contemplating the incorporation of the Casualty Co. and the Fire Co. The attorney for the Insurance Exchange deposes that he took up with a deputy collector either late in 1928 or early in 1929 the question as to whether the two insurance companies, which he contended were continuations of the Insurance Exchange, would likewise be exempt from tax; also that he caused a consolidated return for the two companies for the period March 1 to December 31, 1928, to be prepared and that he filed it with Patrick J. Riley, a deputy collector in the collector’s office on or about March 1, 1929. The return showed no tax due and according to the attorney’s deposition there was attached to the return a full statement relating to the organization of the two companies. Riley died prior to the hearing of this proceeding in Philadelphia in November 1938. A search of the records in the collector’s office fails to show the receipt of the return or any notation upon the collector’s records that he had ruled that the two companies were exempt from tax. The respondent has not been able to find any record of the receipt of any return for the two insurance companies for the period above indicated. It appears that in a letter either dictated or sent under the supervision of Riley on March 20, 1935, responsibility for the representations claimed to have been made to the attorney for the Insurance Exchange was disclaimed. It was stated that the collector’s office never made rulings as to exemptions from income tax but that such claims for exemption were always forwarded to the Commissioner at Washington for a ruling thereon in accordance with the Commissioner’s regulations.

J. W. Rhine, attorney for the Casualty Co. and the Fire Co. in 1929, deposed that he represented the insurance exchange in obtaining a ruling from the Commissioner that the Insurance Exchange was exempt from income tax under the provisions of the Revenue Act of 1926. He further deposed that upon the organization of the Casualty Co. and the Fire Co. he took up with the collector’s office the question of the exemption of those companies from income tax and stated that he had numerous conferences with Riley, who was deputy collector in charge of the income tax division in Philadelphia; that he handed to him a copy of an opinion which he had rendered upon the question of the exemption of income tax of the two companies and that Riley stated to him that he had no question as to the exemption of the companies. He further deposed:

* * * At first I had intended not to file any return at all based on wbat Mr. Riley bad told me, but, about March 1 [1929], in view of, as I say, some conflict of opinion between myself and Mr. Speakman, he, in the meantime, having prepared what he considered to be the proper return to be made by the two companies, I decided to ■ file an information return, and I showed Mr. Speakman the prepared copies which, as I remember, had reported on the face of them the items of interest received, or investments which Mr. Speakman considered to be taxable. I wrote up a return myself, but I did not report any income. 1 wrote across the face of the return as I remember it, a reference to the exemption granted to the Insurance Exchange, and attached a copy of such letter, and claimed exemption on the front of the return by reason of that decision and attached a memorandum schedule, which memorandum schedule showed the net result of the business done by the two companies for the period between June 1, and December 31 [1928].

Rhine further deposed that he also attached a statement to the return which had been prepared by Wigner, Rockey & Co., accountants, showing fust how the Insurance Exchange had been converted into the two stock companies.

With reference to the filing of the return, Rhine deposed as follows :

He [Riley] took the return, and we discussed the entire matter in a general way again, as we had discussed it before, and he said he did not think it was necessary for me to file that, but he would take that, and he walked to the outer office where the long counter is.' I do not remember what the room number was-, but he walked out there with the return, and came back in a few moments, and he said “O. K.,” and as I remember his words, they were something to this effect, “I have marked on my file that these two companies are a continuation of the Insurance Exchange, and are tax exempt in accordance with that letter.” * * *

We do not tbink that the deposition of J. W. Rhine is conclusive that the return was filed and certainly is not conclusive that the respondent has ever ruled that the Casualty Co. or the Fire Co. was exempt from income tax and not required to file income tax returns. The respondent did rule that the Insurance Exchange was exempt from tax under the provisions of the Eevenue Act of 1926 and was not required to file income tax returns so long as the facts obtained which had been presented to the respondent. • But the respondent never ruled or was asked to rule upon the question of the exemption from income tax of the two insurance companies. They are stock insurance companies subject to entirely different provisions of the laws of the Commonwealth of Pennsylvania from the Insurance Exchange. Furthermore, they are subject to different provisions of the income tax law.

The respondent’s regulations are explicit as to the procedure to be followed by a company in obtaining a ruling as to whether it is exempt from income tax. Article 521 of Regulations 74 and 77, promulgated under the provisions of the Eevenue Acts of 1928 and 1932, provide in identical terms as follows:

ART. 521. Proof of exemption. — In order to establish its exemption and thus be relieved of the duty of filing returns of income and paying the tax, it is necessary that every organization claiming exemption file an affidavit with the collector of the district in which it is located, showing the character of the organization, the purpose for which it was organized, its actual activities, the sources of its income and its disposition, whether or not any of its income is credited to surplus or may inure to the benefit of any private shareholder or individual, and in general all facts relating to its operations which affect its right to exemption. To such affidavit should be attached a copy of the charter or articles of incorporation, the by-laws of the organization, and the latest financial statement, showing the assets, liabilities, receipts, and disbursements of the organization.
In the ease of the particular classes of organization listed below, the following additional information should be embodied in or attached to, and made a part of, the affidavit referred to above:
(8) Mutual insurance companies: Copies of the policies or certificates of membership.

The two companies never complied with that article. They never submitted copies of policies or of certificates of membership as required by the regulations. The most that can be said, on the evidence of record, is that the companies’ attorney deposed that he took up with Deputy Collector Eiley the question of the status of the companies and obtained his ruling that they were exempt from income tax the same as the Insurance Exchange and that he filed some information return with regard to the companies for the fiscal period March 1 to December 31,1928.

In support of the contention that the assessment and collection of taxes for the years 1929 to 1933 are barred by the statute of limitations, the petitioners cite Balkan National Insurance Co. v. Commissioner (C. C. A., 2d Cir.), 101 Fed. (2d) 75. The ruling of the court in that case was that where, before time for filing a return for 1918, taxpayer’s property and records were seized by the Alien Property Custodian and the records were never returned, so that it was not possible for the taxpayer to make a return for 1918, the Government is not entitled to the benefit of the unlimited assessment and collection period applicable to cases where no return was filed; that the 1918 tax was outlawed because assessment was not made within five years after the unsigned return for 1918 was filed in 1919 by agents of the Alien Property Custodian.

There are no parallel facts in the proceedings at bar. The companies were at all times in possession of their own records from which required income tax returns could be filed.

The Board does not think that a ruling made by a deputy collector of internal revenue that the two insurance companies were exempt from income tax is a bar to the collection of taxes that are legally due. The respondent is not responsible for the unauthorized acts of his subordinates. F. W. Darling, 19 B. T. A. 337; John D. Biggers, 39 B. T. A. 480. Exemption is a pure question of law. Stewart v. United States, 24 Fed. Supp. 145.

The only act which would start the operation of the statute of limitations is the filing of a return required by law. The returns required by law for the years 1929 to 1933, inclusive, were not filed by the petitioner companies until July 25, 1935. The deficiencies herein claimed to be due were determined on July 10, 1937, or within two years of the date of the filing of the returns. The determinations were timely and the assessment and collection of the deficiencies are not barred.

3. The two insurance companies further contend that even if they are required to file income tax returns, the returns would necessarily show no taxable income; for they contend that they are entitled to deduct from gross income all amounts of income not otherwise deductible as amounts retained “for the payment of losses, expenses, and reinsurance reserves.” This claim of the companies is predicated upon section 208 (c) of the Revenue Acts of 1928, 1932, and 1934, which reads in material part as follows:

(c) Deductions. — In addition to the deductions allowed to corporations by section 23 the following deductions to insurance companies shall also be allowed, unless otherwise allowed—
(3) Mutual insurance companies other than mee and marine. — In the case of mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves.

Under this provision of the taxing act the respondent has held, in Regulations 74 and Regulations 77, promulgated under the provisions of the Revenue Acts of 1928 and 1932:

* * * A stock fire insurance company, operated on the mutual plan to the extent of paying dividends to certain classes of policyholders, may make a return on the same basis as a mutual Are insurance company with respect to its business conducted on the mutual plan. [Art. 1014.]

No similar provision, is found in Regulations 86, promulgated -under the provisions of the Revenue Act of 1934.

The companies contend that although the regulation mentions only “stock fire insurance” companies the same reasoning would also apply to a stock casualty insurance company. They also claim that both companies were “operated on a mutual plan to the extent of paying dividends to certain classes of policyholders.”

In the determination of the deficiencies herein the respondent has permitted the insurance companies to deduct from gross income all dividends paid to their policyholders. The propriety of such deduction js not raised by the pleadings.

The evidence does not show that the net income of the companies as determined by the respondent was retained for the payment of losses, expenses, and reinsurance reserves. Most of it is shown in the petitioner’s reports to the Insurance Commissioner of the State of Pennsylvania in either its security fluctuation reserve or its contingent reserve. J. Borton Weeks, the president of the two insurance companies, was asked, on cross-examination:

Q In your opinion, Mr. Weeks, as president of the two insurance companies, do you think the insurance companies are worth more than .$450,000, — the amount that you carry on the Club’s books?
A Weil, they are worth many times that.
Q Are they worth the increased capital and surplus of $750,000?
A Of course. They could not possibly be worth less than $750,000. As a matter of fact, they are worth over $2,000,000, according to our last annual statement.

The question arises as to the meaning of the statute which permits a mutual insurance company to deduct from gross income amounts retained for the payment of losses, expenses, and reinsurance reserves. In article 207-1 of Regulations 86, the respondent has provided:

Abt. 207-1. * * *
In addition to the deductions and credits to which corporations generally are entitled as defined and limited under sections 23, 24, and 26, insurance companies of this type [mutual insurance companies other than life and marine] are entitled to deduct from gross income:
(2) The amount of premium deposits retained at the end of the taxable year for the payment of losses, expenses and reinsurance reserves. As used in this article the term “losses” means incurred losses; the term “expenses” means accrued expenses and the term “reinsurance reserves” means the amount necessary to reinsure outstanding policies for their unexpired terms.

The evidence does not show that the amounts deducted from gross income as amounts retained for the payments of losses, expenses, and reinsurance reserves come within the definition of those terms as defined in article 207-1 of Regulations 86, which, we think, correctly interprets the law.

The simple facts are that over the period 1929 to 1935, inclusive, each insurance company has accumulated large amounts of assets which are not for the payment of incurred losses, accrued expenses, or for the purpose of reinsuring outstanding policies for their unexpired terms. Legally these accumulations of income belong to the sole stockholder of the two insurance companies. We see no reason why the companies should not be taxed upon their net incomes as determined by the respondent.

It should also be observed that the two companies are claiming the right to deduct from gross income not only all amounts allowed by the respondent and all payments of losses and expenses but, in addition, the balance of its net income as retained for the payment of losses and expenses. This claim is made for each year. Therefore, the amounts claimed as being held for the purpose of paying losses and expenses at the end of the year are deducted from gross income in the following year as losses and expenses paid. In this way there is a duplication of the deduction. We are satisfied that Congress never intended to give to1 mutual insurance companies a duplication of deductions in the manner above described. Section 204 (e) of the Revenue Act of 1934 provides that “Nothing in this section shall be construed to permit the same item to be twice deducted.” We do not think that by this provision Congress intended to change the law, but simply to make explicit that which was not made explicit in the prior income tax acts relating to the taxation of mutual insurance companies. A construction of a taxing statute permitting a duplication of deductions is not favored by the courts. Cf. Ilfeld Co. v. Hernandez, 292 U. S. 62. The claim of the two insurance companies that they can have no taxable income must be denied.

4. The Acceptance Co. claims to be exempt from income tax upon the ground that it is a mere adjunct of its sole stockholder, the Keystone Automobile Club. Its claim is that the Acceptance Co. is exempt from tax because the club is exempt.

From the evidence of record it clearly appears that the Acceptance Co. operates at a profit and that that profit inures solely to the Keystone Automobile Club. The claim that it is exempt because the club is exempt ignores the distinction between a corporation and its stockholders.

In Burr Creamery Corporation, 23 B. T. A. 1007; affd., 62 Fed. (2d) 407, the Board said in part :

However, irrespective of whether the California Milk Producers’ Association owned all the stock of the petitioner in the years in question, we do not believe that the petitioner is entitled to exemption under section 281 (11) oí the Revenue Act of 1921. Since this section grants exemption from taxation, it must be strictly construed. A taxpayer attempting to avail itself of the benefits of this section must prove clearly that it comes within its provisions. * * *

In Sand Springs Railway Co., 21 B. T. A. 1291, it was beld that a corporation was not exempt because its stock is owned by an exempt corporation. See also Journal of Accountancy, Inc., 16 B. T. A. 1260. The Acceptance Co. is liable for the deficiencies determined by the respondent.

Reviewed by the Board.

Decisions will he entered for the respondent.