author: Leech:

text:
    R. & L., Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68118.
    Promulgated December 31, 1935.

      S. L. Her old, Esq., and S. P. Cousin, Esq., for the petitioner.

      DeWitt M. Evans, Esq., and F. B. Sohlosser, Esq., for the respondent
   OPINION

Leech:

Respondent determined that petitioner was formed or availed of during 1929 for the purpose of preventing the imposition of the surtax upon its shareholders by permitting its gains and profits to accumulate instead of being distributed. Pursuant thereto, by authority of section 104 (a), Revenue Act of 192'8, he determined a tax of 50 percent upon petitioner’s net income for 1929, which resulted in a deficiency of $66,990.45 in that year’s income taxes. Petitioner challenges the correctness of that determination. Alternatively, petitioner alleges that respondent erred in including $61.847.61 in income, as commissions earned on the booking of films; and, also, it contends that section 104 is unconstitutional.

E. V. Richards organized the petitioner on March 3, 1927, under the laws of Louisiana, to take over and hold substantially all of his personal properties and investments, in order to avoid certain possible difficulties in the administration of his estate, in the event of his death before his seven minor children attained majority. He turned over the following properties to the petitioner;

Certificates of deposit_$70, 000. 00
Notes receivable- 12, 980. 00
Land_ 22, 397. 50
Buildings_ 60,167. CO
Liberty bonds- 30, 450. 00
Shreveport Mutual Building & Loan Assn, stock- 45, 300. 00
Whitney NaLional Bank stock- 17, ISO. 00
Saenger Theatres, Inc., stock- 234, 079. 00
Hibernia Homestead stock- 5, 000. 00
Equitable Homestead stock_ 5, 000. 00
Metro-Goldwyn-Mayer Corporation stock- 10,125. 00
Standard Fruit & Steamship Co. stock- 5,000.00
Iluyler’s Corporation- 4, 621. 50
Penick & Ford bonds- 8, 000. 00
Carondelet Building, Inc., bonds_ 15, 000. 00
Furniture, Texarkana_ 10,000. 00
555, 300. 00

For these properties, the petitioner issued $555,300 par value of its capital stock, which, except for directors’ qualifying shares, was divided equally between Fichards and his wife. It appears that the only properties that Richards retained were $16,000 in cash, some shares in Saenger Theatres, Inc., and certain agency contracts with Metro-Goldwyn-Mayer, under which he rendered film-booking services on a commission basis.

At the time petitioner was organized, Richards agreed “ to turn over the earnings and commissions of the Metro-Goldwyn Coloration to the R. & L. Inc. for services rendered to them for a period of five years.” After organization, petitioner conducted Richards’ film-booking agency for him, and Richards turned over to it all of the commissions derived therefrom. In 1929, these commissions amounted to $61,847.61. Petitioner reported that amount in its return, as other income, and the respondent left it there.

Sometime after organization but before the end of 1928, petitioner acquired shares in four corporations, which operated approximately 25 motion picture theatres in suburban New Orleans. The affairs of these corporations were managed by Richards, who was petitioner’s president, and other officers of the petitioner.

During the years 1927 to 1929, inclusive, Richards was also employed as president of Saenger Theatres, Inc., at a salary of $66,000 per annum. As payments of this salary were received by him, he turned them over to the petitioner, and the latter gave him credit therefor, on its books, defrayed all of his family expenses, and retained the balance in its treasury. On this account, petitioner was indebted to Richards at the close of the aforesaid years, in the respective approximate amounts of $3,000, $19,000, and $36,000. At no time during these years did the petitioner make any loans to Richards.

Petitioner had net earnings of $62,156.95 in 1927, $88,905.05 in 1928, and $120,325.48 in 1929. It did not declare or distribute any dividends in these years. In 1929, its income, all of which was received in cash, included interest on corporation bonds, $715; rents, $26,699.96; profit from the sale of real estate, $35,650; dividends on stocks of domestic corporations, $42,090; and compensation for services rendered to Richards in connection with his film-booking business, $61,847.67, a total of $167,002.63; and its expenses, including $17,000 for depreciation and $9,750 for “ replacements and renewals ”, amounted to $46,677.15.

In 1928, petitioner purchased a motion picture theater building, at a cost of “ a couple of hundred thousand dollars ”, all but about $50,000 of which was paid in that year. The remainder of $50,000 was paid in 1929. The record does not disclose the use to which the building was put. Apparently the petitioner itself did not operate any motion picture theaters in 1929, for it had no income from that source.

The following are petitioner’s balance sheets as of the beginning and the end of 1929:

The record does not disclose how the surplus and undivided profits reached the proportions indicated by these balance sheets. The petitioner’s total net earnings to the end of 1929 amounted to $271,387.48. Apparently $670,646.60 is donated surplus. The 1929 return shows $3,440 donated in that year, in the form of stocks.

Included in the asset “ Stocks of domestic corporations, $1,034,-374.22”, as of the end of 1929, is the entire capital stock of the Rochelle Investment Corporation, which petitioner acquired in July or August 1929, in exchange for its shares in the Saenger Theatres, Inc. The assets of the Rochelle Investment Corporation consisted of 20,233 shares of Paramount Publix Corporation, which it acquired at $68 per share. The quoted market prices of these shares on November 3 and December 31, 1929, on the New York Stock Exchange, were $39 and $48 per share, respectively. There was a relatively proportional decline in all of the stocks of the domestic corporations owned by petitioner, following the stock market crash in October 1929.

The stocks of domestic corporations which petitioner owned at the end of 1929 are as follows:

Section. 104 of th© Revenue Act of 1928 lays a tax of 50 percent upon the net income, including corporate dividends, of any corporation formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed; and the fact that any corporation is a mere lolding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, is presumptive evidence of the proscribed purpose. The test of the presence of the proscribed purpose is “ the state of mind itself, and the presumption does no more than make the taxpayer show his hand.” United Business Corporation of America v. Commissioner, 62 Fed. (2d) 754, affirming 19 B. T. A. 809; certiorari denied, 290 U. S. 635. “ But the display of that £ hand ’ does not relieve the taxpayer if it discloses the state of mind the statute condemns.” A. D. Saenger, Inc., 33 B. T. A. 135.

The purpose of petitioner’s creation, the character of the properties turned over to it by Richards, the nature and source of its earnings, and the manner in which those earnings have been and were invested at the end of 1929 lead inevitably to the conclusion that the petitioner is a mere holding or investment company. This is denied by the petitioner. It contends that it is a business or operating company, engaged in the management of its properties, conducting a film-booking business, and managing a chain of suburban motion picture theaters. The extent to which the petitioner may have been engaged in any of these activities is fairly reflected by the above statement of facts. The findings are as favorable to the petitioner as the evidence justifies. They disclose that petitioner’s limited activities were only incidental to the main purpose of its creation or existence during the taxable year. This purpose was the incorporation and holding of Richards’ personal estate in one organization, which was the petitioner, a personal holding or investment company.

But even if the petitioner can be said to be a business or operating company, as distinguished from a mere holding company, the facts disclose an accumulation of gains and profits beyond its reasonable needs. At the beginning of the taxable year, not only did it have a paid-in surplus of about $670,000, but it had then accumulated gains and profits in the amount of almost $150,000. At the close of that year the capital and paid-in surplus was intact and those gains and profits totaled approximately $271,000. In none of the activities in which it is claimed that the petitioner was engaged does capital appear to be an essential and necessary factor. Its investments alone were yielding sufficient income to provide for all expenses and leave a substantial net profit for each- year, thus obviating the use of capital to finance any activities. It is true the applicable statute does “not contemplate that a business should remain static; it must be assumed that any business shall have the right to grow.” William C. DeMille Productions, Inc., 30 B. T. A. 826. But what possible business necessity could there have been here for augmenting this substantial accumulation of earnings, by the entire profits of the taxable year? Cf. Cecil B. DeMille, 31 B. T. A. 1161; William C. DeMille Productions, Inc., supra; Fisher & Fisher, Inc., 32 B. T. A. 211.

The petitioner gives three reasons for, its course of conduct: First, that at no time in the taxable year did it have cash funds in excess of its immediate needs, with which to pay dividends; second, that cash, could have been made available for the payment of dividends only through the sale of securities at sacrifice prices; and, third, that, because of its financial condition at the end of 1929, it was prohibited by Louisiana statute from paying any dividends. The first two of these may be answered together, and they are answered by the petitioner’s conduct in reinvesting cash earnings of the year, $740 in life insurance, $859.49 in real estate, $10,000 in bonds, and $62,344.23 in stocks of domestic corporations. Why were these cash earnings totaling $73,943.72 thus reinvested, instead of being distributed? On -that score the record is silent, and we can think of no more plausible reason than that petitioner’s conduct in this respect was in accordance with a policy; not only to hold and administer, but to add to and build up Richards’ personal estate. So far as this record discloses, no dividends were paid during 1927, 1928, or 1929 despite a consistent record of earnings in substantial amounts. The cash earnings certainly for 1929, here involved, could as well have been distributed as reinvested, without the least apparent injury or inconvenience to the petitioner.

The third reason given by the petitioner has less foundation than the other two. Petitioner contends that, because’ df a large shrinkage in the value of its assets in 1929, it had no “ bona fide cash surplus of profits” within the meaning of section 1, Act No*. 241 of 1908, General Assembly of Louisiana, and, therefore, it was prohibited by statute from paying any dividend in that'year. That statute, however, has been superseded by section 26, Act No-. 250 of 1928, General Assembly of Louisiana, by the provisions of which a corporation may lawfully pay a dividend in cash or property out of, among other things not material here, the surplus of the aggregate of its assets over the aggregate of its liabilities, plus the amount of its capital stock. Even at the depreciated value of its securities, after the stock market crash in the fall of 1929, the aggregate of petitioner’s assets over the aggregate of its liabilities, plus the amount of its capital stock, was about $500,000. There was, therefore, no statutory bar to the payment of a dividend by the petitioner in 1929. See A. D. Saenger, Inc., supra.

This record thus presents the ultimate inquiry whether petitioner as a personal holding and investment company without any other apparent object than the accumulation of a personal estate for an individual, or as a. business or operating company, in which capital was not a necessary factor, avoids the present tax by establishing that the substantial earnings basing that tax were -accumulated solely for the purpose of maintaining the original market value of its capital investments in the face of a falling security market. We do not think it does. Since mere depreciation in market value occurred, and no losses were actually sustained, the tax upon such earnings, except for the interposition of the petitioner, to which Richards conveyed his assets, would have been laid upon Richards in an amount exceeding that payable by the petitioner corporation. Such interposition, though not alone conclusive, furnishes one basic fact, here, upon which the incidence of the pending tax penalty is premised. Cf. United Business Corporation of America, 33 B. T. A. 83.

Our present conclusions, as well as the applicable statute upon which they are premised, recognize rather than violate the principle that petitioner, corporation, was an entity separate and distinct from Richards. The disputed tax is laid upon the taxpayer, corporation, for what it did and not for anything done by Richards.

The petitioner is a mere personal holding or investment company. It has permitted its gains and profits to accumulate beyond its reasonable needs, instead of distributing them. The statute makes either of these facts prima facie evidence of a purpose to prevent the imposition of the surtax upon its shareholders. The respondent determined that petitioner was formed or availed of for that purpose; and, by statutory provisions, his determination is presumptively correct. The present record sustains rather than overturns that presumption.

This brings us to the first of petitioner’s alternative issues, that respondent has incorrectly included in income $61,847.67, “booking commissions ” received from Richards. Petitioner argues that “though these commissions were earned for the corporation and were, in law and in equity, its property, yet [Lucas v. Earl, 281 U. S. 111] holds that the beneficial ownership of the earnings does not determine the incidence of the tax liability.” The case of Lucas v. Earl, supra, is not in point and has no application here. The commissions were not earned by Richards “ for the corporation.” They were earned by Richards in the first instance, under Ms film-booking contracts with Metro-Goldwyn-Mayer, for himself, and were turned over by him to the petitioner in accordance with their agreement, as compensation “ for services rendered.” Petitioner rendered services to Richards in the taxable year, by performing all services required under his contracts with Metro-Goldwyn-Mayer. There is no evidence that these payments by Richards to the petitioner were anything else than compensation for services rendered. The respondent’s action, in including the amount in question in petitioner’s income, is, therefore, sustained.

The constitutional questions presented by the petitioner’s second alternative issue have heretofore been considered, and decided adversely to the petitioner. United Business Corporation of America v. Commissioner, supra; Williams Investment Co. v. United States, 3 Fed. Supp. 225.

Reviewed by the Board.

Judgment will be entered for the respondent.

TraMmell, ArtjNdell, and VaN Fossaít dissent.

      (a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 13 and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
      (b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.
      (c) As used in this section the term “ net income ” means the net income as defined in section 21, increased by the sum of the amount of the dividend deduction allowed under section 23 (p) and the amount of the interest on obligations of the united States issued after September 1, 1917, which would be subject to tax in whole or in part in the hands of an individual owner.
      (d) The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. Any amounts so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of the earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his distributed share, be exempt from tax in the amount of the share so included.

         That it shall be unlawful for any domestic corporation, or for any foreign corporation doing business in this State, to make or declare any dividend on its capital stock except from its actual and bona fide cash surplus or profits; or to divide, -withdraw or in any manner to pay to the stockholders, any portion of the company’s capital stock.

       Dividends : Method of Estimating Fund fob Paítment op. I. No corporation shall pay dividends in cash or property, (a) except from the surplus of the aggregate of its assets over the aggregate of its liabilities, plus the amount of its capital stock; or (b) out of any surplus due or arising from (3) any profit on treasury shares before resale; or (2) any unrealized appreciation in value or revaluation of fixed assets; or (3_) any unrealized appreciation in value or revaluation of inventories before sale; or (4) the unaccrued portion of unrealized profit on notes, bonds or obligations for the payment of money, purchased or otherwise acquired, unless such notes, bonds or obligations are readily marketable, in which case they may be taken at their actual market value; or (5) the unaccrued or unearned portion of any unrealized profit in any form whatever, whether in the form of notes, bonds, obligations for the payment of money, installment sales, credits or otherwise, except as provided in the preceding subparagraph (4).
      II. In case all or any part of any cash dividend is paid out of paid-in surplus, the shareholders shall at the time of payment be notified of the fact.
      III. No corporation shall pay dividends in shares of the corporation, except from the surplus of the aggregate of its assets, which, for this purpose only, may include items mentioned in Subdivision I (b), over the aggregate of its liabilities, plus the amount of its capital stock.


source: Caselaw Access Project

author: SteRnhagen:

license: Public Domain

text:
    Albert C. Whitaker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73991.
    Promulgated December 31, 1935.

      W. M. Smith, E’sq., for tbe petitioner.

      Samuel L. Young, Esq., for tbe respondent.
   OPINION.

SteRnhagen:

In the notice of deficiency the Commissioner held that the income of the trust was taxable to the petitioner because the trust was formed by the petitioner ■“ to carry out an obligation and to assure that it would be carried out in the future.” Without resort to the presumption that the Commissioner’s determination is correct, there is ample evidence in the record to sustain it in fact. The agreement between husband and wife was made during their marriage, while the divorce proceeding charging desertion was pending, and two days before the uncontested hearing and entry of the decree. The husband, at the time of the agreement, recognized a marital obligation to the wife, and the agreement expressly recited its purpose to settle such obligation. Otherwise, the divorce court would have been called upon to provide in the decree “ concerning the maintenance of the parties, or either of them ” (West Virginia Code of 1932, Annotated, §4715). Although the petitioner testified that in the negotiations leading to the agreement he rejected any suggestion of alimony, his entire testimony indicates clearly that what he meant was that he would not obligate himself to pay a fixed amount, but would give his wife the dividends of the 1,200 shares, letting her take the chance of increase or diminution. This obviously did not affect the existence or nature of his obligation, but only the terms of its discharge. In consonance with the husband’s obligation, the agreement recites alimony and suit money and the wife expressly accepts the terms “ as fair consideration in lieu of alimony.” These would have no meaning if the husband were regarded as without a marital obligation for maintenance and support, or as' creating a new obligation by the agreement.

The use of the word alimony necessarily implies a marital obligation, and when received by the wife the amount is not taxable income, Gould v. Gould, 245 U. S. 151; Mary R. Spencer, 20 B. T. A. 58; Maud H. Bush, 33 B. T. A. 628. The wife is entitled to it irrespective of the agreement, Audubon v. Shufeldt, 181 U. S. 575, and its inherent character persists through bankruptcy, where it is neither provable nor dischargeable as a debt. Dunbar v. Dunbar, 190 U. S. 340; Wetmore v. Markoe, 196 U. S. 68; In re Hubbard, 98 Fed. 710; Turner v. Turner, 108 Fed. 785. In Dunbar v. Dunbar, supra, where the maintenance of the wife was provided by a contract and not expressly by the decree, and as here the divorce was granted to the husband upon the uncontest’ed ground of de'sertion, the Court clearly intimated that the contract could be held as in the nature- of a decree. Said the Court: ‘ ■

Had the provisions of'this'contract,' so far as contracting to pay money for the support of his wife is-.concerned,' been embodied in the decree of divorce which the husband obtained.from his wife in Ohio on the ground of desertion, the liability of the husband to pay the amount as alimony, notwithstanding his discharge in bankruptcy, cannot be doubted. Audubon v. Shufeldt, 181 U. S. 575. We are not by any means clear that the same principle ought not to govern a contract of this nature when, although the judgment of 'divorce is silent upon the subject, it is plain that the contract was made with reference to the obligations of the husband to aid in the support of his wife, notwithstanding the decree. Thé facts appearing in this record do not show a case of any moral delinquency on the part of the wife, and the contract, considering the circumstances, might possibly be held to take the place of an order or judgment of the court .for the payment of the amount, as in the nature of a decree for alimony. We do not find it necessary, however, to decide that question in this case, because in any event we think the contract as to the support of the wife is not of -such a nature as- to be discharged by a discharge in bankruptcy.
* * * ❖ * * *

Douglas v. Willcuts, 296 U. S. 1, seems to support rather than detract from-what has been said. There the trust was said by the Court to-have been “manifestly made in contemplation of” the divorce suit, and was held to "have been embodied in the divorce decree. The trust income ivas held to serve- as a means of discharging the husband’s duty, and the decree simply placed a sanction on the duty. The crucial holding was that the use of the trust income to ' discharge the existing marital duty was enough to justify the tax of the trust income to the husband. Here the decree is silent as to the conítract' and neither provides for nor prohibits alimony, but the circumstances bring both the decree and the agreement into the same focus and it is just as clear that the trust income is used to discharge the marital duty and not merely a contractual duty voluntarily assumed. It is not the sanction of the decree which requires that the trust income be attributed to the husband, but the fact that the income discharges the husband’s marital obligation. Indeed it is possible that § 4115 West Virginia Code empowers the divorce court at any time to modify the decree to provide alimony if circumstances so require.

While there is reference in the contract to property rights and other claims which purport to be settled, there is no evidence upon which any segregation or allocation can be made whereby less than the full amount of trust income can be attributed to marital rights.

The petitioner relies on Reginald Brooks, 31 B. T. A. 70; 82 Fed. (2d) 173. While the statement of facts in that opinion is not in sufficient detail for an exact comparison of the trust agreement with that in the instant case, and seems to provide only for property rights with no reference to alimony, we can not approve the general rationale of the opinion so far as it is at variance with what we have said here. Of course, so far as it be in conflict with the reasoning of Douglas v. Willcuts, supra, it would in any event be without force. But that we need not discuss because it is involved in the appeal now pending. This is equally true of the Board’s more recent opinions in James H. Hyde, 31 B. T. A. 256; 82 Fed. (2d) 174; and Carl B. Tuttle, 31 B. T. A. 782 (now on review, C. C. A., 6th Cir.).

Reviewed by the Board.

Judgment wild be entered for the respondent.

       T]ie treatment by the Supreme Court of the United States of Douglas v. Willcuts, 296 U. S. 1, as authority for its per curiam reversals, on December 9, 1935, of Commissioner v. Stokes, 79 Fed. (2d) 256; Blumenthal v. Commissioner, 76 Fed. (2d) 507; and Schweitzer v. Commissioner, 75 Fed. (2d) 702, is a clear indication that the scope of the ¡rule is broader than an alimony trust sanctioned by a divorce decree.


author: Seawell :

text:
    E. M. Hurlbut, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gladys G. Lawrence, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71788, 75494.
    Promulgated December 31, 1935.

      Sam H. Benbow, Esq., for the petitioners.

      Willis R. Lansford, Esq., for the respondent.
   OPINION.

Seawell :

Respondent says and contends that under the stipulated and admitted facts the burden imposed upon him by section 602 of the Revenue Act of 1928 has been met and discharged. That the admission that petitioners are the heirs at law of the transferor, the intestate, who had no other valuable assets at the date of his death than those then passing by operation of law to petitioners, and that such assets then had a value of $7,500, whereas the taxes herein involved are only in the amount of $3,821.15, respondent claims “ clearly meets respondent’s burden.” He further says in his brief: “The liability of the several heirs-at-law would be limited by the value of the assets received.”

As we understand petitioners’ contention, it has to do almost wholly with the statement contained in the quoted sentence next above. Petitioners contend that the stipulation is not that the one-half interest of the intestate in the homestead was of the value of $7,500, but that that would have been its value “ if clear of liens.” It becomes requisite, therefore, to inquire in respect to liens upon the property. The homestead, it is stipulated, is still in the possession of the widow, Effie Hurlbut, as her homestead. Such possession is under section 52 of article 16 of the Constitution of Texas, which is as follows:

On tlie death of the husband or wife, or both, the homestead shall descend and vest in like manner as other real property of the deceased and shall be governed by the same laws of descent and distribution, but it.shall not be partitioned among the heirs of the deceased during the life time of the surviving husband or wife, or so long as the survivor may elect to occupy the same as a homestead, or so long as the guardian of the minor children of the deceased may be permitted under the order of the court having jurisdiction, to use and occupy the same.

If the right of the surviving widow during her lifetime to occupy the homestead, as provided in the Constitution of Texas is a lien on that part of the homestead previously owned by the husband, it would seem to be a very substantial interest, materially reducing the value of the title and property of the heirs. A lien, “ In its most extensive signification,” saj's Bouvier, “ includes every case in which real or personal property is charged with the payment of any debt or duty; every such charge being denominated a lien on property. In a more limited sense it is defined to be a right of detaining the property of another until some claim be satisfied.” Webster’s Hew International Dictionary is somewhat to the same effect, defining “ lien ” as “ a legal claim; a charge upon real or personal property for the satisfaction of some debt or duty; a right in one to control or to hold and retain or enforce a charge against the property of another until some claim of the former is paid or satisfied.”

Whatever may be the proper designation of the right secured to the widow under the section of the Constitution of Texas quoted— lien, dower, equity, estate or other designation — and though by the quoted section the interest of the deceased in the homestead shall descend and vest at once in the heirs, it is certain that the heirs have only a restricted title and interest in the property while the widow lives and elects to use the property as her homestead. How much this restriction on the.title of the petitioners reduces the value of the property received by them from .their father, the decedent, we have no evidence or stipulation of fact from which to judge. But assuming, without so finding, that the value of the one-half interest in the homestead which descended from the decedent to the petitioners was, as claimed by the respondent, $7,500, there were liens, without including the homestead right as such, upon that property existing at the time of decedent’s death, and still subsisting, as shown in the stipulations sufficient in amount to absorb that value. The Commissioner determined deficiencies in income taxes against the decedent for the years 1927 and 1928 aggregating $6,402.82, together with interest. These taxes have not been paid and are a lien on the homestead interest of decedent, which lien is preserved against bona -fide purchasers for value by the. filing of notice with the county clerk of Harris County, Texas, where the said real estate is located. U. S. C. A. 26, sec. 115. The amount of the 1927 and 1928 taxes, together with accrued interest, is more than the stipulated value of the assets belonging to decedent’s estate. A similar notice as to deficiency of the decedent involved, in these proceedings for the years 1929 and 1930 was filed in said county, for the same purpose. It does not seem either equitable or conformable to the law for these petitioners to be adjudged transferees of the interest of decedent in the homestead and required to pay the taxes for the years 1929 and 1930, when the respondent is in position to have distraint levied on that same homestead interest and it sold for the decedent’s taxes for 1927 and 1928. Respondent has failed to show any value in said homestead interest above the valid subsisting liens and encumbrances held against it. Without showing the value of the assets received, there can be no transferee liability. The burden rests with respondent to make this proof. Willard H. Ashton, 28 B. T. A. 582; 5 Paul and Mertens, sec. 46.42.

Judgment will be entered for the ‘petitioners.


author: MuRdock:

text:
    Frederick L. Holzer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66990.
    Promulgated January 7, 1936.

      J. E. Marshall’, Esq., for the respondent. .
   MuRdock:

The Commissioner determined a deficiency of $9,133.48 in the petitioner’s income tax for 1925 and also determined that $4,566.74 was due as a penalty provided by section 275 (b) of the Revenue Act of 1926. Although the petitioner filed a so-called petition, he did not appear at the hearing, nor did anyone appear on his behalf. The Commissioner in his answer alleged facts to support the imposition of the fraud penalty. No reply to the Commissioner’s answer was filed. The Commissioner, nevertheless, offered evidence to support the imposition of the fraud penalty.

FINDINGS OF FACT.

A part of the deficiency for 1925 was due to fraud with intent to evade tax.

Decision will be entered for the respondent.


author: Murdock :

text:
    Harry O. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66991.
    Promulgated January 7, 1936.

      J. E. Marshall, Esq., for the respondent.
   Murdock :

The Commissioner determined a deficiency of $8,617.33 in the petitioner’s income tax for 1925 and also determined that $4,308.67 was due as a penalty provided by section 275 (b) of the Revenue Act of 1926. Although the petitioner filed a*-so-called petition, he did not appear at the hearing nor did anyone appear on his behalf. The Commissioner in his answer alleged facts to support the imposition of the fraud penalty. No reply to the Commissioner’s answer was filed. The Commissioner, nevertheless, offered evidence to support the imposition of the fraud penalty.

FINDINGS OF FACT.

A part of the deficiency for 1925 was due to fraud with intent to evade tax.

Decision will be entered for the respondent.


author: Abundell:

text:
    Murphy Oil Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47509.
    Promulgated January 7, 1936.

      Thomas B. Dempsey, Esq., for the petitioner.

      M. B. Leming, Esq., for the respondent.
   OPINION.

Abundell:

The respondent determined deficiencies in income tax for the years 1924 and 1925 in the respective amounts of $38,753.26 and $3,522.61. The deficiency for 1925 has been stipulated. The parties have also stipulated that in respect to petitioner’s property known as fhe Whittier property the petitioner is entitled to a depletion deduction for the year 1924 in the amount of $32,874.82.

The remaining issue concerns the deduction for depletion of petitioner’s so-called “ Coyote property.” The respondent concedes a depletion allowance of $396,117.75, that sum being equal to 50 percent of the net income from the entire Coyote property, determined without allowance for depletion. The petitioner claims a deduction of $547,745.66. The issue is whether the respondent was right in limiting the depletion allowance to 50 percent of net income from the entire property or whether the allowance should be based on March 1, 1913, value, plus subsequent costs without regard to net income, plus an additional allowance based on discoveries in 1918 and 1924.

The facts have been stipulated. The stipulation is by reference made a part of this report and only the salient facts are set out herein. The petitioner, a corporation, on March 1, 1913, owned a tract of land, generally known as the Coyote property, comprising about 2,520 acres in Los Angeles and Orange Counties, California. On March 1, 1913, there were 7 producing oil wells on the property, which proved approximately 730 acres. The respondent allowed a value of the proven area as of March 1, 1913, as a basis for depletion. In 1918 two discovery wells were drilled on the property outside of the March 1, 1913, proven area. As a result of these discoveries the petitioner is entitled to additional depletable value of $2,549,626.82 on the basis of estimated reserves in the discovery area of 2,870,554 barrels. In 1924 an additional discovery was made on the above property in a deeper sand for which the petitioner is entitled to an additional depletable value of $2,637,231.25 and additional reserves of 3,102,625 barrels. The petitioner made additions to cost with respect to the above property in 1918 and 1919 of $17,997.03 and $93,469.85, respectively. Depletion sustained in 1924 computed without the application of the limitation prescribed in the revenue act, and based upon the March 1, 1913, value plus subsequent cost plus discovery appreciation was $547,745.66. For the year 1924 the petitioner sustained depletion on the March T, 1913, value and subsequent cost in the amount of $221,290.10. Of this amount $3,184.83 represents costs capitalized in 1918 and 1919.

The petitioner’s gross income from the Coyote property in 1924 was $862,101.33. Its deductible expenses were $69,865.83, leaving a net income of $792,235.50. The deduction for depletion as now conceded by the respondent at the rate of 50 percent of the net income amounts to $396,117.75.

The allowance for depletion is to be determined under section 204 (c) of the Revenue Act of 1924, which provides as follows:

(c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that in the case of mines, oil and gas wells, discovered by the taxpayer after February 28, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter; but such depletion allowance based on discovery value shall not exceed 50 per centum of the net income (computed without allowance for depletion (from the property upon which the discovery was made, except that in no case shall the deiüetion allowance be less than; it would be if computed without reference to discovery value. [Italics supplied.]

The controversy is whether, under this statute, the petitioner may have a depletion deduction based on the discovery value of wells brought in in 1918 and 1924 in addition to a deduction based on March 1, 1913, value plus subsequent costs of a proven area within the same tract as the discovery wells.

The parties have stipulated the depletion sustained to amount to $547,745.66. This amount applies to the entire property and there is no segregation of it as between the original proven area and the discovery property. Schedules attached to the stipulation show the depletion sustained on March 1, 1913, value of-the proven area plus subsequent cost to be $221,290.10. By the process of subtraction, the petitioner computes depletion sustained on the discovery property to be $326,455.56. Now, the petitioner’s position is that it is entitled to a deduction of the sum, of these figures or $547,745.66. The error in that position lies, in the fact that depletion sustained is not necessarily the same thing as depletion allowable under the taxing statute. Of course, where depletion allowable is based on cost or March 1, 1913, value, it is in the same amount as the depletion sustained. But where resort is had to an arbitrary method such as the discovery basis under the Revenue Act of 1924 or the percentage of income method under the later revenue acts, the two are not the same except by coincidence. In this case, the petitioner uses the same figure, $326,455.56, as being both the depletion sustained and the depletion allowable, and seeks to bolster its view in this respect by pointing out that that amount is not in excess ,of 50 percent of net income. There the petitioner runs into difficulty. For one purpose it seeks to have the words “ the property ” limited to the discovery property and for another purpose it uses those words as embracing both the proven area and the discovery wells. That is to say, for the purpose of supporting its view that the depletion sustained in the amount of $326,455.56 is the depletion allowable, it segregates the oil land into proven property and discovery property and says that the latter is “ the property ” within the meaning of the statute. When it comes to determining whether this figure is within the 50 percent limitation, the petitioner does not make a similar segregation, but treats the income from the entire tract, embracing both the proven area and discovery area, as being the income from “ the property.” This, we think, it can not do. See Houston Products Co. v. United States, 4 Fed. Supp. 715; to the effect that discovery depletion is limited to a percentage “ of the net income from the discovery properties.” Assuming without deciding that deductible depletion may be computed on cost as to part of a particular tract and on discovery valuation on another part of the tract, this petitioner does not give enough facts upon which such computation can he made. It has omitted the very essential element of the amount of income from the discovery property which must be shown in order to determine, under the petitioner’s theory, whether the depletion sustained on a discovery basis is within the statutory limitation. Presumably some of the income was from the discovery property, but whether or not it was sufficient to permit of an allowance of $326,455.56, as claimed, we do not know.

The amount that the respondent now concedes to be allowable as a depletion deduction apparently gives the petitioner much more than the depletion allowable based on cost, and under the circumstances here we can not say that the amount now conceded does not give the petitioner the reasonable allowance contemplated by statute.

Decision will be entered v/nder Rule 50.


author: TuRNee:

text:
    Askania Werke A. G., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58546.
    Promulgated January 7, 1936.

      H. A. Milúlls, G. P. A., for the petitioner.

      John H. Pigg, Esq., John IF. Smith, Esq., and H. S. Fessenden, Esq., for the respondent.
   OPINION.

TuRNee:

Our first inquiry is necessarily directed to a determination of the source of the income derived from the sales outlined in our findings of fact. If the sales were made in the United States, there is no question but that the income, if any, derived therefrom is subject, under sections 233 (b) and 217 (e) of the Revenue. Act of 1926 and sections 231 (a) and 119 (e) of the Revenue Act of 1928, to the Federal income tax. .

The petitioner contends that the sales were made in Germany by what are known as c. i. f. contracts. We have previously held that under contracts of that nature, title passes and the sale takes place at the point of shipment, when the seller has loaded the goods on the carrier, secured the insurance, and. forwarded to ■ the purchaser the proper shipping documents. East Coast Oil Co., S. A., 31 B. T. A. 558. In support of his contention that we have such sales in this case, the petitioner points to the terms previously recited from the conditions of sale. Attention is also called to the fact that the price quoted to the purchaser in the invoice is in the same amount as the total of the retail price in Germany, transportation costs, insurance, and import duty. It is also insisted that the billing and shipping of the goods in the name of the purchaser are significant.

While these elements are ordinarily present in a sale made under c. i. f. contract, they are not necessarily conclusive, and in our opinion, other facts appearing in the instant case prevent us from concluding that we have- such contracts here. The petitioner failed to produce copies of any of the sales contracts. Neither did it offer any copies of the so-called letters of confirmation. Under the circumstances, we must determine the nature of the sales contracts on the basis of such facts as we have. If it had been shown that the conditions of sale were made a part of each contract and the things done were in harmony with the conditions stated therein, we would readily conclude that the contracts 'were of the nature contended for by the petitioner. The facts as shown by the record are quite different, however, in many important respects. ■ While it does appear that the conditions of sale were transmitted to the purchaser, we have no information whatever as to the importance of these conditions as reflected by the letters of confirmation or the-written contracts, if any were executed, and we do know that in numerous cases a statement of conditions was not sent with the letter of confirmation but with the invoice. The invoices on their face negatived any idea that the sales were made under c. i. f. .contracts.- They specifically stated that the price quoted was f., o. b. Houston, Texas. Furthermore, the invoices did not indicate in any manner whatever that insurance, freight, or import duties were computed separately in making up the f. o. b. prices shown on the invoices. It is also noticeable that there is nothing to indicate that the usual bill of lading or the essential and necessary policy of insurance accompanied the invoice. The nature of the sale is determined by what was finally done and not by conditions which may have appeared in preliminary writings but not adhered to. United States v. Andrews, 207 U. S. 229. It is our opinion, on the facts as they appear in the record, that delivery of the goods and transfer of title occurred in Houston, Texas.

Having determined that the sales in question were made in the United States, it is now necessary to consider and dispose of the petitioner’s alternative contention with reference to the computation of income. The only books and records kept by Stubbe in the Houston office or by the petitioner in the United States were the cash books showing receipts and disbursements and amounts transmitted to the petitioner’s home office in. Germany. The respondent found it impossible to make a determination of the petitioner’s profits from the sales in the United States from these records and determined the net income to the petitioner therefrom to be 10 percent of the gross sales, the percentage being arrived at on the basis of average profits realized by other foreign corporations engaged' in like or similar transactions. The only proof offered ats the hearing in refutation of the respondent’s determination consisted of certain balance sheets of the petitioner covering its entire financial condition at the beginning and end of the taxable years. We have nothing further. Nothing was offered which gives any indication of the amount of profits, if any, realized by tlie petitioner from the sales made in the United States.

Under the circumstances, the method followed by the respondent in determining the petitioner’s net income appears to us to be proper and reasonable, in the absence of proof on the part of the- petitioner showing that it was erroneous.

The remaining question involves the determination of the penalties for failure to file income tax returns. A return for the year 1928 was voluntarily filed by Stubbe in.the name of the petitioner corporation. Similar returns for the other two years were filed by him at the instigation of a revenue agent, but subsequent to the filing of the return for 1928. The petitioner denies responsibility for any of these returns, contending that it never at any time filed returns for any of these years for the reason that it was'under no obligation to do so. The respondent has determined penalties for the years 1926 and 1927 and has made no claim that a penalty should be imposed for 1928. Under section 3176 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926, it is provided that in the case of failure to make and file a return within the time prescribed by law the Commissioner of Internal Revenue shall add 25 percent of the amount of the tax; provided, however, that if a return is afterwards filed'and it is shown that the failure to file was due to reasonable cause and riot to willful neglect, no such ’ aclditiori shall be made to the tax. In this'case the petitioner has’denied that the returns filed were its returns, and on its own argument the exception provided by statute which might relieve it of the imposition of the penalties does not apply. Accordingly the determination by the respondent is sustained.

Judgment will be entered for the respondent.


author: Smith:

text:
    Harwood Robbins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67076.
    Promulgated January 7, 1936.

      Thomas B. Dempsey, Esq., A. Caldeo' Maelcay, Esq., and Arthur McGregor, Esq., for the petitioner.

      De'Witt M. Evans, Esq., for the respondent.
   OPINION.

Smith:

This proceeding involves a deficiency in petitioner’s income tax for the calendar year 1929 in the amount of $68,356.49. The only question in issue is the amount of gain, if any, derived by the petitioner upon the sale of certain personalty acquired by him by general devise from his mother’s will. The dispute arises as to the basis to be used in computing the gain or loss on such property. Substantially all of the facts have been stipulated.

The petitioner’s mother, Harriet C. Robbins, died testate in 1910, a resident of the State of Ohio, leaving a large estate, and her will was duly probated in Hamilton County, Ohio. The provisions of the will pertinent to this proceeding are as follows:

Item twenty-four (24). I bequeath and devise all the rest and residua of my estate, of every kind and character, wherever situate, and especially including all property that I am given power to dispose of by the terms of the will1 of my father, Edward Harwood, deceased, late of Hamilton County, Ohio, to my son, Harwood Robbins, and my grandson, Harwood Schultz, their heirs and assigns forever, to be divided equally between my said son and my said grandson, share and share alike, but
Provided, however, that if my said grandson, Harwood Schultz, should die without a wife or child living at the time of his death, the share hereby bequeathed and devised to him, shall pass to my son, Harwood Robbins, his heirs and assigns forever. If, however, he leaves no child but leaves a wife, she is to receive forty thousand dollars ($40,000.00), and the balance of the share hereby bequeathed and devised to him, shall pass to my son, Harwood Robbins, his heirs and assigns forever.
* * * * * * *
Item twenty-sis (26). The portion of my estate given to my grandson, Har-wood Schultz, which is in stock of the Grasselli Chemical Co. is to be left in said company for at least five years after my death, and he to have the income from same. After that, he can leave it there or not, as he pleases.

The testatrix’ son, Harwood Robbins, is the petitioner herein. The testatrix’ grandson, Harwood Schultz, subsequently had his name changed to Harwood Spencer.

On April 6, 1910, the petitioner and Spencer entered into a written agreement interpreting certain parts of the will of Harriet C. Robbins, which provided, among other things, that the child referred to in item 24 of the will should be an issue of blood and not an adopted child; that in lieu of the $40,000 to be paid to Spencer’s wife she would receive the equivalent in Grasselli Chemical Co. stock; and that the petitioner would wait one year after Spencer’s death before serving his claim or collecting his inheritance.

In 1912 Spencer obtained possession of 1,0841/2 shares of common stock of the Grasselli Chemical Co., his portion of the estate under the will of Harriet C. Robbins, which was later increased to 8,020 shares by stock dividends.

Ignoring the provisions of the will of Harriet C. Robbins and the agreement of April 6, 1910, with the petitioner, Spencer subsequently attempted to cut off the petitioner’s interest in his mother’s estate by entering into certain trust agreements with the Union Trust Co., of Cleveland, Ohio, by which he conveyed to it in trust all of his shares of the Grasselli Chemical Co. stock for the benefit of himself for life and then to his wife for life, and after her death to persons to be appointed by her in her will, or, on her failure to appoint, to certain of her relatives.

Spencer died September 28, 1928, leaving a will but no children. By his will dated December 22, 1922, he bequeathed all the residue of his estate to the Union Trust Co., of Cleveland, Ohio, to be added to the trust fund above mentioned and disposed of as though originally a part thereof.

Upon Spencer’s death the petitioner immediately claimed the Gras-selli Chemical Co. stock which had been transferred to the Union Trust Co. in trust by Spencer, but Spencer’s widow opposed the petitioner’s claim and the trust company refused to deliver the stock to the petitioner. Thereupon, the petitioner, on January 19,1929, instituted an action against the trust company and Spencer’s widow in the Court of Common Pleas, Cuyahoga County, Ohio, to obtain possession of the certificates of stock.

Before the final determination of the suit and on July 1, 1929, the petitioner, party of the first part, the Union Trust Co., party of the second part, and Spencer’s widow, party of the third part, entered into an agreement of compromise and settlement whereby it was agreed, among other things, that out of the property the widow was to be paid approximately $50,000 in cash and that a trust fund of $240,000 would be created for her benefit during the remainder of her life. The material provisions of the agreement are as follows:

1. That on the execution of this agreement, Second Party shall surrender said 8020.4268 shares of The Grasselli Chemical Company stock and demand $20 par stock of the said duPont Company in exchange therefor, 5614 shares of which duPont stock and all accruals thereof since September 23rd, 1928, and said five thousand six hundred fourteen shares of said duPont stock will hereinafter be referred to as “ said stock.”
2. That as soon as possible after the execution of this agreement Second Party shall sell on the market a portion or portions of the said stock sufficient to produce the net sum of $50',000 which sum thereupon shall be kept by Second Party in a separate account and invested and administered in accordance with the terms of the later of said trust agreements, including the payment of the net income therefrom by Second Party to Third Party. Also, Second Party shall pay Third Party interest on $40,000 from September 23rd, 1928 and on $10,000 from July 1st, 1929, at the rate of six per cent per annum until the said sale is made and said $50,000 is placed in said separate account, and shall make such payment of interest as soon as income from said stock sufficient therefor is received.
3. That out of the income from said stock or the balance thereof, or the reinvestment thereof, or if necessary out of the principal thereof, Second Party shall pay the sum of One Thousand Dollars ($1,000) on the first day of each and every month commencing as of the first day of October, 1928, to Third Party during her life time, together with interest at the rate of six per cent per annum on such monthly instalments as have already accrued and as may accrue before monthly payments are paid up to date from the due date until paid, and that such payments shall be brought up to date as soon as possible.
4. That Second Party shall pay the balance of the net income from said stock or the reinvestment thereof to First Party, making payment as soon as possible of such amount of such net income as remains after bringing payments to Third Party as specified in paragraphs 2 and 3 hereof up to date, and continuing payments thereafter quarterly when, as and if net income is available for distribution saving only sucli amount as "will enable Second Party toi make the payments provided for in paragraph 3 hereof during the succeeding quarter.
s}s * ❖ * # *
8. That if it be finally adjudicated in said pending case after all persons or parties having and/or claiming to have an interest in said stock have been made parties defendant in said case that said parties who have or claim to have an interest in said stock have no interest therein and can, never have any claim thereto against Second Party under said trust agreements, or if Second Party is otherwise assured to its satisfaction that no one can ever have a claim against it for said stock except First and Third Parties, their heirs, executors, administrators, successors and assigns whose rights are set forth in this agreement, then the property in the special account set up pursuant to paragraph 2 hereof or the proceeds thereof including the income then accrued or earned thereon shall be transferred and/or paid by Second Party to Third Party and the obligations of Second Party under said paragraph 2 thereupon shall cease and be ended, and a portion of said stock or funds derived from the sale thereof of the value of Two Hundred and Forty Thousand Dollars ($240,000) shall be placed in trust with Second Party as the trustee and that thereafter the monthly payments of One Thousand Dollars ($1,000) to Third Party as agreed to in paragraph 3 hereof shall be paid from the income derived from said trust and that if the income therefrom shall be insufficient for such payments that the trustee shall have the right to use such portion of the principal of said trust fund as may be necessary to make such payments. If such trust funds should become exhausted before the death of Third Party, then Second Party shall be released from any further obligation to make such monthly payments to Third Party and such monthly payments shall thereafter be made to Third Party by First Party. Upon the death of Third Party the balance of the principal and income then in said trust fund shall be paid by Second Party to First Party or to such party or parties as First Party may direct. Said trust agreement shall be drawn in accordance with the form heretofore submitted by Second Party to First Party and to Third Party.
9. That if the adjudication referred to in paragraph 8 hereof is made or if Second Party is otherwise assured as to claims, as set forth in said paragraph 8, the portion of said stock and the proceeds thereof and the income from the same not otherwise disposed of hereunder shall be transferred and/or paid by Second Party to First Party, and the property now held by Second Party under said trust agreements which is not represented by “ said stock ” shall be administered by Second Party under the trust agreement where listed at the time of the death of Harwood Spencer if identifiable and otherwise under such one of said trust agreements as may be finally ordered in said pending case.
10. That as soon as possible after the execution of this agreement and on the order of First Party, Second Party will sell on the market a portion or portions of the said stock in addition to the stock referred to in paragraph 2 hereof, of the value of not to exceed One Hundred Thousand Dollars ($100,000), the proceeds of said sale to be held by the Second Party until this settlement can be fully consummated. The proceeds of such sale shall bear interest at the rates paid by Second Party in its savings department during such period as such proceeds are held by Second Party in accordance with the then rules of its savings department or shall be reinvested as First Party and Second Party may agree upon. First Party hereby authorizes his attorneys, Gris-wold, Green, Palmer & Hadden to make and transmit to Second Party such order to sell said stock and such agreement as to reinvestment.
11. That if it shall not be finally adjudicated in said pending case after all persons or parties having and/or claiming to have an interest in said stock have been made parties defendant in said case, that said parties who have or claim to have an interest in said stock have no interest therein and can never have any claim thereto against Second Party under said trust agreements, or if Second Party is not otherwise assured to its satisfaction that no one can ever have a claim against it for said stock except First and Third Parties, their heirs, executors, administrators, successors and assigns, as set forth herein, then the provisions of paragraph 2 hereof shall be continued in effect until the death of Third Party, and said stock shall be administered by Second Party under the terms and conditions of said trust agreements between Second Party and Harwood Spencer as modified by paragraphs 2, 3, 4, 5, 6, 11), 12 and 13 hereof.

Notwithstanding the agreement of settlement, the trust company refused to release the stock to the petitioner until the court had entered its decree quieting title against other possible beneficiaries under the trust agreements and the will of Harwood Spencer. In the meantime, and under the provisions of the settlement agreement, the trust company exchanged the 8,020 shares of Grasselli Chemical Co. stock for 1,604 shares of E. I. duPont de Nemours & Co. stock, which latter shares were subsequently increased by reason of stock dividends to 5,614 shares. Immediately after this exchange the stockholders of the Grasselli Chemical Co. did not own or control 80 percent or more of the shares of the E. I. duPont de Nemours & Co. shares.

Thereafter, during August and September 1929, the trust company sold 2,940 shares of the duPont stock for $615,007.70. Of the proceeds from this sale, $240,000 was held in trust by the trust company to provide the annuity of $12,000 per annum which Spencer’s widow was to receive under the settlement agreement.

On November 23, 1929, the court entered its decree in the suit to quiet title in the petitioner’s favor. The decree reads in part as follows:

XV. Tbe court further finds that plaintiff, under the will of Harriet Chase Robbins, became on the 23rd day of September, 1928, the owner absolutely and in fee simple of the 8020.4268 shares of the no par common stock of The Grasselli Chemical Company referred to in plaintiff’s petition and in the answer of defendant The Union Trust Company and in the first cause of action of its cross-petition; that the ownership of said stock by the plaintiff was subject to the payment of Forty thousand dollars ($40,000) as of the said 23rd day of September, 1928, to said Katharine W. Spencer, for the payment of which $40,000 and interest thereon from the 23rd day of September, 1928, said Katharine W. Spencer has a charge and lien upon said stock; that on the 18th day of July, 1929, said The Union Trust Company rightfully changed said 8020.4268 shares of Grasselli stock into 5614 shares of the present $20.00 par common stock of E. I. duPont de Nemours & Company; that said The Union Trust Company held possession of and legal title to said stock and/or the proceeds thereof under the two trust agreements attached to its answer and cross-petition herein, but since said 23rd day of September, 1928, bolds said stock or the proceeds thereof and the dividends, interest, income, rights, and privileges accrued or accruing by reason thereof, as trustee for the benefit of plaintiff and said Katharine W. Spencer as their interests are herein set forth, respectively, and for no other purpose and in no other capacity; and that plaintiff is entitled to the payment, assignment, transfer, conveyance and delivery of said 5614 shares of duPont stock, or the proceeds thereof, and the dividends, interest, income, rights and privileges accruing thereon since said 23rd day of September 1928, upon the payment of $40,000 and interest upon said sum from said 23rd day of September, 1928, until said sum and interest is paid to said Katharine W. Spencer.
* # * * * * *
VIII. A written agreement of settlement entered into between plaintiff and defendants The Union Trust Company and Katharine W. Spencer after the filing of the petition herein and as of the 1st day of July, 1929, was offered in evidence. The court finds that said agreement has no bearing upon the determination of the issues herein, and no issue having been presented to the court as to the rights of the parties to said agreement among themselves under the agreement, the court expressly refrains from making any finding, adjudication or order as to such rights, and the findings, adjudications and orders contained in the preceding paragraphs hereof are made without prejudice to such rights.

Soon after November 23, 1929, the trust company, after defraying litigation and other expenses, and paying $52,862.53 to Spencer’s widow as provided in the settlement agreement, distributed to the petitioner the remainder of the proceeds of the above mentioned sale of duPont shares, together with 2,674 additional duPont shares which remained unsold.

In his income tax return for 1929 the petitioner reported a loss on the sale of the duPont shares by the trust company of $33,249.10 computed as follows:

Sold 2,940 shares for_$615, 007. 70
Less 210.8 shares (Spencer’s widow’s undisputed part)_ 40, 000. 00
Balance 2,729.2 shares sold for_ 575,007. 70
Value, July 1,1929, 2,729.2 shares at $187.50, less brokerage_ 511, 042. 70
Additional cost (including payments and annuities to Spencer’s widow, attorneys’ fees, compensation to trustee; etc_ 97, 214.10
Loss- 33, 249.10

The petitioner bases his claim for the loss upon the theory that the shares of stock were distributed to him within the meaning of section 113 (a) (5) of the Revenue Act of 1928 on July 1,1929, at the time of and by reason of the agreement of settlement between him, the trust company, and Spencer’s widow. The respondent contends, on the other hand, that the time of distribution was the death of the grandson, September 23, 1928, when the fair market value of the shares was $66 per share. On that basis the respondent has computed a gain to the petitioner of $293,135.27 computed as follows:

Total shares received 5fiH

Sold 2,940 shares_$615,007. 70
Less 210.8 (Mrs. Spencer’s share u/w of Harriet Bobbins)- 40, 000. 00
Balance 2,720.2 shares sold for_ 575, 007. 70 Cost:
Market value 5,614 shares at 66, 9/23/28_ $370, 524. 00
Annuity contract, per settlement agreement- 159, 803. 76
Attorney fees_ 35,000. OO
Mrs. Spencer, per settlement agreement_ 10, 000. 00
Interest_ 2,363. 53
Union Trust Co. — Misel. expenses_ 2,125. 01
Total cost of 5,614 shares_ 579, 815. 30
Cost per share_ 103.28024
Cost of stock sold (2,729.2 x 103.28024)_ 281, 872.43
Taxable profit_ 293,135. 27

It is stipulated that the fair market value of the duPont shares was $187.50 on July 1, 1929, and $114.25 on November 23, 1929, and that the value of the 8,020.4268 shares of the Grasselli Chemical Co. stock on July 1, 1929, and July 18, 1929, was of equal fair market value to the 5,614 shares of duPont stock which was received in exchange therefor.

Section 113 (a) (5) of the Revenue Act of 1928 provides:

(a) Property acquired after February 28, ISIS — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
‡ 5Íí ‡
(5) Pkopertt tkansmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death.

Since the property in question, viz., the 8,020 shares of Grasselli Chemical Co. stock, does not come within any other of the classes of property described in section 113 (a) (5) above, it necessarily falls under the provisions of the third sentence of the quoted section, that “ in all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer.” It is upon this question, that is, the date of distribution, that the petitioner and the respondent base their contentions in this proceeding, the respondent contending that the date of distribution is the date of the death of the grandson, September 23, 1928, and the petitioner contending that the date of distribution is the date on which the settlement agreement was executed, July 1, 1929, or, in the alternative, the date on which the final decree of the court quieting title was rendered, November 23, 1929.

Before discussing the issue as thus narrowed, it may be well to note that under the will of the testatrix the petitioner did not take a vested remainder interest in that half of the residuary estate which was bequeathed to the grandson, but took only a contingent interest which was to become absolute in the event that the grandson should predecease him leaving no issue. See Lane v. Corwin, 63 Fed. (2d) 767; certiorari denied, 290 U. S. 644; Edmund S. Twining, 32 B. T. A. 600; William, P. Clyde, Jr., 32 B. T. A. 799. The grandson’s interest in the property was not merely a life estate with remainder over to the petitioner but was an estate in fee simple subject to divestment upon the contingency named. The wording of the will is:

* * * I bequeath and devise all the rest and residue of my estate, * * * to my son, Harwood Robbins, and my grandson, Harwood Schultz, their heirs and assigns forever, to be divided equally between my said son and my said grandson, share and share alike.

As was later determined by the court in the action to quiet title, the petitioner’s right to the property bequeathed to the grandson vested in him and he acquired title thereto on the death of the grandson, September 23, 1928.

What we are called upon to determine, however, is not the date of acquisition of the property by the petitioner but “ the time of the distribution ” to him. A recognition of the possible distinction between the two dates is shown by the change in the wording of the. revenue acts fixing the basis for computing gain or loss on the sale of such property from the “ time of such acquisition ” as it appears in the 1926 Act to the “ time of the distribution ” as it appears in section 113 (a) (5) of the 1928 Act. With respect to this change in the law, the Supreme Court, in Brewster v. Gage, 280 U. S. 327, said:

The Revenue Act of 1928, § 113 (a) (5), expressly established value at the time of the death of the decedent as the basis of calculation in respect of sales of personal property acquired by specific bequest and of real estate acquired by general or specific devise, or by intestacy, and in ail other cases fixed market value at the time of distribution to the taxpayer as the basis. 45 Stat. 819 (26 U. S. O. A. § 2113). The deliberate selection of language so differing from that used in the earlier acts indicates that a change of law was intended. * * *

See also Ralph W. Harbison, 26 B. T. A. 896, for further discussion of the legislative history of section 113 (a) (5) above.

Brewster v. Gage, supra, arose under the earlier Acts of 1918 and 1921, which were similar to the 1924 and 1926 Acts, the Court holding that under the earlier-acts the time of acquisition and the base for determining gain or loss on the sale of the property acquired by general devise was the value at the date of the death of the testator and not the date of distribution to the legatees. In its opinion the Court said:

Upon the death of the owner, title to his real estate passes to his heirs or devisees. A different rule applies to personal property. Title to it does not vest at once in heirs or legatees. United States v. Jones, 236 U. S. 106, 112, 35 S. Ct. 261, 59 L. Ed. 488, Ann. Cas. 1916A, 316. But immediately upon the death of the owner there vests in each of them the right to his distributive share of so much as shall remain after proper administration and the right to have it delivered upon entry of the decree of distribution. * * * The decree of distribution confers no new right; it merely identifies the property remaining, evidences right of possession in the heirs or legatees, and requires the administrators or executors to deliver it to them. The legal title so given relates back to the date of the death. Foster v. Fifield, 20 Pick. (Mass.) 67, 70; Wager v. Wager, 89 N. Y. 161, 166; Thompson v. Thomas, 30 Miss. 152, 158.
Petitioner’s right later to have his share of the residue vested immediately upon testator’s death. At that time petitioner became enriched by its worth, which was directly related to and would increase or decline correspondingly with the value of the property. And, notwithstanding the postponement of transfer of the legal title to him, Congress unquestionably had power and reasonably might fix value at the time title passed from the decedent as the basis for determining gain or loss upon sale of the right or of the property before or after the decree of distribution. And we think that, in substance, it would not be inconsistent with the rules of law governing the descent and distribution of real and personal property of decedents to construe the words in question to mean the date of death.

In so deciding, the Court rejected the ruling of the Board in F. W. Matthiessen, Jr., 2 B. T. A. 921, and Alice Fisher Foster, 7 B. T. A. 1137, and of the Court of Claims in Matthiessen v. United States, 65 Ct. Cls. 484; certiorari denied, 278 U. S. 609, that the value at date of acquisition meant value at date of distribution.

The phrase “ the time of the distribution ” as used in the 1928 Act must necessarily relate to the time at which the property is actually delivered to or made available for the use of the distributee or someone acting for him by the executors, administrators, or others having lawful possession or control thereof. See Haskell v. Commissioner, 78 Fed. (2d) 869; certiorari denied, 296 U. S. 652. Otherwise, it is difficult to see how any effect could be given to the change enacted in the 1928 Act. This time may occur immediately upon the death of the prior owner or at some later date during the process of administration of the estate. Brewster v. Gage, supra. It is a question to be determined from the facts in each case.

It seems clear in the instant case that whatever were the petitioner’s rights of ownership with respect'to the property in question before that time, he did not actually receive it by way of any distribution, nor was it within his power to possess it until the court entered its decree quieting title thereto. How, then, can it be said that the property was distributed to him prior to that time ?

The respondent has determined that the distribution took place at the date of death of the grandson, September 28, 1928. Yet, at that time nothing whatever was actually done by way of distributing the property to the petitioner. It was then being held by the trust company as trustee and it was continued to be so held for over a year thereafter. The petitioner laid claim to the property under his mother’s will immediately upon the grandson’s death, but the grandson’s widow made adverse claim and the trust company, as trustee, properly refused to release it until the rights of the parties had been determined by the court. The trust company’s position during the interim between the death of the grandson and the decree of the court was analogous to that of any duly appointed executor, administrator, or trustee. It had possession of the property and held legal title thereto for the benefit of others. If the property had not been so held at the time it is probable that the court would have appointed a trustee ad litem upon the filing of the suit to quiet title.

It is true that the property in question never fell into the deceased grandson’s estate and was not subject to distribution by his executors, or administrators, but that is not material here. His death was the event that vested title in the petitioner and passed ownership in the property to him just as the death of a testator commonly vests title to the property of the estate in the legatees. In no event does the time of the death of the present owner necessarily bear any relation to the time of the distribution of the property to the successor owner.

We held in Arthur E. Braun, Trustee, 29 B. T. A. 1161, that the dates of distribution within the meaning of section 313 (a) (5) above were the dates on which the properties were ordered to be distributed by court decrees and not the dates when the decrees were entered. Also, we held in William R. Huntley, 30 B. T. A. 931, that the date of distribution was the effective date of the decree of dis-tributión rather than the date of actual delivery to the distributee pursuant thereto.

For the purpose of applying section 113 (a) (5) we can see no reasonable grounds for a distinction between the distribution by the trust company here and that of the ordinary distribution of property by a duly appointed executor or administrator pursuant to a decree of court, as was the situation in the Braun and Huntley cases.

We do not think that the voluntary agreement entered into by the parties on July 1, 1929, while the suit to quiet title was still pending was, as the petitioner contends, the “ distribution ” contemplated by the statute. This agreement did no more than definitely determine the separate .interests of the claimants to the property just as is often done by the heirs and legatees of an estate in process of administration. The agreement anticipates but does not in itself constitute the distribution. Under the agreement here, certain acts with respect to the property were to be performed by the trust company, but no distribution of any part of the property was to be made or was made to the petitioner until after termination of the suit to quiet title, and then the amount to be distributed, if any, was contingent. See paragraphs 8 to 11, inclusive, of the agreement quoted above.

In our opinion the time of the distribution of the property in question to the petitioner was not the date of death of the grandson or the date of the execution of the agreement, but was the date of the decree of the court quieting title, which was November 23, 1929. This being true, it seems to follow that there was no sale of the shares in question by the petitioner after the distribution. In these circumstances we fail to see how the petitioner is liable to tax upon any gain or entitled to the deduction of any loss on the sale under the provisions of section 113 (a) (5). This section can hardly be construed as intended to fix a base for computing gain or loss on a sale of property which was not determinable until some time after the sale. As we have found, the petitioner here acquired his interest in the property prior to the date of the sale by the trust company but did not receive it in distribution until later. The sale was made not by the petitioner, but by the trust company holding for the petitioner and others. The sale referred to in section 113 (a) (5) is a sale by the taxpayer and not by another. There is no question before us as to the liability of the trust company, as trustee, for any gain on the sale, or the liability of the petitioner as a beneficiary of the trust.

We are of the opinion that whatever was finally distributed to this petitioner pursuant to his mother’s will and the settlement agreement constituted his inheritance from his mother’s estate and that as such no part of it is taxable to him. The death of the grandson, the settlement agreement, and the decree of the court quieting title to the property were all merely the events which determined the vesting and distribution of the petitioner’s interest therein.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Matthews concurs in the. result.

       September 23, 1928, Sunday, date of death, no quotation. September 22, 1928, Saturday, 100 shs. offered at 07, no ibid. September 15, 1928, Saturday, 100 sks. sold at 65. Average o£ 66 used.


author: Tuenek :

text:
    Louis W. Hill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73971.
    Promulgated January 9, 1936.

      G. G. Goodman, Esq., and Francis D. Butler, Esq., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Tuenek :

With reference to the first issue, it is the contention of the petitioner that the income involved is income from an irrevocable trust which during the taxable year was expended for the benefit of his wife and adult children and could under no circumstances be treated as income taxable to him. He points out that his wife had income-producing property of her own having a value in excess of $600,000 and, further, that his children were of legal age and he had no legal responsibility to provide a home for them. On the other hand, the respondent contends that the expenditures in question were in payment of obligations of the petitioner and, as such, constituted income to him.

Except for the payment of $12,000 per annum to Maud van Cordlandt Taylor Hill, which amount is not involved in this proceeding, the petitioner in creating the trust obviously had but one purpose in so far as the income in question is concerned, and that was to provide the funds for the support of the petitioner’s wife and the maintenance of the family home so long as she occupied that home with him. Under Minnesota law these are obligations of the petitioner and it matters not that his wife may have independent means of her own. Kosanke v. Kosanke, 137 Minn. 115; 162 N. W. 1060. Furthermore, a husband is liable for goods sold and delivered to his wife for family use, even though he has furnished her with money to pay for the same. Rotering v. Hibbard, 210 N. W. 395. He is also required to maintain his wife according to his estate and rank in life. Cf. Bergh v. Warner, 47 Minn. 250; 50 N. W. 77.

The fact that the trust instrument provided that the petitioner should personally pay one sixth of the expenses of maintaining the home does not make the support of his wife and the maintenance of the family home any the less his obligation, and neither is the fact that adult children are permitted to live there of any significance. The trust in question makes no provision for, and obviously does not contemplate, their separate maintenance.

The petitioner is a man of wealth and the maintenance of a more or less elaborate establishment as his home is in keeping with his financial position. An examination of the expenditures listed indicates that with very few exceptions the items involved are those which might reasonably be contemplated in connection with the maintenance of such a home and there is no showing that they are not proper items in the budget of a family maintaining the social position required of the petitioner and his wife.

That income from a trust which, by its terms, provides that the income is to be used in the payment of a legal liability of the grantor is taxable to the grantor, is no longer in doubt. Douglas v. Willcuts, 296 U. S. 1; and Commissioner v. Schweitzer, 296 U. S. 551; Stokes v. Helvering, 296 U. S. 551; and Helvering v. Blumenthal, 296 U. S. 552, decided per curiam, under authority of Douglas v. Willcuts, supra. The income in question was properly included in the income of the petitioner.

The remaining issue involves the computation of the deduction for charitable contributions. The petitioner contends that the deduction is to be based on net income prior to the deduction of capital losses. In Helvering v. Bliss, 293 U. S. 144, the Supreme Court held that capital net gains should be included in gross income for the purpose of computing deductions for charitable contributions. Subsequently, on the basis of the reasoning contained in that decision, we held in James K. Lockhart, 32 B. T. A. 732, that such deductions were to be determined on net income reduced by capital net losses. This latter decision is determinative of the issue here and the respondent is sustained.

Decision will be entered under Rule 50.