author: Leech :

text:
    John B. Marsh and Isabel S. Marsh (Husband and Wife), Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81527.
    Promulgated October 14, 1938.

      Russell L. Bradford, Esq., Rollin Browne, Esq., and George H. Graven, Esq., for the petitioners.

      DeWitt M. Evans, Esq., Philip A. Bayer, Esq., and Breedlove Smith, Esq., for the respondent.
   OPINION.

Leech :

The petitioners contend that the preference stock in International became worthless in 1932. They argue that the events occurring in that year, which establish its worthlessness, were the death of Kreuger, the adjudication of the corporation as a bankrupt, the public disclosure of the frauds and embezzlements perpetrated by Kreuger, followed by the disappearance of a market value for the stock. It is therefore their position that all reasonable hope or expectation that the holders would ever receive anything on account of it thus vanished in that year. The respondent denies that the stock became worthless during 1932. He argues that it continued to have value at least until 1936, when it was exchangeable for participating certificates in Imco, which in turn also had value. He concedes, however, that if the stock became worthless in 1932, the petitioners are entitled to the deduction taken in their return as a loss on the stock.

The question of whether property becomes worthless during a particular year is one of fact. Brown v. Commissioner, 94 Fed. (2d) 101; M. Rea Gano, 19 B. T. A. 518. The determination of that fact then calls for a practical, not a legal, test. Lucas v. American Code Co., 280 U. S. 445. Usually, losses are evidenced by closed and completed transactions. However, the statute and regulations permit the deduction of losses which are not fixed by closed and completed transactions but which are determinable upon the occurrence of other identifiable events. A loss fixed by such identifiable events may be deductible, within the act and regulations, without the taxpayer establishing that no possibility of eventual recovery of any portion of his investment exists. Thus, in deducting losses on worthless investments a taxpayer is not required to be an incorrigible optimist. United States v. White Dental Manufacturing Co., 274 U. S. 398; Brown v. Commissioner, supra. “An identifiable event”, other than a closed transaction, fixing a loss, has been described as “an incident or occurrence that points to or indicates a loss — an evidence of a loss.” Industrial Rayon Corf oration v. Commissioner, 94 Fed. (2d) 383. Among such identifiable events which establish the worthlessness of corporate stock and the consequent right to a deduction of a loss thereon, is judicial bankruptcy of a corporation that is hopelessly insolvent. Jeffery v. Commissioner, 62 Fed. (2d) 661; William L. Taylor, 37 B. T. A. 1055.

The record is replete with evidence of gigantic frauds perpetrated by Kreuger over a period of years through forgeries, deliberate and systematic false representations, misappropriation of assets, the violation of the confidence reposed in him by business associates, and/or otherwise. His death, in March 1932, and the immediately following revelation of the chaotic financial condition existing in the corporate empire dominated by him, were the signals for the comprehensive and intensive investigations that were immediately begun in the United States and abroad. Yery early, these investigations disclosed that this corporate empire, including International, was a victim of his wrongdoing. By the end of 1932, it was generally known that his fraudulent practices had been extensive and exceedingly damaging to the financial welfare of the corporations dominated by him.

The first tentative report of the receiver in bankruptcy, dated May 13, 1932, disclosed that, at the close of business on April 13, 1932, the unaudited books of International showed assets of approximately $197,000,000 and a surplus of about $14,000,000 above liabilities and outstanding capital stock. Investigations made in 1932 revealed that this picture was completely false; that many of the items listed on the books as assets were fictitious and worthless; that the values shown for many others were greatly overstated and that other assets in large amounts, recorded on the books, were not in the possession of the corporation and that their recovery, even if possible, would be dependent on the outcome of legal proceedings. By the end of 1932, the trustee in bankruptcy, who formerly had been the receiver, had only been able to reduce to possession securities having a cost of about $60,000,000, as shown by the books, and had on hand about $1,700,000 in cash, of which $1,380,000 was in a special fund pending determination of certain adverse claims with respect to it. Before January 31, 1933, the trustee had instituted suits against the directors of International for approximately $135,000,000, against certain banks for about $4,-000,000 and for the recovery of income tax of about $2,290,000 which it was alleged was erroneously paid. As against the facts disclosed in the foregoing description of the condition with respect to assets, as of January 31, 1933, claims on debentures, alone, in an amount in excess of International’s total outstanding liabilities of $105,444,-014.43, as shown by its books, had been filed against the estate. While some of these claims had, doubtless, been improperly filed and were later disallowed by court order, such action had not been taken at that time. In addition, claims filed by or on behalf of the Swedish Match Co., A/B Kreuger <& Toll (Swedish and American estates), and Dutch Kreuger & Toll aggregated approximately $1,200,000,000. Although the trustee was contesting the last mentioned claims, they had not been adjudicated. Further, the Federal Government had under advisement the assessment of an additional income tax for 1931 of approximately $1,000,000, and this assessment was subsequently made.

Upon the unanimous request of the representatives of the creditors of International, the trustee did not, at the beginning of its administration of International’s affairs, make any attempt to dispose of its assets, either in their entirety or piecemeal. No possibility existed for their sale as an entirety and any expenditure toward that end would probably have been useless. Piecemeal sales could not have been made at prices approximating the true value of the assets. As a result of vigorous and protracted negotiations in the settlement of intercom-pany claims and controversies, the recovery of assets and an orderly disposition of assets, as well as allowing liberal values for the principal assets undisposed of, it appears that the net value of International’s assets after the payment of administration expenses, etc., was approximately $37,000,000, or about $61,000,000 less than the amount of the uncontested and allowed claims of creditors which were entitled to priority over the preference stock.

In our opinion, the situation existing at the close of 1932 clearly indicated that International was hopelessly insolvent. That such was the then view of the holders of and others interested in its outstanding obligations and stock, is shown by the quotations on the New York Stock Exchange in November 1932 of from $65 to $102 per $1,000 face amount of its debentures and the public sales of the preference stock in December of that year, the proceeds from which were insufficient to pay the expenses incident thereto. While the public sales of preference stock were probably for the sole purpose of establishing losses, the negligible prices received, when considered in the light of known facts, tend to indicate that the sellers and buyers considered the stock was practically worthless. Subsequent developments only confirm what was known and generally regarded to be International’s real financial condition in 1932.

In its reports to the court, to and including that of February 8, 1933, the trustee refrained from expressing its opinion as to the value of International’s assets. From an examination of those reports it seems that the trustee’s action in this respect was not due to its opinion or belief that International was solvent, but resulted from its desire to avoid expressing an opinion of value which might finally prove to be excessive. The trustee merely presented the facts in its possession to the court and the public. It was left to the interested parties, themselves, to draw their own conclusions as to whether the company was insolvent.

The respondent contends that the "over the counter” sales of the preference stock, made within the price ranges per share of a high of 62 cents and a low of 12½ cents in 1932, following the month of May, of a high of 25 cents and a low of 17⅜ cents, in 1933; of a high of 16½ cents and a low of 10½ cents, in 1934; and of a high of 27½ cents and a low of 11½ cents in 1935, established that the stock continued to have value, not only throughout 1932 but during subsequent years through 1935. Applying the foregoing per share prices to 750 shares of preference stock, the number of shares owned by Isabel S. Marsh, and making allowance for brokerage commission and transfer taxes, the respondent computes maximum and minimum values for the block of stock as follows: $429 and $54 in 1932; $135.75 and $79.50 in 1933; $72 and $27 in 1934; $154.50 and $34.50 in 1935. The record is silent as to the number, frequency, or size of the sales upon which the respondent relies. Whether they were scattered, isolated transactions involving only a few shares each, we do not know. Aside from the showing that they were made “over the counter”, nothing is revealed of the circumstances surrounding any of them. In view of this condition of the record and of the public sales made about the end of 1932, the proceeds from which did not meet the expenses thereof, and considering the generally recognized insolvent condition of International in 1932, we think that these sales upon which the respondent relies, were of a type that is made for the purpose of establishing losses or represent purchases made by optimists in defiance of reason and the generally known and accepted facts. Transactions of that type do not establish value for stock that is already worthless. Brown v. Commissioner, supra; Wesch v. Helburn, 5 Fed. Supp. 581.

The respondent argues that the agreements of December 17, 1924, between the Swedish Match Co. and International and the holders of its preference stock, by reason of which it was possible for the Imco plan to be negotiated by the protective committee for the holders of preference stock, gave added value to the preference stock. A careful examination of the agreements in connection with the various prospectuses given to the public at the time of the offering of the different issues of preference stock, indicates that their primary purpose was to promote the sale of preference stock by attempting to mislead the public into believing that the preference stock was, in some way, backed by the Swedish Match Co. However, assuming that they were valid, which the Swedish Match Co. denied, the most that can be found in the agreements is that they imposed restrictions on the sale by the Swedish Match Co. of the common stock held by it in International and restricted the declaration of dividends on its own stock by the Swedish Match Co. The respondent does not point out, nor is it apparent, that a violation of these restrictions would be injurious or damaging, necessarily, to the holders of preference stock in International. Although the petitioners were not familiar with the existence of these agreements prior to 1936, all the prospectuses given to the public in connection with the offerings of preference stock, refer to the agreements, and the prospectus, issued in connection with the offering of such stock in 1924, contains a fairly clear summary of the agreements. In view of this, we think it is only reasonable to conclude that the public, generally, knew of the existence of the agreements, was fairly definitely informed as to their contents, and gave such consideration to them as was deemed warranted in making purchases and sales of preference stock, both before and after International’s adjudication as a bankrupt. Whatever value, if any, the agreements gave to the preference stock, was reflected in the price at which the stock was sold. There is not only nothing to show that the Swedish Match Co. violated its part of the agreements, but there is evidence which indicates performance of the portion relating to the retention of a majority of the common stock in International. There is no evidence that International ever performed under the agreements. Under these circumstances the agreements appear, at best, to have had only a nuisance value. We are unable to say that they gave any appreciable value to the stock. This is demonstrated by the offer to the holders of preference stock under the Imco plan.

For the issuance of its preference stock, International had received very substantial sums of money just as it had in connection with the issuance of its debentures. It was, therefore, natural for the protective committee for the holders of preference stock to try to obtain something of value for the holders of such stock. The Imco plan was used for the settlement of intercompany claims and the purchase of certain assets by the Swedish Match Co. The plan as proposed, in effect, offered, for a limited period ending June 30, 1938, to the holders of preference stock in the United States, a group of speculations, namely: That the selling price of class B stock in the Swedish Match Co. would increase; that the London buying price of Swiss Kronor would remain stationary or at least not increase; and that, since the stock was to be sold outside of the United States, the exchange rate between the country in which the stock was sold and the United States would be favorable for making remittance to the holders of preference stock in the United States. On June 8, 1936, two days before the protective committee announced that the Imco plan would be offered to the holders of preference stock, the average selling price, on the London Stock Exchange, of class B shares in the Swedish Match Co. was equal to the London buying price of only about 19 Swedish Kronor, or a price which was below that at which any of such shares could be sold under the Imco plan. The evidence indicates that at that time on the London Stock Exchange, the shares were selling around the lowest price for the preceding period of about three months. That what was offered the holders of preference stock under the Imco plan, was of a highly speculative character, is demonstrated by the nominal and erratic prices at which Imco participating certificates were quoted.

At the time of the submission of the proceeding Isabel S. Marsh had received nothing from the Imco participating certificate which she had received in exchange for her shares of preference stock in International. Whether she received anything between that date and June 30, 1938, when the rights under the certificates expired, we do not know. However, if she did, such recoupment of her loss resulting from the preference stock would not be fatal to her position here since she did not have the burden of showing that there was no possibility of recovering any portion of her investment. United States v. White Dental Manufacturing Co., supra.

After having duly considered the evidence we are of the opinion that the preference stock in International became worthless in 1932 and have so found as a fact. It follows that the petitioners are entitled to the deduction taken in their return with respect to the shares of such stock held by Isabel S. Marsh. Cf. Robert Ridgway, 35 B. T. A. 122 (on appeal C. C. A., 2d Cir.).

Beviewed by the Board.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Smith : TurNer,

license: Public Domain

text:
    C. Griffith Warfield, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89170.
    Promulgated October 18, 1938.

      Lawrence A. Baker, Esq., and Henry Bavenel, Esq., for the petitioner.

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

Smith :

This proceeding is for the redetermination of a deficiency of $171.28 in petitioner’s income tax for 1934. Petitioner alleges that the respondent erred in. adding to his reported income $812.54 “fiduciary income”, and $3,400 claimed as a capital loss on a real estate transaction.

The essential facts are stipulated. On January 12,1927, petitioner and two other individuals, Lawrence A. Baker and H. L. Rust, Jr., entered into a contract to purchase certain real estate situated in the District of Columbia, known as 1128-1130 Connecticut Avenue. The total purchase price under the contract was $350,000. The purchasers agreed to pay $50,000 in cash, assume a first trust indebtedness of $160,000, and execute second trust notes for $140,000. The purchase was consummated on May 1, 1927, each of the participants contributing $13,000 in cash. Prior to that time, on April 27, 1927, the petitioner and his associates, who then included a fourth individual, Thomas B. Hayward, who in the meantime had acquired an interest in the contract, entered into a further agreement that H. L. Rust, Jr., should take title to the property and operate it as trustee for himself and his associates. The trustee was simply to manage and operate the property, collect the rents and profits, and distribute the net profits to the parties in interest.

On January 24, 1934, H. L. Rust, Jr., wrote the petitioner and the other coowners of the property that past due interest and a curtail on the second trust against the property would have to be met or the owner of the note secured thereby would institute foreclosure proceedings immediately. On January 30, 1934, petitioner wrote H. L. Rust, Jr., that he could not meet his share of the interest and curtail.

On February 19, 1934, the property was sold at foreclosure by the Union Trust Co., as trustee, under tbe second trust and was purchased by the holder of the second trust note. The bid price was $40,000 over and above the amount of the first trust. At that time the principal of the second trust amounted to $105,000 and accrued interest was due thereon in the amount of $8,207.50, so that the petitioner received nothing from the sale. Petitioner’s total investment in the property at the time of the foreclosure was $17,000.

In his return for 1934 the petitioner reported a total income of $2,148 after deducting a capital loss of $3,400 on the above described real estate transaction. The respondent has disallowed the deduction of the $3,400 item and has added to petitioner’s income a further amount of $812.54, representing petitioner’s share of alleged partnership earnings from the operation of the real estate in question in 1934. In making these adjustments the respondent determined that the petitioner and his associates operated the property in 1934 as a partnership and that the partnership realized profits from rentals for the year of $3,250, of which amount petitioner’s share was $812.54. He found that the partnership sustained a total net loss on the sale of the property in the amount of $108,013.63, of which amount only $2,000 was deductible by the partnership under the statutory limitation on capital losses.

Petitioner’s principal contention is that the statutory limitation on capital losses contained in section 117 (d) of the Eevenue Act of 1934 is not applicable to the loss on the foreclosure sale of the real estate here involved. Section 117 (d) provides in part as follows:

(cl) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * *

In Commonwealth, Inc., 36 B. T. A. 850, we held that section 117 (d) was not applicable where the owner of real estate subject to a first mortgage deeded the property to the mortgagee without consideration, thereby sustaining a loss of his investment in the property, and that such loss was deductible in full as an ordinary loss. Likewise, in Sol Greisler, 37 B. T. A. 542, where the property was bid in by the mortgagee at a foreclosure sale for an amount less than the mortgage and the taxpayers sustained a loss of their entire investment, we held that the loss was an ordinary loss deductible in full under section 23 (e) (2) of the Eevenue Act of 1934.

The instant case is distinguishable from Betty Rogers, 37 B. T. A. 897, where it was held that the voluntary transfer of real estate to the holder of the purchase money trust note in consideration for the release of the owners from their obligation on the note and cancellation of the indebtedness represented thereby constituted a sale of the property and resulted in a capital loss rather than an ordinary loss. Commonwealth, Inc., supra, was distinguished on the ground that “In. that case the taxpayer received nothing in consideration of the transfer of the property to the mortgagee.” This distinction applies with equal force here. Petitioner received no consideration whatever in the transaction. His investment in the property was entirely wiped out by the foreclosure sale and he got nothing in return. In the instant case there was no voluntary conveyance of the property by the owners to the holder of the trust note, but a published sale of the property under foreclosure proceedings. There was no agreement between petitioner and the holder of the trust note relieving the petitioner of his liability, if any, thereon. On these facts we hold that the loss sustained by the petitioner on the eale of the property in question was an ordinary loss and is deductible in its entirety. The deduction thus allowed offsets petitioner’s taxable income as computed by the respondent without benefit of the deduction.

Reviewed by the Board.

Judgment of no deficiency will ~be entered.

TurNer,

dissenting: As I read the opinion of the majority in this proceeding there is no question that the property disposed of was a capital asset and the holding rests entirely upon the conclusion that the disposition of the asset was not by way of a sale or exchange within the meaning of section 111 of the Revenue Act of 1934. That section of the statute in so many words deals with “the gain or loss recognized upon the sale or exchange of a capital asset.” To say that the loss in the instant case was not sustained “upon the sale” of the petitioner’s property, admittedly a capital asset, is in my opinion to ignore the plain facts and the fundamentals of mortgages and foreclosures. Furthermore, even though it may be said that there was no sale of anything belonging to petitioners in such cases as Commonwealth, Inc., 36 B. T. A. 850, and Sol Greisler, 37 B. T. A. 542, which cases were not reviewed by the Board, and in respect of which I express no opinion here, the factual situation on which those decisions turn is not present in this case. In the instant case the creditor apparently instituted suit and obtained judgment upon the personal obligations of the petitioners and, by reason of authority previously given by the petitioner in the trust instrument, procured an order authorizing the sale of the capital assets here involved, the petitioner’s property, and the application of the proceeds in satisfaction of the petitioner’s debt. According to the facts as I understand them, the trustee actually or at least constructively received a sum of money for the benefit of the petitioner upon such sale and the amount so received was applied toward satisfaction of the judgment against the petitioner. I am unable to find any basis for a conclusion that the loss was not sus-tamed “upon, the sale” of a capital asset belonging to the petitioner merely because the sale occurred in connection with foreclosure proceedings and was actually made by a trustee for the account of petitioner rather than by the petitioner himself.

For the reasons stated, I respectfully dissent.

Leech agrees with this dissent.


author: Smith :

text:
    H. L. Rust, Jr., and Mildred A. Rust, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89171.
    Promulgated October 18, 1938.

      Lawrence A. Baker, Esq., and Henry Bmenel, Esq., for the petitioners.

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

Smith :

This proceeding is for the redetermination of a deficiency of $450.46 in petitioner’s income tax for the year 1934. The essential facts are stipulated.

H. L. Rust, Jr., hereinafter referred to as the petitioner, and two other individuals, Lawrence A. Baker and C. Griffith Warfield, on January 12, 1927, entered into a contract to purchase certain real estate situated in the District of Columbia, known as 1128-1180 Connecticut Avenue, for a total purchase price of $350,000. The purchasers agreed to pay $50,000 in cash, assume a first trust indebtedness of $160,000, and execute second trust notes for $140,000. The purchase was consummated on May 1, 1927. Each of the participants contributed at that time $13,000 in cash.

On April 27, 1927, petitioner entered into an agreement with the other individuals interested in the purchase, then including a fourth party who in the meantime had purchased an interest from one of the others, that the petitioner should take title to the property and operate it as trustee for himself and his associates. The trustee was to manage and operate tbe property, collect the rents and profits, and distribute the net profits to the parties in interest.

On January 24,1934, the petitioner wrote to the other participants that past due interest and a curtail on the second trust against the property would have to be met or the owner of the note secured thereby would institute foreclosure proceedings immediately. Two of petitioner’s associates advised him that they could not meet their share of such payments.

Eealizing that the property would be foreclosed, petitioner and one of his associates, Lawrence A. Baker, both of whom were liable as endorsers and guarantors on the second trust note and desired to protect themselves against probable deficiency judgments on the sale of the property at foreclosure, and both of whom were able and willing to meet their share of the interest and curtail referred to above, made an arrangement with the owner of the note secured by the second trust to bid up to a certain price for the property and permit them to take it over from him if he should be the successful bidder.

On February 19, 1934, the property was sold at foreclosure by the Union Trust Co. as trustee under the second trust and was purchased by the holder of the second trust note for $40,000 over and above the first trust. This amount was substantially less than the amount at which petitioner and Lawrence A. Baker were to be protected and to be permitted to take title to the property under the agreement referred to above. At that time the principal of the second trust amounted to $105,000 plus accrued interest of $8,207.50.

Thereafter and during 1934, petitioner and Lawrence A. Baker received from the purchaser at the foreclosure sale a deed to the property as tenants in common, for the following consideration: assumption of the first trust of $160,000; execution and delivery of a new second trust note for $104,000; and the payment of $13,000 for interest, taxes, and curtail of the first trust. The petitioner and Lawrence A. Baker owned the property throughout the remainder of the taxable year.

In his income tax return for the year 1934 petitioner did not claim any loss deduction on account of the foreclosure sale of the property in question. He included in his gross income one-half of the net rents from the property and claimed as a deduction one-half of the interest and taxes. Petitioner’s net income as reported in his return was $4,974.91 which the respondent in his deficiency notice increased to $11,269.26. The adjustments made by the respondent, including the disallowance of a claimed loss of $17,100 on certain bank stock, are not in dispute except as they pertain to the real estate transactions described above.

The respondent has determined on the basis of reports submitted by an examining revenue agent on June 16, 1936, that the real estate in question was operated by a partnership composed of H. L. Rust, Jr., the petitioner, Lawrence A. Baker, C. Griffith Warfield, and T. B. Hayward, for the period January 1 to February 19,1934, and that for the period February 20 to December 31, 1934, it was operated by a partnership composed of the petitioner and Lawrence A. Baker. He has determined that for the period January 1 to February 19, 1934, that partnership had a net income from rents of $3,250, of which petitioner’s share is $812.50. That amount has been added to petitioner’s reported income. The respondent further determined that for the period February 20 to December 31,1934, the partnership had a net loss of $810.13, one-half of which, or $405.06, is deductible by petitioner. In computing the earnings and profits of the partnership for the period January 1 to February 19, 1934, the respondent determined that the partnership sustained a capital net loss on the foreclosure sale described above of $108,013.63, but that only $2,000 of such amount is deductible because of the statutory limitation on capital loss deductions contained in section 117 (d) of the Revenue Act of 1934. That section of the statute reads in part as follows:

(d) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 idus the gains from such sales or exchanges. * * ⅜

The questions for our determination are whether any deductible loss was sustained by the petitioner by reason of the foreclosure sale, since petitioner retained or reacquired an interest in the property after the sale, and, if so, whether the loss was a capital loss within the meaning of section 117 (d).

In Tompkins v. Commissioner (C. C. A., 4th Cir.), 97 Fed. (2d) 396; the court held, reversing the Board’s unreported decision in Charles H. Tompkins, Docket Nos. 85268, 85269 (memorandum opinion promulgated Sept. 2,1937), that, where a partnership and a corporation jointly purchased certain real estate subject to a first trust which the purchasers assumed and upon default of interest and taxes the mortgagee foreclosed and the partnership repurchased the property at the foreclosure sale for an amount exactly equal to the outstanding first trust, the partnership, as well as the corporation, sustained a loss of its total investment in the property by reason of the foreclosure sale. In its opinion the court said:

The situation here presented is not that of a mortgagor who permits a sale of mortgaged property under a mortgage or deed of trust, buys it in at the mortgage sale and then attempts to take a deduction for the difference between the cost of the property and the amount realized upon the sale. In such case the sale might well be disregarded for income tax purposes, for the reason that the mortgagor continues to hold the property originally purchased and gain or loss is not realized until it is finally disposed of by him. Here there was not a continuation of the old status of the holder of the property, but the old status was closed by an identifiable event having no relation to tax avoidance and an entirely new relationship with respect to the iwoperty was commenced. The loss on the original venture was liquidated lor taxpayers in the same way as was the loss of the other party to the venture; and the purchase of the property was a new and distinct undertaking with reference to which future gain or loss should he reckoned.

The facts here are not distinguishable from those in the TompMns case. The original Aventure, composed of the four individuals, terminated with the foreclosure sale on February 19, 1934, and a new venture with only two of the participants, the petitioner and Lawrence A. Baker, was then begun.

We hold upon authority of Tompkins v. Commissioner, supra, that the petitioner sustained a loss of his entire original investment in the real estate in question upon the foreclosure sale on February 19,1934.

The remaining question, whether the loss was a capital loss subject to the limitations prescribed in section 117 (d) of the Bevenue Act of 1934, has been decided by the Board in Commonwealth, Inc., 36 B. T. A. 850, and in Sol Greisler, 37 B. T. A. 542. We held in those cases that where real estate is bid in by the mortgagee at the foreclosure sale for an amount not greater than the outstanding mortgage the resulting loss to the owner is not a capital loss, but is an ordinary loss deductible in full in the taxpayer’s income tax return. In the instant proceeding the petitioner is entitled to the deduction on the full amount of his investment in the real estate in question at the time of the foreclosure sale.

HevieAved by the Board.

Judgment will he entered v/nder Rule SO.

Leech and Turner dissent for the reasons set forth in the dissenting opinion in C. Griffith Warfield, 38 B. T. A. 907.


author: Van Fossan Smith,

text:
    Harry Payne Bingham and Mrs. Harry Payne Bingham, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82160.
    Promulgated October 18, 1938.

      Will R. Gregg, Esq., Allin H. Pierce, Esq., and Donald M. Harris, Esq., for the petitioners.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Van Fossan

: The only issue before us is whether the transaction by which the petitioner reacquired the real estate sold to Copp resulted in a capital loss or an ordinary loss or bad debt, as provided in the applicable portions of sections 23 and 101 of the Kevenue Act of 1932. The facts may be restated briefly as follows:

In 1926 the petitioner sold Florida real estate to Copp for $500,000, of which $50,000 was paid in cash and $450,000 by the execution of four promissory notes, secured by a mortgage on the real estate, due March 15, 1926, 1927, 1928, and 1929, respectively. The petitioner returned the entire profit on the sale in 1926.

Copp paid the first note, a part of the principal on the remaining notes, and the interest on all notes up to March 15,1931. After September 15, 1931, he was unable and failed to make further payments on either the principal or the interest. From that date until February 13, 1932, the petitioner attempted to collect the notes or to persuade Copp to reconvey the real estate to him. He was unsuccessful in both endeavors. On that day he instituted a foreclosure proceeding. Later, a settlement was effected with Copp under which Copp reconveyed the property at an appraised value of $242,500 and Bingham executed a satisfaction of the mortgage and canceled and surrendered the unpaid notes to Copp.

There is no question that the notes are capital assets of the petitioner. A loss is conceded to have been sustained. Only the character of the loss is at issue.

Under substantially similar facts we held in Betty Rogers, 37 B. T. A. 897, that the conveyance of the property by the debtors in consideration of the cancellation of their debt was a sale within the meaning of that word, as used in section 101 (c) (2) of the Revenue Act of 1932, and that the loss there sustained was a capital loss.

The facts in that case were, briefly, as follows:

During September 1927 Will Rogers and his wife Betty purchased real estate for profit at a price of $105,000, payable as follows: $15,000 in cash, the assumption of a $52,000 mortgage note, and the execution by the purchasers of their note for $38,000, secured by a deed of trust on the property. The petitioners paid the $15,000 cash and the $52,000 note. Their note for $38,000 due August 25,1932, was assigned to the California Trust Co. On August 29, 1932, payment was demanded and a proceeding to enforce collection under the trust deed was threatened if the payment were not made. Thereafter the purchasers agreed to convey the property to the holder of the note and the latter agreed to surrender and cancel the note and did so.

After discussing the meaning of the words “sell” and “exchange”, we said:

* * * By reason of the transfer of the property to their creditor petitioners were released from their promise to pay $38,000, and their creditor relinquished its right to collect this amount. In our opinion the transaction should he treated either as a sale of petitioners’ right, title, and interest in the property for the price of their obligation or as an exchange of real estate for the obligation, both properties having an equal value. We prefer to regard the transaction as a sale. This view is supported by a decision of the Supreme Judicial Court of Massachusetts in Gallus v. Elmer, 193 Mass. 106; 78 N. E. 772. * *

In distinguishing the case of Hale v. Helvering, 85 Fed. (2d) 819, we said:

While we agree with the court that under the facts of the Hale case the compromise of a note was not a “sale” or an “exchange”, because the property in the notes was extinguished, and not sold, we do not believe that this case is controlling of the instant proceedings. Petitioners disposed of real property. They are claiming the right to a loss deduction for the reason that the amount realized was less than the cost of the property to them. No compromise of a note is involved. Petitioners gave up all of their right, title and interest in the real property for the equivalent of $38,000, and thereby reduced the amount of the loss resulting from their investment in the property by that amount. If petitioners had transferred the property for $38,000 in cash and then had used the cash to satisfy their indebtedness, it is clear that they would have made a sale of their property. We do not believe that the situation is changed where the property is transferred directly to the creditor in satisfaction of the indebtedness. Of. United States v. Hendler, 303 U. S. 564; E. F. Simms, 28 B. T. A. 988, 1030 * * *.

In the Hale case the court specifically pointed out that “there was no acquisition of property by the debtor, no transfers of property to him.” In the instant case such a transfer of property occurred.

The case at bar differs in its facts from the Rogers case in that there the note of the debtors was assigned, while here it was retained by the vendor of the real estate, and there the ability of Rogers to pay the note was unquestioned, while here Copp was unable to pay his obligations. These differences, we think, create no basis of distinction between the cases. The assignee of the note acquired the rights by the deed of trust granted to the vendor of the property and thus is on a parity with it with relation to the purchasers. The petitioner and the vendor occupy the same relative positions with respect to Copp and Rogers.

Nor does the difference in the financial positions of Rogers and Copp render the basic principle in the Rogers case essentially inapplicable to the case at bar. Assuming that Copp was wholly unable to pay all or any part of the interest or principal of his notes to the petitioner, yet the relinquishment of the payee’s right to collect those notes from the maker and the release of any right he might have to a deficiency judgment against the debtor in case the foreclosure sale produced a deficiency, were without question a valuable consideration. Applying the principles set forth in the Rogers case, the conveyance of the real estate, worth $242,500, by Copp to Bingham, carrying with it all of the former’s right, title, and interest therein, was made in consideration of the price of Copp’s obligations, coupled with the right to enforce against him the collection of those debts or of any potential deficiency judgment after foreclosure. Hence, the transaction constituted a sale or exchange of property and property rights within the meaning of the statutory definition of a capital asset and the loss, $65,668.86, is a capital loss.

We are not unmindful of the fact that in the Rogers case the petitioners claiming the loss were the purchasers, while in the case at bar they are the sellers. The rule is applicable equally to both. When the transaction is found to be a sale or exchange, all those connected with it must be governed by the character so established. Since the reconveyance by the vendee of the property sold by the seller, or his successor in interest, under the circumstances of the Rogers case constituted a sale or exchange resulting in a capital loss to the vendee, under similar circumstances, such as those surrounding the case before us, the sale or exchange thus made creates a capital loss for the vendor.

Reviewed by the Board.

Decision will be entered under Rule 50.

Smith,

dissenting: The majority opinion holds that where property is sold and purchase money notes secured by a mortgage on the property are taken in partial payment and the vendee, being unable to pay the notes, surrenders or reconveys the property to the vendor and is released from his obligation on the notes, the loss to the vendor is a capital loss “resulting from the sale or exchange of capital assets”, with in the meaning of section 101 of the Revenue Act of 1932. Consequently, it is held, the unpaid portion of the indebtedness may not be deducted either as an ordinary loss or as a bad debt although wholly uncollectible at the time of the transaction.

I do not think that section 101 was ever intended to apply to a situation of this sort. The only sale or exchange that took place here was the original transfer of the property to the vendee in 1926. The taxpayer, vendor, has paid the tax on his gain from that sale. The unpaid portion of the sale price, which was included in the taxable gain, then became a debt owed to the taxpayer by the vendee. If the taxpayer had ascertained that the debt was worthless in whole or in part during the taxable year and had charged off the worthless portion, such portion, without question, would be deductible by him as a bad debt. Harold S. Denniston, 37 B. T. A. 834. The evidence is that the taxpayer did ascertain that the debt was worthless over and above the fair market value of the mortgage notes and the collateral security. By way of settling the debt the taxpayer, under an agreement with the debtor, took over title to the property under his mortgage in full satisfaction of the debt and, the debtor being unable to make further payment, charged off the balance as a bad debt. The view of the majority opinion is that under the Board’s ruling in Betty Rogers, 37 B. T. A. 897, this constituted a sale or exchange by the petitioner “of Copp’s [the debtor’s] obligations, coupled with the right to enforce against him the collection of those debts or of any potential deficiency judgment after foreclosure.”

Without challenging the soundness of the principle on which the Betty Rogers case was decided, as applied to the facts in that case, I think that its application in this case leads to an entirely erroneous result. The theory that there was a “sale” here by the creditor to the debtor of the debtor’s own obligation to the creditor becomes entirely unreasonable in the face of the facts that in the so-called sale the petitioner received nothing more from the debtor than he was already legally entitled to receive under his mortgage, and the debtor was unable to pay anything more. There was no new consideration passing from the debtor to the petitioner except the debtor’s consent to convey the property back to the petitioner voluntarily without the formality of a foreclosure suit. This is a common form of procedure in such circumstances. The seller merely agrees to take back his property because of the buyer’s inability to pay and is willing to stand his loss on the uncollectible balance of the debt. Such a loss is not one “resulting from the sale or exchange of capital assets” within the intendment of section 101 (c) (2) of the Revenue Act of 1932.

       SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      *******
      (e) Losses by Individuals. — Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      *******
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
      SEC. 101. CAPITAL NET GAINS AND LOSSES.

      (b) Tax in Case of Capital Net Loss. — In the case of any taxpayer, other than a corporation, who for any taxable year sustains a capital net loss (as hereinafter defined in this section), there shall be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted, and the total tax shall be this amount minus 12¾ per centum of the capital net loss; but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section.
      (c) Definitions. — For the purposes of this title—
      * * . * * * * «
      (2) “Capital loss” means deductible loss resulting from the sale or exchange of capital assets.
      *******
      (6) “Capital net loss” means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain.

      (8) “Capital assets” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *


text:
    L. L. Skaggs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90217.
    Promulgated October 18, 1938.

      Robert Ash, Esq., for the petitioner.

      Francis S. Gettle, Esq., for the respondent.
   OPINION.

Smith :

The petitioner contests a deficiency in income tax for 1934 of $2,912.09, only a part of which is in controversy. The questions presented are (1) whether the petitioner is liable to income tax upon the total amount of the net rent received by him in 1934 from property constituting his separate estate located in California or upon only one-half thereof; (2) whether the petitioner is taxable upon the full amount of the gain realized from the sale of certain shares of Safeway Stores stock in 1934, or only upon one-half thereof.

The facts were stipulated.

Petitioner is a resident of Ft. Worth, Texas. He was domiciled in the State of Texas in 1934, and for many years prior thereto. In 1926 he acquired improved real estate in Oakland, California, which, in 1934, was leased. In January 1929 the petitioner, who previously had been married and divorced, married a second time. During 1934 he received from the Oakland property a net rent of $11,468.28.

In his income tax return for 1934 the petitioner reported the income from the Oakland real estate as community income and returned one-half of the net rent of $5,734.14 as his income. The respondent has determined that as the Oakland building had been acquired prior to the petitioner’s marriage, and since under the California laws all the rents received from the Oakland real estate constituted petitioner’s separate income, he is liable to income tax upon the net rent received in the amount of $11,468.28.

In 1926 Safeway Stores, which operated a chain of grocery stores in which petitioner was interested, was incorporated and petitioner took shares of stock in the corporation for his interest in the business. In 1934 the petitioner sold some of his shares of Safeway Stores stock at a capital gain of $16,863.70.

In his income tax return for 1934 the petitioner reported the taxable gain from the sale of the Safeway Stores stock as community income and included in his return one-half thereof, or $8,431.85. The respondent has determined that the profit from the sale of the stock was separate income of the petitioner and that the entire capital gain of $16,863.70 is taxable to him.

In his brief the respondent concedes that the second question involved in this proceeding, namely, the capital gain upon the sale of the shares of Safeway Stores stock, is ruled by W. T. Carter, Jr., 36 B. T. A. 853. In accordance therewith it is held that the petitioner is liable to tax on only one-half of the capital gain from the sale of the stock.

The issue remaining for determination relates to the taxability to the petitioner of rent received from real property located in California. The respondent insists that the total amount of the rent received, namely, $11,468.28, was separate income and taxable to the petitioner in its entirety.

Income accruing to the matrimonial community in the State of Texas belongs equally to the husband and wife and is taxable to them equally. HopTcins v. Bacon, 282 U. S. 122; Commissioner v. Wilson, 76 Fed. (2d) 766. “The nature and extent of the community interests depends on the state law.” Commissioner v. Wilson, supra.

Article 4613 of the Statutes of Texas, as enacted in 1917 and as readopted in the Eevised Civil Statutes of 1925 (Acts of 41st Legislature, p. 66, ch. 32, par. 1), provides in part:

All property of the husband, both real and personal, owned or claimed by him before marriage, and that acquired afterwards by gift, devise, or descent, as also the increase of all lands thus acquired, and the rents and revenues derived therefrom, shall be his separate property. [Italics supplied.]

In 1929, section 4613 was amended by the deletion of the above italicized words “and the rents and revenues derived therefrom.”

It was held in Commissioner v. Wilson, supra, that even for the years 1925 and 1926 the “rents and revenues” of the husband’s separate property belong to the community; that the provisions to the contrary contained in section 4613 until its amendment in 1929 were invalid under the Constitution of the State of Texas; and that the word “increase” contained in the present statute has never been supposed to include rents — citing Arnold v. Leonard, 114 Tex. 535; 273 S.W. 799.

The Court of Claims, in Hurd v. United States, 22 Fed. Supp. 421, disagreed with the United States Circuit Court of Appeals for the Fifth Circuit in the Wilson case that rents from the husband’s separate property were community income between 1925 and 1929. The court indicated, however, that it had no doubt but that after 1929 rents received from separate property were community income.

In W. T. Carter, Jr., supra, the Board stated:

Under the community property system, in the absence of a contrary statutory provision, it is the general rule that the increase, rents, and profits of the separate property of the spouses fall into the community, 31 C.J. 29, and this was the early rule in Texas prior to 1917, Mitchell v. Mitchell, 80 Tex. 101; 15 S.W. 705; Dixon v. Sanderson, 72 Tex. 359; 10 S.W. 535. And statutes exprpssly giving to the separate estate the increase or fruits of particular kinds of separate property impliedly exclude other exceptions to the general rule previously established that all issues and profits of the separate property fall into the community. 31 C.J. 31, citing Howard v. York, 20 Tex. 670; Braden v. Gos, 57 Tex. 37. Thus, the statutes above referred to did not abrogate or in any way affect the long established general rule recognized by the courts of Texas that the increase, rents, revenues, and profits of the separate personalty of either spouse belonged to the community.

The respondent contends, however, that the income from the rents from the real estate situated in California must be determined under the laws of that state, which declare them to be the separate property of the owner of the real estate, and that the laws of the State of Texas are not controlling of the question.

We do not agree with this contention. While under the laws of the State of California rents from the separate estates of the spouses are their separate property — see section 163, Civil Code of California, 1927 — this is not the law in the State of Texas as shown above, and in our opinion the status of the income from the rents in question must be determined under the laws of the State of Texas, where the petitioner was domiciled. Kent is said to be a chose in action, that is, personal property. Richardson v. Neblett, 122 Miss. 723; 84 So. 695. It was said in State v. Royal Mineral Association, 132 Minn. 232; 156 N. W. 128, that rents unaccrued are not personal property but are a part of the land until severed, and that rents due or past due are “simply an item of money due and payable.” See also People v. McComber, 7 N. Y. S. 71. In Broadwell v. Banks, 134 Fed. 470, the court said:

* * * In the absence of any statutory provision to the contrary, it is elementary that the rents which accrued during the lifetime of the owner of the leased premises are personal property, and go to his personal representative as assets of the estate, * * *

The ownership and disposition of personal property is uniformly governed by the lex domicilii. Black v. Zacharie & Co., 3 Howard, 482; Whitney v. Dodge, 105 Cal. 192; 38 Pac. 636. In Thayer v. Clarke (Tex. Civ. App.), 77 S. W. 1050, the court said :

* * * It is well settled that as to all personal property acquired during coverture the law of the matrimonial domicile controls, such property having in theory no fixed situs. As to all real estate so acquired the law of the state in which it is situated controls, * * *

See also Snyder v. Stringer, 116 Wash. 131; 198 Pac. 733; Douglas v. Douglas, 22 Idaho, 336; 125 Pac. 796; Kraemer v. Kraemer, 52 Cal. 305.

In Thayer v. Glarlee, supra, the court further said:

* * * It is also the law in this state [Texas] that all personal property acquired during marriage is presumed to have been earned by one or the other or both members of the community during the existence of the marriage, and this presumption prevails until it is made to appear that it was owned by the one or the other prior to the marriage, or was acquired during marriage by gift, devise, or descent. * * *

The rents here in question were not owned by the petitioner before marriage and were not acquired by gift, devise, or descent. They were therefore earnings of the community under the Texas law.

We think that under the laws of the State of Texas petitioner’s wife had a vested interest equal to that of the petitioner in the rents from petitioner’s real estate situated in the State of California at the time they were received and that accordingly only one-half of such income is taxable to the petitioner in his separate return. Hopkins v. Bacon, supra.

If the' property here in dispute, that is, the rents from petitioner’s real estate, had been acquired by the petitioner as his separate property while domiciled in California and brought into the State of Texas when he established his domicile there, a different rule might apply. See In re Arms’ Estate, 186 Cal. 554; 199 Pac. 1053; § 649 McKay, Community Property. It is generally recognized that vested property rights are not affected by the owner’s change of domicile and the removal of the property from a community state to a noncommunity state or vice versa.

The instant case is distinguishable from John O’Neil, 16 B. T. A. 614. There, it was held that oil royalties from the husband’s separate real properties situated in Oklahoma, a noncommunity property state, were the separate income of the husband domiciled in Texas and were not income of the community. To the same effect is Rosalie Hampton, 31 B. T. A. 853.

The reasoning of the Board in the O’Neil case was that since the royalties from oil lands are not community income either in the State of Oklahoma, or in the State of Texas, where they are held to be “neither rents nor profits, within the meaning of the law making such common property” — citing Stephens v. Stephens, 292 S. W. 290— they are not to be treated as community income for the purpose of the Federal taxing statutes. It was pointed out that even if the land from which the royalties were received had been situated in the State of Texas, under the law of that state, the royalties would constitute separate and not community property. The following language was quoted from Stephens v. Stephens, supra:

The land is separate property. The oil in place is realty capable of distinct ownership, severance, and sale. It is a part of the corpus of appellee’s sole estate. He conveyed his oil and received, as the principal consideration therefor, one-eighth of the production. No skill, labor, or supervision of either of the spouses, and no community property was expended in the sale or production. The oil and the proceeds thereof received by appellee were neither rent nor profits, within the meaning of the law making such common property, but the consideration for separate realty. * * *

Beference was made in our opinion in the O’Neil case to 31 Corpus Juris 32, where it is said:

* * * Under the general rule that the law of the situs determines whether land is separate or community property, revenues from land in a common-law state do not fall into the community, although the owner lives in a community-law state.

The stated rule, we think, should not be taken to mean that ordinary annual rentals from separate real estate situated outside of the state of the owner’s domicile remain the separate property of the owner even when under the law of the domicile it belongs to the community. A rule of property established by decisions of the state courts or by state statutes is binding on the Federal courts. Warburton v. White, 176 U. S. 484; Tyler v. United States, 281 U. S. 497.

In the instant case the rents derived from petitioner’s separate real estate constituted community income under the laws of the State of Texas, where the petitioner was domiciled, and are therefore taxable to the community.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: OPINION. Smith:

text:
    Mary A. B. du Pont Laird, Walter J. Laird and Philip D. Laird, Executors of the Estate of William Winder Laird, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51654.
    Promulgated October 18, 1938.

      Aaron Finger, Esq., Percy W. Phillips, Esq., and Laurence Graves, Esq., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Smith:

It is the petitioners’ contention under the mandate proceeding in this case that the value for estate tax purposes of the 1,000 common shares of Christiana Securities Co., and of the 250 shares of Delaware Realty & Investment Co. on November 19, 1927, the date of the death of the decedent, was $758 per share and $6,046 per share, respectively. The respondent, on the other hand, contends that the value of the Christiana Co. shares at the date of the death of the decedent was $1,760.60 per share and of the Delaware Co. shares $15,043.66 per share, or the same amounts as originally determined. He contends that “upon the basis of the company’s net worth, earning and dividend-paying capacity, and all other factors having a bearing upon the value of the stock”, as required by article 13 (3) of Regulations 70, the values are as claimed by him; furthermore, that the evidence presented before the Board at the rehearing warrants such values.

The question before the Board is essentially one of fact. It is a difficult one to answer. There have never been any sales of the shares of stock of either of the corporations in question which would throw light upon the question. No case coming before the Board or the courts where the facts are comparable has been cited.

To prove their contentions the petitioners have presented the evidence of a number of witnesses, some of whom have made an extended study of the situation. As a result of their studies, two of the witnesses have expressed the opinion that the value of the Christiana Co. shares at the date of death was $975 per share and of the Delaware Co. shares $7,841 per share. The basis of their estimate of $975 per share for the Christiana Co. shares is that the average annual earnings for the three years 1925, 1926, and 1927, including the dividends and interest received by the Christiana Co. plus the undistributed earnings of underlying companies, were $108.33 per share. They have multiplied these average annual earnings by nine in order to obtain the value of $975 per share. In a similar manner they have valued the shares of the Delaware Co. by adding to average annual earnings received of $349.41 per share for the same three-year period (should be $362.33 per share) their estimate of the undistributed earnings of the underlying companies of $548.02 per share and multiplied the total by eight, which gave a value of $7,179 per share, to which sum was added $662.26 per share which was the value determined by the respondent for the shares of Longwood, Inc., owned by the Delaware Co. The result is a fair market value of the Delaware Co. shares of $7,841 per share. These witnesses were of the opinion that the earnings of the Delaware Co., including the undistributed earnings of the underlying companies, should be multiplied by eight rather than by nine, since it was conceivable that a part of the undistributed earnings of the underlying companies would never be received by the Delaware Co. by reason of the taxation of those earnings as they passed through the several corporations to the treasury of the Delaware Co., and also by reason of the fact that the Delaware Co. had an undetermined liability in respect of that company’s annuity contract which required the payment of an annuity of $900,000 for an undetermined period.

Another witness for the petitioners was of the opinion that the fair market value of the Christiana Co. shares on November 19, 1927, was $758 per share and of the Delaware Co. shares $6,046 per share. He was of the opinion that the other witnesses for the petitioners erred in multiplying the earnings of the Christiana Co. shares by nine and of the Delaware Co. by eight in obtaining their valuations. He reached his valuations by multiplying the average annual earnings for the three-year period 1925 to 1927, inclusive, of the Christiana Co. shares by seven and of the Delaware Co. shares by six.

The respondent, on the other hand, has presented the testimony of two valuation witnesses, one of whom was of the opinion that the value of the Christiana Co. shares on November 19, 1927, was $2,095 per share, based solely upon the earnings attributable to reasonably similar stocks, and after consideration of the fair market value previously determined on the basis of the net worth of the assets, which was $1,760.60 per share. He considered the asset basis of valuation as the most reliable measure of value and stated his opinion that $1,760.60 was the minimum fair market value of the Christiana Co. shares as at the date of death. Similarly, he valued the shares of stock of the Delaware Co. at $14,950 per share on the basis of its dividend-paying capacity, at $17,400 per share solely upon the basis of its earning capacity, and at $15,043.63 solely upon the basis of the net worth of the company’s assets.

Another witness for the respondent valued the Christiana Co. shares at $2,000 per share and the Delaware Co. shares at $17,000 per share in a retail market, and at $1,840 per share for the Christiana shares and at $15,250 per share for the Delaware shares in a wholesale market, or one in which a banker would buy the shares for resale to the public. The Govermnent witnesses were of the opinion that, since there was an active demand for investment trust shares as at the date of the death of the decedent, bankers would have been glad of an opportunity to purchase the shares of stock in question and to have issued certificates of beneficial interest against them for sale to the public after the manner in which fixed investment trusts were operating at that time. •»

After making a careful study of each company’s net worth and earning and dividend-paying capacity, and after taking into account all other factors having a bearing on the value of the stock as required by article 13 (3) of Kegulations 70, the Board has reached the conclusion that the fair market value of the Christiana Co. common shares at the date of the death of the decedent was $1,000 per share, and of the Delaware Co. $8,500 per share. We shall not in this opinion attempt to set forth all of the factors which have led us to reach these valuations or the weight which we have given to each of the various factors. We have taken into account not only the factors which appear in our findings of fact, but many others brought out in the evidence. We deem it appropriate, however, to set forth some of the considerations which have led us to our conclusion.

We are of the opinion that the Government witnesses have given too much weight to the market quotations of the shares of stock owned by each of these companies in arriving at their determinations of value. The market quotations of the du Pont Co. common shares practically doubled in market price from January to November 19, 1927. The shares sold as low as $168 per share in January, and at more than double that price in October 1927. The median between the high and the low price at which the shares sold on November 19, 1927, was $325.75 per share. The respondent used this value in determining the fair market price on November 19, 1927, of 840,000 shares of the du Pont Co. stock in reaching his determination of a value of $1,760.60 per share for the Christiana Co. shares, as shown in the deficiency notice. If the decedent had died in January 1927, at a time when the du Pont Co. shares were selling at $168 per share, the value of the Christiana Co. shares determined upon the basis used by the respondent would be only approximately one-half of the value determined by him for the shares on November 19,1927.

The earnings of both the Christiana Co. and the Delaware Co. were largely dependent upon the earnings of the General Motors Corporation. That corporation contributed between 60 and 70 percent of the earnings of the du Pont Co., which, in turn, was the principal source of the earnings of the Christiana Co. and of the Delaware Co. The earnings of the General Motors Corporation showed a large increase in 1926 and 1927 over the earnings of prior years. A large part of such increase was due to the fact that the Ford Motor Co., which had been the principal manufacturer of automobiles in the United States prior to 1927, was practically out of production in 1927. Beginning about 1924 or 1925, there was a demand on the part of the public for a faster automobile than the Ford Model T that was then being produced. That car was obsolescent in 1925 and 1926. The public was buying a better or higher-priced car than the Ford Model T. The Ford Motor Co., in 1926 or in 1927, saw the handwriting on the wall and decided to abandon the manufacture of the Ford Model T and to change over to the production of a faster and more up-to-date car. During this period of transition the General Motors Corporation enjoyed great prosperity. The evidence shows that whereas in 1925 nearly 2,000,000' Ford cars had been produced, the number produced in 1927 was only 454,601. The General Motors Corporation was the beneficiary ox this decline in the production of the Ford Motor Co. The latter company had, however, an enormous plant. It was well recognized that it would be back in production within a short time with a car which might prove a formidable competitor with the cars produced and sold by the General Motors Corportion. The prospective earnings of the General Motors Corporation for a period of two or three years could be forecast as early as 1926. The Board is of the opinion that those earnings could be forecast in January 1927, as well as in November 1927.

A further fact to be taken into consideration is that, if the Christi-ana Co. had attempted in November 1927 to sell any large block of its holdings of the du Pont Co. shares, the probabilities are that it could not have realized anything like $325.75 per share for its total holdings of 840,000 shares — approximately one-third of the outstanding common shares of the du Pont Co. Some witnesses for the petitioners were of the opinion that if the Christiana Co. sold all of its 840,000 shares of du Pont Co. stock the market price would have declined to perhaps $125 per share. Even though the price might not have declined to that extent, the Board is satisfied that the company could not have realized anything like $325.75 per share for all of its holdings of du Pont Co. common stock.

It is further to be noted that if the Christiana Co. and the Delaware Co. had liquidated its holdings of du Pont Co. common stock, of Atlas Powder Co. stock, and of Hercules Powder Co. stock at approximately the quotation prices on November 19, 1927, the companies would have been subject to large income taxes upon the profits realized. Accordingly, a stockholder of the Christiana Co. or of the Delaware Co. could not have received in cash the full amount of the proceeds received by those companies from the sale of their investments.

Both the Christiana Co. and the Delaware Co. were family holding corporations. The principal investment of the Christiana Co. was in the shares of stock of the du Pont Co. The principal investment of the Delaware Co. was either in the shares of the du Pont Co. or in the shares of the Christiana Co. All of the witnesses are agreed that the principles of valuation to be applied are essentially such as would apply to industrial companies.

The petitioners’ witnesses were of the opinion that the valuation could be best obtained by multiplying the average annual earnings of each company, including the undistributed earnings of underlying companies for the three-year period 1925 to 1927, by nine or by eight for the Christiana Co., and by eight or by seven for the Delaware Co. Counsel for the respondent submits that these multipliers are far too small in the light of all of the evidence in the case. The petitioners’ witnesses have cited authorities on “valuation” to the effect that the value of industrial stocks are in many cases determined by multiplying the average annual earnings over a three or five-year period by ten or a smaller multiplier.

The evidence in this case shows that the shares of common stock of General Motors Corporation, on November 19, 1927, sold at a low of 132 and at a high of 132⅝. The earnings of that company for 1927, not including undistributed earnings of subsidiary companies, are shown by the corporation’s annual report as having amounted to $12.99 per share. The sale price of the shares on the date of the death of the decedent was, therefore, approximately ten times the earnings for the year.

The earnings of the du Pont Co., including the company’s equity in the undistributed earnings of certain subsidiaries of that company, including its proportionate share of the undistributed earnings of the General Motors Coi'poration for the years 1923 to 1927, inclusive, were $24.70, $17.62, $28.78, $21.89, and $24.06, respectively, per share, computed upon the basis of the number of shares outstanding at the close of each year. The median between the high and the low market price of the shares computed on the number of shares outstanding at the close of each year was 127⅜, 127, 183⅝, 139, and 256, respectively. Upon the basis of such median prices the du Pont shares sold on the market at approximately five times the earnings for the years 1923 and 1925, at six times the earnings for 1924, 1925, and 1926, and at ten times the earnings for 1927. They sold at approximately thirteen times the 1927 earnings on November 19, 1927.

The Board is of the opinion that the fair market value of the shares of the Delaware Co. would be a somewhat smaller times average annual earnings for the three-year period than in the case of the Christ-iana Co. shares. The reason for this is that the estimated earnings of the underlying companies might suffer some attrition in passing through the treasuries of the several corporations. This might arise from expenses of the companies and from future taxes which might be imposed upon the several corporations. The earnings of the subsidiaries of the General Motors Corporation would be received by the Delaware Co. by being passed through the treasuries of the General Motors Corporation, the du Pont Co., and the Christiana Securities Co.

We think it clear that an investment in the shares of stock of the Christiana Co. or of the Delaware Co. would be less attractive than an investment in either the stock of the General Motors Corporation or the du Pont Co. There was no established market for the shares of either the Christiana Co. or of the Delaware Co. The public did not generally know of the existence of the companies. Little information regarding them could be obtained from financial publications. A purchaser of the shares would find no established market for them in case he desired to sell them. He would further find that the shares were not acceptable as collateral for loans with banks, since there was no established market for them.

It should also be noted that a purchaser of the Christiana Co. shares or of the Delaware Co. shares did not have any direct interest in the shares of stock owned by these companies as investments. A purchaser was not in any position to take advantage of the high prices which were obtaining in the market for the du Pont Co. shares. The history of the Christiana Co. shows that it had held its interest in the du Pont Co. for a period of many years without any substantial change in the number of shares held. The same is also true of the Delaware Co. The shares owned by these companies were not for sale. The companies were not operated, as many investment trusts, with an idea of selling the shares on a favorable market. Therefore, a prospective investor would look primarily to the earnings of the company from dividends to be received on its investments.

The earnings of the Christiana Co. for 1921 were $81.67 per share and the dividends paid were $70 per share. From a careful study of all of the evidence the Board is of the opinion that a prospective purchaser might expect to receive over a period of future years dividends of $70 per share and perhaps somewhat more, although, of course, the earnings would be affected by business conditions.

From a consideration of all of the evidence the Board has reached its conclusion that the fair market value of the Christiana Co. shares, on November 19, 1927, was $1,000 per share and of the Delaware Co. shares, $8,500 per share.

At the rehearing of this proceeding counsel for the petitioners made an additional claim for the deduction from the gross estate of administration expenses consisting of commissions to be paid to the executors, and additional attorneys’ fees in connection with the litigation. Such fees paid or payable are a legal deduction from gross income. It does not appear, however, that any executors’ fees have been paid or that any ever will be paid. In the absence of any showing of payment they may not be allowed as a deduction. Attorneys’ fees paid or payable are deductions from the gross estate.

Reviewed by the Board.

Judgment will be entered under Rule 60.


text:
    Corpus Christi Terminal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88103.
    Promulgated October 18, 1938.

      George 8. AtMnson, Esq., Wesley E. Seale, O. P. A., and M. 8. Gameiro, G. P. A., for the petitioner.

      Edward G. Adams, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency in petitioner’s income tax for the calendar year 1934 of $8,929.93 and a deficiency in excess profits tax for the year in the amount of $786.78. The only question in issue is the amount of petitioner’s taxable gain or deductible loss from the sale in 1934 of certain assets which it acquired in 1931.

The facts are not in dispute. On September 1, 1934, the petitioner sold all of its physical assets and good will to the General American Transportation Corporation for a total consideration of $150,000, consisting of $75,000 cash and noninterest-bearing promissory notes for the balance.

It is agreed that the assets which the petitioner sold in 1934 were acquired in 1931 in a reorganization of the Eggleston Oil Corporation of San Antonio, Texas, as of October 1,1931. The Eggleston Oil Corporation was organized in 1928 as a successor to George B. Eggleston & Co. Petitioner was organized pursuant to a contract entered into August 20,1931, between the Eggleston Oil Corporation and the Pure Oil Co. of Ohio.

Upon petitioner’s organization and pursuant to the contract of August 20,1931, it acquired all of the physical assets of the Eggleston Oil Corporation, of a book value of $178,989.81, in exchange for 600 shares of its class A preferred stock, 182 shares of its class B preferred stock, and the assumption of the transferor’s liabilities in the amount of $100,789.81. Petitioner’s total capitalization consisted of 600 shares of class A preferred stock, 182 shares of class B preferred stock, and 1,000 shares of common stock, all of no par value. The preferred stock was nonvoting. All of the preferred stock had a “declared” value of $100 per share. The common stock was all sold for cash at 10 cents per share, 400 shares being subscribed for by the Eggleston Oil Corporation and 600 shares by the Pure Oil Co.

The assets of the Eggleston Oil Corporation were transferred to the petitioner pursuant to the contract of August 20,1931, at a net valuation of $178,989.81, which was the fair market value of the petitioner’s preferred stock, plus the amount of the Eggleston Oil Corporation’s indebtedness assumed by the petitioner. The assets were entered in petitioner’s books at approximately that figure.

Assets which the petitioner sold to the General American Transportation Corporation on September 1, 1934, consisted of the fixed assets acquired from the Eggleston Oil Corporation in 1931, plus the additions thereto from that date to the date of the sale.

In its income tax return for 1934 the petitioner reported a loss on the sale of the assets in question of $1,683.21, being the difference between the alleged cost basis of $178,343.72 less depreciation of $26,660.51, and the selling price of $150,000. The respondent has determined that the cost basis of the assets to the petitioner was $86,988.23; that the petitioner acquired the assets in 1931 in a nontaxable transfer from the Eggleston Oil Corporation. The respondent’s determination is based on the report of a revenue agent who made an examination of petitioner’s books in connection with its returns for 1933 and 1934. The report was submitted in evidence on agreement of counsel that the facts therein stated were true and correct. The cost basis to petitioner of the assets in question, plus additions, and after proper adjustments for depreciation to the date of sale, is shown in the report as $86,988.23, which is the cost basis used by the respondent in his deficiency notice.

The question presented for our determination is the correct basis to be used in computing petitioner’s profit or loss upon the sale of the assets to the General American Transportation Corporation in 1934. The petitioner contends that such basis is the cost of the assets to the petitioner under section 113 (a) of the Revenue Act of 1934, or the cost of the assets to the Eggleston Oil Corporation plus its recognized gain on the transfer to the petitioner under section 113 (a) (7). The result would be the same in both cases; that is, the cost basis would be $178,343.72, less depreciation deducted on its tax returns of $25,621.16, or $152,722.56. The respondent contends that this basis should be reduced by $65,734.33, which is the amount shown by the revenue agent’s report as the gain realized by the predecessor corporation upon the sale of the assets in 1931 but which, he contends, was not a recognized gain of the Eggleston Oil Corporation. The pertinent provisions of the Revenue Act of 1934 are as follows:

SEO. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that—
*******
(7) Transfers to corporation where control of property remains in same persons. — If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.

Since the acquisition of the assets in question by the petitioner occurred in 1931, we must look to the provisions of the Revenue Act of 1928 for the purpose of determining the gain or loss recognized by the transferor in 1931. Section 112 of the Revenue Act of 1928, under the caption of “Recognition of Gain or Loss,” reads in part as follows:

(a) General rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
*******
(d) Same-gam of corporation. — If an exchange would be within the provisions of subsection (b) (4) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but
(2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess jof the sum of such money and the fair market value of such other property so received, which is not so distributed.

Under section 112 (d) (2) above the recognized gain to the Eggles-ton Oil Corporation on the transfer of the assets to the petitioner in 1931 was not in excess of the fair market value of the property received other than petitioner’s stock; there was no money passed in the transaction. The consideration for the transfer was the petitioner’s preferred stock and the assumption of the $100,789.81 indebtedness of the transferor. The Supreme Court held, in United States v. Hendler, 302 U. S. 680, that the assumption of a transferor’s indebtedness by a transferee as consideration for the transfer of assets was the equivalent of the payment of cash and that the amount of such assumed indebtedness should be included in computing the recognizable gain to the transferor under section 112 (d) of the Bev-enue Act of 1928. To the same effect are Brons Hotels, Inc., 34 B. T. A. 376; and Theodore Ebert, Jr., Estate, 37 B. T. A. 186.

Since under the decision of the Supreme Court in United States v. Hendler, supra, the assumption of indebtedness by the petitioner corporation of $100,789.81 is to be treated the same as cash, the entire amount of the Eggleston Oil Corporation’s gain of $65,734.33 in 1931 upon the transaction was taxable gain.

The evidence does not show whether the transferor paid a tax for 1931 upon the taxable gain to it of $65,734.33. It is immaterial, however, whether it paid the tax upon such gain or not. The “recognizable” gain to the transferor must be added to the cost basis of the predecessor corporation in arriving at the cost basis of this petitioner. David B. Gann, 23 B. T. A. 999; affd. (C. C. A., 7th Cir.), 61 Fed. (2d) 201; certiorari denied, 287 U. S. 650.

It is unnecessary to decide! whether the gain or loss upon the sale of the assets by the petitioner in 1934 is to be based upon the cost to the petitioner of those assets, or whether the transaction falls under section 113 (a) (7) of the Eevenue Act of 1934, as the petitioner contends. If the basis of the property sold is the “cost of such property,” then the cost basis is $152,722.56. If, on the other hand, the transaction falls under section 113 (a) (7) of the Bevenue Act of 1934, the recognizable gain to the transferor must be added to the cost basis of the transferor. That recognizable gain was $65,734.33, which, added to the cost basis of the transferor, $86,988.23, results in a cost basis to the petitioner of $152,722.56.

Since the cost basis to the petitioner is $152,722.56 and the sale price $150,000, the petitioner sustained a deductible loss of $2,722.56 upon the sale in 1934. Petitioner’s tax liability for the year 1934 will be redetermined accordingly.

The parties have stipulated that on December 23, 1936, the petitioner paid additional tax for 1934 in the amount of $7,127.14 and that in the determination of that amount an overpayment was credited for 1933 of $34.38 tax and $3.90 interest.

Judgment will be entered under Rule 50.


author: Sternhagen :

text:
    Mary A. Cushing, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 83792, 83793.
    Promulgated October 19, 1938.

      Francis V. Barstow, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined deficiencies in petitioner’s income tax of $1,761.04 for 1932 and $7,519.09 for 1933. Several adjustments were made in petitioner’s income, only one of which is assailed — the inclusion in her individual income of $18,252.72 for 1932 and $52,409.25 for 1933, which was the income of a trust which she had created in 1930. The facts are contained in a written stipulation.

Petitioner, a resident of Boston, Massachusetts, executed a trust instrument on January 8,1930, transferring to her mother and a trust company, as trustees, certain securities to hold or sell and invest the proceeds in their discretion. The trustees were, among other provisions, directed:

* * * to pay to [petitioner] ⅛ each year a yearly sum at such times as she shall desire. The said yearly sum shall be fixed at $1,000.00 from and after the date of the execution of this instrument, but may be increased at any time or from time to time by instruments in writing signed by [petitioner] and the Trustees and deposited with the corporate trustee. In addition to paying [petitioner] the said yearly sum, the Trustees may at any time or times during [her] lifetime transfer and deliver to her the whole or any part of the principal or income of the trust property as the said [mother] or any successor individual trustee may by writing delivered to the corporate Trustee determine to be for the best interest of the [petitioner] and upon receipt of such writing the corporate Trustee shall Join in such transfer and delivery to the extent designated in such writing. And from and after the death of the [petitioner] the Trustee shall hold, dispose of or otherwise deal with the trust property then remaining in their hands as she shall by her last will appoint and in default of such appointment shall transfer, pay over and deliver the same to the person or persons who would then have been entitled to the same had she died intestate a resident of the said Commonwealth and absolute owner of the said property such persons to take according to the statutes.

Section 10 of the instrument provided:

The terms hereof may be altered or amended in any manner by consent of [petitioner] and both Trustees, provided that each Trustee shall execute a certificate to the effect that in her or its opinion the alteration or amendment shall be for the interest and benefit of [petitioner].

The trust was altered on August 2, 1930, by the grantor with the trustees’ consent, to permit the withdrawal of a specific group of securities originally transferred as part of the corpus.

When petitioner created the trust, she resided in Massachusetts, was single, and twenty-one years of age. She has since married and in the years in question had two children living. Her mother was born December 1, 1882; her father died June 19, 1921.

The issue arises under Revenue Act of 1932, sections 166 and 167, and narrows to the question whether petitioner’s mother was during the taxable years “a person not having a substantial adverse interest in the disposition of the corpus or income of the trust.” The petitioner argues that her mother had a “substantial adverse interest,” because (1) under the General Laws of Massachusetts, chapter 273, sections 20-22, she could if destitute demand support of petitioner, which demand she could also implement by an order to the trustees to distribute to petitioner, and (2) she was among the petitioner’s intestate successors, which gave her a contingent interest under the General Laws of Massachusetts, chapter 190. The argument, we think, must fail. Both grounds are insufficient to support a finding that the mother had a “substantial adverse interest.” Conceding arguendo that the mother had a personal interest which could be recognized as adverse to that of the beneficiary of the trust which she was charged to execute “for the best interest of” such beneficiary, a more remote interest it would be difficult to imagine. The mother’s right to support is, so far as the cited Massachusetts statute shows, derived from a penal statute conditioned upon the destitution of the parent, the possession by the child of sufficient means at that time, and his unreasonable neglect or refusal to provide for the parent. The mother’s right to intestate distribution is contingent upon her survival of the petitioner, who is 26 years younger, the petitioner’s default of testamentary appointment, and the prior death of the two children and all other lineal descendants. Such a remotely possible expectancy is from every practical standpoint less than a substantial interest, even though under the earlier statute it might have constituted the mother a “beneficiary.”

The petitioner points to an earlier decision of the Board as to herself involving 1931 to that effect; but the statutory term “not a beneficiary” under the Revenue Act of 1928 was different from the term “a'person not having a substantial adverse interest” under the Revenue Act of 1932, now controlling. The statute was deliberately changed so as to exclude a beneficiary “having a very minor interest” from among those who could save the settlor from being taxed on the trust’s income. Moreover, in the 1931 proceeding it did not appear that petitioner had any children and hence her mother’s interest as a beneficiary in the event of petitioner’s intestacy appeared to be far more direct than it can now be said to have been. This is likewise true of the husband’s interest in Jane B. Shiveriek, 37 B, T. A. 454. There the husband-trustee was the one empowered immediately to take the trust income upon the settlor’s death, and this was held to be sufficient to justify calling his a substantial adverse interest. If the test be one of degree or quantum, it is plain that the mother’s interest here is only technically like the husband’s interest there, and can not as truly be called substantial. If the test be whether the interest be not merely technical or legalistic but also valuable, genuine, and capable of measurement, there is no substantial interest here.

The Commissioner’s determination is sustained.

Judgment will be entered under Buie SO.

       The stipulation omits the fact that there were two children, but it is stated by both parties in their briefs and it may be taken as agreed. If it be insisted that the record omits this fact, then the burden of proof rule must operate to require a similar hypothesis.

       SBC. 166. REVOCABLE TRUSTS.
      Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested — ■
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
      SBC. 167. INCOME BOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the gx-antor.
      (b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”

       Senate Finance Committee Report, No, 665, 724 Cong., 1st sess., p. 34,