text:
    J. Earl Morgan, Executor of the Estate of Elizabeth S. Morgan, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82771.
    Promulgated September 30, 1937.

      A. M. Kracke, Esq., for the petitioner.

      H. F. Noneman, Esq., and Frank T. Horner, Esq., for the respondent.
   OPINION.

Arundell :

Petitioner seeks the redetermination of a $43,977.93 deficiency in estate tax. All the issues, except one, have been agreed upon by stipulation and effect will be given thereto under Rule 50. The issue remaining is whether two certain powers of appointment were “general” as determined by respondent, or “special” as contended for by petitioner. The parties filed a stipulation of facts which we incorporate herein by reference and briefly summarize only those facts which are material to a clear understanding of the issue we are to decide.

The decedent, Elizabeth S. Morgan, died testate May 3, 1933, a citizen of the United States and a resident of the State of Wisconsin, and petitioner is the duly appointed' executor of her last will and testament. Isaac Stephenson, decedent’s father, died testate on March 15, 1918. He was also a citizen of the United States and a resident of the State of Wisconsin. By his last will and testament and several codicils thereto, he conveyed certain property in trust for the benefit of his children. The children were to receive the income annually and a certain portion of the principal at the end of four, eight, and twelve years after his death, and the entire remaining principal at the end of sixteen years after his death, provided they were living at the end of each of the four stated periods. The trust estate was divided into nine parts, part numbered five being conveyed in trust for decedent’s benefit as follows:

Item Fifteen: I direct said trustees to pay to my daughter Elizabeth S. Morgan annually the net animal income from part numbered five (5) into which my trustees shall have divided my estate * * *.
I give, devise and bequeath to the appointee or appointees of my daughter Elizabeth S. Morgan by her last will and testament all property of any nature and kind in the hands of my said trustees at the time of her death constituting said part five (5) * * *.

The trust further provided that, should decedent die without exercising the power, then whatever portion of the principal remained should go to her issue, and, in the event of her death without issue, then such remaining portion of the principal should be equally divided and distributed among the other remaining parts into which the estate was divided.

On May 12, 1917, Isaac Stephenson executed a deed of trust reading in part as follows:

7. After my death and during the continuance of the trust hereby created, said Trustees shall pay annually to my daughter Elizabeth S. Morgan the net annual income from said part numbered five (5).
If my daughter Elizabeth S. Morgan shall be living at the time of the termination of this trust, said Trustees shall transfer to her all property then in their possession constituting said part five (5).
If my daughter Elizabeth S. Morgan shall die prior to the termination of said trust, then said Trustees shall pay annually the net annual income from said part five (5) to such person or persons as she may appoint by her last will and testament duly admitted to probate, and at the termination of this trust said Trustees shall transfer the property then in their possession constituting said part five (5) to such person or persons as she may appoint in the manner aforesaid.
If my daughter Elizabeth S. Morgan, dying as aforesaid, should fail to make such appointment * * * then and in any such event the annual income from said part five (5), * * * shall be paid annually by said Trustees to her issue surviving * * * and at the termination of said trust, said Trustees shall transfer all the property then in their possession, constituting said part five (5), * * * to the then surviving issue of my said daughter * * *.

During her life decedent received the distributions payable to her at the end of the fourth, eighth, and twelfth years after the death of her father, as provided for in his will, but she did not receive the distribution payable to her at the end of the sixteenth year, owing to the fact that she only lived fifteen years, one month, and eighteen days after her father’s death.

By her last will and testament decedent exercised the power of appointment under her father’s will as to that portion of the property which she would have received at the end of the sixteen years after her father’s death, had she lived, and she also exercised the power of appointment given her by her father’s deed of trust, the appointments being in the following words:

Twenty-Second: Under the last will and testament of my father * * * I do hereby nominate, constitute, authorize and appoint my husband, J. Earl Morgan * * *.
Twenty-Third : Under the Deed of Trust dated May 12, 1917, * * * I do hereby appoint my husband, J. Earl Morgan * * *.

The respondent determined that both powers which decedent exercised by will were “general” powers of appointment; that the value of the property passing under such powers was $41,212.82 and $325,613.51, respectively; and that these values should be included in decedent’s gross estate under section 302 (f) of the Revenue Act of 1926, as amended by section 803 (b) of the Revenue Act of 1932.

Petitioner contends that the two powers in question were “special” powers, rather than “general” powers, as was determined by the respondent. Petitioner does not question the respondent’s determination of the value of the property passing under the powers.

Section 302 (f) of the Revenue Act of 1926, as amended by section 803 (b) of the Revenue Act of 1932, provides in part as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated * * ⅜
* * * * * * *
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *.

It has been held that in determining the nature and effect of powers we look to the law of the state having jurisdiction, Leser v. Burnet, 46 Fed. (2d) 756; Christine Smith Kendrick et al., Executrices, 34 B. T. A. 1040, 1044. In this case the powers were created while the donor was a resident of Wisconsin; the donee was a resident of that state; the property affected is in that state, and the estate of the deceased donee is being administered in the courts of that state.

The statutes of Wisconsin- in force when the powers herein were created and when they were exercised define general and special powers as follows:

232.05 General power. A power is general when it authorizes the alienation in fee, by means of a conveyance, will or charge of the lands embraced in the power, to any alienee whatever.
232.06 Special power. A power is special: (1) When the person or class of persons to whom the disposition of the lands under the power to be made are designated. (2) When the power authorizes the alienation by means of a conveyance, will, or charge of a particular estate or interest less than a fee.

These provisions are held by the Wisconsin Supreme Court to apply to both real and personal property. Will of Zweifel, 194 Wis. 428; 216 N. W. 840; Cawker v. Dreutzer, 197 Wis. 98; 221 N. W. 401, 413.

The two powers here appear to us to come squarely within the above definition of general powers. Each of them “authorizes the alienation in fee, by means of a * * * will * * * to any alienee whatever.” They do not contain the specified elements that mark special powers. They do not designate the person or class that may be appointed (232.06 (1)); they do not limit the estate that may be alienated to a particular estate or an interest less than a fee (232.06 (2)). Consequently, it is our opinion that these powers, fitting exactly as they do in the statutory definition of general powers, must be held to be general powers under the law of Wisconsin.

In Cawker v. Dreutzer, supra, the Supreme Court of Wisconsin states that the Wisconsin statute on powers, being “derived by adoption from New York, should have the same interpretation here as • there * * The statutes of the two states are almost identical. See sec. 134, Real Property Law, McKinney’s Consolidated Laws of New York. The courts of New York have construed powers such as are under consideration in this case to be general powers. In the case of In re Lather's Will, 137 Misc. Rep. 222; 243 N. Y. S. 380, there was a testamentary trust to pay the income to the testator’s son for life and then to distribute the corpus to the son’s appointees designated by will. The power to appoint was exercised and the court held that “it was a general power exercised by will.” On similar facts in Farmers’ Loan & Trust Co. v. Shaw, 56 Misc. Rep. 201; 107 N. Y. S. 337, it was held that the power was “a general power of appointment without limitation.” An early New York case, Dana v. Murray, 122 N. Y. 604; 26 N. E. 21, uses almost literally the language of the Wisconsin statute in defining a general power. The definition is, “It'is general where it authorizes the alienation in fee by means of a conveyance, will, or charge of the lands embraced in the power to any alienee whatever.” These holdings of the New York courts applying their similar statute afford substantial support for our view that the powers in this case are general powers.

The case of Cawker v. Dreutzer, supra, is said by petitioner to be authority for holding these powers to be special powers. In that case there was a testamentary trust to pay the income to plaintiff’s mother for life, then to the plaintiff for life with a power of appointment as to the corpus, to be exercised by will. In a suit brought by the donee of the power the two main questions presented were, first, whether the power of appointment was valid, and, second, if the power was valid, whether it gave the donee complete and absolute title in the property. Under the second point the theory of the plaintiff was that there was a merger of her life estate and of her power of appointment. On the first point the court held the power to be valid. In discussing the second point the court said in part:

Neither is tlhie power a general power, as defined in section 232.05, but is a special power under subdivision (2), §232.06, because it embraces an interest less than a fee.

The petitioner points to the quoted language in support of the contention that the powers in this case are special powers. We do not so read the opinion of the court. The chief concern of the court was to determine whether the power was one that the Wisconsin statute describes as “an absolute power of disposition.” Sec. 232.08. The court held that it was not such a power and consequently there was no merger of estates. As we read the opinion, the court did not have squarely presented to it the question of whether the power was general or special, and its statement as above quoted is dictum. The Cawker case appears to be the only one reported to date that at all purports to touch upon the question here involved. In view of the fact that the precise question we have was not before the Wisconsin court in the Cawker case, we think the quoted words should not be taken as decisive, especially as they appear to be out of harmony with the decisions of the New York courts construing their similar statute. Considering the powers in this case in the light of the language of the Wisconsin statute and the decisions of the New York courts above cited, we hold, as set out above, that the powers were general and that the property passing thereunder is includable in gross estate.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Sternhagen :

license: Public Domain

text:
    Carl K. Lifson, Administrator of the Estate of Benjamin Lifson, Deceased, and Sophie Lifson, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83314.
    Promulgated September 30, 1937.

      George T. Altman, Esq., for the petitioners.

      Claude R. Marshall, Esq., for the respondent.
   OPINION.

Sternhagen :

A deficiency of $4,607.60 in petitioners’ income tax for 1934 was determined. The facts are stipulated.

Sophie Lifson, who with her husband filed a joint return for 1934 on the actual receipts and disbursements basis, bought in August 1933, a sheriff’s certificate of sale of certain foreclosed real property in St. Paul, Minnesota, took possession of the property in October 1933, and recorded the certificate in December 1933. The 1933 Minnesota property taxes amounted to $19,286.27, and she paid this in two equal installments on July 3, 1934, and December 8, 1934. She demands a deduction for taxes paid in 1934, and the Commissioner denies this on the ground that the payment must be treated as part of the cost of the property because when she acquired it the tax had already, on May 1,1933, accrued and become a lien.

The law of Minnesota is that property taxes are a lien on and after May 1 of the year to which they are applied, Mason’s Minnesota Statutes, 1927, §2191; National Bond & Security Co. v. Hopkins, 96 Minn. 119; 104 N. W. 678; Thompson v. United States, 8 Fed. (2d) 175; Merle-Smith v. Minnesota Iron Co., 195 Minn. 313; 262 N. W. 865, and it has been held that to one on the accrual basis the deduction is to be taken in that year, Merchants Bank Building Co. v. Helvering, 84 Fed. (2d) 478; Leamington Hotel Co., 26 B. T. A. 1004; Cloguet Co-operative Society, 21 B. T. A. 744. Whether to a continuing owner on the cash basis the deduction must be taken only in the year of accrual rather than the subsequent year of payment has not been considered, although the answer would seem fairly plain. But this is not such a case, for here the accrual was at a time before the acquisition of the property by the petitioner, and the question is whether the payment after accrual by the petitioner, who acquired the property after accrual, is to be regarded as the payment of a tax or the payment of an inherent cost of the property. If the tax were a personal liability of the owner at the time of accrual, the payment directly by the successor would not be the payment of the successor’s tax but the short cut payment to the former owner and the payment by him of his tax liability. Falk Corporation v. Commissioner., 60 Fed. (2d) 204. As such, it would clearly be cost of the property and not deductible by the successor. But there is no personal liability; only a charge against the property and a lien for its enforcement, and this reasoning is not applicable.

Since by state law the charge is fixed as of May 1, although not accurately calculated till later, a buyer after May 1 would take it with knowledge of the tax and would negotiate his price accordingly, either to exclude or to include the tax, or perhaps to prorate it. Cf. State v. Northwestern Telephone Exchange Co., 80 Minn. 17; 82 N. W. 1090. Buying the sheriff’s certificate, petitioner had no such choice. She bought the certificate with the burden of the accrued tax attached, and the cost of the certificate included the accrued tax. This is consistent with Helvering v. Missouri State Life Insurance Co., 78 Fed. (2d) 778; Merchants Bank Building Co. v. Helvering, supra; Leamington Hotel Co., supra; Cloguet Co-operative Society, supra. It is not at variance in theory with Theodore Plestcheeff, 35 B. T. A. 508 (on review, C. C. A., 9th Cir.). That case turned upon Washington statutes as construed by Washington courts to different effect from the Minnesota law here involved. The tax incidence under Washington law was held not to occur on the date analogous to May 1 in Minnesota, but on the later date when the lien became perfect and enforceable by the state. In Minnesota the lien is regarded as perfect on May 1, and the courts have held it to determine the incidence of tax on that date.

The Commissioner correctly held the amount of $19,286.27 to be part of petitioners’ cost and not a deduction.

Judgment will be entered for the respondent.


author: Miller :

text:
    Ruth Mintz Sack, Sole Beneficiary and Trust Manager Under Northern Trust Agreement No. 9842, Authorized Representative of All of the Heirs of Louis Mintz, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89049.
    Promulgated October 5, 1937.

      Eugene Meachem,, Esq., for the petitioner.

      B. D. Daniels, Esq., for the respondent.
   OPINION.

Miller :

This proceeding came on for hearing July 14, 1937, upon respondent’s motion to dismiss for lack of jurisdiction.

The pertinent facts are as follows: On February 18, 1937, the Commissioner mailed a notice of deficiency to “Mr. Louis Mintz, 528 West 63rd Street, Chicago, Illinois.” On May 12, 1937, a petition was filed with the Board captioned “Ruth Mintz Sack, sole beneficiary and trust manager under Northern Trust Agreement No. 9842, authorized representative of all of the heirs of Louis Mintz, deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.”

The jurisdictional facts alleged in the petition are that petitioner is an individual, residing at Chicago, Illinois; that the “deficiency letter * * * purports to have been mailed to petitioner on, to-wit: the 18th day of February, 1937”; and that the taxes in controversy are income taxes for 1934.

In verifying the petition Ruth Mintz Sack states that “no executor or administrator has been appointed by any court for or on behalf of the Estate of her Father, Louis Mintz”, and that she is authorized to file this appeal on behalf of Louis Mintz by the power of attorney given her by named parties, “being all of the children and only heirs of law of Louis Mintz * *

The power of attorney referred to states that the parties named therein, “being all of the children and only heirs at law of Louis Mintz, deceased, * * * do make, constitute and appoint Ruth Mintz Sack * * * to act as petitioner and prosecute an appeal before the United States Board of Tax Appeals pertaining to the income tax deficiency for the year 1934, proposed as to Louis Mintz, deceased * * *.”

Thereafter, and under date of June 22, 1987, the Commissioner filed a motion to dismiss the proceeding, as captioned and filed, for the reason that the petition shows on its face that one Euth Mintz Sack is the petitioner party and not the taxpayer Louis Mintz; that the petition fails to show that the taxpayer, Louis Mintz, is deceased; that the petition fails to show that Euth Mintz Sack is the duly authorized representative of the estate of Louis Mintz, if taxpayer is deceased; that petitioner is not the proper party to appear before the Board; and, therefore, that the Board has no jurisdiction to entertain the appeal.

At the hearing petitioner conceded that the petition contains no direct allegation that the person for whom the deficiency letter was intended is dead. It is urged, however, that no other reasonable inference can be drawn, and counsel stated that the only assets of Louis Mintz consisted of personal property, and the heirs did not want to go to the expense of having the court appoint an executor or administrator and institute probate proceedings in order to file this petition. It is further urged that the petition is sufficient as filed, but if held insufficient, counsel moved the Board to grant him an additional 60 days within which to file an amended petition.

After considering the argument of counsel and the cases cited, it is our opinion that respondent’s motion to dismiss for lack of jurisdiction should be granted. The petitioner is not the taxpayer against whom the Commissioner asserted a deficiency. The petitioner is not the person notified of a deficiency in tax, nor is she, as an heir, the personal representative of the taxpayer. Schouler, Wills, Executors and Administrators, vol. 3, p. 1670. The verification of the petition and the attached power of attorney indicate that the petitioner acts not for the taxpayer, but for the named individuals, who, it is alleged, are all the children and heirs of Louis Mintz.

Where the Board’s jurisdiction has been challenged as to the proper parties, the general rule is that the party petitioner must be the taxpayer to whom the deficiency notice was directed. William A. Matern, 21 B. T. A. 384, and cases there cited. An exception exists, and jurisdiction has been taken, where the deficiency notice was mailed to a deceased taxpayer and the appeal was brought by the executors of his estate. Edwin W. Eisendrath et al., Executors, 28 B. T. A. 744. An exception has also been recognized where the person filing the petition has actual authority to represent the taxpayer and no one has been misled as to the liability asserted. Corinne Porter Scruggs, Administratrix, 29 B. T. A. 1102, and cases cited. But here the petitioner had no actual authority. No deficiency has been asserted against her or the individuals she allegedly represents. The Board has no jurisdiction, therefore, to determine a deficiency against ber as an individual, as a fiduciary, or in any other capacity. Leesa Dombrowski, 35 B. T. A. 1028; Fred Shingle, 34 B. T. A. 875; Martha M. Hanify, 21 B. T. A. 379; Percy N. Powers, 20 B. T. A. 753.

The second motion which we must consider is petitioner’s motion that she be granted 60 days in which to file an amended petition. This motion, from its very nature, must be founded upon a proper party petitioner. Neither the taxpayer, nor his legal representative, is before us, and, therefore, we have no petition that can be amended. Petitioner’s motion for a 60-day extension of time within which to file an amended petition is, therefore, denied.

An order will issue in accordance herewith dismissing the proceeding for lack of jurisdiction.

Reviewed by the Board.

         This report was prepared during Mr. Miller’s term of office.


author: Harron :

text:
    Guaranty Trust Company of New York and J. Whitney Peterson, Executors of Last Will and Testament of Jonathan Peterson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72503.
    Promulgated October 5, 1937.

      H. H. Shelton, Esq., and Montgomery B. Angell, Esq., for the petitioners.

      Frank D. Strader, Esq., and Lewis S. Pendleton, Esq., for the respondent.
   Supplemental Findings op Fact and Opinion.

Harron :

This proceeding was submitted on a stipulation of facts signed by the parties. The parties have filed an amendment to the stipulation of facts which corrects an erroneous statement appearing in paragraph (8), subparagraph (b) of the stipulation of facts filed at the hearing January 20, 1936. Upon the correction made by the amendment to the stipulation of facts, the following change is made hereby in the findings of fact in the report of the above entitled proceeding promulgated April 23, 1937, 35 B. T. A. 916, at page 919 :

The second paragraph on page 919 of the report is as follows:

On July 19, 1924, Mrs. Peterson deposited her husband’s two checks aggregating $240,000 in her personal account in the Guaranty Trust Co., and the cheeks were paid that day.

This paragraph is hereby deleted and the following is substituted therefor and incorporated in our findings of fact:

The cheek of Jonathan Peterson payable to Etta J. Peterson, dated July 17, 1924, in the amount of $225,000 was a certified cheek and the account of the decedent with The National City Bank was debited with this amount July 17, 1924. The check of Jonathan Peterson to Etta J. Peterson, dated July 17, 1924, in the amount of $15,000 was paid July 18, 1924 and the decedent’s bank account accordingly debited. The account of Mrs. Etta J. Peterson with the Guaranty Trust Company of New York was credited July 18, 1924 with $240,000 consisting of the amounts of the decedent’s checks referred to herein.

On the basis of the above findings of fact the following revision is made in the opinion in this proceeding on page 924 of the report in the first new paragraph, so that the paragraph, as revised, will read as follows:

The first trusts were executed by Mrs. Peterson and the various checks deposited in her personal account and in her new account, as trustee, on July 18, 1924, pursuant to the agreement between herself and her husband as to the use of the funds he transferred to her. Mrs. Peterson entered upon the execution of the various steps agreed to without consulting any disinterested person as to the “investment” of the trust funds and in such complete accord with the suggestions of her husband throughout in all the transactions that we are unable to find that she had any real or independent control over the funds purportedly given to her. It is our opinion that in all the transactions Mrs. Peterson acted under the direction and control of her husband under agreement to return the funds involved to him in the form of “loans” and that he did not lose control of the subject matter of his alleged “gifts.” Under such circumstances, we are constrained to hold that Peterson did not make valid gifts to his wife individually or as trustee. See In re Halligan’s Estate, 143 N. Y. S. 676; In re Von Benuth’s Estate, 143 N. Y. S. 672; Schwab v. Schwab, 163 N. Y. S. 246; Schneider v. Schneider, 107 N. Y. S. 792, all relating to attempted gifts of bank deposits. In re Miller’s Estate, 236 N. Y. S. 290; 140 N. E. 701, 702.

In all other respects, the findings of fact, opinion and decision in this proceeding, promulgated April 23,1987, remain unchanged.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Smith:

text:
    Robert Wilson Carter, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Robert Wilson Carter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 80751, 80752.
    Promulgated October 6, 1937.

      Charles F. Byers, Esq., for the petitioners.

      Edward A. Tonyes, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, involve income tax deficiencies as follows:

The respondent contends that the returns filed by Robert Wilson Carter for 1930 and 1931 were false and fraudulent, with intent to evade tax. He does not contend that the return filed by Mrs. Robert Wilson Carter for 1931 was false and fraudulent.

The petitioners are husband and wife, residing at Luling, Caldwell County, Texas. They filed separate income tax returns on a community property basis for both 1930 and 1931. The return filed by the husband (hereinafter called'Carter) for 1930 shows net community income of husband and wife of $18,499.41. He reported as his net income for 1930 one-half of the above, or $9,249.11. The return filed by Carter for 1931 shows net community income of husband and wife of $22,202.36, one-half of which, or $11,101.18, was reported as the net income of each.

Carter contends that the respondent erred in the determination of the deficiency for 1930 by disallowing the deduction from gross income of one-half of an alleged loss of $8,420 upon the sale of 200 shares of Gulf Oil Corporation stock and that in determining the deficiency for 1931 he erred in disallowing the deduction of one-half of a claimed loss of $6,950 upon the sale of 200 shares of Gulf Oil Corporation stock; also that for 1931 the respondent erred in adding to the net income reported one-half of $306.75 salaries and commissions. He also contends that the respondent erred in ascertaining a 50 percent penalty for each of the years 1930 and 1931; that the returns were not false and fraudulent with intent to evade income tax; and that the deficiency asserted for 1930 is barred by the statute of limitations.

Petitioner Mrs. Robert Wilson Carter contends that in the determination of the deficiency against her for 1931 the respondent erred by adding to the net income reported one-half of $306.75] for increased salaries and commissions received by the community, and by disallowing the deduction of one-half of the loss of $6,950 claimed to have been sustained on a sale by the community in 1931 of 200 shares of Gulf Oil Corporation stock. Neither petitioner has pleaded the statute of limitations so far as the deficiencies for 1931 are concerned.

In the return filed by Carter for 1930 it is claimed that the community sustained a loss of $8,420 upon the sale of 200 shares of Gulf Oil Corporation stock. The cost of the stock was reported to have been $20,970 and the sale price $12,550. In the return filed by him for 1931 it is claimed that the community sustained a loss of $6,950 upon the sale of 200 shares of Gulf Oil Corporation stock, the cost of which is represented to have been $12,550 and the sale price $5,600. After the caption “State how property was acquired”, appearing in schedule C of the 1931 return, is the notation “Received in cancellation of purchase note, ‘Involuntarily acquired.’ ”

In answer to the question, “During the years 1930 and 1931, what was your occupation or business Mr. Carter?”, Carter testified:

Most of my time was devoted to the Gulf Refining Company wholesale distributor agency at Luting. I had other duties and business pertaining to farming, owned land, operated it, I owned producing, oil royalties and during the years 1928 and 1929 and 1930 and 1931 and the years since, I have received royalties which have required the investment of all these moneys received from those and I have dealt during that period in the purchase of oil royalties, stocks, listed stocks, and investments, local by nature to a good extent, and the early part of 1929 and 1930, such as the purchases of notes from and through the Lipscomb Bank and Trust Company, Luling, Texas, and stocks, as I have previously stated, and bonds.

The evidence of record in these proceedings shows that in 1930 Carter acquired 200 shares of Gulf Oil Corporation stock, paying therefor $20,700—not $20,970, as shown by the return. There was a considerable shrinkage in the market price of Gulf Oil Corporation stock in 1930 after its purchase by Carter.

In December 1930 Carter entered into a transaction with J. M. Brewer by which Brewer gave him his note for $12,550, which was the then market price for the 200 shares, payable with interest in March 1931. Upon the receipt of the note Carter endorsed his stock certificates in blank, attached to them the note received from Brewer, and placed them in his safety deposit box.

Brewer was a truck driver in Carter’s employ and received a salary of approximately $100 per month. During 1929 he had an income from oil royalties of approximately $6,000, and in 1930 an income of approximately $1,700. In March 1931 the market price for the shares was approximately the same or a little above the market price in December of 1930. A dividend had been paid upon the stock between December and the following March, which was received by Carter, the record owner of the shares. Pursuant to an agreement made by Carter with Brewer shortly after the maturity of the note in March 1931, the note was canceled without any payment of interest and Carter “took back” the shares of stock.

It was upon this transaction that Carter claims to have sustained a loss in 1930 of the difference between the cost of these shares, $20,700, and the amount of the note, $12,550.

In December 1931 Carter again decided to “sell” his 200 shares of Gulf Oil Corporation stock. He took them to H. M. Ainsworth, president of the Lipscomb Bank & Trust Co., of Luling, Texas. The fair market value of the shares at the time was $5,600. Ainsworth agreed to “buy” the shares from Carter, and gave him his note with interest for $5,600 due in June 1932. Carter turned over the shares of stock to Ainsworth and accepted Ainsworth’s note for them. The shares were transferred to Ainsworth on the corporation’s books. In June 1932, when the note became due, Carter surrendered it to Ainsworth without any payment of principal or interest having been made thereon and Ainsworth turned over his certificates for 200 shares of Gulf Oil Corporation stock to Carter. The shares were then retransferred to Carter on the books of the Gulf Oil Corporation.

The tax return filed by Carter for 1931 shows community income received from salaries, wages, commissions, etc., of $4,536.15 and expenses paid in connection therewith of $5,353.14, or a loss from salaries, wages, and commissions of $816.99, which amount was deducted from community income received from all sources in the determination of the net community income reported for 1931 of $22,202.36. In the determination of the deficiency the respondent added back to the net community income $306.75, reducing the claimed community loss of $816.99 by that amount.

No bona fide sales of Gulf Oil Corporation stock were made by Carter in 1930 or 1931, and the income tax returns filed by him for those years in which amounts were deducted for losses from alleged sales were false and fraudulent with intent to evade tax.

Carter’s first contention is that the deficiency determined for 1930 is barred by the statute of limitations. It is not barred, however, if the return filed for 1930 was false and fraudulent with intent to evade tax. Sec. 276 (a) of the Revenue Act of 1928.

The only evidence before us in these proceedings consists of Carter’s testimony and his income tax returns for 1930 and 1931. Carter testified somewhat evasively that the claimed sales of 200 shares of Gulf Oil Corporation in 1930 and 1931 were not made with the object in view of reducing income tax liability. We are satisfied, however, from a consideration of all the evidence of record, that this is not so. The shares of stock of the Gulf Oil Corporation were listed on the New York Curb Exchange. If Carter had desired to sell his shares in December 1930 and December 1931, he could have done so very readily, and realized the market value in cash therefor. Instead of doing that he made an arrangement in December 1930 with his truck driver whereby the truck driver, without making any down payment on the shares of stock, gave the petitioner his note for the shares to be paid in March 1931, and when the note matured the maker did not pay the note but requested Carter to take back the stock. Whether the maker of the note was financially responsible in December 1930 does not appear from the evidence. He was a truck driver who received a salary of approximately $100 a month. We are of the opinion that the proven facts in this case show that it was not the intention of Carter to make a sale of the stock to Brewer in December 1930. If Carter had desired to part with title to the stock he could at least have sold the stock when Brewer failed to pay his note at maturity and applied the proceeds against the note. The evidence indicates that the market value of the shares at that time was equal to or greater than the value in December 1930.

The burden of proving fraud is on the respondent, but, as was said in L. Schepp Co., 25 B. T. A. 419, at page 421:

In meeting his statutory burden of proof, the respondent is not confined to the affirmative evidence adduced by him; if the weight of all the valid evidence in the case establishes fraud, his burden is discharged, and it is immaterial by which of the opposing parties the evidence was introduced.

We are of the opinion that the claimed sale of the Gulf Oil Corporation stock by Carter in December 1930 was not bona fide, and that the return filed by Carter for 1930 was false and fraudulent with intent to evade tax. The determination by the respondent of the deficiency for 1930, together with the 50 percent fraud penalty, is sustained.

In December 1931 Carter practically duplicated the transaction which he had made in December 1930. The point of material difference is that in December 1931 Carter went to H. M. Ainsworth, the president of the Lipscomb Bank & Trust Co., at Luling. Ainsworth gave Carter! his note for the purchase price of the stock, payable approximately six months later, took possession of the shares of stock, and had them transferred to his name. Then in June 1932, when the note matured, the stock was turned back to Carter by Ainsworth, the note was canceled, and the stock was retransferred to Carter’s name upon the corporation’s books of account. Carter still owned the shares of stock at the date of hearing in 1936.

If only the year 1931 were before us we might be disposed to consider that Carter made a bona fide sale of the shares of stock in question in 1931. In Harold F. Seymour, 27 B. T. A. 403, the Board stated as follows:

Though the Board has approved deductions for losses where the evidence was not decidedly more favorable to petitioner than that surrounding the first purported sale, we can recall no case in which approval has been given where the same parties went through almost the identical process in the next year. To approve a single instance requires the resolving of many doubts in favor of the petitioner, but to permit a recurrence of the same procedure in the next year under the circumstances here present overtaxes our credulity. Despite the statements of the parties to the transactions that they were outright sales, we are not convinced that such sales were free and genuine. In our judgment they were lacking in bona fides.
If the transaction of 1927-1928 stood alone the deduction might conceivably have been allowed, but the repetition thereof for the years 1928-1929 in precise parallelism goes beyond mere coincidence. It casts such doubt on, the good faith of petitioner in both years as to make it impossible for us to approve the purported sales. The evidence and the inferences reasonably to be drawn therefrom lean too strongly against petitioner to permit us to approve the deductions.

It is quite apparent, in view of the fact that Carter is still the owner of the shares of stock reported to have been sold, that he had no real losses from the claimed sales of shares of stock in 1930 and 1931. The evidence is compelling that the transaction with Ainsworth, as with Brewer, was merely for the purpose of establishing an income tax loss without Carter making any sale of the shares of stock. The same conclusion must be reached with respect to the transaction in 1931 as was reached with respect to that in 1930. Carter sustained no deductible loss from the claimed sale and the return filed for 1931 was false and fraudulent.

Carter further contends that the respondent erred in adding $306.15 for salaries and commissions to the community income reported for 1931. The return filed showed a loss to the community from salaries and commissions of $811.29. The net effect of the respondent’s adjustment is to reduce that claimed loss by $306.75. The burden was upon Carter to prove error on the part of the respondent in making the adjustment. The only proof submitted by Carter upon this point consists of his testimony that the amounts received for salaries and commissions in 1931 were correctly stated on the return, according to his best recollection. On cross-examination it was brought out, however, that Carter’s testimony was directly to the total amount received, $4,536.15, and not to the correctness of a claimed loss of $817.29 in respect of salaries and commissions. We must conclude upon this evidence that Carter has not sustained the burden of proof by showing error on the part of the respondent in reducing the claimed loss from this source by $306.75. The adjustment made by the respondent is approved.

No evidence was submitted by petitioner Mrs. Robert Wilson Carter in support of her contention that the respondent was in error in determining a deficiency in income tax for 1931 of $225. Manifestly, if the deficiency determined against Carter for 1931 is correct, the deficiency determined against Mrs. Robert Wilson Carter is also correct.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Smith :

text:
    Rose G. Ruben, Amos S. Deinard and Northwestern National Bank and Trust Company of Minneapolis, a Corporation, as Executors of the Estate of I. H. Ruben, Deceased, Under the Last Will and Testament of I. H. Ruben, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65887.
    Promulgated October 6, 1937.

      George B. Leonard, Esq., and Benedict Deinard, Esq., for the petitioners.

      Gerald W. Brooks, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency in income tax for 1929 of $15,425.48. The petitioners admit liability for a deficiency of $1,836.44.

The question in issue before the Board is whether the petitioners’ decedent derived any taxable income from the payment of $251,000 in 1929 by a corporation, of which he owned one-fourth of the capital stock, in settlement of an equity decree which included not only a money judgment for $351,542.81, but also a decree for rescission and cancellation of 25,716 shares of Miles Theatre Co. stock. The decree was against the petitioners’ decedent, two other individuals, a trust estate, and a corporation. The petitioners contend that their decedent derived no taxable income from the payment made.

The facts in the case are contained in a written stipulation of facts signed by counsel.

Some years prior to 1918 M. L. Finkelstein and I. H. Ruben, the petitioners’ decedent, were partners in theatrical properties in Minneapolis and St. Paul, operating a circuit of motion picture theatres. On April 29, 1918, William Hamm purchased a one-half interest in all of the theatre holdings of the partnership. This new partnership of Hamm, Finkelstein & Ruben operated until October 1, 1918, on which date the partnership assets were transferred to a common law trust, “Twin City Amusement Estate”, which will hereinafter be referred to as “Twin City.” Twin City owned and operated the theatre circuit until May 1, 1926. The beneficial interests in Twin City were as follows:

The trustees comprised seven persons, including among others, Hamm, Finkelstein, and Ruben. The declaration of trust specifically provided that any trustee or beneficiary should be indemnified out of the trust estate for any personal liability.

Twin City was determined and held to be a corporation for Federal tax purposes throughout its existence.

On May 1, 1926, Northwest Theatre Circuit, Inc., hereinafter referred to as “Northwest”, was incorporated under the laws of Delaware and took over all the assets and business of Twin City and assumed all of Twin City’s liabilities. The trustees of Twin City who held title to all of its assets transferred those assets to Northwest in exchange for all of the authorized stock. Hamm, Finkelstein, and Ruben became stockholders of Northwest in the following-proportions :

In December 1914 the partnership composed of Finkelstein and Ruben purchased a controlling interest in the Miles Theatre Co., which operated a theatre in Minneapolis. That partnership, the successor partnership, and the successor trust acquired additional shares of the Miles Theatre Co. from time to time. No dividends were, paid by the Miles Theatre Co. to its stockholders from 1914 to 1920. Dividends of 10 percent were paid in April and October 1920 and April 1921, and a 20 percent dividend was paid in September 1921.

In January 1920 H. N. Backus and others who were stockholders, or former stockholders, of the Miles Theatre Co. commenced suit in the United States District Court, District of Minnesota, Fourth Division, against the trustees of Twin City, individually and as trustees, the Miles Theatre Co., New Palace Theatre Co., and others. The suit was a minority stockholders’ suit brought in behalf of the Miles Theatre Co. to recover assets claimed to have been wrongfully diverted from the Miles Theatre Co. by the controlling stockholders. As incidental to the claim on behalf of the corporation for an accounting, a large number of persons who had at one time been stockholders in the Miles Theatre Co., but who had sold their stock to Twin City or its predecessor partnership, sought to rescind the sales of their stock and to be restored to their original status as stockholders.

The former stockholders made no claim for damages. They claimed that Twin City and its predecessor partnerships had purchased their stock at improperly inadequate prices.

The litigation continued until April 1929. In an opinion by the court dated November 19, 1929 (23 Fed. (2d) 357), it was held:

(d) The individual defendants [Hamm, Finkelstein, and Ruben] above named are all equally liable and the defendant Twin City Amusement Trust Estate, which is a holding agency for such individual defendants, is equally bound with them. The property of the corporation and that of the individual plaintiffs and interveners, and the gains therefrom, have been commingled and confused with property of the defendants. The sums found due should therefore be a charge and lien upon the property of the defendants held by the Twin City Amusement Trust Estate.

The decree was entered December 24, 1927, and was amended on February 14, 1928, and February 15, 1928. In the decree entered December 24, 1927, it was ordered in part:

2. That plaintiffs, interveners and said company are entitled to recover from defendants Finkelstein, Ruben, Hamm and the Twin City Amusement Trust Estate, and each of them, and said defendants are ordered forthwith to pay to said Trustee for the use and benefit of said company and all persons who may be entitled to share therein, the following sums of money, exclusive of costs and disbursements;
Defendants are ordered to make net payment to said Trustee (exclusive of costs and disbursements) in the aggregate sum of $351,542.81, as of December 1, 1927.

The amendment to the decree of February 15, 1928, made Northwest, which had become in 1926, and was then, the owner of all the theatrical properties formerly owned by Twin City (including all of the Miles Theatre Co. stock ever owned by any of the defendants), an additional party defendant as successor to Twin City and imposed the recovery as a lien against all the assets in the hands of Northwest.

The defendants took an appeal to the Circuit Court of Appeals for the Eighth Circuit from the decree as amended. On April 1, 1929, the litigation was disposed of by stipulation of settlement filed in the case. Under this settlement Northwest was to pay $250,000 cash out of its own funds. As a part consideration for this payment Northwest was to acquire the balance of the outstanding Miles Theatre Co. stock, stated in the decree to be 210 shares. The payment discharged Northwest’s liability for the money judgment on behalf of the Miles Theatre Co. in the decree of December 24, 1927, and also discharged its liability to restore and cancel 25,716 shares of the Miles Theatre Co. stock; also, the lien imposed upon all of its property in the decree and in the amendment thereof of February 15,1928. Northwest paid an additional $1,000 over the amount set in said stipulation. The final decree entered pursuant to the stipulation of settlement on April 13,1929, provided in part:

AH claims of every sort of all the plaintiffs, of all the interveners, of all the other persons who have filed claims herein, of all other stockholders and former stockholders of the Miles Theatre Company, of the Miles Theatre Company, and of H. E. Fryberger, Esq., against each and all of the defendants, existing on the 30th day of March, 1920, relating in any way to said Miles Theatre Company or to any of its stock, have been fully and finally compromised and settled, and are hereby fully and finally discharged and released, and all of the said persons are hereby barred, foreclosed and enjoined from any prosecution of any of said claims hereafter.'

A final decree of distribution and also an additional decree entered April 23, 1929, provided specifically for the distribution of the settlement money; $155,000 out of the $251,000 was paid to H. E. Fryberger, solicitor for the plaintiffs, to compensate him for his expenses and services in the litigation; and $96,000 was paid to. the stockholders and former stockholders of the Miles Theatre Co., who were parties to the litigation; the amount to be paid each stockholder was determined by an appraisal of the value of his stock.

The corporate minutes of Northwest disclose no corporate action with respect to the settlement of the law suit. No dividend declaration was made in relation to the payment by the corporation of the settlement money.

The decree of December 24, 1927, was duly entered in the United States District Court, but was not docketed. At all times after the rendition of the decree Twin City (and its successor Northwest), was financially able to discharge the obligation imposed by the decree.

In this proceeding the respondent submits that the petitioners’ decedent, by reason of owning one-fourth of the capital stock of Northwest, is liable for income tax upon one-fourth of the $251,000 paid by Northwest in settlement of the litigation because of the fact that the petitioners’ decedent was liable for the payment of the judgment rendered against him in at least the amount of $62,750.

Where a corporation, pursuant to a contract, pays an obligation of a third party the amount of the payment constitutes taxable income of the person for whose benefit the payment is made. Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine Railroad, 279 U. S. 732. Cf. United States v. Mahoning Coal Railroad Co., 51 Fed. (2d) 208; certiorari denied, 285 U. S. 559. The petitioners in this proceeding contend, however, that the payment made by Northwest was not pursuant to a contract; that Northwest was liable for the payment of the judgment; and that in making the payment it liquidated its own obligations.

The whole history of the litigation resulting in the judgment against the petitioners’ decedent and others was by reason of acts done principally by Hamm, Finkelstein, and Ruben. It is very evident from the portion of the opinion of the court quoted above that Twin City was made liable for the payment of money by reason of the fact that it was the “holding agent for such individual defendants”, and Northwest was joined as a party defendant because it was the successor of Twin City. We are of the opinion that there is no merit in the contention of the petitioners that Northwest was primarily liable for the payment of the money judgment. The judgment was against all of the defendants. So far as appears the plaintiffs in action might have had execution against any defendant for the entire amount of the judgment.

We are also of the opinion that there is no merit in the contention of the petitioners that the amount of $251,000 paid in the compromise settlement was not pursuant to a contract. Hamm, Finkelstein, and Ruben were the only stockholders of Northwest. Pursuant to an agreement between them Northwest paid the money for the benefit of all parties concerned. In making the payment a liability was paid which rested against each of the stockholders, as well as against Northwest.

In Blumenthal v. Commissioner (C. C. A., 2d Cir.), 76 Fed. (2d) 507, the court considered whether the settlor of a irrevocable trust was taxable upon income of a trust applied in discharge of her income tax. The trust estate consisted of shares of stock pledged with the bank to secure the taxpayer’s bank loan. It was provided in that trust agreement that dividends received on the stock held in trust should be applied in payment of principal and interest on the bank loan. The Circuit Court held that in view of the bank’s custom of selling collateral stock first in event of default on a loan before enforcing payment against the debtor, the corpus of the trust was primarily bound to pay the note. When dividends on the stock were applied in payment of the note, the court held that the trust was primarily benefited, not the settlor, and that such income was not taxable to her. The decision of the Second Circuit was reversed by the United States Supreme Court in Helvering v. Blumenthal, 296 U. S. 552, upon the authority of Douglas v. Willcuts, 296 U. S. 1.

In this proceeding the respondent has treated one-fourth of the money payment made by Northwest as a dividend to petitioners’ decedent and has accordingly subjected it only to surtax. This is the most favorable view that can be taken of the payment. In any event it was a payment made by Northwest to satisfy a liability that rested against each of the stockholders. We are of the opinion that the petitioners’ decedent, who owned one-fourth of the capital stock of Northwest, is liable for income tax upon at least one-fourth of the amount paid. We are of the opinion that this is the minimum amount for which he might be held liable for tax. If this amount of money, had been paid over to the petitioners’ decedent by Northwest, there can be no question but that it would have been a taxable distribution to the recipient. The payment by Northwest in satisfaction of a debt owing by the petitioners’ decedent is the equivalent of a dividend.

The petitioners make the further contention that, since the declaration of trust of Twin City specifically provided that any trustee or beneficiary should be indemnified out of the trust estate for any personal liability, the trust was primarily liable and the petitioners’ decedent only secondarily liable so that he was entitled to exoneration from the trust estate. In Browning v. Fidelity Trust Co. (C. C. A., 3d Cir.); 250 Fed. 321; certiorari denied, 248 U. S. 564, the Circuit Court considered the liability of a trustee for improperly releasing a mortgage lien on property subject to a trust mortgage. A clause in the mortgage provided that the trustee should not be answerable for any act performed by, or misconduct of, any of its agents or employees, or under any circumstances whatsoever, except for bad faith. In discussing the effect of this provision, the court stated:

* * * The plaintiff admits that as a general proposition parties creating a trust can, by their agreement, limit the liability which is imposed by one and accepted by the other, Tuttle v. Gilmore, 36 N. J. Eq. 617, but maintains, very properly, that the law, dictated by considerations of public policy, determines the point beyond which the parties can not agree to relieve a trustee from liability for breach of a trust duty. For instance, a trustee can not contract for immunity from liability for acts of gross negligence or for acts done in bad faith. Such contracts are invalid because repugnant to law.

We are of the opinion, however, that a sufficient answer to the petitioners’ argument on this point is that the decree of the District Court held Hamm, Finkelstein, and Ruben each liable for the judgment debt. By virtue of the decree Ruben was personally liable for the payment of the judgment. The indemnification clause in the declaration of trust can therefore be of no avail to the petitioners in this proceeding.

In this disposition of the case the Board does not overlook the fact that upon the settlement Northwest acquired 210 outstanding shares of Miles Theatre Co. stock. To that extent payment by Northwest was a capital expenditure which added to its assets. If the evidence afforded the basis for determining the cost of these additional shares, a reduction might be made in the amount of $62,750 determined by the respondent to have been realized by Ruben. But the determination of the respondent is prima facie correct. Welch v. Helvering, 290 U. S. 111; Wickwire v. Reinecke, 275 U. S. 101; Austin Co. v. Commissioner (C. C. A., 6th Cir.), 35 Fed. (2d) 910; certiorari denied, 281 U. S. 735. The burden of proof was upon the petitioners to show that the determination of the respondent was incorrect. They have failed to bear such burden.

Reviewed by the Board.

Judgment will be entered for the respondent.

Black, Sternhagen, Arundell, Murdock, and Disney dissent.


author: Hill:

text:
    Essie Irene Gaffney, as Executrix Under the Last Will and Testament of James E. Gaffney, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83151.
    Promulgated October 7, 1937.

      Pike P. Waldrop, Esq., for the petitioner.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Hill:

The issue for decision here is whether the decedent made a valid gift to his wife in 1922 of the shares of Commonwealth Realty Trust and in 1923 of the shares of stock in the Brooklyn Ash Removal Co., under the facts and circumstances set out in our findings of fact above.

The courts of the State of New York, where the transactions involved herein occurred, have stated' the requisite elements of a gift in the following language:

In order to constitute a gift, there must be, on the part of the donor, an intent to give, and a delivery of the thing given, to or for the donee, in pursuance of such intent, and, on the part of the donee, acceptance. * * *
Delivery may be either actual, symbolical, or constructive, but must be such as to divest the donor of the possession, control, and dominion over the thing given. In re Babcock’s Estate, 147 N. Y. S. 168, affirmed 153 N. Y. S. 1105.

The Board has repeatedly recognized substantially the same elements as essential to the making of a valid gift inter vivos. See Adolph Weil, 31 B. T. A. 899; Theodore C. Jackson et al., Administrators, 32 B. T. A. 470, and decisions cited.

While respondent concedes that the decedent formally transferred to his wife title to the shares of stock in controversy, he contends that there was a lack of donative intent on the part of decedent; that petitioner has not shown a clear and unmistakable intention on the part of the decedent absolutely and irrevocably to divest himself of title, dominion, and control of the subject matter of the gift in praesenti, nor the irrevocable transfer of the present legal title and of the dominion and control of the entire gifts to petitioner, so that decedent could exercise no further act of dominion or control over them. Respondent argues that the facts show that decedent never intended to make a gift of the securities to his wife, but merely effected a formal transfer of title to remove his assets from the reach of creditors, retaining for himself all beneficial interest and dominion and control.

In support of his contention, respondent points to the following facts: (1) The stock certificates were kept in the decedent’s safe deposit box at the bank, to which Essie I. Gaffney did not have the right of access from the dates of the transfers in 1922 and 1923 until April 7, 1931; (2) in 1925 petitioner endorsed the certificates in blank and put them up as collateral with the Manufacturers Trust Co. for personal loans to the decedent, where the certificates remained until the decedent’s death; (3) after the transfers, decedent continued to participate in the direction of both the Commonwealth Realty Trust and the Brooklyn Ash Removal Co.; (4) from December 1930 to the date of his death, decedent held a power of attorney to draw checks on petitioner’s bank account; and (5) a large portion of the income from the transferred assets was consumed in the payment of household expenses, and in loans to the decedent and to a corporation which he owned.

The matters referred to by respondent, we think, are of little importance in deciding the issue presented in this case, except only as they may bear upon the question of donative intent.

A gift is none the less valid and complete because the donee does not retain possession of the property after delivery. “The donor may retain possession if he does so as agent of the donee for safekeeping.” Brady's Estate, 239 N. Y. S. 5. “After a gift is once complete and the title has passed to the donee, the fact that the donor subsequently has possession of the property given does not affect' the validity of the gift.” Edson v. Lucas, 40 Fed. (2d) 398.

Transfer of stock on the books of the corporation in itself constitutes a delivery, in the absence of evidence establishing lack of donative intent. Marshall v. Commissioner, 57 Fed. (2d) 633, citing Robert's Appeal, 85 Pa. 84. It is only where it is affirmatively shown that the donor did not intend thereby to make a gift that transfer of stock on the books of the corporation is held to be insufficient. Theodore C. Jackson et al., Administrators, supra; McCann v. Commissioner, 87 Fed. (2d) 275. Cf. Oscar C. Joseph, 32 B. T. A. 1192.

If a valid gift inter vivos has been made, it is of no importance what the donee thereafter does with the income from the property. In the case of a bona fide gift by a husband to his wife, the wife may thereafter dispose of the income as she chooses. She may lend it to her husband, or may indeed make a gift of it to him, without invalidating the gift to her of the res. To recognize any less right in the donee would be to restrict her ownership of the property. In Marshall v. Commissioner, supra, in referring to stock transferred by the petitioner to his wife on the books of the corporation, the court said:

What she did with those [dividend] cheeks after receipt is a matter of complete indifference. The stock was not endorsed and redelivered to her husband, and could not thereafter be transferred, or the dominion and ownership of ilie petitioner be regained, except through the independent and voluntary act of his wife.

If the wife returns the income from the property to the husband as a gift, or as an alleged loan not thereafter repaid, such act might properly raise a question whether the husband in the first place had the requisite intention to make a bona fide gift of the property to Ms wife, and such question then must be resolved in the light of the facts of each particular case. “It is true that where property is transferred by a husband to his wife without consideration, there is a presumption that it is a gift, but it is also true that such presumption is one of fact and may be rebutted by a showing of the real intention of the parties. Smithsonian Institution v. Meech, 169 U. S. 398.” McCann v. Commissioner, supra.

What then were the real intentions of the parties in the instant case as disclosed by the record ? The uncontroverted evidence shows (1) that prior to the transfers, decedent told his wife that he was “going to give” the securities in question to her; (2) that at the time of the transfers there was no understanding or agreement between decedent and his wife that he should retain any right or interest of any kind in the transferred property, and decedent never thereafter in fact claimed any such right or interest; (3) that the shares were formally transferred on the books of the trust and of the corporation from decedent to his wife, and thereafter all dividend checks, with the single exception, were either made payable to the wife and delivered to her, or were deposited to the credit of her personal bank account; (4) that after the transfers decedent repeatedly made statements to third parties that he had given the securities to his wife; (5) that in 1921 prior to the transfers decedent had made a will containing a testamentary disposition of the securities in question, and after the transfers decedent and his wife executed new wills contemporaneously by which the wife exercised such power of appointment and no mention was made thereof by decedent in his will; (6) that after the transfers decedent and his wife prepared statements of their respective assets and liabilities which they submitted to a bank for the purpose of obtaining loans, and in such statements the securities involved were consistently listed over a number of years as being the property of decedent’s wife; and (7) that the private books of account of decedent, containing a statement of his assets, made no reference to the securities in controversy.

In our opinion, the actions of the parties, when viewed in their entirety, before, at the time, and subsequent to the transfers assailed by respondent, extending over a period of approximately 10 years prior to decedent’s death, fairly establish that the decedent intended to and did make a bona fide gift of the securities to his wife. And we think the matters urged by respondent do not compel a contrary conclusion.

In support of his position, respondent cites our decisions in Theodore C. Jackson et al., Administrators, supra; Oscar G. Joseph, supra, and the decision of the United States Circuit Court of Appeals for the Sixth Circuit in McCann v. Commissioner, supra. All of these cases, we think, are clearly distinguishable on the facts. The circumstances of each case indicate that the transferor therein had no intention of making a bona gift inter vivos.

In the McCann case, the husband incorporated his business and issued the majority of the stock of the corporation to his wife, who paid nothing for the stock. Another corporation was later organized, and its stock was issued to the stockholders of the first corporation, the wife receiving her share. None of the stock certificates was ever delivered to the wife. They were placed in the office of the corporation under the control of her husband. The dividends on the stocks standing in the wife’s name, when declared, were credited to her account on the books of the company and then transferred to her husband’s account. Later, the husband sold the stock of the corporation without consulting his wife, and the purchaser issued a check for more than $1,000,000 in part payment of the stock held in her name. The check was delivered to the husband, and by his direction it was endorsed by his wife and redelivered to him. He deposited it in the bank to his own credit and invested the proceeds in Government bonds which he held at the time of his wife’s death. The court in its opinion said:

The facts found by the Board clearly rebut the presumption of a gift of the stock to the decedent. They show that it was contemplated by the parties that the stock should be held by the wife for the husband, and that both thereafter regarded it, with the dividends thereon and proceeds from its sale, as his property and as not belonging to her.

The facts of the other cases cited by respondent as readily distinguished themselves from the present proceeding as those in the McCann case.

Respondent urges a further point which requires brief discussion. He argues in substance that when Essie I. Gaffney endorsed the stock certificates in blank in 1925 and put them up as collateral security for loans to the decedent, she thereby restored the property to decedent, and since the certificates so remained with the bank until decedent’s death, they constituted a part of his gross estate. In support of this contention respondent cites McCann v. Commissioner, supra.

The analogy, we think, does not hold. In the cited case, the wife endorsed the check given in payment for the stock and delivered the check to her husband, who appropriated the proceeds to his own use. The wife thus divested herself of all incidence of ownership, and restored the property, or proceeds of sale, to her husband prior to her death. The property, therefore, constituted no part of her gross estate when she died. Here there is no evidence that the wife intended to or did restore to her husband the ownership of the securities formerly given to her by him. She merely loaned the stock certificates to him for the specific purpose of using them as collateral security for loans. It is of no significance that the husband happened to die before the loans were repaid and the certificates returned to the wife. Decedent was under the legal obligation to return them to his wife upon demand, or in accordance with the agreement under which they were loaned, or to account to her for their value. Clearly they were not his property, nor were they intended to be or so treated.

Respondent urges the alternative contention that if the transfers under consideration constituted gifts, they were intended to take effect in possession or enjoyment at or after decedent’s death, and therefore should be included in his gross estate. The conclusions reached by us above obviously are a sufficient answer to this contention. Since the transfers were valid and completed gifts inter vivos, they took effect in enjoyment as well as possession at the respective dates of the transfers. It is not contended that the transfers were made in contemplation of death, nor do the facts so indicate.

On the issue presented, respondent’s action is reversed.

The conclusions reached render it unnecessary to hold a further hearing for the introduction of evidence respecting the value of the securities mentioned. Also, we assume that the third issue respecting deductions is now eliminated, since petitioner assigned error in that connection only if it should be held that respondent did not err in including the value of the securities in decedent’s gross estate.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Kern :

text:
    John E. Zimmermann, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sarah A. F. Zimmermann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82488, 82491.
    Promulgated October 7, 1937.

      Henry S. Drinker, Jr., Esq., and Frederick E. S. Morrison, Esq., for the petitioner.
    J. W. Smith, Esq., for the respondent.
   OPINION.

Kern :

The present proceedings in these consolidated cases involve petitioners’ objections to the proposed determination of the respondent filed July 26, 1937, and their own proposed alternative computations, submitted under Rule 50.

These cases originated by petitions filed December 18, 1935, appealing from respondent’s notice of deficiency dated September 20, 1935. The issue raised in these petitions concerned the disallowance by respondent of certain items of capital net loss arising from the sale of securities by petitioners in the year 1932, and the issue of fraud was raised by respondent in his answer. Subsequent to the hearing and argument in these cases, the Board, in a decision promulgated July 13, 1937, found for the petitioner (except as to a small amount of the stock sold by petitioners) and ordered judgment to be entered in each case under Rule 50, it being contemplated by the decision that an additional capital loss on the sale of securities be included in the computation of the tax for the year 1932 with respect to petitioner John E. Zimmermann in the sum of $252,342.32, and in the computation of tax for the same year with respect to petitioner Sarah A. F. Zimmermann in the sum of $51,159.16. Thereafter, on July 26, 1937, respondent submitted a proposed determination and notice of settlement based upon computations made pursuant to such order, which not only included said items of capital loss, but also disallowed the items of charitable contributions contained in the return of petitioner John E. Zimmermann in the sum of $17,178.64, and similar items in the return of petitioner Sarah A. F. Zimmermann in the sum of $7,673.88. These disallowances were made by respondent in his rccomputations submitted pursuant to Eule 50, since he had allowed as a deduction in the case of each petitioner the sums of their capital net loss, as set forth above, and as a consequence, there was no net income in the case of petitioner John E. Zimmermann, and a greatly reduced net income in the case of petitioner Sarah A. F. Zimmermann. Therefore, since the amounts of contributions properly deductible are limited to 15 percent of the net income, these amounts were necessarily to be recomputed in accordance with the decision promulgated July 13, 1937, in these proceedings, which, to the extent outlined above, had made changes in the net income of petitioners subject to tax.

It is the contention of petitioners, as raised by their objections and alternative computations submitted herein and the briefs thereon, that these items in the recomputations submitted by respondent raised new issues not contained m the pleadings or mentioned by counsel at the hearing before the Board, and that therefore, no adjustment in the items of charitable contributions can be made in the recomputations submitted pursuant to Rule 50. In the briefs submitted by petitioners sur objections to respondent’s computations, the contention is further made that the net income on which the 15 percent limitation of contributions is reckoned should be computed without regard to capital net loss.

With regard to this latter contention, the Board has already ruled in several cases adversely to petitioners. James H. Lockhart, 32 B. T. A. 732; aff'd., 89 Fed. (2d) 143; Sewell L. Avery, 32 B. T. A. 948; aff'd., 84 Fed. (2d) 905; Louis W. Hill, 33 B. T. A. 891; aff'd., 88 Fed. (2d) 941.

The contention of petitioners that adjustments for charitable contributions were not in issue on the pleadings or at the hearing before the Board in these proceedings, and therefore can not be considered in any recomputations made pursuant to Rule 50, necessarily presupposes that such adjustments constitute a “new issue.” In Great Northern Railway Co., 10 B. T. A. 1347, the Board ruled that no new issue could be raised on recomputation under Eule 50. To the same general effect see Davison v. Commissioner, 60 Fed. (2d) 50; Fifth Street Building v. Commissioner, 11 Fed. (2d) 605; Bankers Pocahontas Coal Co. v. Burnet, 287 U. S. 308. However, the doctrine of these cases is limited by opinions therein to new issues “other than those relating to computation”, and the facts in the cases cited clearly indicate that the “new issues” there did not arise incidentally to a computation made pursuant to opinions in those cases which would necessarily result from the application of the doctrines laid down in such opinions, but were, on the other hand, issues of fact or of law which were not properly a part of the recomputation made necessary by the application of the doctrines enunciated in the opinions.

In the instant cases, the recomputations submitted by the respondent pursuant to the previous opinion herein included large capital net losses erroneously excluded, according to the contention of petitioners, in the deficiency notices which were the bases of appeal, thus greatly reducing in each case the amount of income subject to tax. It is respondent’s contention, as evidenced by the recomputations submitted by him and by the argument of counsel for respondent at the hearing in these proceedings on August 18, 1937, that the necessary result of allowing such capital net losses not only reduced the net income subject to tax, but also reduced the net income upon which the 15 percent available for deduction as charitable contributions should be computed. Respondent’s contention is sustained by General Counsel Memorandum No. 14030 (C. B. XII-2, p. 135), issued December 24, 1934, interpreting the case of Helvering v. Bliss, 290 U. S. 144, and by the decision of this Board in James H. Lockhart, supra, decided’June 10, 1935, more than six months prior to the time of filing of the petitions in these proceedings. In the light of these cases it should have been evident to the petitioners at the time of the filing of the petitions, and later at the hearing thereon, that, if they succeeded in establishing the result of the stock sales set out in their contentions as capital losses during 1932, the charitable gifts base in each case would be correspondingly reduced, and that such reductions would be reflected in any recomputation made under Rule 50 for all purposes. In other words, in view of the law as it was at the time of the filing of the petitions herein, the issue of the reduction of the charitable gifts bases was a matter petitioners should have foreseen to be necessarily involved in the arithmetical calculations incident to a recomputation along the lines of their contentions in the petitions filed herein. It must, therefore, be considered that respondent’s recomputation does not present any new issue within the meaning of the rule laid down in Great Northern Railway Co., supra, and other cases cited.

Petitioners’ objections to the recomputation of the respondent submitted under Rule 50 are overruled.


author: Morris:

text:
    W. H. Luquire Burial Association Company, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent. Luquire Funeral Homes and Insurance Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 79097, 79098.
    Promulgated October 7, 1937.

      William S. Pritchard, Esq., for the petitioner.

      Hartford Allen, Esq., and L. W. Creason, Esq., for the respondent.
   OPINION.

Morris:

Did the issuance of burial insurance contracts constitute the petitioner a “life insurance company” under the provisions of section 201 of the Revenue Acts of 1928 and 1982 ? The term “life insurance company” as defined in subdivision (a) of that section “means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance) the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.” We do not understand the petitioner to urge, nor could it seriously, that its business is the issuance of annuity or combined health and accident insurance. Nor, if we find that the petitioner is a life insurance company, do we understand that there is any serious doubt that its reserve funds held for the fulfillment of its contracts “comprise more than 50 per centum of its total reserve funds”, since its reserves, other than those so held, are negligible.

While there are many accepted definitions of what constitutes life insurance, in the generally accepted sense, Cooley says that the following, in Commonwealth v. Wetherbee, 105 Mass. 149, has been approved by the courts and writers as the clearest:

* * * A contract of insurance is an agreement by which one party for a consideration, which is usually paid in money, either in one sum or at different times during the continuance of the risk, promises to make a certain payment of money, on the destruction or injury of something in which the other party has an interest. In fire and marine insurance, the thing insured is property; in life or accident insurance, it is the life or the health of a person. All that is requisite to constitute such a contract is the payment of the consideration by the one and the promise of the other to pay the amount of the insurance upon the happening of injury to the subject by the contingency contemplated in the contract.

Briefs on tbe Law of Insurance—Cooley, vol. I, p. 15. Section 8341 of the Code of Alabama, 1923, defines a “contract of insurance” to be “an agreement, expressed or implied, by which one party, for a consideration, promises to pay money, or its equivalent, or to do some act of value to the assured, upon the destruction or injury of, something in which the other party has an insurable interest.”

Were the contracts issued by the petitioner “life insurance” contracts? Cooley’s answer (vol. YI, p. 6) to this query is that “A corporation executing contracts to furnish members a funeral and all necessary requisites is engaged in writing life insurance.” Citing State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co., 82 Wash. 124; 143 Pac. 878; and Renschler v. State ex rel. Hogan, 90 Ohio St. 363; 107 N. E. 758. Couch, in a similar work, says that “burial or funeral benefit insurance is valid, and being determinable upon the cessation of human life, and dependent upon that contingency, constitutes life insurance.” I Couch on Insurance, sec. 32, pp. 46, 47, footnote 3.

In State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co., supra—a case arising in the Supreme Court of the State of Washington—an action was brought, on the relation of the state insurance commissioner, to enjoin the operation of appellant’s business, on the ground that it was in violation of the insurance laws of the state. In a very substantial sense its objects and purposes were the same as in the case of the petitioner, to wit, to engage in the undertaking business and to issue burial certificates guaranteeing the insured “a decent and respectable burial.” Holding the contract entered into there to be an “insurance contract”, the court said:

* * * The contract evidenced by the certificate has all of the elements of a life insurance contract. It is an agreement to perform a service which can become obligatory only on the death of the certificate holder. While no beneficiary of the promise is named, in reality one exists, and may be ascertained with as much certainty as if directly and specifically named. It is the person who would otherwise be obligated to pay the expenses of the burial. This may be the heir of estate of the decedent, his relatives, or the state; but, whoever such person may be, he is relieved of his obligation to the extent of the value of the service agreed to be performed by the terms of the certificate. There is therefore a promise by one person to perform a valuable service on the death of another, a valuable consideration paid for the promise, and a person to whom the benefit of the promise will inure. Had the ordinary insurance nomenclature been used to designate the person making the promise, the person to whom the promise is made, the person who will receive the benefit of the promise, and the consideration paid for the promise, no one would question that it was an insurance contract. But a contract is to be determined from its nature and effect, not by the terminology used to characterize it. Here there is an “insurer,” and “insured,” a “premium,” and a “beneficiary,” and we think the contract nothing else than a plain, ordinary insurance contract.
That contracts of the nature of the contract hero in question are insurance contracts, and subject to control under the insurance statutes, is the general trend of authority. * * *

In another case, arising under the laws of the State of Kansas, State ex rel. Attorney General v. Wichita Mutual Burial Association, 84 Pac. 757, cited with approval in State v. Globe Casket & Undertaking Co., supra, the supreme court of that state held an association, organized for the purpose of securing to its members a burial worth $100 in consideration of certain assessments to be paid by its members, during lifetime, to be an insurance association, saying:

We conclude, from the foregoing facts, that the business, designed to be transacted under the plan of the Wichita Mutual Burial Association, is plain, ordinary insurance. Membership in this association insures to each member, above 10 years of age, that which is equivalent to $100 cash, payable at the death of such member, to whoever would otherwise defray the burial expenses of such decedent. If the certificate of membership issued by this burial association be designated “policy,” the assessment “premium,” and those who are relieved from paying the funeral expenses of the deceased member “beneficiaries,” this association, both in general plan and phraseology, will be a substantial duplicate of the ordinary mutual insurance company. The fact that no beneficiary is specifically named deserves little consideration, since in reality one exists, and may be ascertained with as much certainty as if directly and specifically mentioned. Whoever would otherwise pay the burial expenses of the deceased member is, by being relieved of that burden, as directly benefited to the amount of such expenses, as if the cash was paid immediately to such person. If the deceased member leaves an estate, the whole thereof, undiminished by the burial expenses which would otherwise be paid therefrom, will be received by his heirs. If he leaves no estate, then his immediate relatives and friends, who would otherwise have furnished the expenses of his burial, will be benefited by being relieved of that burden.

True the court in that case merely said, except by clear inference, that the business engaged in was “ordinary” insurance and did not specifically say that it was “life” insurance, but since the contracts, as in all of such cases, are predicated upon the death of the insured, we conceive of no other classification into which it might logically fall.

In still another case—cited with approval in State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co., supra, arising under the laws of the State of Indiana—State v. Willett, 86 N. E. 68—the state supreme court, considering a similar question, said:

* * * The contract was issued by an association whose declared object is to secure, or make certain, by a system of mutual contribution, to each member of the association, at death, the specific benefit of $75 for application to his burial service. This was indemnity, or security, that at the cessation of the life of the member a certain sum of money should be payable by the association for his burial, whether the deceased had paid one assessment or a thousand. The controlling elements of the contract, as interpreted by the by-laws, are in all material respects similar to those of an ordinary mutual life insurance company. * * * It is simply a business enterprise in which the contract holder is promised a definite thing, in consideration of his performance of a definite undertaking on his part. The contract is determinable by the cessation of a human life, and belongs to that extended class of agreements dependent upon such contingency, and commonly known as “life insurance.”

In fact the authorities generally hold, wherever such funeral or burial contracts are entered into, that they constitute life insurance and that such corporations or associations are engaged in the life insurance business. State ex rel. District Attorney General v. Mutual Mortuary Association, Inc. (Tenn.), 61 S. W. (2d) 664; State ex rel. Landis, Attorney General v. De Witt C. Jones Co. (Fla.), 147 So. 230; Sisson, Attorney General ex rel. Nardolillo v. Praia Undertaking Co. (R. I.), 141 Atl. 76; State v. Willett (Ind.), supra; Renschler v. State ex rel. Hogan (Ohio), supra; State v. Wichita Mutual Burial Association (Kans.), supra; State v. Beardsley (Minn.), 92 N. W. 472; Oklahoma Southwestern Burial Association of Ardmore v. State ex rel. Read, Insurance Commissioner (Okla.), 274 Pac. 642; Pennsylvania Railroad Co. v. Roydhouse (Pa.), 110 Atl. 277; Fikes v. State (Miss.), 39 So. 783; Smith v. Bullard, 61 N. H. 381; State ex rel. Fishback, Insurance Commissioner v. Globe Casket & Undertaking Co. (Wash.), supra.

While not called upon to rule specifically upon the exact question, the Court of Appeals of Alabama, on March 16, 1937, in Booker T. Washington Burial Insurance Co. v. Williams, 173 So. 269— wherein a burial insurance policy was brought into question—very clearly indicated by its reasoning, and references to the term “life insurance” in applying the law to the circumstances of that case, that it considered such contracts and such businesses as life insurance under the laws of the State of Alabama, and the firms engaged in the issuance thereof as in the life insurance business. See also Jordan's Mutual Aid Association v. Asberry (Ala.), 154 So. 120.

We had the benefit of the undisputed testimony of the man who was the insurance commissioner of the State of Alabama during the period under consideration, who testified that his office regarded and treated burial insurance organizations as “industrial life insurance” businesses, operating under what was known as “mutual aid laws” of the state.

The respondent makes a point of the fact—citing, among others, a certain definition from I Couch on Insurance, 1929 ed., p. 49, par. 34, to the effect that only the payment of -a “sum of money” upon death will suffice—that payment under the contracts here were to be made in merchandise and services. Cooley, in his Briefs on the Law of Insurance, vol. I, p. 5, recognizes the inaccuracy or incompleteness of the definitions of insurance wherein, after setting forth one, he says, “Perhaps a better definition is that a contract of insurance is an agreement by which one party for a consideration promises to pay money or its equivalent or to do some act of value to the assured upon the destruction or injury of something in which the other party has an interest”, clearly recognizing that the “equivalent” of money would suffice. In this connection it should be noted, supra, that Alabama.has adopted this as its statutory definition of what constitutes a “contract of insurance”, recognizing the payment of money “or its equivalent.”

In conclusion, finding as we do that the petitioner was organized to engage in the burial insurance business; that it so engaged; that it not only was recognized as an insurance company by the Insurance Commissioner of the State of Alabama, but was supervised by and required to file annual reports with. Mm in the same manner as ordinary life insurance companies: that it not only established reserves for the fulfillment of its contractual obligations but those reserves were actually determined by actuaries of the insurance commissioner; and that a contract was entered into between the petitioner, insurer, and the insured, whereby for the payment of a stipulated sum, over a period of time, the petitioner would pay, in merchandise and services, a sum measured by the retail value of a complete funeral, upon proof of death of the insured (cf. West Virginia & Kentucky Insurance Agency, 18 B. T. A. 715), we are convinced that the petitioner issued “life insurance” contracts and that it meets the test of the statute defining life insurance companies. Having so decided, the alternative question presented need not be considered.

Reviewed by the Board.

Judgment will be entered under Rule 50.

       This report was prepared during Mr. Morris’ term of office.


author: Arnold :

text:
    Seymour H. Knox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82450.
    Promulgated October 8, 1937.

      Ralph M. Andrews, Esq., for the petitioner.

      Ralph F. Staubley, Esq., for the respondent.
   OPINION.

Arnold :

Respondent has determined a deficiency in gift tax under the Revenue Act of 1932 in the amount of $950. The facts are stipulated as follows:

1. Seymour H. Knox, the petitioner herein, is and at all times material was a resident of the City of Buffalo, New York.
2. On December 26, 1934, petitioner entered into an agreement of trust with The Marine Trust Company of Buffalo, a trust company incorporated under the laws of the State of New York, with its principal office in the City of Buffalo, New York, and himself, as trustees, a true and correct copy of which agreement of trust is attached hereto, designated Exhibit “A” and hereby made part hereof.
3. Seymour H. Knox, III, one of petitioner’s children referred to in Article “First” of said agreement of trust (Exhibit “A”), was born on March 9, 1926, and Northrup R. Knox, the other of Grantor’s children referred to in said Article “First”, was born on December 24, 1928. Both of said children are now living.
4. On December 26, 1934, pursuant to paragraph “First” of the agreement of trust (Exhibit “A”), petitioner assigned, transferred and delivered to the trustees, without any valuable consideration whatsoever, and the trustees accepted, certificates representing the securities described in said agreement of trust, which, on the date of said transfer, had an aggregate fair market value of $583,470.00. The trustees throughout the balance of the calendar year 1934 and thereafter have continued to hold the property so transferred to them or the proceeds thereof subject to the terms of the agreement of trust dated December 26, 1934 (Exhibit “A”).
5. Petitioner made no gift or gifts within the calendar year 1934 other than the transfer of securities on December 26, 1934, above described, and petitioner made no other gifts between June 6, 1932, and December 31, 1933, both dates inclusive.
6. Thereafter and on or about March 15, 1935, petitioner duly filed with the Collector of Internal Revenue at Buffalo, New York, a gift tax return, in which he reported total gifts within the s^ear 1934 of $583,470.00. In determining net taxable gifts in his return, petitioner deducted an amount of $10,000.00, upon the ground that the transfer of securities on December 26, 1934, constituted a gift of a present interest to each of his two children, and further deducted the specific exemption of $50,000.00, leaving net taxable gifts for the year 1934 of $523,470.00. Petitioner reported a tax of $37,854.65 on said return.
7. Thereafter in his final determination dated September 17, 1935, the Commissioner disallowed the exclusions of $10,000.00 upon the ground that “no exclusions are allowed as the trustees may, in their discretion, accumulate the income, and beneficiarios do not have an unrestricted present right to the immediate use of the income or corpus of the trust.”

Section 2 of the trust agreement is as follows:

Second : The Trustees shall take and hold the securities so assigned, transferred and delivered to them, together with such additional property as may hereafter from time to time be delivered to them by the Grantor, and shall invest and from time to time reinvest the same and collect the income, issues and profits arising from the property from time to time constituting the trust fund, and, from time to time during the continuance of this trust, shall pay over the net income to or for the benefit of the Grantor’s children (including any child or children of his born after the date of this instrument) and the lawful issue of any deceased child or children of thd Grantor, in equal shares, per stirpes and not per capita, with the right to the Trustees in their discretion to accumulate income for the benefit of the Grantor’s children, or either of them, in being at the date of this instrument, during minority, paying over any such accumulations to the child for whose benefit the same were accumulated upon his arrival at the age of twenty-one years, or the sooner termination of this trust. The birth of any child or children of the Grantor after the date of this instrument shall not require the redistribution of any income theretofore received by the Trustees, such afterborn child or children, as to the income of the trust, to be entitled to participate only in net income subsequently received by the Trustees.
Upon the death of the survivor of said Seymour H. Knox, III, and Northrup E. Knox, the trust hereby created shall cease and terminate, and the Trustees shall thereupon transfer and deliver the property then constituting the trust fund unto the then surviving child or children of the Grantor and the lawful issue then surviving of any deceased child or children of his, in equal shares, per stirpes and not per capita, and if there shall be no surviving child or children or issue, the said property shall be transferred and delivered to the persons entitled to take as distributees of the Grantor as then determined by the intestate laws of the State of New York, such determination to be made as if the Grantor had died on the date of the termination of the trust.

The trustees were given broad powers and authority to manage and administer the trust property as well as to invest and reinvest any income or property accumulated. The right of a beneficiary to receive trust.income could not be assigned in any manner and if attempted could not be recognized by the trustees.

Section 501 (a) of the Revenue Act of 1932 provides for the imposition of a tax “upon the transfer * * * by an individual * * * of property by gift”, and subsection (b) provides that “The tax shall apply whether the transfer is in trust or otherwise * *

Section 504 (b) reads as follows:

(b) Gifts Less Than $5,000.—In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.

Section 1111, “Definitions”, provides in part:

(a) When used in this Act—
(1) The term “person” means an individual, a trust or estate, a partnership, or a corporation.

The sole question raised is whether the transfer of the securities to the trustees constituted “gifts (other than of future interests in property) ”, or whether, as the respondent held, future interests.

Under the provisions of the trust the income could be accumulated in the discretion of the trustees during the minority of the children then in being and any such accumulations paid over to them upon their arrival at the age of 21 years or the prior termination of the trust.

Respondent argues that as the beneficiaries who might ultimately receive the income or trust corpus were presently unknown and the trustees could accumulate the income, no vested interests were acquired during the calendar year in question, and that since the interests of ¡.he children wore to vest in possession at a future date, the gifts fall within the exception specified in the statute and the deduction claimed is to be denied.

Respondent states that the intent of Congress is clear, in view of the language of the committee reports, wherein it is stated that the term “future interests in property” refers to any interest or estate, whether vested or contingent, limited to commence in possession or enjoyment at a future date.

The question raised and presented for our determination has been determined adversely to respondent’s contention in the following-cases: Thomas E. Wells, 34 B. T. A. 315; aff'd., 88 Fed. (2d) 339; Commissioner v. Krebs, 90 Fed. (2d) 880, affirming Board memorandum opinion not reported; Noyes v. Hassett, 20 Fed. Supp. 31.

While here there were two beneficiaries in being at the time of the execution of the trust instrument and in the cases referred to there was but one beneficiary in each trust, we do not think under the reasoning of the courts in those cases petitioner is entitled to two exclusions of $5,000 each as contended for by him as there is but one trust involved in this proceeding. There the statutory definition, that the term “person” as used in the act means “a trust”, was stressed and the courts held that the trusts were the “persons” to whom the gifts were made and took present title to and possession of all the property from the donor.

We hold petitioner is entitled to an exclusion deduction of $5,000 under section 504 (b).

Reviewed by the Board.

Decision will be entered under Rule 50.