author: Mellott:

text:
    Milo W. and Reed J. Bekins, Executors, Estate of Katherine Bekins, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87675.
    Promulgated September 27, 1938.

      Dana Latham, Esq., and George Bouchard, Esq., for tbe petitioners.

      T. M. Mather, Esq., for tbe respondent.
   OPINION

Mellott:

Tbe Commissioner determined that interest, amounting to $1,550.72, received by tbe decedent and ber estate during tbe year 1935 upon certain bonds, was improperly excluded from gross income under section 22 (b) (4) of tbe Revenue Act of 1934. Accordingly be determined a deficiency in tax of $48.78. Petitioners contend that be erred.

Tbe facts were all stipulated. We shall make reference herein only to those necessary for an understanding of tbe question to be decided.

Tbe petitioners are tbe duly appointed and acting executors of tbe estate of Katherine Bekins, deceased, who died testate, a resident of tbe State of California, May 11, 1935.

Tbe decedent owned eight blocks of bonds, all of which she bad acquired by purchase from a regular dealer in securities. They bad been issued by political subdivisions of California under one of four general acts of tbe legislature. It will be sufficient for present purposes to make brief reference to tbe facts in connection with one block of bonds issued under each of tbe acts and to decide whether tbe interest received on such bonds is, or is not, exempt under tbe statute.

Bonds Issued Under California Improvement Ad of 1911.

One block of bonds issued under tbe above act was tbe “Neptune Ave. and G. Street, Series 2, L. A.” bonds, covering tbe paving of Neptune Avenue in tbe city of Los Angeles and tbe installation of gutters, sidewalks, curbs, sewers, ornamental lights, and storm drain. Tbe total cost of tbe improvement was $436,910.75 and tbe assessment roll on tbe basis of which they were issued was dated November 24, 1926. Tbe bonds owned by tbe decedent “covered certain properties located on Neptune Avenue” and during tbe taxable year there was “received from said bonds that portion of tbe principal provided for by said bonds, together with all tbe interest accruing therefrom.” The amount of interest received was $302.39. It is stipulated that the “amounts so maturing were paid by those property owners against whose properties said bonds were a lien to the City Treasurer of the city of Los Angeles and were paid by him to petitioners upon presentation of proper principal and interest coupons.”

The bonds were in the form set out in section 63 of Act 8199 of the General Laws of California, 1931, Deering, shown in the margin. It was stipulated that we should take judicial notice of the act under which they were issued and we have done so.

The act is quite lengthy and no attempt will be made to analyze all of its provisions. Briefly, part I prescribes the various steps to be taken in connection with the making of an improvement, the creation of an assessment district, and the levying of assessments. Part II prescribes the procedure in connection with changes of grade. Part III provides for the issuance of bonds in connection with work done under part I but not under part II, while part IV contains definitions of the terms used in the act. Brief reference will, however, be made to some of the provisions of the act which are deemed to be especially pertinent to the issue to be decided.

Section 21 provides that after the contractor has fulfilled his contract an assessment shall be made “to cover the sum due for the work performed.” The assessment shall refer to the contract and show the amount to be paid, and also shall show “the amount of each assessment against each lot or portion of a lot.” It is filed with the city clerk. (Property belonging to the United States, the State of California, or any county or city, however, is to be omitted, § 20.) Notice is given by the clerk of the filing of the assessment and provision is made for the hearing of protests and the correction of errors. Warrant is then issued and, when it and the assessment are recorded in the office of the superintendent of streets, “the several amounts assessed shall be a lien upon the lands, lots [etc.].”

The warrant is delivered to the contractor or his assigns and constitutes “full authority * * * to collect the said assessments and they shall be free to make demands upon the owners by virtue of said warrant and to demand and receive payment of the same * * *.” The warrant is returned on or after 30 days to the superintendent of streets.

After the full expiration of 30 days from the date of the warrant (§ 02) the superintendent of streets certifies to the city treasurer a complete list of all assessments unpaid which amount to $25 or over. The unpaid assessments become due and payable to the treasurer in equal annual payments, the number of the annual payments corresponding “to the number of serial payments provided to be made on the principal of the bonds issued to represent said unpaid assessments.” Interest is due on each fifteenth day of May and November succeeding the filing of the list of unpaid assessments.

Section 63 provides that the city treasurer shall, upon the filing of the above list, “make out, sign, and issue to the contractor, or his assigns, payee of the warrant and assessment, a separate bond, representing upon each lot or parcel of land upon said list the total amount of the assessment against the same * * *.” Then follows the form of bond set out in the margin above. Other sections provide how the owner may, under certain circumstances, stop the issuance of bonds on his particular property, and, in the event of division of the lot or parcel of land for which a bond has been issued, for the issuance of new bonds; but it is unnecessary for present purposes to set out those provisions.

Section 67 provides:

Penalty for nonpayment. Whenever payment either upon the principal, or of the interest upon any bond issued hereunder has not been, or shall not be made when the same has become, or shall become due, and the holder of the bond demands in writing that the city treasurer proceed to advertise and sell the lot or parcel of land described by said bond as being that upon which the assessment represented by said bond was levied, then said treasurer shall proceed as provided in the next section. [Amendment approved May 23, 1921; Stats. 1921, p. 293.]

Section 68 requires the treasurer to publish notice of the “sale of property delinquent for nonpayment of bond No. , Series No. issued for the improvement of ”, and provides that “In order to avoid this sale, payment of the total amount” together with cost of publication and the additional interest accruing up to the date of payment must be made.

Section 72 provides that the purchaser at the sale “shall become vested with a lien on the property * * * to the extent of his bid, and is only divested of such lien by the payment to the city treasurer of the purchase money, including costs * * *.” The city treasurer must issue a certificate of purchase, delivering the original to the purchaser and recording a duplicate in his office.

Redemption may be made by the owner or any party in interest within 12 months from the date of purchase (§ 73), but if redemption is not made the treasurer must make a deed to the property to the purchaser or his assign. The deed, when duly acknowledged or proved “conveys to the grantee the obsolute title to the lands described therein” (§ 74). A cumulative remedy is given the holder of a bond by section 76a, under which suit may be filed “to foreclose the lien of the bond and recover the amount due thereon.”

Are the bonds issued under the above act “obligations of * * * (a) * * * political subdivision” of the State of California? If they are, then the interest received was improperly included by the respondent in the gross income of the estate.

In Edwards v. Kearsey, 96 U. S. 595, 600, the Supreme Court defined “obligation” as follows: “ ‘Obligation’ is defined to be ‘the act of obliging or binding; that which obligates; the binding power of a vow, promise, oath or contract,’ etc. id.” Bouvier says: “Obligation in its general and most extensive sense is synonymous with duty. In the more technical sense it is a tie which binds us to pay or do something agreeably to the laws and customs of the country in which the obligation is made.” Webster states that “it is a formal and binding agreement or acknowledgment of a liability to pay a certain sum or do a certain thing.” The Civil Code of California (sec. 1427, Deering) defines it as “a legal duty by which a person is bound to do or not to do a certain thing.” In Kansas City Southern Railway Co., 16 B. T. A. 685, 688, this Board said:

The word obligation “is in its general and most extensive sense, synonymous with duty”; it has been defined “to be ‘the constraining power or authoritative character of a duty, a moral precept, a civil law, or a promise or contract voluntarily made; that to which one is bound; that which one is obliged or bound to do, especially by moral or legal claim; a duty.’ ” * * *
Thus it will be seen that the word obligation may include, in the broader sense, a mere duty, or it may mean a contract, either express or implied, and in a stricter sense, it may be confined to bonds or other similar evidences of indebtedness.

The above definitions are at best only suggestive of the sense in which the words “obligations of a political subdivision” are used in the statute under consideration. In order to determine their true meaning recourse must be had to the context and purpose of the enactment, cf. Hibernia Savings & Loan Society v. San Francisco, 200 U. S. 310; and, the section under consideration being one granting an exemption from tax, it must be strictly construed; for “Tax exemptions are never lightly to be inferred”, Heiner v. Colonial Trust Co., 275 U. S. 232; Denman v. Slayton, 282 U. S. 514.

We are not here concerned with the power of Congress to impose a tax upon an obligation of a state or one of its political subdivisions. For the purposes of this case it may be assumed that the prohibition is absolute. Cf. Willcuts v. Bunn, 282 U. S. 216. But, as the District Court said in United States Trust Co. of New York v. Anderson, 60 Fed. (2d) 291; affd., 65 Fed. (2d) 575, certiorari denied, 290 U. S. 683, “There is no reason to suppose that this statutory exemption was intended to be otherwise than declaratory of the constitutional limitation upon the power of Congress to impose a tax upon an obligation of a state. The court has not been referred to any case in which the exemption has been extended to any obligation other than to repay money borrowed by a state or a subdivision thereof. The reason for the statutory exemption does not apply except in cases which involve the poiver of the government to borrow money, as a means of carrying on its governmental functions.”

Did the municipality borrow the money represented by the bonds as a means of carrying on its governmental functions? We think not. The general plan of the California statute (Brook v. City of Oak land, infra) is to provide a means by which, a city may improve its streets without pledging its credit or assuming any obligation whatsoever. True, it permits the treasurer of a municipality to issue the bonds and to act as the agent of the owner of the bonds in making collection. But the municipality does not borrow any money nor does it obligate itself to make any payment. The bond specifically provides that “neither the municipality nor any officer thereof is to be holden for payment.” The sole remedy of the holder of such a bond is to have the property sold or to foreclose the lien and recover the amount due thereon from the owner of the property. The courts of California have held that such a bond is a contract, the provisions of the statute in force at the time it was issued being a part of such contract and enforceable by the parties. “In effect”, says the Supreme Court of California in Chapman v. Jocelyn, 182 Cal. 294; 187 Pac. 962, “the bond creates a power of sale whereby the contractor may enforce the lien of the assessment against the property described in the bond. The city treasurer is thereby made a special agent of the parties concerned, with authority to execute the power according to its terms, as found in the statute under which the bond is issued.”

■ In a more recent decision, Jeffreys v. Point Richmond Canal & Land Co., 260 Pac. 548, it was reiterated that the bonds issued under the improvement act of 1911 constituted a contract and for that reason a subsequent amendment, giving the holder of the bonds an additional remedy, was held inoperative as to bonds previously issued, as impairing, “to the detriment of the property owner, the contract rights which became fixed when the street proceedings were taken and the bonds issued.”

In Brook v. City of Oakland, 160 Cal. 423; 117 Pac. 433, 436, it was claimed that bonds issued under the Improvement Act of 1911 were invalid because the act provided that the issuing city was not responsible for their payment. The Supreme Court said:

* * » position appears to be founded on the theory that the bonds should be obligations of the city of Oakland. The theory of the statute is that of a local improvement to be paid for by an assessment raised upon the property of the district benefited thereby. Such bonds do not become obligations of the city in which the district may be situated. Meyer v. S. F., 150 Cal. 131, 88 Pac. 722, 10 L. R. A. (N. S.) 110; Union T. Co. v. State, 154 Cal. 716, 99 Pac. 183, 24 L. R. A. (N. S.) 1111. We know of no constitutional provision requiring that the city should become liable thereon and none is cited to us.

Upon brief petitioners place considerable reliance on the fact that from 1921 to 1932 the regulations of the Department apparently did not attempt to deny exemption to interest on bonds such as those issued under the provisions of the California statute. That may be trae. We show in the margin article 74 of Regulations 62, issued under the 1921 Act. Substantially the same provisions were contained in Regulations 65, 69, 73, and 77. The regulations for the taxable year, however (Regulations 86), contain a provision to the effect that special tax bills issued for special benefits to property, if such tax bills are legally collectible only from owners of the property benefited, are not the obligations of a state, territory, or political subdivision. (Art. 22 (b) (4)-l, Regulations 86.) The respondent relies partially upon the regulation, as amended, and partially upon his own later rulings, G. C. M. 13469, XIII-2 C. B. 125, and G. C. M. 16861, XV-2 C. B. 179. He denies petitioner’s contention that the earlier construction precludes a modification which will result in taxing the interest in question.

It is true, as petitioners point out, that reenactment of a statute which has been construed by a department charged with its enforcement frequently is held to be tantamount to legislative approval of the interpretation placed upon it and “will not be disturbed except for weighty reasons.” Brewster v. Gage, 280 U. S. 327; Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269. But where “the provisions of the act are unambiguous, and its directions specific, there is no power to amend it by regulation.” Koshland v. Helvering, 298 U. S. 441; cf. Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129; Helvering v. Powers, 293 U. S. 214; Mary Duke Biddle v. Commissioner, 302 U. S. 573; and if the construction placed upon it is obviously wrong, it should not be followed.

We are of the opinion that the earlier ruling of the department, if it exempted from tax interest upon bonds such as those issued under the California Improvement Act of 1911, was palpably and obviously wrong. The statute is unambiguous, and exempts from tax only interest upon “obligations of a political subdivision of a state.” We have pointed out above some of the reasons why the bonds in question can not be considered such obligations. Additional or supplemental reasons for this conclusion will be set out later herein.

Upon brief petitioner relies quite strongly on two previous decisions by this Board, Michael Pontarelli, 35 B. T. A. 872 (then on appeal to the Seventh Circuit) and Garey-Reed Co., 36 B. T. A. 36 (on appeal to the Sixth Circuit). Petitioner contends that the facts in the cited cases are “identical” with those of the instant proceeding. Considering the four blocks of bonds collectively, as the parties have done in their briefs, the contention is not without some merit. But we have examined separately the bonds issued under the four acts; and we think- it is more accurate to say that the bonds issued under the California Acquisition and Improvement Act of 1925 and under the Improvement Bond Act of 1915 (which will be discussed hereinafter) are similar to those involved in the cited cases, while those issued under the acts of 1911 and 1921 are quite dissimilar.

In Carey-Reed Co., supra, bonds were issued and sold in anticipation of the collection of the taxes. They were signed by the mayor and city treasurer, attested by the city clerk, and the municipal seal was affixed. Payment was secured by pledge of the special assessments and liens against the property, and, though the bonds did not pledge the full faith and credit of the issuing municipality, the statute nevertheless required that in the event of nonpayment “the city would prosecute with due diligence and suit for the collection thereof.” We pointed out that in the sale of such bonds the city was exercising its borrowing powers and that there was a limited liability upon it for payment. We therefore held that the bonds were “obligations” within the purview of section 22 (b) of the Revenue Act of 1932.

Michael Pontarelli, supra, involved special improvement bonds issued by the city of Chicago in anticipation of its collection of deferred installments on assessments made against contiguous property to pay for a local improvement. As pointed out by the court in affirming the decision of the Board, in an opinion promulgated June 17, 1938, at 97 Fed. (2d) 793, and since the filing of briefs herein, there was a real obligation on the part of the city, it having promised “to pay to bearer” the amount of the bond, the only qualification being as to the funds out of which payment was to be made, neither the bonds nor the statute under which they were issued giving the holder the right to proceed against the property benefited or against the owner thereof.

We think that the cited cases are clearly distinguishable from the instant proceeding. As we have heretofore pointed out, the bondholders’ sole remedy under the Act of 1911 is against the property benefited and the owner of it, neither the city nor any of its officers being holden for payment. There is no difference, in substance, between a bond issued under this act and a tax bill issued under the laws of many of the states. Cf. Standard Investment Co., 36 B. T. A. 156; T. I. Stoner, 37 B. T. A. 249. We hold, therefore, that the interest collected on such bonds should have been included in petitioner’s gross income for the taxable year.

Bonds Issued under the California County Improvement Act of 1921.

The decedent owned two blocks of bonds issued under the above act, the particulars of which are shown in paragraphs (f) and (g) of the stipulation. One block covered certain properties within an assessment district designated as “Los Angeles County Improvement District No. 524, County of Los Angeles”, the bonds being some of “Series I.”

The assessment roll was dated January 24, 1927, and the work for which the bonds were issued covered the paving of Peck Hoad, a major highway between Monrovia and El Monte, within the County of Los Angeles and lying outside of any incorporated town or city.

Upon brief petitioners state, and a check of the acts confirms, that the bonds issued under this act have exactly the same legal status as bonds issued under the Improvement Act of 1911, discussed in the preceding portion of this opinion. The Act of 1911 governed improvements and the issuance of bonds where the improvements were located entirely within the limits of incorporated cities or towns, while the Improvement Act of 1921 authorized the identical procedure where the improvements were made outside of an incorporated city or town. The latter act included by reference the provisions of the former.

The form of the bond attached to the stipulation of facts is substantially the same as that set out in the margin above. It is unnecessary to repeat what has been said above with reference to the bonds issued under the California Improvement Act of 1911. For the reasons therein set out, it must be held that the respondent did not err in including in petitioners’ gross income for the year 1935 interest received upon the bonds issued under the California County Improvement Act of 1921.

Bonds Issued wider California Acquisition and Improvement Act of 1925.

The decedent owned 11 bonds in the face amount of $1,000 each, issued under the above act during the year 1928, designated as bonds of “Los Angeles County Acquisition and Improvement District No. 19, Series B.” During the taxable year 1935, $709.80 was received, representing interest on said bonds.

The district was formed for the purpose of improving Pomona Boulevard in the County of Los Angeles and the proceeds from the sale of said bonds were employed for the work of necessary excavations and the installation of curbs, sidewalks, gutters, and concrete pavement. The portion of the highway improved lay entirely outside any incorporated town or city.

A copy of the form of bond is attached to the stipulation as Exhibit A and is shown in the margin. It is in substantially the form provided by section 39 of Act 3276a of the General Laws of California, 1931, Leering.

It is stipulated that the amount due from each property owner, within the district on account of his obligation with respect to said bonds is and was included each year in the property owner’s general tax bill; that the amounts so due were not, and never are, billed to tbe property owner as a separate item; and that the tax collector will not accept from any property owner within said district any payment on account of taxes which does not include his liability on account of the bonds.

The act under which the bonds were issued is very lengthy and for the purposes of this proceeding need not be reviewed in detail. Briefly, it confers jurisdiction upon the legislative body of a county to acquire and improve public ways within the boundaries of such county, and after a hearing, to make an order directing the treasurer to issue the necessary bonds. The bonds are to be delivered to the contractor or to his order, assign or lawful representative. The legislative body has power to determine the number- of years, not to exceed 30, within which the aggregate principal of the bonds shall be paid and discharged and to fix the rate of interest thereon, not to exceed, however, 8 percent per annum, the interest to be payable semi-annually.

The holder of any matured bond or interest coupon remaining unpaid for lack of sufficient moneys in the interest and sinking fund of any district is authorized to apply the credit represented by such bond or coupon as a medium of exchange in the purchase of lands sold by the state for delinquency in the payment of special assessment taxes of the same district (§41). If the holder of such credit memorandum becomes a purchaser, the tax collector shall accept it in lieu of money. The legislative body is required to levy a special assessment tax upon all the lands within the district “clearly sufficient to pay the principal and interest on said bonds as the same shall become payable” and, whenever any of the bonds or any payment of principal or interest becomes due and there is not sufficient money in the interest and sinking fund to pay it, the legislative body may order the necessary amount to be transferred from the general fund of the county to the interest and sinking fund as a loan to be repaid from the first money coming into the interest and sinking fund thereafter.

The bonds are legal investments for trust funds and for state school funds and the laws with reference to registration of municipal, county, or district bonds are applicable to them.

Section 41 provides for the levying of a tax upon the property within the assessment district to provide for the payment of the interest and principal on said bonds; that the assessment “shall be made at the same time and in the same manner and by the same persons as the assessment for general county taxes”; and that “such special assessment taxes shall be collected and enforced together with, and not separately from, taxes for county purposes.”

We think that there are many substantial differences between the bonds issued under this act and those issued under the acts discussed. above. The Supreme' Court of California, in American Co. v. City of Lakeport, 220 Cal. 546; 32 Pac. (2d) 622, pointed out some of the differences between the bonds issued under the Act of 1911 and those issued under the Act of 1915. The latter act, as will hereinafter be pointed out, is substantially the same as the Act of 1925. See also American Securities Co. v. Forward, 220 Cal. 566; 32 Pac. (2d) 343. We shall not extend this already lengthy opinion by quoting from the court decisions. Suffice it for present purposes to point out a few of the distinctions which, we think, justify the conclusion that the bonds issued under this act are obligations of a political subdivision.

The bonds contain an unconditional promise of the city to make payment of principal and interest when due, and to levy and collect a tax upon the lands in the district in an amount clearly sufficient to do so. The amounts due from the owners are levied and assessed in the same maimer and by the same persons as the assessment for general county taxes and such amounts are, and must be, included each year in the property owners’ general tax bills. Whenever the special fund does not have sufficient money in it to pay the amounts due, the legislative body may order the necessary amount to be transferred from the general fund to make payment. The bonds are legal investments for trust funds, including the state school fund, and must be registered. They, like the bonds considered by the court and the Board in Michael Pantarelli, obligate the municipality to make payment albeit out of special funds, and hence are “obligations * * * of a political subdivision” of the state within the purview of section 22 (b) of the Revenue Act, supra. The respondent erred in including in petitioner’s gross income for the year 1935 the interest received on such bonds.

Bonds Issued TJnd?-r the California Improvement Bond Act of 1915.

The sum of $70 was received by the petitioners during the calendar year 1935, representing interest on bonds issued under the Improvement Bond Act of 1915. The bonds are designated “Series 64” and cover properties located in an assessment district described as “City and County of San Mateo Street Improvement.” The assessment roll was dated March 3, 1930. The work consisted of paving and installation of sewers and ornamental lights on certain public highways in the County of San Mateo.

The act under which the bonds were issued “is intended to and does provide an alternative system for the issuance of bonds.” (§ 20, Act 8209, General Laws of California, 1931, Deering.) Bonds may be issued under this act, in the discretion of the legislative body of the city, instead of under part III of the Improvement Act of 1911 and instead of under the Improvement Act of 1921. A copy of one of the bonds is set out as Exhibit D attached to the stipulation and is in substantially the form provided by section 6 of the act. It has many similarities to the bonds issued under the provisions of the Improvement Act of 1925.

The bonds are payable to the party to whom they are issued or to bearer; are issued and payable in series; and are required to be registered with the city treasurer.

Upon default in payment, the land securing the assessments shall be sold in the same manner in which real property in such city is sold for the nonpayment of general municipal taxes, and in that event it is subject to redemption within one year from the date of sale. The city must become the purchaser of the property at any delinquent sale where there is no other purchaser. A cumulative remedy is given by section 11 (c) by which the amount due may be collected by suit brought in the Superior Court to foreclose the lien.

In connection with the purchase by the city it is provided (§16) that the city council may, and in the event of demand by the tax collector must, “at the time of fixing the annual tax rate and levying the taxes to be collected for general municipal purposes, levy a special tax upon the taxable property in the city for the purpose of paying for the lands purchased or to be purchased at such tax sales * * *. Such special tax shall be in addition to all other taxes levied for municipal purposes * * Section 12 provides that “In the event of there being no available funds in the treasury with which to make such payment [i. e., in connection with a purchase] the tax collector shall delay the entry of the certificate of sale [to the city] until such funds are available, making demand in the meantime upon the city council that a suitable amount be included in the next tax levy for the purpose of providing funds with which to make such payment; * * *”

One difference between the bonds issued under this act and those issued under the Improvement Act of 1925 is that the amounts due from each property owner under this act are billed by the county tax collector to the property owner as separate items. It is stipulated that “On some occasions said amounts appear as separate items on the regular tax bill. On other occasions the property owners are billed separately at times different from those on which regular tax bills are issued. The amounts due on account of said assessments under the Improvement Bond Act of 1915 may be paid and will be accepted by the county tax collector entirely apart from and regardless of whether or not the general taxes due from said property owners are paid.”

We are of the opinion that the bonds issued under this act are “obligations * * * of a political subdivision” of a State or Territory within the purview of section 22 (b) (4). As pointed out above, they are somewhat similar to those issued under the Act of 1925. They are not in substance tax bills, as are those issued under the Acts of 1911 and 1921. The issuing municipality, although the bonds may not pledge its full faith and credit, has many obligations and duties to perform. Specific reference has been made to many of them and they need not be repeated.

In American Co. v. City of Lakeport, supra, the Supreme Court of California pointed out some of the differences between the bonds issued under this act and those issued under the 1911 or 1921 Acts. It pointed out that under such acts “the assessments or bonds * * * are in specific sums on particular parcels of property, usually in odd denominations and payable on varying dates. The Improvement Bond Act of 1915 provides for a more marketable type of security, Bonds issued serially in even denominations, secured by assessments payable at the same time and in the same maimer as general taxes.” It held that the act did not violate the state constitution by imposing a tax upon the property within the city for a purely municipal purpose, stating that the legislature has not levied a tax. “It has merely fixed the liability of the city to pay for property purchased, and has required the city to levy and collect taxes in an amount suitable for that purpose.” Other constitutional objections were overruled and it was held that “a mandatory duty rested upon respondents [officers of the city] to levy and collect a tax to meet the delinquent assessments * '* While the court did not specifically state that the bonds were “obligations” of the issuing municipality, it is clear that the mandatory order would not have been entered otherwise.

We are therefore of the opinion, and hold, that bonds issued under the Improvement Bond Act of 1915 are “obligations * * * of a political subdivision” of the State of California and that the respondent erred in including the interest received on such bonds in petitioners’ gross income for the year 1935.

Reviewed by the Board.

Judgment will be entered under Rule 50.

       Sec. 22. (b) Exclusions from Gross Income. — Tbe following items shall not be included in gross income and sfyall be exempt from taxation under this title:

      (4) Tax-free interest. — Intent upon (A) tbe obligations of a State, Territory, or any political sub* divisionthereof,ortheDistrictofColumbia; * * *

       Street Improvement Bond.
      Series (designating it), in the city (or other form of the municipality) of (naming il). $ 100 No.
      TJnder and by virtue of an act of the legislature of the State of California (title of this act), I, out of the fund for the above designated street improvement bonds, series will pay to , or order, the sum of dollars, ($ ) with interest at the rate of per cent per annum, all as is hereinafter specified, and at the office of the treasurer of the of , state of California.
      This bond is issued to represent the cost of certain street work upon , In the of , as the same is more fully described in assessment number issued by the street superintendent of said , after the acceptance of said work, and recorded in his office. Its amount is the amount assessed in said assessment against the lot or parcel of land numbered therein, and in the diagram attached thereto, as number , and which now remains unpaid, but until paid, with accrued interest, is a lien upon the property affected thereby, as the same is described herein and in said recorded assessment with its diagram, to wit: the lot or parcel of land in said of , county of , state of California,
      This bond is payable exclusively from said fund, and neither the municipality nor any officer thereof is to be holden for payment otherwise of its principal or interest. The term of this bond is years from the second day of January next succeeding the fifteenth day of the next November following its date, and at the expiration of said time the whole sum then unpaid shall be due and payable; but on the second day of January of each year, following the fifteenth day of the next November, after its date, an even annual proportion of its whole amount is due and payable, upon presentation of the coupon therefor, until the whole is paid, with all accrued interest at the rate of per centum per annum.
      The interest is payable semi-annually, to wit: on the second days of January and of July in each year hereafter, upon presentation of the coupons therefor, hereto attached, the first of which is for the interest from date to the next second day of , and thereafter the interest coupons are for semi-annual interest.

        Redemption of bond. This bond may be redeemed by the owner or any person interested in any lot or parcel of land described herein, in the manner provided in said act, at any time before maturity, and before commencement of proceedings for sale, upon payment to the city treasurer, for the holder of this bond, of the amount then unpaid on the principal sum thereof, with interest thereon calculated up to the due date of the next maturing interest coupon, and all penalties accrued and unpaid, together with interest for six months at the rate named in said bond.

        Default in payment of principal or interest. Should default be made in the annual payment upon the principal, or in any payment of interest from the owner of said lot or parcel of land, or anyone in his behalf, the holder of this bond is entitled to declare the whole unpaid amount to be due and payable, and to have said lot or parcel of land advertised and sold forthwith, in the manner provided by law. In case of such default, there shall be immediately added to such defaulted amount, five per cent of the amount thereof, and on the first day of each month following such default there shall be added a further penalty of one per cent of such defaulted amount. The city shall be entitled to one-half the penalty first imposed, namely, two and one-half per cent and the other two and one-half per cent and all subsequent penalties shall be paid to the holder of the bond along with and as a part of such defaulted payment.
      At said of , this day of , in the year one thousand hundred and City treasurer of the of

       Abt. 74. Interest upon State obligations. — Among income exempt from tax is interest upon the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia. Obligations issued for a public purpose by or on behalf of the State or Territory or a duly organized political subdivision acting by constituted authorities duly empowered to issue such obligations, are the obligations of a State or Territory or a political subdivision thereof. The term “political subdivision” denotes any division of the State or Territory made by the proper authorities thereof acting within their constitutional powers for the purpose of carrying out a portion of those functions of the State or Territory which by long usage and the inherent necessities of government have always been regarded as public. Political subdivisions of a State or Territory, within the meaning of the exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory. The purchase by a State of property subject to a mortgage executed to secure an issue of bonds does not render the bonds obligations of the State, and the interest upon them does not become exempt from taxation, whether or not the State assumes the payment of the bonds.

       Dollars 1000
      Number Series A
      Acquisition and improvement District Bond Acquisition and Improvement District No._ Of the County of Los Angeles State of California
      under and by Virtue of an act of the legislature of the State of California, known as the “Acquisition and Improvement Act of 1925,” as amended, the County of Los Angeles, State of California, will pay to the bearer, out of the fund hereinafter designated, at the office of the treasurer of said County, on the_day of_, 19_, the sum of
      One Thousand Dollars
      in gold coin of the united States of America, with interest thereon in like gold coin at the rate of seven per cent per annum, payable semi-annually, on the second day of January and the second day of July in each year from the date hereof (except that the first interest payment will be made on the second day of July next succeeding one year after the date of this bond and the last installment of interest payments will be paid at the maturity of this bond) upon the presentation and surrender, as they respectively become due, of the proper interest coupons hereto attached, the first of which is for interest from the date hereof to the second day of July next succeeding one year after the date of this bond, and the last for interest to the maturity hereof from the last preceding date of interest payment.
      This Bond is issued under and in conformity with the provisions of the above mentioned “Acquisition and Improvement Act of 1925”, as amended, and is one of a series of bonds issued to represent the expenses of certain public improvement authorized by the provisions of said Act and comprehended in the proceedings had for the above named district. It is hereby certified, recited and declared that all proceedings, acts and things required by law precedent to or in the issuance of this bond have been regularly had, done and performed, and this bond is by law made conclusive evidence thereof.
      -This Bond is payable out of the “Acquisition and Improvement District No._of the County of Los Angeles Interest and Sinking Fund” exclusively, as the said fund appears upon the books of the Treasurer of said County, and neither said County nor any oflieer thereof shall be holden for its payment otherwise; but in accordance with the provisions of said Act a special assessment tax will be levied and collected upon the lands in said district in an amount clearly sufficient to pay the principal and interest of said bonds as the same shall become payable.
      In Witness Whereon the Board of Supervisors of said County of Los Angeles has caused this bond to be signed by the Treasurer of said County and the seal (seal) of the Board of Supervisors of said County to be hereto affixed this-day of__ 19__

        Treasurer of the County of Los

        Angeles, State of California.


source: Caselaw Access Project

license: Public Domain

text:
    Susanna Bixby Bryant, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89052.
    Promulgated September 27, 1938.

      Thomas R. Dempsey, Esq., A. Galder Maolcay, Esq., and Arthur Mogregor, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Mellott:

The Commissioner made several adjustments in recomputing petitioner’s tax liability for the year 1935, which resulted in the determination of a deficiency in income tax in the amount of $10,465.22. The only adjustment in controversy is the addition to taxable income of the amount of $18,130.14 representing interest received on improvement bonds issued by the City of Los Angeles and the County of Los Angeles, California, which the petitioner claims is exempt from taxation under section 22 (b) (4) of the Kevenue Act of 1934.

The facts were presented in a written stipulation. Those pertinent to the issue involved are as follows:

The petitioner during 1935 received interest on bonds issued by the City of Los Angeles, and the County of Los Angeles, in the State of California, as follows:

From bonds issued under the Improvement Act approved February 27, 1893_ $679.46

From bonds issued under the Improvement Act approved April 7, 1911_ 14,504.61

From bonds issued under the Improvement Act approved June 16, 1913_ 125.25

From bonds issued under the Improvement Act approved June 3, 1921_ 4, 523.40

[sic] $19,932.72

Add:

Bonus on overpayment and penalties- 1,486.20

Unallocated Interest_ 12.76

$21,331.68

Less: Service fees, costs of audits, etc- 3,201.54

Net amount received by petitioner-$18,130.14

In Milo W. Bekins et al., Executors, 38 B. T. A. 604, this date promulgated, we discussed at length the contention of the taxpayer that the bonds issued under the California Improvement Act of 1911 and bonds issued under the California County Improvement Act of 1921 were exempt from the income tax under the above section. In holding that they were not we pointed out that they are merely liens against the particular lots or parcels of land described in each separate bond; that no security is back of any bond other than such lien; that the bonds provide upon their face that they are payable exclusively from the fund paid to the city treasurer by the owner of the property upon which they are a lien; and that in no event is the issuing municipality or any of its officers “to be holden for payment.” It is unnecessary to repeat any of the discussion here. For the reasons set out in the Behins case it must be, and it is, held that the Commissioner did not err in including in petitioner’s income for the year 1935 the interest received by her upon the bonds issued under the provisions of those acts.

Bonds Issued Under the Improvement Act Approved February ¿7, 1893.

The above act (Act 8208, General Laws of California, 1931, Deer-ing) authorizes the governing body of a city to issue serial bonds to represent assessments of twenty-five dollars or more for “street work” which means “work upon streets, lanes, alleys, courts, places, and sidewalks, and for construction of sewers within municipalities.”

We set out in the margin a copy of one of the bonds owned by petitioner and issued under this act, which is in the amount of $945.09 and is a first lien upon “Lot 7, Block 45, The Town of San Pedro.” The bond is in substantially the form provided by section 4 of Act 8208, sufra.

We also set out in the margin the portion of section 5 of the act, including subdivision a, which states the procedure to be followed by the owner of a bond in the event default is made in payment. Succeeding subdivisions of the same paragraph provide for the filing of an affidavit of publication and for the collection by the city treasurer of the cost of sale; authorize any person interested in the lot to make payment and avoid having the property sold; require the city treasurer to keep certain records; and provide that redemption may be made “by the owner of the property, or any party in interest” within twelve months of the sale. If the property is not redeemed within such period the treasurer “must make to said purchaser, or his assignee, a deed to the property,” which “conveys to the grantee the absolute title * * * except the lien for state, county, and municipal taxes.”

It is apparent from an examination of the above act, and of the bonds issued under it, that such bonds are not “obligations of a political subdivision” of the State of California. Milo W. BeMns et dl., Executors, sufra, and cases therein cited. We hold, therefore, that the respondent did not err in including in petitioner’s income for the year 1935 the interest received upon them.

Bonds Issued wider Improvement Act Approved June 16, 1913.

The title of the above act was amended May 26, 1917, to read as follows:

Act 8205. — An act to provide for the establishment and change of grade of public streets, lanes, alleys, courts, places and rights of way, and of any of the following avenues of public travel, namely, tunnels, subways, viaducts, bridges or independent subterranean ways in municipalities and providing for the construction or improvement thereof, in cases where any damage to private property would result from such improvement, and for the assessment of the costs, damages and expenses thereof upon the property benefited thereby, and to provide a system of local improvement bonds to represent the assessments for the costs, damages and expenses of such improvement, and for the payment and effect of such bonds.

The act is shown in full in Act 8205 of the General Laws of California, 1931, Deering. For the purposes of this proceeding it is sufficient to state that it is substantially as indicated by its title.

The form of bond (§ 25) is similar to that set out in the margin in Milo W. Bekins et al., Executors, supra, in the portion of the opinion devoted to a discussion of the bonds issued under the California Improvement Act of 1911. Under this act the city treasurer makes out and signs “a separate bond representing upon each lot or parcel of land * * * the total amount of the assessment.” It is payable exclusively from the fund paid to the treasurer by the owner of the lot “and neither the city nor any officer thereof is to be holden otherwise for its principal or interest.” It is “a lien upon the lot described in such bond superior to all other liens, charges and encumbrances, except the liens of prior assessment and of municipal, state and county taxes.”

The act also contains provisions for the appointment of a commission “to estimate the damages caused by said proposed improvement and to assess the same” (§. 6); authorizes the amounts assessed to be paid over to the owner “when sufficient money is in the hands of the city treasurer in the special fund devoted to the proposed improvement * * *” (§ 20); prescribes the procedure to be followed in the event the owner refuses to accept the amount awarded (§ 21); provides that the bonds “shall take the place of and have the same force, validity and effect as assessment liens that the assessments would have had if no bonds had been issued” (§ 28); and authorizes “the owner of any property assessed, to whom damages have been awarded” to take such bonds, or any of them, “in lieu of, or in satisfaction pro tanto of such damages” (§ 31).

In the event of default in the payment of principal or interest the treasurer, upon the application of the holder, takes substantially the same steps as those which are, or may be, taken under the other acts discussed herein and in the BeJcins case. Briefly, the property is sold and, unless redeemed within twelve months, a deed is executed conveying to the grantee the absolute title to the lands, free of all encumbrances except the lien for state, county, and municipal taxes (§§ 34 to 42, inch).

We are of the opinion, and hold, that bonds issued under the above acts are not “obligations of a political subdivision of a State or Territory” within the purview of section 22 (b) (4) of the Revenue Act of 1934. It follows that the respondent did not err in including in petitioner’s gross income for the year 1935 the interest received on such bonds.

Reviewed by the Board.

Judgment will be entered for the respondent.

         Series Three
      Beacon And Portions of Other Streets No. 16
      $945 and 09/100
      Street Improvement Bono
      In the City of Los Angeles
      County of Los Angeles State of California
      Under and by virtue of an Act of the Legislature of the State of California, entitled “An Act to provide a system of street improvement bonds to represent certain assessments for the cost of street work and improvement within municipalities, and also for the payment of such bonds, Approved February 27th, 1893, and Acts Amendatory thereof, I, out of the fund for the above designated Street Improvement Bond, Series Number Three will pay to Fairchild-Gilmore-Wilton Co. or order, the sum of Nine hundred Forty Five and 09/100 Dollars ($945 and 09/100) with interest at the rate of seven per centum per annum, all as hereinafter specified, and at the office of the Treasurer of the City of Los Angeles, State of California.
      This bond is issued to represent the cost of certain street work upon
      Beacon Street and portions of other Streets
      in the City of Los Angeles, as the same is more fully described in Assessment number 2682, issued by the Street Superintendent of said City of Los Angeles, after his acceptance of said work, and recorded in his office. Its amount is the amount assessed in said Assessment against the lot or parcel of land numbered therein, and in the diagram attached thereto, as Number 212 , and which now remains unpaid, but until paid, with accrued interest, is a first lien upon the property affected thereby, as the same is described herein, and in said recorded Assessment with its diagram, to wit: that lot or parcel of land in said City of Los Angeles, County of Los Angeles, State of California, described as follows:
      Lot 7, Block 75, The Town of San Pedro
      Mise. Records of Los Angeles, County Book 84, pages 81 to 84, inclusive
      This bond is payable exclusively from said fund, and neither the municipality nor any officer thereof is to be holden for payment otherwise for its principal or interest. The term of this bond is Nine Years from the 2nd day of January next succeeding its date, and at the expiration of said time the whole sum then unpaid shall be due and payable, but on the second day of January of each year after its date, an even annual proportion of its -whole amount is due and payable upon presentation of the Coupon therefor until the whole is paid, with all accrued interest at the rate of seven per centum per annum.
      The interest is payable semi-annually, to wit: on the second days of January and July in each year hereafter, upon presentation of the coupons therefor the first of which is for the interest from date to the next second day of January and thereafter the interest Coupons are for semi-annual interest.
      Should default be made in the annual payment upon the principal or in any payment of interest, by the owner of said lot or parcel of land, or any one in his behalf, the holder of this bond is entitled to declare the whole unpaid amount to be due and payable, and to have said lot or parcel of land advertised and sold forthwith, in the manner provided by law.
      At said City of Los Angeles, this Fourteenth day of August In the year one thousand nine hundred and Twenty-Three

        Treasurer o1 the City of Los Angeles, California.

       5. Failure to pay interest and principal on bonds as due. Whenever payment either upon the principal, or of the interest upon any bond issued hereunder has not been, or shall not be made when the same has become or shall become due, and the holder of the bond demands in writing that the city treasurer proceed to advertise and sell the lot or parcel of land described in said bond as being that upon which the assessment represented by said bond was levied, then said treasurer shall proceed as follows:

        Subdivision a. Publication of notice of delinquency. He shall publish for two (2) weeks in a newspaper of general circulation, published in the city in which said bond was issued, or if no newspaper is published in said city, then in some newspaper having general circulation therein, a notice which shall be substantially (filling in all blanks) as indicated following, to wit:
      “Notice of sale of property delinquent for nonpayment of bond No. , series No. , issued for the improvement of
      Default having been made in the payment of the following named coupons (here fill in date and amounts of the coupon or coupons which have not been paid) and the holder of said bond having demanded in writing that the city treasurer of the city of , proceed to advertise and sell the lot or parcel of land mentioned in the said bond.
      Now, therefore, I give notice that I will on the day of , 19 , at the hour of o’clock M. of said day, sell at public auction the lot or parcel of land mentioned in said bond, or so much thereof as may be necessary at (here state the place of sale, which shall be at the office of said treasurer or at some public place in said city) unless the amount due on said bond and the accrued interest thereon together with the cost of the publication of this notice are paid; and that I will so sell the same to the person who will take the least amount of said lot or parcel of land and pay a full amount of unpaid principal and interest on said bond, together with costs of publication. The lot or parcel of land mentioned in said bond and to be sold, is more particularly described, to wit: (here set forth the description of the lot or parcel of land as contained in the bond). The amount due on said bond up to the date of this notice is as follows : Due on the principal thereof, dollars; due on account of interest, dollars. (Here set forth the interest calculated up to the day on which the notice is dated at the interest rate named in said bond upon the unpaid principal for the full period for which no interest has been paid.) Total amount due on said bond: (here set forth the total of the foregoing items) :
      In order to avoid this sale, payment of the total amount above named will be required together with the cost of publications made before such payment and the additional interest accruing up to the date of payment:
      In the event of sale, such sale will include interest in addition to the above total amount due accruing up to date of sale, the cost of publication of notice of sale, and one dollar for the issuing of certificate of sale. The (here naming newspaper) is
      designated as the newspaper in which this notice shall be published.
      Dated

        Treasurer of the city of .”
      The day named in the notice shall not be less than fifteen (15) days from the date of the first publication of the notice.


author: Turnee : Black,

text:
    Textile Mills Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75423.
    Promulgated September 28, 1938.

      E. S. Koohersperger, Esq., for the petitioner.

      J. H. Pigg, Esq., for the respondent.
   OPINION.

Turnee :

In his notice of deficiency the respondent rested his dis-allowance of the deductions here in issue on the provisions of article 262 of Eegulations 74, which states in part that “Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses, are not deductible from gross income.” He makes no claim that the acceptance of employment such as is involved in this proceeding was not within the scope of petitioner’s powers or business. Neither does he make any claim that the expenses incurred were not in fact ordinary and necessary in performing the services required of it under its contract. He now rests his claim wholly upon the decision of the United States Circuit Court of Appeals for the Ninth Circuit in Sunset Scavenger Co. v. Commissioner, 84 Fed. (2d) 453, which reversed the Board and approved the regulation cited. At the hearing his counsel stated that “the question in one sentence is whether the Board will follow that decision or whether it won’t.”

The petitioner admits that the expenses in question were incurred for services relating solely to the promotion of legislation, but claims that they were ordinary and necessary to the performance of the services required under its contracts and were therefore allowable deductions under the statute, section 28 (a) of the Revenue Act of 1928.

In Sunset Scavenger Co. v. Commissioner, supra, the court states that the statute is “ambiguous because it makes no determination of what is or is not an ‘ordinary and necessary’ expense” and holds that article 262 of Regulations 74, which limits “the sweeping terms of the statute by prohibiting the deduction” of the expenditures made to avert the enactment of legislation unfavorable to the taxpayer is controlling since the statutory provision allowing the deduction of ordinary and necessary expenses has been reenacted without change in all of the revenue acts after the Revenue Act of 1918, under which the regulation in question was first promulgated. The court further states that the Board in G. T. Wofford, 15 B. T. A. 1225, and Los Angeles & Salt Lake Railroad Co., 18 B. T. A. 168, as well as in the case there under consideration, took the view that the expenditures must have been for some illegal purpose to place them outside the provisions of the statute. It was held that such a conclusion was unsound in that it gave no consideration to the effect of the regulation and was equivalent to reading something into the regulation which could not there be found.

The petitioner questions both the application of the decision in Sunset Scavenger Co. v. Commissioner, supra, to the facts in the instant case and the reasoning of the court as to the purpose and effect of the regulation. As to the latter, it is argued that article 262 is not an interpretation of the term “ordinary and necessary expenses”, but has to do with contributions which depend for their allowance as deductions upon an entirely different provision of the statute, and under such circumstances that Congress can not be said to have approved any such limitation or meaning of the term “ordinary and necessary expenses”, as the respondent claims and the court has determined. While it is true that the article in question does appear in the Commissioner’s regulation following the quotation of that provision of the statute, section 23 (n), which deals with the allowance of charitable and other contributions as deductions, it is to be noted that the statute makes no allowance therein for the deduction of contributions or gifts made by a corporation, and the apparent purpose of the article is to show that, while expenditures made by a corporation may not be deducted as contributions after the manner of an individual taxpayer, such expenditures are proper deductions as “ordinary and necessary expenses” where they are made legitimately and for the purpose of procuring a direct benefit “to the corporation as an incident of its business.” In other words, the article clearly and obviously shows that the test of deductibility of expenditures by corporations is to be found in that portion of the statute governing the deductibility of ordinary and necessary expenses rather than in the provision of the statute covering the deduct-ibility of contributions. Accordingly, the argument of petitioner that the Commissioner’s regulation has no relation to the provision of the statute providing for the deduction of “ordinary and necessary expenses” must be regarded as unsound.

On the facts a distinction can be drawn between the instant case and Sunset Scavenger Co. v. Commissioner, supra, but in our opinion the distinguishing facts do not take the instant case outside the ruling of the court. It is true that in Sunset Scavenger Co. v. Commissioner the legislation in respect of which the expenditure was made would have directly affected the business in which the taxpayer was engaged, while in the instant case the petitioner was not promoting or opposing legislation which directly affected the business in which it was regularly engaged, but, as an agent, was seeking to promote legislation for the benefit of others and its compensation was to be received for services rendered as such agent and not from the possible effect the legislation might have on petitioner’s business. In other words, the petitioner was lobbying in behalf of legislation for its own benefit only in so far as it would receive compensation for such lobbying activities from the parties who were to be directly affected and benefited. The activities, however, were none the less lobbying activities and the language of the regulation is sufficiently broad to cover the expenditures of both principal and agent. We are, therefore, unable to find the distinction claimed by the petitioner between the instant case and that of the Sunset Scavenger Co.

Accordingly, if we conclude, as did the court in Sunset Scavenger Co. v. Commissioner, that the regulation is to be applied in all cases where the activities in respect of which the expenditures are made may reasonably be said to fall within the terms of the regulation, we need go no further, even though the expenses are in fact ordinary and necessary to the conduct of the taxpayer’s business. In applying the statute and the regulation, however, the Board has consistently considered the facts in each particular case and has reached its conclusion as to whether or not the expenditures were in fact ordinary and necessary. See particularly Sunset Scavenger Co., 31 B. T. A. 758, and Los Angeles & Salt Lake Railroad Co., supra. With all due respect to the honorable court, we feel that the facts herein are such that obligatory application of the regulation would result in misapplication of the statute in the instant case. Compare William P. Kyne, 35 B. T. A. 202, wherein it appears that there was some question as to the legality of the business in which petitioner was engaged, and Lelia S. Kirby, 35 B. T. A. 578, wherein it does not appear that the activities of the Southern Tariff Association, to which the petitioner made contributions, had a direct bearing on petitioner’s business.

In section 12 of the Trading with the Enemy Act, under which the property sought to be recovered was seized, it is stated that “after the end of the war any claim of any enemy or of an ally of enemy to any money or other property received and held by the Alien Property Custodian or deposited in the United States Treasury, shall be settled as Congress shall direct.” (40 Stat. 424.) Obviously the only recourse for the restitution of the property so seized was with Congress, and in our opinion the language of the statute was in effect an invitation to the parties whose property had been seized to present their claims to Congress at the end of the war. Cummings v. Deutsche Bank, 300 U. S. 115, 120, 121. They were aliens and consequently were at some disadvantage in preparing and presenting their claims, and it was logical that they should seek aid and assistance in this country. The petitioner was engaged generally in the representation of foreign interests in connection with their property and business affairs in the United States and it was in keeping with the circumstances of both parties and the relationship between them that the petitioner should be employed by the particular group of aliens referred to herein in their efforts to recover the property which had been seized. The respondent has made no claim, as we have pointed out, that such employment was outside the scope of petitioner’s powers or business and we have concluded from the record that the services rendered were necessary for the accomplishment of the desired result. There has been no showing that the petitioner indulged in any questionable practices in carrying out the purposes of its employment and no showing or claim that the activities in respect of which the expenses were incurred were against public policy. Cf. National Outdoor Advertising Bureau, Inc. v. Helvering, 89 Fed. (2d) 878. Accordingly we are unable to reach any conclusion except that the expenses here in question were in fact “ordinary and necessary” in the conduct of petitioner’s business and, having reached that conclusion, it is our opinion that the statute directs their allowance as deductions in determining petitioner’s net income. Cf. Lucas v. Wofford, 49 Fed. (2d) 1027, affirming 15 B. T. A. 1225.

Eeviewed by the Board.

Decision will be entered umder Rule 50.

Black,

dissenting: Article 262 of Treasury Eegulations 74, quoted in the majority opinion, provides, among other things, as follows: “Sums of money expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses, are not deductible from gross income.” I think this is a wholesome regulation and correctly interpretative of the law. There seems to be little, if any, doubt that the expenditures which the petitioner sought to deduct as ordinary and necessary business expenses and which the Commissioner has disallowed as deductions from gross income fall within the foregoing regulation. The majority opinion, as I read it, concedes that fact, but holds that the regulation, when applied to expenditures such as were made in the instant case and disallowed by the Commissioner, is too broad and reads something into the law which is not there. I am unable to agree with that interpretation.

The Ninth Circuit, in the Sunset Scavenger Co. case, cited in the majority opinion, gave unqualified approval to the quoted Treasury regulation as being a reasonable and correct interpretation of the law.

In William P. Kyne, 35 B. T. A. 202, and Lelia S. Kirby, 35 B. T. A. 578, we cited and followed the court’s opinion in the Simset Scavenger Go. case. I am not convinced that we should depart from that position in the instant case. It is perfectly true, as the majority opinion points out, that there are some differences in the facts in the Kyne and Kirby cases from the facts of the instant case, but I do not think these differences are sufficient to justify a distinction and a different ruling in the instant case from that which we made in the Kyne and Kirby cases. I, therefore, record my dissent from the majority opinion and think the decision on this point should be for the Commissioner.

Mellott and DiSNey agree with this dissent.

        Akt. 262. Donations iy corporations. — Corporations are not entitles to deduct from gross income contributions or gifts which individuals may deduct under section 23 (n). Donations made by a corporation for purposes connected with the operation of its business, however, when limited to charitable institutions, hospitals, or educational institutions conducted for the benefit of its employees or their dependents are a proper deduction as ordinary and necessary expenses. Donations which legitimately represent a consideration for a benefit flowing directly to the corporation as an incident of its business are allowable deductions from gross income. For example, a street railway corporation may donate a sum of money to an organization intending to hold a convention in the city in which it operates, with the reasonable expectation that the holding of such convention will augment its income through a greater number of people using the cars. Sums of inoney expended for lobbying purposes, the promotion or defeat of legislation, the exploitation of propaganda, including advertising other than trade advertising, and contributions for campaign expenses, are not deductible from gross income.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses.- — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      *******
      (n) Charitable and other contributions. — In the case of an individual, contributions or gifts made within the taxable year * * *.


author: Smiti-i:

text:
    R. L. Blaffer, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sarah Campbell Blaffer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89317, 90945.
    Promulgated September 28, 1938.

      'Walter E. Barton, Esq., and J. L. Block, G. P. A., for the petitioners.

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

Smiti-i:

These proceedings, consolidated for hearing, involve gift tax deficiencies for 1934 as follows:

In his brief the respondent states the questions presented as follows:

Did the Commissioner properly determine that the petitioner, B. L. Blaffer, residing in Texas, should properly include in his taxable gifts the full value of certain insurance policies, rather than only one-half thereof as contended by petitioner?
The first three issues of the petitions in both proceedings raised questions of value. These matters have been disposed of by the stipulations of the parties. Both petitions also raise the question of the extent of the exemption to which the petitioners are entitled for the year 1934. The respondent concedes the correctness of the petitioners’ contentions in this respect. The respondent also concedes the correctness of the contention of K. L. Blaffer as to the exclusions to which he is entitled for the year 1934.
The stipulation and the concessions leave only the question presented above.

The stipulated facts may be summarized as follows:

1. On December 29, 1934, tlie petitioner, R. L. Blaffer, made an irrevocable assignment of all of his right, title, and interest in and to certain life insurance policies on his own life to R. L. Blaffer & Co., as trustee, for the benefit of four individuals. Sarah Campbell Blaffer did not join in the assignment. The petitioners were married on April 22, 1909, and subsequent to that date premiums on the policies were paid from the community property of the petitioners. R. L, Blaffer reported one-half of the values of the policies in his gift tax return for 1934.

2. The following shows the names, numbers, dates of issuance, face values, and values of the policies as of December 29, 1934:

3. In the case of each policy the insured, R. L. Blaffer, had the right to revoke the beneficiary and to borrow money thereon until the date of the irrevocable assignment thereof on December 29, 1934. Sarah Campbell Blaffer, the wife of R. L. Blaffer, was named beneficiary in all of the policies, except as hereinafter stated, from the time the policies were written until the assignment thereof on December 29, 1934. In Equitable Life Insurance Co. policy No. 928225 the sister of R. L. Blaffer was named beneficiary until June 26, 1915, when the name of the beneficiary was changed to the name of the insured’s wife, Sarah Campbell Blaffer, and no change was made in the name of the beneficiary thereafter until the transfer of the policy on December 29, 1934. In State Mutual Life Insurance Co. policy No. 41019 the sister of R. L. Blaffer was named beneficiary. The name of the beneficiary was changed to the insured’s wife, Sarah Campbell Blaffer, on or about April 22, 1909, and no further change was made in the name of the beneficiary until the transfer of the policy on December 29, 1934. The policies were 20-pay life policies, except Pacific Mutual Life Insurance Co. policy No. 385056 and Aetna Life Insurance Co. policy No. 5357, which were ordinary life. At the time of the marriage of the petitioners on April 22, 1909, the value of Equitable Life Insurance Co. policy No. 928225 was $192, and on that date State Mutual Life Insurance Co. policy No. 41019 had no value whatever.

The Board makes the additional following finding of fact:

The insurance policies set forth in paragraph 2 above were the separate property of the petitioner, R. L. Blaffer, and the value thereof is properly includable in his taxable gifts for the year 1934.

It is the contention of R. L. Blaffer that only one-half of the value of the policies transferred to the insurance trust was taxable to him, inasmuch as the premiums after his marriage were paid from community property, and that he did npt own a greater interest in the policies than one-half of the cash surrender value thereof.

The status of insurance policies under the Texas law and the decisions of the Texas courts is well established. The leading Texas case is Martin v. McAllister (1901), 94 Tex. 567; 63 S. W. 624. In that case Mrs. Martin had died and her surviving husband had applied the community assets, including the homestead, to the payment of community debts. He retained as his own the proceeds of a life insurance policy upon Mrs. Martin’s life which had been made payable to him and applied these to the payment of the community debt. The children challenged the father’s right so to do. The question in the case, so far as this inquiry is presently concerned, was whether the proceeds of the policies upon the life of Mrs. Martin were the separate funds of her husband. The following are pertinent extracts from the court’s decision:

The money derived from the policy on the life of Mrs. Martin was not acquired during the marriage, hut was received by the husband after her death, in pursuance of a contract of insurance made during her life, and belonged to Thomas P. Martin in his separate right. ⅜ * * In the 'Succession of Hearing> above cited, the Supreme Court of Louisiana held that the proceeds of a policy of insurance on the life of the husband in favor of the wife were not the community property of the spouses, and were not liable for the debts of the husband. That court said:
“* * * jf the policy issues to the wife, or is properly transferred to her, the amount stipulated therein belongs to her when the event insured against happens, and she cannot be forced to inventory it as a part of her husband’s estate. The object he had in view would be defeated if a contrary doctrine prevailed. It is the wife whom the husband seeks to protect when he insures his life in her behalf; otherwise, he would not insure in her name. He has no need to protect his creditors by such a mode, for they can protect themselves.”
It is contended by the defendants in error that the husband could not appropriate the community funds to his own use in the purchase of this contract without the consent of his wife; but our statute specially provides that the husband shall have the sole right of control of the community property, and it has been uniformly held that such control cannot be interfered with unless it is exercised in fraud of the rights of the wife. * * *

The case of Rowlett v. Mitchell, 52 Tex. Civ. App. 589; 114 S. W. 845, was one in which a widow sued to recover one-half of the proceeds of a life insurance policy upon the life of her deceased husband, which was payable to his children by his first wife. The policy was taken out before his second marriage, but after that marriage he continued to pay the premiums thereon and used about $73.20 of the community funds of the second marriage in paying the premiums due on the policy. The policy was for $1,000 and the entire community estate was worth only about $450. The trial court concluded that the facts did not show any fraud upon the rights of the wife, and that the children named in the policy were entitled to the proceeds thereof. The appellate court, in affirming the judgment, said:

We think the evidence was sufficient to support the conclusion reached by the trial court that the use by Shoulders of community funds of his second marriage to pay the premiums on the policy in favor of the children of his first marriage was not with intent to defraud appellant as the owner of an interest in such community funds. Therefore it must be said that in rendering the judgment complained of the trial court did not err; for the right of the husband to dispose of community funds is an absolute one, so long as it is not exercised for the purpose of defrauding the wife. Sayles’ Ann. Civ. St. 1897, art. 2968; Stramler v. Coe, 15 Tex. 215; Martin v. McAllester, 94 Tex. 567, 63 S. W. 624. * * *
* * * The right of the husband to dispose of the community estate except for the purpose of defrauding his wife is an absolute one only while the marriage relationship exists. While that relationship continues, if not under a disability — as lunacy, for instance — he may expend their joint estate ever so unwisely, may squander it in “riotous living,” or may give it away to objects meritorious or without merit, yet she cannot be heard to complain. It is only when he disposes of it for the purpose of defrauding her that the law will afford her relief. * * *

In Jones v. Jones (1912), 146 S. W. 265, the court cited and quoted Rowlett v. Mitchell, supra, with approval, and continued in its opinion as follows:

Our Supreme Court, in the ease of Martin v. McAllister, has held that when insurance is taken upon the life of the wife, payable to the husband, and premiums paid out of the community funds, the proceeds of the policy become the separate property of the husband. The court stated that it saw no ground in the facts of the case to impeach the action of the husband as fraudulent towards his wife, and announced the doctrine that, as the proceeds of a policy upon the life of the husband or wife could not become the property of either during the lifetime of both of them, it cannot be held to be community property, and is therefore the separate property of the one to whom it is payable.

Whiteselle v. Northwestern Mutual Life Insurance Co. (1920), 221 S. W. 575, involved the question of whether the divorced wife of the decedent retained any interest in an insurance policy in which he had irrevocably designated her as the beneficiary. While the policy did not specifically provide for a cash surrender value, it did as a matter of fact have such a value. The court, citing Martin v. McAllister, supra, held that the use of community funds in payment of premiums for insurance upon the life of one spouse in favor of the other does not, in the absence of fraud, create in the community the right to reimbursement for the funds so used. The court stated:

* * ⅞ Under the insurance contract, no surrender or loan value existed as a matter of right; and the only contingency upon which liability of any sort could arise by virtue of the terms of the policy was the death of the insured. It was authoritatively decided in Hatch v. Hatch [35 Tex. Civ. App. 373 ; 80 S. W. 411] that the surrender value of a policy of this character is not property the ownership of which will be determined by the ownership of the fund from which the premiums are paid; that the existence of such surrender value does not change the character of the contract as being in any sense other than one purely of insurance; and that the only interest one could have in such a policy would be by virtue of some insurable interest in the life of the insured, as distinguished from a property right in the policy itself.

To the same effect as the foregoing is Johnson v. Cole (1924), 258 S. W. 850. The court there held that any insurance policy on the life of the husband is no part of the community estate of the husband and wife, citing with approval Jones v. Jones, supra, and Martin v. McAllister, supra.

In Fain v. Fain (Tex. Civ. App., 1936), 93 S. W. (2d) 1226, the court summarized rules relating to life insurance policies in Texas as follows:

We believe it clear that the life insurance policies that were made payable to the defendant’s estate were his separate property, in which the community estate could have no interest, either legal or equitable, Martin v. McAllister, 94 Tex. 567, 63 S. W. 624, 56 L. R. A. 585; Jones v. Jones (Tex. Civ. App.) 146 S. W. 265.
In Whiteselle v. Northwestern Mutual Life Ins. Co. (Tex. Com. App.) 221 S. W. 575, 576, it was specifically held that “the use of community funds in payment of premiums for insurance upon the life of one spouse in favor of the other does not in the absence of fraud, create in the community the right to reimbursement for the funds so used.” And further: “Recovery upon the remaining ground, namely, that the cash surrender value of the policy at the date of the divorce was community property, a one-half interest in which was decreed in the wife, is precluded under the decision in Hatch v. Hatch [35 Tex. Civ. App. 373, 80 S. W. 411], in which a writ of error was denied.

It is quite evident from the foregoing that in Texas a policy of life insurance taken out by one spouse in favor of the other, and which is not in fraud of the rights of the other, is separate property and there is no right in the community for reimbursement of the amounts expended in payment of premiums.

In support of their contention the petitioners cite Estate of Louisa Morris Carroll, 29 B. T. A. 11, the headnote of which reads as follows:

Subsequent to marriage, a husband took out four insurance policies on his own life, with the proceeds payable to his estate. While such policies were in effect, the wife of the insured died. Held, that under the law of Louisiana the cash surrender value of such policies falls into the estate of the marital community upon the dissolution thereof by death, and that one half of such value should be included in the estate of the deceased spouse for Federal estate tax purposes.

In our opinion we stated:

Under the laws of Louisiana it appears to be well settled that an insurance policy taken out by the husband and payable to his estate is community property. In Succession of Buddig, 108 La. 406; 32 So. 361, the court, in its syllabus, said: “A policy of life insurance issued to a married man during the existence of the community and made payable to his executor, administrators and assigns, falls into the community, and not his separate estate on the dissolution of the former by death.” In the body of the opinion the court said: “He [the husband] has no right to transact so as to build up a separate estate to the disadvantage of the community. Everything left at dissolution is presumed common.” At section 485, McKay on Community Property, a very generally accepted authority, the writer says: “So far as the author has been able to discover in the authorities, the only case where an insurance policy has been held to be common is where the husband during marriage, procures insurance on his own life payable to himself, his executors, administrators or assigns.”

In Newman v. Commissioner, 76 Fed. (2d) 449, the court held that under Louisiana law, where a husband, during the existence of the community, takes out a life insurance policy payable to the wife as beneficiary, but with right reserved to change the beneficiary, and pays premiums out of community, although the proceeds become the wife’s separate property at the husband’s death, the transaction is regarded as a gift by husband to wife, and that the estate of neither husband nor wife is regarded as having paid premiums so as to be entitled to reimbursement on account of their payment. The court stated :

We raise the question, however, not to decide, but to reserve it. Eor we think, in the light of the settled law as to these premium payments, that there is no basis for the claim that they fall within the regulations invoked. That law is that when, during the existence of the community, a husband, as here, takes out a policy payable to his wife as beneficiary, but with the right reserved to change, and pays the premiums out of the community, though the proceeds at his death become her separate property, Succession of Desforges, 135 La. 49, 50, 64 So. 978, 52 L. R. A. (N. S.) 689; Nulsen v. Herndon, 176 La. 1097, 1098 147 So. 359, 88 A. L. R. 236; Sizeler v. Sizeler, 170 La. 128, 127 So. 388; Douglass v. Equitable Life Assur. Soc., 150 La. 519, 90 So. 834, the transaction is regarded as a gift by the husband to the wife, and the estate of neither is regarded as having paid the premiums so as to be entitled to reimbursement on account of their payment. Kelly v. Kelly, 131 La. 1024, 60 So. 671; Succession of Bofenschen, 29 La. Ann. 711; Martin v. McAllister, 94 Tex. 567, 63 S. W. 624, 56 L. R. A. 585; Whiteselle v. N. W. Mut. Life Ins. Co. (Tex. Com. App.) 221 S. W. 575.

We are of the opinion that the decision by the Board in Estate of Louisa Morris Carroll, supra, which involved the law of Louisiana, does not control the situation here presented. Nor is it of consequence that the community property laws of the State of Washington lay down a different rule from those of the courts of the State of Texas, cf. Lang v. Commissioner, 304 U. S. 264, or that the laws of the State of California appear to be like those of Washington. Thus, in New York Life Insurance Co. v. Bank of Italy, 214 Pac. 61, it is said: “The chose in action represented by the policy belonged to the community because of the fact that community funds had been paid as the consideration for its acquisition.”

We can not doubt that as a result of the assignment by K. L. Blaffer the insurance trust acquired full title to the insurance policies transferred. There was no transfer to the insurance trust by the wife. The corollary of petitioner R. L. Blaffer’s contention would appear to be that the wife, Sarah Campbell Blaifer, was liable to gift tax upon one-half of the value of the insurance policies assigned. But no contention is made that she is so liable. She made no gift to the insurance trust.

We conclude that the insurance policies here involved were the separate property of the petitioner, R. L. Blaffer, and should be included in his taxable gifts for the year involved.

Reviewed by the Board.

Judgments will he entered under Bule 50.


author: Smith:

text:
    Libbie Rice Farish, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. S. Farish, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88366, 88367.
    Promulgated September 28, 1938.

      Walter E. Barton, Esq., and J. L. Bloele, O. P. A., for the petitioners.

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

Smith:

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

The facts were stipulated. In his brief the respondent states the questions presented as follows:

Did the Commissioner properly determine that the petitioner, W. S. Farish, residing in Texas, should properly include in his taxable gifts the full value of certain insurance policies, rather than only one-half thereof, as contended by petitioner?
The petition in Docket No. 88367 raises the question of the value of certain insurance policies. This question, however, is waived in the petitioner’s brief (p. 2). The petitions also raise the question of the extent of the exclusions to which the petitioners are entitled in 1934 and 1935. The respondent concedes the correctness of the taxpayers’ contentions in this respect. Petitions also raise the question of the extent of the specific exemption to which the petitioners are entitled in the year 1934. The respondent also concedes the correctness of the taxpayers’ contentions in this respect.
The concessions leave only the question presented above.

The stipulated facts are summarized as follows:

1. On February 20, 1934, the petitioner, W. S. Farish, made an irrevocable assignment of all of his right, title, and interest in and to certain life insurance policies on his own life to W. S. Farish, Sr., for the use and benefit of his son and daughter. The petitioners were married on June 1, 1911, and subsequent to that date the premiums on the policies were paid from the community property of the petitioners. W. S. Farish reported one-half of the values of the policies in his gift tax return for 1934.

2. The following shows the names, numbers, dates of issuance, face values, and values of the insurance policies referred to in paragraph 1 above:

3.In the case of each policy the insured, W. S. Farish, had the right to revoke the beneficiary and to borrow money thereon until the date of the irrevocable assignment thereof on February 20, 1934. Libbie Eice Farish, the wife of W. S. Farish, was named beneficiary in all of the policies, except as hereinafter stated, from the time the policies were written until the assignment thereof on February 20, 1934. In the New York Life Insurance Co. policies Nos. 2116255 and 2141993 the estate of W. S. Farish was named beneficiary and no change was made in the name of the beneficiary until the transfer thereof to the life insurance trust on February 20, 1934. All of the policies were ordinary life policies except the New York Life policies Nos. 2116255 and 2141993, which were 20-pay life policies. At the túne of the marriage of the petitioners on June 1, 1911, the values of the New York Life policies Nos. 2116255 and 2141993 were $170 and $680, respectively.

The Board makes the following additional finding of fact:

The insurance policies set forth in paragraph 2 above were the separate propertjr of the petitioner, W. S. Farish, and the value thereof is properly includable in his taxable gifts for the year 1934.

The Board determines that W. S- Farish is liable to gift tax in 1934 for the full value of the policies transferred, upon authority of the Board’s opinion in R. L. Blaffer, 38 B. T. A. 632, promulgated concurrently herewith.

Be viewed by the Board.

Judgments will be entered umder Rule 50.