text:
    F. Stanley Porter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82425.
    Promulgated August 24, 1937.

      Joshua W. Miles, Esq., for the petitioner.

      Carroll Walker, Esq., and C. H. Curl, Esq., for the respondent.
   OPINION.

Arundell:

The pleadings in this case raise two questions: Whether or not the petitioner made a bona fide sale of stock in December 1932, and whether or not there was fraud in his claim of a loss on the transaction.

There is little, if any, room for doubt as to the actuality of the sale by the petitioner of his shares in December 1932. He gave orders to sell to an established stock brokerage firm; his orders were executed by the firm in the regular way that sales are made on the stock exchanges; the sales were reflected in petitioner’s separate account, and the petitioner received the sale price of his shares. These matters are established by the testimony of not only the petitioner, but representatives of the brokerage firm, and the testimony is substantiated by written contemporaneous records. The sales so made divested petitioner of all title and control over the property sold. See Thomas W. Behan, 32 B. T. A. 1088; aff'd., 90 Fed. (2d) 609.

As affecting the bona fides of the sales the respondent points to the marital relation of the buyer and seller, the gift of the proceeds of the sales and the use thereof to make the purchase, and the use of the wife’s stock as collateral for the petitioner’s indebtedness to the bank. We have frequently said that transfers between members of a family should be subjected to searching scrutiny in order to determine whether they are actual, valid, bona fide sales. See John E. Zimmermann, 36 B. T. A. 279. Under this rule, we have carefully examined the several matters urged by the respondent and we do not find in them anything to vitiate the petitioner’s sales nor anything to support the view that the purchases by the wife constituted a reacquisition by either the petitioner or the marital community. Some of the elements of this case were also present and discussed in the Behan case, supra. In that case, husband and wife bought and sold securities; upon a sale by one the other bought; the purchases were paid for out of the proceeds of sales which were transferred from the seller to the buyer for that purpose. The Circuit Court in its opinion considered particularly the matter of the transfer of funds from one spouse to the other, and held that as each was financially able to buy out of his or her own estate the transfer of funds was “but a convenience; not a necessity without which the purchases were impossible.” It is further pointed out in the Behan opinion that the transfer of funds, considered as a gift, was not a gift of the securities because the securities were not transferred to the donee, but, on the contrary, were sold on the market for their fair market value. The transfer of funds after the sales the court said “in no way affected the scope or finality of the severance of property rights which resulted from the sales.” The only feature which on its face appears to distinguish the Behan case from this one is that in the present case the new certificates were devoted to the same use as the old, namely, as collateral for the husband’s loan. But this is not, in fact, a distinction, for the new certificates were the property of the wife and the use to which she put them does not change the fact of the prior sale by the husband. We accordingly hold the sales of securities by the petitioner to have been actual, bona fide sales, and the resulting loss to be allowable.

Counsel for the respondent in his brief advances the proposition that, because the securities sold were in the joint names of petitioner and his wife, only one-half of the loss is in any event allowable to the petitioner. Ownership of shares is not necessarily determined by the name on the stock certificates. The evidence here is to the effect that these shares were purchased by the husband through his individual brokerage account and they were regarded by both petitioner and his wife as his separate property. We do not consider the registry in the joint names, under the circumstances here, sufficient to establish joint ownership. We are satisfied, and have found as a fact, that the shares were the separate property of the petitioner. We accordingly hold that the loss sustained is allowable to petitioner in full.

The respondent’s charge of fraud is based solely on the stock sales. That matter being decided for the petitioner, the assertion of fraud falls with it.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Hill:

license: Public Domain

text:
    Jeanette E. Rushmore, Executrix of the Estate of Charles E. Rushmore, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77164.
    Promulgated August 26, 1937.

      Joseph B. Lynch, Esq., for the petitioner.

      F. T. Horner, Esq., for the respondent.
   Opinion.

Hill:

The issue raised by assignment of error No. III is whether the value of a mortgage on the premises at 800 Sixth Avenue, Borough of Manhattan, City and State of New York, should be included in the gross estate at its face value of $115,000 as determined by the Commissioner, or at a less value as contended by the petitioner. Counsel have agreed that such value is $112,000. Accordingly, we hold such value to be $112,000.

Assignment of error No. IX raised the issue that the Commissioner, failed to allow proper credit for estate taxes imposed by the State of New York upon decedent’s estate. Counsel have agreed with respect to this assignment of error as shown in our findings of fact. In accordance with such agreement we hold that petitioner is entitled to credit for such taxes in the amount of $44,750.53 and to further credit for such additional state estate, inheritance, legacy, or succession taxes as shall be actually paid, upon the submission of acceptable proof of such payment.

The remaining issue, raised by assignment of error No. VII, is whether under the terms of the indenture of trust executed by petitioner’s testator, Charles E. Rushmore, deceased, on April 23, 1929, the corpus of the trust, to the extent of $257,716.03, is includable in the gross estate of decedent for estate tax purposes, on the sole ground that it was a transfer “intended to take effect in possession or enjoyment at or after his death.” There is no controversy as to value.. The only issue is the propriety of such inclusion. The trust was not created in contemplation of death and is irrevocable, terminable upon the death of the trustor’s daughter or grandson, whichever should survive the other.

This issue involves two questions. The first question is whether the transfer under the trust instrument was intended to take effect in possession or enjoyment at or after the death of the trustor within the meaning of section 302 (c) of the Revenue Act of 1926, prior to amendment thereof.

The second question presented under this issue is whether section 302 (c) of the Act of 1926, as amended by House Joint Resolution No. 131, 71st Congress, effective March 3, 1931, and/or as amended by section 803 (a) of the Revenue Act of 1932, effective June 6, 1932, is applicable here; in other words, whether the provisions- of these amendments, or either of them, are applicable to the transfer here by retroaction.

The first question stated involves the application to the facts here of section 802 (c) of the Revenue Act of 1926, as it stood prior to March 3, 1931, and prior to June 6, 1932, the respective dates of amendments thereof. The transfer by trust indenture was made on April 23, 1929, and the trustor died October 30, 1931. The trust, during its continuance, reserved to the trustor one-half of the income from the trust property during the joint lives of himself and wife and the whole of the income during the period of his survivor-ship of his wife should she predecease him. No power was reserved to alter, modify, or revoke the trust. The transfer of the property held in trust was to specifically named persons or those whose identities are definitely ascertainable. The only reversionary interest the trustor had in the property was contingent upon his surviving both his daughter and his grandson. This was a remote contingency and one which, in fact, did not happen. The possibility of reverter did not rest upon the exercise of any right or power reserved to the trustor. The transfer was complete and absolute by the terms of the trust at the date of its execution and no title to, or interest in, the property remained in the trustor after that date. There was no shifting of economic interest in the property at or after his death. We hold, therefore, that under section 302 (c) of the Revenue Act of 1926, as it stood prior to amendment, the transfer was not intended to take effect in possession or enjoyment at or after the trustor’s death. May v. Heiner, 281 U. S. 238; Helvering v. St. Louis Union Trust Co., 296 U. S. 39; Reinecke v. Northern Trust Co., 278 U. S. 339; Tait v. Safe Deposit & Trust Co. of Maryland, 74 Fed. (2d) 851; Mildred Kienbusch, Executors, 34 B. T. A. 1248; Jacob Scheider et al., Executors, 35 B. T. A. 183; Daisy Christine Patterson, Executrix, 36 B. T. A. 407.

Considering now the second question stated, it must be conceded that the mere fact that decedent reserved to himself income from the trust property during his natural life brings the transfer within the provisions of both the amendments (above mentioned) to section 302 (c), supra. If such amendments, or either of them, are retroactive in their operation, respondent’s contention that the transfer is includable in decedent’s gross estate for estate tax purposes must be sustained on the ground that he retained for his life the right to the income from the property.

The question of whether the amendments .are retroactive is not new. It has been before the Board and the courts in a number of cases and, so far as we are advised, it has been uniformly held that the provisions of the amendments are only prospective in operation and have no application to transfers completed prior to their enactment. Nichols v. Coolidge, 274 U. S. 531; Helvering V. Helmholz, 296 U. S. 93; Bingham v. United States, 296 U. S. 211; Mildred Kienbusch et al., Executors, supra; Mary Q. Hallock et al., Trustees, 34 B. T. A. 575.

We hold, therefore, that the amount of $257,716.03, or any part thereof, involved in assignment of error No. VII is not includable in the gross estate of decedent for estate tax purposes.

Judgment will be entered under Rule 50.

       (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise,! of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

       “(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property * * *

       SEC. 803. FUTURE INTERESTS.
      (a) Section 302 (c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows:
      “(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property * * *”


author: Miller :

text:
    Robert Glendinning and Edna M. Welsh, Executors of the Estate of Charles N. Welsh, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81585.
    Promulgated August 31, 1937.

      William H. S. Wells, Esq., for the petitioners.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Miller :

The total net distributive income of the Charles N. Welsh trust during the year 1931 was $47,477.23. Pursuant to the terms of the trust, this was distributed in part directly to the decedent; in part to Helen Gallatin Welsh de Stubner; in part to Charles N. Welsh, Jr., a son, who was emancipated during the entire year; and in part to a son, Albert R. G. Welsh, who was a minor until November 10, 1931. There is no dispute as to the tax liability of the petitioner for the income which was distributed directly to the decedent.

Petitioners concede, moreover, that the income distributed to the minor son prior to November 10, 1931, the date of his emancipation, should be taxed to decedent. Helvering v. Schweitzer, 296 U. S. 551. Respondent concedes that the amount distributed to the emancipated son during the entire year was not taxable to the decedent. The only question remaining, therefore, is whether or not that portion of the income of the trust distributed to Helen Gallatin Welsh de Stubner for the period from January 1 to July 21,1931, the date of her death, was taxable to the decedent.

It is now well settled, following the decision in Douglas v. Willcuts, 296 U. S. 1, that the income of a trust paid directly to a divorced wife is taxable to the husband who created the trust, whenever the purpose of the trust and the provision for payment of its income is to satisfy a legal obligation of the husband to support and maintain his wife, whether the satisfaction of that obligation results from the payment of alimony decreed by a competent court, or from the carrying out of a separation agreement which provides for such payments in lieu of alimony, dower, or other rights of the wife in the property of the husband. Albert C. Whitaker, 33 B. T. A. 865; Helvering v. Brooks, 82 Fed. (2d) 173. See also Helvering v. Coxey, 297 U. S. 694, reversing 79 Fed. (2d) 661; Helvering v. Stokes, 296 U. S. 551, reversing 79 Fed. (2d) 256.

In several recent cases, however, this proposition has been limited, where it appeared that the legal obligation of the husband to support and maintain his wife had been terminated, under the law of a particular state, by divorce or by subsequent remarriage of the wife; Harry S. Blumenthal, 34 B. T. A. 994; aff'd., 91 Fed. (2d) 1009; Henry Oliver Rea, 35 B. T. A. 1132; Edward T. Hall, 36 B. T. A. 398. And in these cases it was held that the income of the trust distributed to the wife after divorce or remarriage is not taxable to the husband.

The instant case arose in Pennsylvania, where the decedent, his former wife, and their children resided. This Board has held, and the respondent conceded in his brief, that under the laws of Pennsylvania, without more, a husband is not liable for the support and maintenance of a sane, divorced wife. See Henry Oliver Rea, supra, and authorities there cited.

Nevertheless, the respondent contends that under the circumstances of this case the rule of Douglas v. Willcuts, supra, governs, and the petitioners are liable, on the theory that a legal obligation arose from the trust agreement itself, which obligation was satisfied in part by the payment of the income of the trust in 1981 to Helen Gallatin Welsh de Stubner. This contention is correct and must be sustained.

The trust agreement referred to was entered into on October 5, 1918, by Charles hi. Welsh, party of the first part, Helen Gallatin Welsh, party of the second part, and the Pennsylvania Co. for Insurances on Lives & Granting Annuities, party of the third part. It recited the marriage of the parties of the first and second parts; the existence of two sons; the making of an order by the Municipal Court of Philadelphia County directing the first party to pay $8,000 per month to the second party for the support of herself and the two children; the existence of an agreement between the first and second parties, varying the order of the court; “the purpose of the first and second parties to supersede and terminate said support order and said agreement * * * and to release each other from all further performance thereunder; and in lieu thereof to create a trust estate for the uses and purposes (t) hereinafter expressed * * The trust agreement next recited the creation of the trust in usual terms and thereafter set forth the following provisions:

Eleventh. The party of the first part also agrees to give each person to whom any fixed amount of income is payable hereunder, in addition to such amount, sums which will be sufficient to pay, with respect to said fixed amount and the payments made under the provisions of. this Article, to wit, Article Eleventh, the following charges:
(a) All taxes imposed, levied, assessed or demanded by the United States or any State or Territory (or sub-division thereof) of the United States except taxes imposed, levied, assessed or demanded by reason of the residence of the beneficiaries outside of the State of Pennsylvania.
(b) The amount of the United States income tax imposed, levied, assessed or demanded thereon from time to time not exceeding the amount which would be payable under the law in force at the date of this agreement (if then in force), together with such amount of said tax imposed, levied, assessed, or demanded as aforesaid, as shall be in excess of double the amount computed as above. Calculation of taxes under this subdivision, to wit, subdivision (b) shall be on the assumption that said fixed amount (plus payments under this article, to wit Article Eleventh), is the total income of such person.
Each of said payments shall be made at least thirty days prior to the last date for payment of such tax without penalty and shall be made by the Trustee, so far as it will accomplish that purpose, out. of any income in the hands of the Trustee at such time or times to which the party of the first part shall be entitled hereunder; but in the absence of such income or to the extent that same is not sufficient for this purpose, then by the party of the first part.
Thirteenth. It is agreed by and between the parties of the first and second parts that the order of the Municipal Court dated the 21st day of June 1917, shall be revoked and the agreement dated the 16th day of July 1917 between the parties of the first and second parts, he cancelled as of April 1st, 1918; the party of the second part hereby releasing the party of the first part from all claim and demand by reason of any payments heretofore made by the party of the first part to the party of the second part, or for or on account of the party of the second part, or in payment of any bills contracted by. the party of the second part or for which she might be or has been held liable.
Fourteenth. These presents are without prejudice to either party’s right to institute, prosecute, maintain or obtain upon any legally sufficient grounds, any suit or suits for divorce and these presents shall remain m full force and effect notwithstanding any divorce between the parties should any occur or be granted. [Italics supplied.]
Fifteenth. Said Charles N. Welsh, party of the first part, agrees that in each and every year during the continuance of this trust, in which he or his estate is entitled to the excess income, if any, from the trust, in which there should not be produced a net sum sufficient to enable the Trustee to distribute hereunder the sum of Thirty-six thousand Dollars ($36,000) in such year, he or his estate will forthwith make up and pay to the Trustee the amount of such 'deficiency.

On November 18, 1918, a decree of the Court of Common Pleas of Philadelphia County was entered, divorcing Helen Gallatin Welsh and Charles N. Welsh. On January 6, 1919, a petition was presented on behalf of Helen Gallatin Welsh in the Municipal Court of Philadelphia County, reciting the granting of the decree of divorce and the making of a settlement between the parties, and praying that the support order be vacated and arrears remitted. On the same day the prayer of the petition was granted. Thereafter, in August 1921, Helen Gallatin Welsh was married to one de Stubner and on July 21, 1931, she died.

The legal obligation described in Douglas v. Willcuts, supra, was . not limited to one arising from a general obligation to support and maintain a wife, or from a court decree or order. In that case, for example, the Supreme Court referred to the statutory provision that income of a trust reserved by the grantor for the payment of premiums upon certain types of insurance policies is taxable to him (Revenue Act of 1928, sec. 161), and then went on to hold that, in spite of the statutory earmarking of such income, it was not the intention of Congress thereby to exclude from tax liability other trust income which, in contemplation of law, remains in substance that of the grantor. It said further;

We do not regard-the provisions of the statutes as to the taxation of trusts, fiduciaries and beneficiaries (Revenue Act 1926, §§ 2, 219, 26 USCA §§ 1696 and note, 161-167 note; Revenue Act 1928, §§ 161, 162, 26 USCA §§ 161, 162) as intended to apply to cases where the income of the trust-would otherwise remain, by virtue of the nature and purpose of the trust, attributable to the creator of the trust and accordingly taxable to him. These provisions have appropriate reference to cases where the income of the trust is no longer to be regarded as that of the settlor, and we find no warrant for a construction which would preclude the laying of the tax against the one who through the discharge of his obligation enjoys the benefit of the income as though he had personally received it.

To hold that the petitioner in the instant case was not liable for tax upon the income of the trust paid to Helen Gallatin Welsh de Stubner in 1931 would require us to hold that the trust instrument created no legal obligation upon the part of Charles 1ST. Welsh which' continued after her divorce and remarriage. Such a holding would be clearly unjustified under the circumstances of this case. Helen Gallatin Welsh was a party to the trust agreement; there was a valuable consideration for the promises of Charles N. Welsh in the form of a legal obligation, then existing, to support her, together with a court order to pay to her, for her support, $3,000 per month; the agreement specified that the trust was being created for the purpose, among others, of providing support for her during her lifetime, in lieu of then existing obligations; the possibility of divorce was recognized, and it was expressly provided that the payments under the trust should continue to be made notwithstanding any divorce; the taxpayer agreed, further, to make up any deficiency which might occur in any year because of the failure of the trust to produce the required income; and he agreed further to pay to Helen Gallatin Welsh additional amounts sufficient to provide for taxes, imposed by the United States or any state or territory, with respect to the income paid by the trust.

If these various undertakings had been included in a simple contract by the terms of which a third party thereto had been required to pay, on behalf of the taxpayer, the various amounts specified, such payments clearly would have been made in his behalf and in satisfaction of his obligations. Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine Railroad, 279 U. S. 732. “The creation of a trust by the taxpayer as the channel for the application of the income to the discharge of his obligation leaves the nature of the transaction unaltered.” Douglas v. Willcuts, supra.

The facts in the instant case clearly distinguish it from other cases decided by this Board since Douglas v. Willcuts, in which the income of trusts paid to former wives was held not taxable to the settlors of the trusts following divorce or remarriage. In Harry S. Blumenthal, supra, the trust there involved was created by the taxpayer pursuant to a decree requiring him to do so. It was created expressly for the purpose of paying alimony; it related solely to his obligation to support his wife; presumably its effective life had the same limitations as the decree which brought it into being. In Henry Oliver Rea, supra, the opinion therein emphasizes .the facts which distinguish that case from the instant one:

The trust agreement does not show on its face that it. was created to provide income for the support of the wife or in lieu of alimony, or that it constituted a settlement of the rights of the parties growing out of the marital relationship existing between them. It does not refer to a contemplated separation of the parties and contains no waiver or relinquishment by the wife of support or of her interest in petitioner’s estate. * * * The instant proceeding is distinguishable from the above cases involving income from trusts created by the husband for the wife in that therein either the separation agreement, decree of the court, or stipulation of the taxpayer and the Commissioner disclosed that the income involved was provided for and paid in lieu of alimony or the wife’s interest in the husband’s property.

In Edward T. Hall, supra, it appeared that the taxpayer divorced his wife on the ground of “indignities.” She made no defense and shortly afterward married the man, her misconduct with whom occasioned the divorce. The taxpayer created the trust because his wife “begged him for an allowance, and because of his love for her and the fact that she was the mother of his four children and because he could not see her suffer * * * in spite of what she had done to him * * *.” We held in that case, on the facts there found, that “to justify taxation of the income of a trust to the grantor, it must appear that the trust was established to discharge a legal obligation of the grantor existing at or prior to the creation of the trust.”

In the instant case there was a legal obligation existing at the time of creation of the trust and there was another legal obligation of Charles 1ST. Welsh existing in 1931,. in satisfaction of which income of the trust created by him was paid to Helen Gallatin Welsh de Stubner. Consequently, he was liable for tax thereon.

Decision will be entered for the respondent.


author: Smith:

text:
    First National Bank of Atlanta and Mrs. Madeline W. Hebert, Executors of the Estate of Paul Octave Hebert, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83238.
    Promulgated August 31, 1937.

      W. A. Sutherland, Esq.-, for the petitioners.

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

Smith:

The identical question raised in the first issue has been decided by the Board recently in Dwight Whiting et al., Trustees, 35 B. T. A. 100, where we held that the value of certain shares of stock which were transferred as a gift in 1917, the donor retaining the income therefrom for life, should not be included in the gross estate of the donor, who died on November 8, 1983, as a transfer intended to take effect in possession or enjoyment at or after death under section 302 (c) of the Revenue Act of 1926, as amended by Joint Resolution of March 8, 1931, and section 803 (a) of the Revenue Act of 1932.

In our opinion we said:

Our question, then, is whether or not section 302 (c), supra, as amended, relates back and covers transfers made prior to the dates of the amendments in cases where the death of the decedent does not occur, until after the amendment dates. The answer to that question can be drawn from the decision of the Supreme Court in Helvering v. Helmholz, 296 U. S. 93. There the Court had before it the interpretation of section 302 (d) of the Revenue Act of 1926, which deals with the power to revoke, alter, or amend a trust instrument. The provisions there dealt with first appeared in the Revenue Act of 1924. The transfer under consideration was made in 1918. The Court, after pointing out that the transfer was complete at the time of the creation of the trust, that no interest remained in the grantor, and under the revenue act then in force the transfer was not taxable as intended to take effect in possession or enjoyment at the death of the grantor, held that if “section 302 (d) of the Act of 1926 could fairly be considered as intended to apply * * * its operation would violate the Fifth Amendment.” See also White v. Poor, 296 U. S. 98. Cf. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. We are unable to draw a distinction between the application of section 302 (d) in the above cases and section 302 (c), as amended, in the instant case. Jerome C. Smith v. United States, - Fed. Supp. -. Cf. Bingham v. United States, 296 U. S. 211; Industrial Trust Co. v. United States, 296 U. S. 220; Nichols v. Coolidge, 274 U. S. 531.

See also Mildred Kienbusch et al., Executors, 34 B. T. A. 1248.

Here, as in the ’Whiting case, the decedent, prior to the Joint Resolution and the amendments referred to above, parted irrevocably with every interest in the property except the right to receive the income therefrom for life, which right was cut off by his death, leaving no interest therein to pass to his survivors as a part of his estate.

In neither the Whiting case, the Kienbusch case, nor this case is the question raised as to the propriety of including in the gross estate all transfers made after the effective date of the amendment to section 302 (c) of the Revenue Act of 1926, where the decedent donor retained the enjoyment of the income of the transferred property during life.

In an amended answer filed in this proceeding the respondent alleged affirmatively that the gift in question was made in contemplation of death. No evidence other than the instrument by which the gift was made was offered in support of this contention, however, and in his brief the respondent waived the allegation.

In view of our discussion in Dwight Whiting et al., Trustees, supra, we deem it unnecessary to cite other authorities or further to discuss the question here. In accordance with our decision in that case we hold that the respondent erroneously included the value of the bonds in question in decedent’s gross estate for' estate tax purposes.

The remaining question in issue is whether the bequests to charity are deductible from decedent’s gross estate under section 303 (a) (3) of the Revenue Act of 1926, or whether under the laws of the State of Georgia they were void as charitable bequests and are therefore subject to the estate tax.

Section 3851 of the Georgia Code of 1926 reads as follows:

Charitable devises.—No person leaving a wife or child or descendants of child, shall, by will, devise more than one-third of his estate to any charitable, religious, educational, or civil institution, to the exclusion of such wife or child; and in all cases the will containing such devise must be executed at least 90 days before the death of the testator, or such devise shall be void.

Since the decedent’s will here was executed only 89 days before his death the respondent contends that the charitable bequests made therein were void.

In view of the facts here it is not necessary for us to rule upon the question of whether the respondent has correctly interpreted and applied the quoted provision of the Georgia statute as rendering void the charitable bequests made in the decedent’s will. The validity of these bequests was the subject of a suit brought by the executors of the decedent’s estate in the Superior Court of Fulton County, Georgia, a court of competent jurisdiction, and that court has ruled that the bequests are all valid and has directed the executors to pay them out in accordance with the terms of the decedent’s will. The decree of the court is binding on us in all matters pertaining to the construction and the administration of the decedent’s will. Jones v. Habersham, 107 U. S. 174; Freuler v. Helvering, 291 U. S. 35; Fidelity & Columbia Trust Co. v. Lucas, 66 Fed. (2d) 116; Smith v. Commissioner, 78 Fed. (2d) 897; Commissioner v. Blair, 83 Fed. (2d) 655.

In Smith v. Commissioner, supra, the question involved was the deductibility of certain charitable bequests which were made pursuant to a compromise agreement entered into between a testator’s next of kin and the beneficiary under his will. The statutes of the State of Rhode Island, where the testator was a resident at the time of his death, provide for the compromise of contested wills and further provide that where this takes place “the estate of such deceased person shall be administered and disposed of according to the provisions of the will as modified by the compromise.” The court, in reversing the Board, held that the charitable bequests were deductible, saying:

Oil matters of this sort the federal courts are bound by the state law. “It is very properly admitted by the government that the New York decree is in this proceeding binding with respect to the meaning and effect of the will. The right to succeed to the property of the decedent depends upon and is regulated by state law (Knowlton v. Moore, 178 U. S. 41, 57, 20 S. Ct. 747, 44 L. Ed. 969, 976), and it is obvious that a judicial construction of the will by a state court of competent jurisdiction determines not only legally but practically the extent and character of the interests taken by the legatees.” Pitney, J., Uterhart v. U. S., 240 U. S. 598, 603, 36 S. Ct. 417, 418, 60 L. Ed. 819. See, too, Freuler v. Helvering, 291 U. S. 35, 45, 54 S. Ct. 308, 78 L. Ed. 634; Helvering v. Grinnell, 294 U. S. 153, 55 S. Ct. 354, 79 L. Ed. 825. * * *

In its interpretation of section 3851 of the Georgia Code the Supreme Court of that state has said that its purpose is not to protect the public interests but to prevent a private wrong and that the statutory limitation on the testamentary power is to be strictly construed in favor of those persons named in the statutes and none other; and where such persons have failed or refused to assert their claims under the statute it can not be invoked by collateral kin. Monahan v. O'Byrne, 147 Ga. 633. Charitable devises generally are favored by the laws of the State of Georgia. Reynolds v. Bristow, 37 Ga. 283; Jones v. Habersham, supra; Monahan v. O'Byrne, supra.

Since the charitable bequests in question have been held valid by a court of competent jurisdiction and have been or will be paid out of the decedent’s estate in accordance with the provisions of his will, and since, admittedly, they fall within that class of bequests referred to in section 303 (a) (3), above, we hold that they are deductible from decedent’s gross estate.

Judgment will he entered under Rule 50.

       Sec. 803. (a) Section 302 (c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows:
      “(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.”

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—

        if ⅝ * # ⅜ A *
      (3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contibutions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate; * * *


author: Disney :

text:
    Ross B. Hammond, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83688.
    Promulgated August 31, 1937.

      Robert T. Jacob, Esq., for the petitioner.

      F. R. Shearer, Esq., C. C. Holmes, Esq., and E. M. Woolf, Esq., for the respondent.
   OPINION.

Disney :

The determination of the issue in the instant case requires the consideration, interpretation, and application of sections 41 and 42 of the Revenue Act of 1932 and articles 322 and 334 of Regulations 74 and 77, made pursuant thereto.

The sections of the act referred to are as follows:

SEC. 41. GENERAL RULE.
The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the ease may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. (For use of inventories, see section 22 (c).)
SEC. 42. PERIOD IN WHICH ITEMS OP GROSS INCOME INCLUDED.
The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted' under section 41, any such amounts are to be properly accounted for as of a different period.

Article 322, Regulations 77 reads in part as follows:

Bases of computation.-—Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. * * *
The true income, computed under the Revenue Act of 1932 and, where the taxpayer keeps books of account, in accordance with the method of accounting regularly employed in keeping such books (provided the method so used is properly applicable in determining the net income of the taxpayer for purposes of taxation), shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change.
A taxpayer who changes the method of accounting employed in keeping his books for the taxable year 1932 or thereafter shall before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner. Nor the purposes of this article, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, such as a change from cash receipts and disbursements method to the accrual method, or vice versa; a change involving the basis of valuation employed in the computation of inventories (see articles 101-108) ; a change from the cash or accrual method to the long-term contract method, or vice versa; a change in the long-term contract method from the percentage of completion basis to the completed contract basis, or vice versa (see article 334) ; and a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis (see articles 57 and 131). Application for permission to change the method of accounting employed and the basis upon which the return is made, shall be filed within 90 days after the beginning of the taxable year to be covered by the return, except that as to the taxable year 1932 such application may be filed not later than 30 days prior to the close of the taxable year. The application shall be accompanied- by a statement specifying the classes of items differently treated under the two methods and specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless and until the taxpayer and the Commissioner agree to the terms and conditions under which the change will be effected.

Article 334 reads as follows:

Long-term contracts.—Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term “long-term contracts” means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts "may, as to such income prepare their returns upon the following bases:
(a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificates .of architects or engineers showing the percentage of completion during the taxable year of the entire work to be performed under the contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of' the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If, upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.
(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of completion.
A taxpayer may change his method of accounting to accord with paragraphs (a) and (b) of this article, only after permission is secured from the Commissioner as provided in article 322.

Counsel for the petitioner in Ms reply brief states: “The crux of the entire case is whether the respondent gave the petitioner, impliedly or expressly, consent to file its return for 1932 on the basis of percentage of completion of long-term contracts.” He insists that such consent was given and contends that respondent’s consent is. to be found in the letter of December 15, 1938, written by the internal revenue agent in charge at Seattle, Washington. The entire body of that letter is set out in our findings of fact. Do its contents justify the contention made by petitioner’s counsel? That letter merely informed the petitioner that its income tax return for 1932 had been recommended for acceptance as correct, and advised it that such was, subject to approval in Washington and “that, should subsequent information be received which would materially change the amount reported, the Bureau is obliged under existing laws to redetermine your tax liability.” The letter shows the internal revenue agent in charge made only a recommendation relative to petitioner’s 1932 return. The agent in charge was not authorized and did not attempt to do more than recommend.-

There is no evidence in the record that petitioner made any inquiry of the agent in charge or of the respondent as to how the recommendation was considered and acted upon by the respondent.

For the calendar year 1931 and for taxable years prior thereto, the petitioner reported upon its Federal income tax returns income upon construction contracts upon the basis of the net result of the completion of each individual contract. In the income tax return for the taxable year 1932 petitioner reported profit of $1,925.51 from job Ho. 175, which was begun in 1931 and completed in 1932.

Petitioner, contrary to its previous practice in reporting income from construction projects, included in its return for 1932 an estimated profit of $17,000 as of December 31,1932, which profit accrued on job No. 179, begun in 1932 and completed in 1933. The record shows that in 1932 there was no taxable income of petitioner whether or not the $17,000 accrued profit from job No. 179 was included in its return for that year.

Upon completion of job No. 179 in 1933, a total net profit of $22,145.92 had been realized, but only the difference between that amount and the $17,000 accrued profit in 1932 from job No. 179, to wit, $5,145.92, was reported as taxable income in petitioner’s 1933 return.

The record indicates the petitioner’s accounting system and manner of making- its income tax returns in 1931 and in prior years met with the acceptance and the approval of the respondent and there is no controversy on this point. There is no evidence that petitioner ever made any request of, or application to., respondent (Commissioner) that it be allowed to change in any respect its manner of accounting and reporting its income as it had been doing in 1931 and prior years.

The Revenue Act of 1932 was approved June 6 of that year and was effective, as to “Title I—Income Tax”, on January 1, 1932. The fact that the regulations made pursuant to the provisions of that act and set forth in our findings of fact were not approved and promulgated until February 10, 1933, did not, in our opinion and we so hold, relieve the petitioner from the necessity, which already existed, of securing the consent of the Commissioner before changing in its 1932 return, filed in 1933, the method of accounting theretofore regularly employed by it in 1931 and prior years.

Assuming that petitioner was not affected by Regulations 77, articles 322 and 334, as to his return for 1932, Regulations 74, articles 322 and 334, respectively, must be held to be effective. As contended by the petitioner, Regulations 74, article 334, did not contain a requirement that permission be secured from the Commissioner, until modified by Regulations 77, article 334. However, article 322 of Regulations 74 provides in general, under the caption “Bases of computation”, that:

A taxpayer who changes the method of accounting employed in keeping his hooks for the taxable year 1928 or thereafter should, before computing his income upon such new basis for purposes of taxation, secure the consent of the Commissioner. Application for permission to change the basis of the re: turn shall be made at least 30 days before the close of the period to be covered by the return and shall be accompanied by a statement specifying the classes of items differently treated under the two systems and specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change.

Although the word “should” is first used as to the securing of consent of the Commissioner, it is immediately followed by a requirement that “Application for permission to change the basis of the return, shall be made at least 30 days before the close of the period to be covered by the return.” (Emphasis ours.) Under such language, we regard and hold article 322 as requiring the Commissioner’s permission before a change of basis, even prior to the regulations promulgated February 10, 1933.

Moreover, we conclude that the petitioner did not by his return for 1932 comply with the then regulations requisite to report profit from a long term contract prior to the year of final completion. Article 334 of Regulations 74 provides that the income from long term contracts is in general taxable for the period for which the income is determined, and further provides that gross income derived from such contracts may be reported either (a) upon the basis of percentage of completion, or (b) may be reported in the taxable year in which the contract is finally completed. The statute, section 42 in the Acts of both 1928 and 1932, specifies in general that income is to be reported for the taxable year “in which received by the taxpayer.” It is not disputed that the contract herein involved was not finally completed until 1933. Of the income therefrom, $17,000, as above seen, which was in general under Regulations 74, article 334, to be reported “for the period in which the income is determined”, was reported in 1932. The year of determination is plainly, we think, the year when the final result as to income from the contract is ascertained, and not a year when a mere estimate is made, as here. The very fact that an estimate was made in 1932 shows that the total profit or income was not settled, determined, until closing of contract in 1933. Moreover, was the return made for 1932 “upon the basis of percentage of completion?” No percentage was specified in the return. In fact, the return nowhere uses tire figures $17,000, and the same is nowhere identifiable, apparently being simply a portion of the gross receipts of $388,674.84 which were reported. Yet, article 334 of Regulations 74 provides that :

* * * In such ease there should accompany the return certificates of architects or engineers showing the percentage of completion during the taxable year of the entire work to be performed under the contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. * * *

The return for 1932 furnishes none of the above mentioned information and it is obvious that the petitioner complied neither with the letter nor the object of the above article of the regulations. As above pointed out, petitioner’s counsel in his reply brief states that the crux of the case was whether petitioner was by the respondent given implied or express consent to file its return for 1932 on the basis of percentage of completion of a long term contract. We fail to see where the petitioner filed such a return on such a basis—assuming that it had such consent. What it filed failed to comply with regulations then in effect. We conclude that permission of the Commissioner was necessary for a change of basis in 1932, prior to Regulations 77, and that the return filed did not comply with the then regulations as to material and essential content of return. This leaves for consideration the question as to whether there was a waiver by the Commissioner of the regulations.

The letter of December 15,1933, relied on by petitioner to establish the Commissioner’s consent to the change desired in reporting its income, is ineffective not only for reasons heretofore stated, but for lack of authority in the agent in charge to give consent to the change sought. Darling v. Commissioner, 49 Fed. (2d) 111; certiorari denied, 283 U. S. 866. Such power was not within the scope of his authority. Furthermore, there is no evidence that he even attempted to exercise such power or authority.

The record shows that the revenue agent, upon examination of the books and records of the petitioner in November 1933, discovered that petitioner had in its 1932 return changed in one particular, pointed out in our findings of fact, its method of reporting its income. As a result of the revenue agent’s investigation and the discovery of the change made by petitioner in reporting income from construction contracts, there was eliminated from petitioner’s 1932 income tax return the accrued income of $17,000 on job No. 179. The petitioner, however, was not informed that such action had been taken. On the assumption that the 1932 return as filed had been accepted—no tax being demanded of petitioner under its 1932 return—the petitioner continued to keep its books of account and to report its earnings and expense upon the basis of determining the percentage of income and expense attributable to each uncompleted job during each calendar year.

In the early case of Clendening Co., 1 B. T. A. 622, we held as a general rule or principle that a taxpayer may not change the basis of reporting income without complying with the regulations prescribed by the Commissioner pursuant to statutory authority. See also American Conservation Service Corporation, 24 B. T. A. 183, 185; Jerome R. George, 27 B. T. A. 765, 770; East Coast Motors, Inc., 35 B. T. A. 212, 217. That general principle has been adhered to in all our revenue statutes and regulations made pursuant thereto and in the decisions of the Federal courts and of this Board. Where there have been qualifications or modifications of the principle, it has been, in our opinion, under circumstances substantially different from those in the instant case. As the return shows, the petitioner had no income tax to pay in 1932, regardless of whether it had reported as it did prior to 1932, or made the change in 1932 as it did. The filing and closing of its 1932 return, not shown to be communicated to petitioner, therefore, did not imply that the Commissioner gave his consent to the changing of petitioner’s “method of accounting regularly employed” by it in 1931 and prior years, nor give petitioner any equitable grounds of complaint based on limitation statutes or as to waiver.

There was in the treatment of this matter by the Commissioner no “trap for the unwary”, for petitioner has not been injured, having on either theory for basis of return a loss for 1932; it is simply prevented from using a change of basis as a means of deducting $17,000 in 1932, when it had a loss to offset it, instead of 1933 when the income was actually received.

We are unable to see, in the circumstances in this case, that mere inaction by the Commissioner is evidence of the voluntary relinquishment of right which is essential to waiver, and plainly estoppel does not lie, there being no showing of detriment to petitioner.

To permit the petitioner to change its method of reporting income, as it contends, would be to allow it to evade paying income tax on the accrued income of $17,000 on job No. 179, by including the $17,000 in income in a year, 1932, when its losses were such that it would have no taxable income on which to pay and would result in including in its taxable income for 1933, the year in issue, only $5,145.92 of the $22,145.92 profit actually realized upon the completion of job No. 179. This would not be clear reflection of income.

Such distortion of income as would result, if petitioner were permitted to change its method of reporting as attempted by it, under circumstances disclosed by the record in the instant case, is not, in our opinion, authorized by the statute nor warranted by the regulations made pursuant thereto.

We are of the opinion and hold that the respondent did not err in refusing to permit the petitioner, under the circumstances shown by the record, to change its method of reporting income from the completed contract basis, consistently followed by it prior .to 1932, to the percentage of completion basis, which it sought to adopt in 1932 and 1933, attempting to do so without securing the necessary consent of the Commissioner thereto.

We, therefore, are of the opinion and hold that in the determination of the petitioner’s tax liability for the year 1933 the respondent did not err in including in income of petitioner the sum of $17,000— assigned by petitioner as error—and the respondent’s determination with respect thereto is accordingly approved.

The record shows that the respondent concedes he should have allowed petitioner as ordinary and necessary entertainment expenses the sum of $450, and no more is insisted upon.

Decision will be entered under Rule 50.


author: Mellott:

text:
    Orie R. Kelly and Grace V. Kelly, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79959.
    Promulgated September 8, 1937.

      Russell D. Morrill, Esq., and Francis L. Casey, Esq., for the petitioners.

      F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Mellott:

The petitioners, who are husband and wife, residing at White Plains, New York, filed a joint return of income for the year 1932. Therein they deducted as a capital' net loss $2,606.25, claimed to have been sustained in connection with the surrender by Orie R. Kelly of one-half of the stock owned by him in the County Trust Co. of New York under the circumstances hereinafter related. Inasmuch as the transactions which will be discussed herein were all carried out by Orie R. Kelly, he will be referred to as the petitioner.

The Commissioner disallowed the claimed capital net loss in the amount of $2,606.25, added to the net income shown on the return $2,700 as dividends received by petitioner on his shares of stock in the County Trust Co. of New York and determined a deficiency in tax for the year 1932 in the amount of $795.64.

In making the above determination respondent determined as a fact, and now contends, that a distribution which was made by the County Trust Co. in October 1932, was made at such time and in such manner as to make it essentially equivalent to the distribution of a taxable dividend to the extent of $661,339.31. (Sec. 115 (g), Revenue Act of 1932.) Petitioner having received his aliquot portion of said sum, amounting to $2,700, said sum was added by the respondent to, and he contends that it is taxable as a part of, petitioner’s income.

Petitioner contends that the distribution of cash and stock of the County Improvement Corporation was made in connection with a reduction of the capital stock of the County Trust Co. in exchange for the surrender of one-half the number of shares held by him as a stockholder of the Trust Co., that the transaction was a partial liquidation under the statutes (section 115 (h), Revenue Act 1932)', that it was not made at such time and in such manner as to make it essentially equivalent to the distribution of a taxable dividend, and that a capital net loss was sustained in the amount of the excess of the cost of that part of the stock surrendered by him—a portion of such stock being a capital asset within the meaning of section 101 of the Revenue Act of 1932—over the amount of cash and the fair market value of the Improvement Corporation stock which he received. Respondent contends in the alternative that even if it should be found that the cash received by the petitioner is not taxable to the extent of the available earned surplus still it must be found that petitioner did not sustain a recognizable loss on the transaction. The contentions will be considered in the order stated.

The proceeding was submitted upon a stipulation of facts, certain documentary evidence and the testimony of three witnesses. We find the facts to be as stipulated and from the whole record we set out herein the facts deemed by us to be especially pertinent to the issues to be decided.

The County Trust Company of New York (hereinafter referred to as the Trust Company) was incorporated under the banking laws of the State of New York and commenced business on or about February 23, 1926. Since that date it has been engaged in the general banking business in New York City. As a result of a merger with another company its name has since been changed.

Upon its organization, the Trust Company issued its entire authorized capital stock of $1,000,000, consisting of 10,000 shares of the par value of $100 per share for cash at $150 a share. Of the $1,500,000 received on the issuance of said stock $1,000,000 was credited to the capital stock account and $500,000 was credited to the paid-in surplus account.

From the time of its formation in 1926, its business and earnings steadily increased. In 1929 there was a large demand for money on call loans at high rates of interest and it was expected that it could employ additional capital profitably under these circumstances. Accordingly, on or about February 15, 1929, the capital stock of the Trust Company was increased to $4,000,000, consisting of 40,000 shares of a par value of $100 per share. The increase of 30,000 shares over and above the previously outstanding 10,000 shares was issued and sold for $200 cash per share. Of the $6,000,000 received as the result of the issuance of said 30,000 shares, $3,000,000 was credited to the capital stock account and $3,000,000 to the paid-in surplus account.

On or about November 19, 1930, the number of shares of the Trust Company was changed from 40,000 shares of $100 par value to 160,000 shares of $25 par value, the total capital remaining unchanged at $4,000,000. At the time of the increase of the number of shares and the reduction of the par value, the stock was selling at a high price and the change was made to give the stock greater marketability and wider distribution. As a result of this reduction m the par value of the stock, the number of stockholders in the bank was increased.

On or about April 24, 1929, the County Improvement Corporation was organized under the laws of the State of New York with an authorized capital stock of 1,000 shares of no par value. By October 20, 1932, the authorized and outstanding capital stock of said corporation had been increased to, and consisted of, 40,000 shares of no par value, all of which were owned by. the Trust Company. The cost of this stock in cash to the Trust Company was $1,100,000. On October 20, 1932, in addition to the aforementioned capital stock held by the Trust Company, said Improvement Corporation was indebted to the Trust Company in the amount of $1,100,000, secured by a bond and first mortgage on the land and the twenty-story County Trust Building located at Eighth Avenue and Fourteenth Street, in New York, N. Y., owned by the County Improvement Corporation.

The fair market value of the voting trust certificates (hereinafter mentioned) for capital stock of the County Improvement Corporation during the period from October 20, 1932, to November 1, 1932, both inclusive, was $12 per share.

In December 1930, the president of the Trust Co. reported to its board of directors that the Trust Company’s policy regarding future dividends deserved serious consideration. He reported that an analysis of the earnings and expenses for the eleven months ending November 30, 1930, disclosed a decided downward trend in the gross and net earnings, resulting in net earnings of approximately $31,000 monthly at the end of that period as compared with earnings of twice that amount at the beginning of the period; that the decrease in earnings might be traced to three factors; a decrease in deposits, a decrease in the rates of interest on invested assets, and an increase in non-earning assets. The president concluded that an increase in earnings could not be looked for at that time since an increase in deposits was improbable on account of the general business depression; that higher rates of interest available would mean a change in the policy of investing the liquid funds in a class of items which would not be immediately liquid or which would have elements of greater risk than the present investments, and that it was unwise to sacrifice the then liquid position of the company merely for the sake of increasing its earnings; that it was also impossible materially to reduce operating costs. The president recommended that the dividend rate on the Trust Company’s $25 per share par value stock be reduced to $1.20 per share a year. This dividend would be equivalent to $4.80' per share of $100 par value, as compared with the $8 per share paid prior to the reduction to $25 per share. The directors passed a resolution that a quarterly dividend of 30 cents per share be paid on the new stock in accordance with the president’s recommendation.

Due to the general depression, the business and earnings of the Trust Company continued to decline. At the end of 1931 and during the first six months of 1932 the earnings were so unsatisfactory, considering the amount of capital the Trust Company was employing, that its president concluded that action should be taken to relieve the company of capital funds which it was unable to employ profitably in its business. In 1932 the Trust Company had about twice as much capital in relation to deposits as the average of all banks in New York State reported by the State Superintendent of Banks for 1931. The president discussed the proposed reduction of capital informally with the directors, with other bankers, and with the Superintendent of Banks of the State of New York, and all were of the opinion that the Trust Company had twice as much capital as was necessary.'

The president, on or about September 14, 1932, recommended to the board of directors of the Trust Company that a 50 percent reduction in capital stock was desirable. He therefore recommended that there be returned to the Trust Company one-half of the stock held by the stockholders, they to be paid part in cash and part in Improvement Corporation stock. The Improvement Corporation stock was to be distributed rather than cash in order to preserve the liquid condition of the bank for the protection of depositors. At a special meeting held on September 14, 1932, the board of directors of the Trust Company adopted the president’s recommendations.

Thereafter the stockholders and directors of the corporation took the necessary action to reduce the capital stock of the Trust Company from $4,000,000, consisting of 160,000 shares of the par value of $25 each, to $2,000,000, consisting of 80,000 shares of the par value of $25 each, and to distribute to the stockholders the $2,000,000 by which the capital stock was reduced. The transaction was reflected upon the Trust Company’s books as follows :

The stockholders were required to surrender their certificates of County Trust stock for new certificates equal to 50 percent of the number of shares represented by the certificates surrendered, and $10 in cash and voting trust certificates representing one-half share of Improvement Corporation stock for each share retired and cancelled. On November 1, 1932, the petitioner, Orie E. Kelly, surrendered his certificates for 540 shares of Trust Company stock and, in accordance with the change in capital structure effected October 20, 1932, received (1) certificates for 270 shares of Trust Company stock, (2). voting trust certificates for 135 shares of County Improvement Corporation stock which had a fair market value of $12 per share, or $1,620, and (3) $2,700 in cash.

Prior to the change in the capital structure effected on October 20, 1932, the Trust Company had outstanding $4,000,000 of capital stock consisting of 160,000 shares of a par value of $25 each which were held by approximately 600 stockholders.

The certificate of reduction of the capital stock of the Trust Company, and the certificate showing the approval thereof by the Superintendent of Banks, were filed in the Office of the Secretary of State of New York on October 20, 1932. On October 21, a letter was sent to the stockholders of the Trust Company requesting the surrender of their certificates in exchange for new certificates representing one-half as many shares of Trust Company stock, and cash and voting trust certificates of Improvement Corporation stock as above set out, and the exchanges contemplated therein were duly made.

On October 20, 1932, the petitioner, Orie R. Kelly, owned 510 shares of the Trust Company stock, the date of acquisition and the cost thereof being as reflected in the following schedules:

On November 25,1930, the 100 shares of $100 par value stock set out above were exchanged for 400 shares of $25 par value stock, and subsequent purchases were made so that on October 20, 1932, petitioner owned 540 shares which had cost him $21,060.50, as shown below:

The Trust Company stock did not constitute petitioner’s stock in trade nor was it property of a kind which would properly be included in his inventory if on hand at the close of the taxable year, nor property held by him primarily for sale in' the course of his trade or business.

The fair market value of the capital stock of the Trust Company, as disclosed by quotations reported in the Commercial and Financial was follows:

At October 20, 1932, the market value of the investment securities held by the Trust Company, exclusive of County Improvement Corporation stock, was approximately $2,000,000 less than the amount at which such securities were carried on the books. A reserve for depreciation of securities of $1,080,518.84 was carried on the books at October 20, 1932, and said reserve was increased by $1,000,000 on April 13, 1933. This reserve was used on April 13,1933, to write the securities down to market value.

The following is a schedule of dividends paid by the Trust Company since its organization to October 20, 1932:

No stock dividends were issued by the company prior to October 20, 1932.

At all times between October 20, 1932, and November 1, 1932, the Trust Company had earnings or profits available for dividends in the amount of $661,339.31.

Petitioner, in his return of income for the year 1932, deducted a claimed capital net loss of $2,606.25 on the four purchases made prior to November 8,1930, explaining it under Schedule D as the difference between the. cost of County Trust Co. shares, stated to be $3,320.25 and the amount realized, stated to be $714, which represented 68 shares surrendered at $10 per share, plus 34 voting trust certificates valued at $1 per share. He now contends that he sustained a capital net loss of $4,464.50 and an ordinary loss of $10,432, or a total loss of $14,896.50, which he explains in his brief as follows:

There was no identification of the lots or certificates for shares cancelled. The following schedule shows the various lots of stock acquired at different times and different prices, the amount received for each lot making up the 270 shares cancelled on the basis of the “first in, first out” rule (Allington v. Commissioner, 31 B. T. A. 421) and the loss calculated under Section 111 (a) :
Petitioner Reid 136 shares for more than two years prior to the exchange on November 1, 1932, and since they qualified otherwise as capital assets under the definition of section 101 (c) (8), petitioner is entitled to the deduction of a loss of $4,464.50 sustained on the exchange thereof in accordance with Sections 23 (r) and 101, all of which is recognizable under Section 112. The loss on shares which did not qualify as capital assets under Section 101 amounted to $10,432.

We agree with petitioner’s contention that the transaction shown in the above facts, most of which were stipulated, were not, as determined by the respondent, “essentially equivalent to the distribution of a taxable dividend”, and hence taxable, in whole or in part, under section 115 (g) of. the revenue act shown supra. The section has been discussed in many court and Board decisions and it is now well established that it is the duty of the Commissioner, in the first instance, and of this Board and the courts in the second, to scrutinize all transactions in which a distribution is made by a corporation to its stockholders, accompanied by a reduction of stock, and determine whether or not the particular one discloses such facts as call for the application of the section now under consideration. A few of such cases are Henry B. Babson, 27 B. T. A. 859, aff'd., 70 Fed. (2d) 304; certiorari denied, 293 U. S. 571; Commissioner v. Cordingley, 78 Fed. (2d) 118; George O. Rockwood, 31 B. T. A. 927, aff'd., 82 Fed. (2d) 359, and McGuire v. Commissioner, 84 Fed. (2d) 431, affirming 32 B. T. A. 1075; certiorari denied, 299 U. S. 591.

It has been said, and we believe correctly, that the section was “aimed at capitalizations of earnings which -had no fair business object but were intended merely to evade the payment of taxes.” Commissioner v. Quackenbos, 78 Fed. (2d) 156. There has been no such showing here. This Board and the courts have uniformly held that sums paid in retirement of stock are not taxable as dividends, unless the retirement was made in pursuance of a plan formed at the time when the stock was originally issued, or as a cloak for the distribution of earnings. Henry B. Babson, supra; Commissioner v. Quackenbos, supra; Commissioner v. Cordingley, supra; George O. Rockwood, supra.

In the instant proceeding the retirement of the Trust Company stock was not made pursuant to any plan formed when it was originally issued, nor as a cloak for the distribution of earnings. The corporation was engaged in the general banking and trust business and had about 600 stockholders. It had never issued any stock dividends, and, except for the first three years of its existence, cash dividends were paid regularly commencing in 1929 and continuing through 1933. In 1929, when there was an increasing demand for loans and the opportunity for large earnings therefrom, its capital was increased from $1,000,000 to $4,000,000. The stock market crash in November, 1929, and the general business depression which, followed, resulted in a decline in its business earnings. As a result it was compelled to reduce the amount of the regular dividend from $8.00 per share to $4.80 per share of $100 par value. In 1932, when the ratio of its capital to deposits was more than twice as high as the average for all banks in New York State, it decided to relieve itself of capital for which there was no profitable use, and to reduce its capital from $4,000,000 to $2,000,000. This was done; but the cancellation and redemption of the stock was not made “at such time and in such manner” as to be “essentially equivalent to the distribution of a taxable dividend.” The respondent’s determination that it was such a distribution is not approved.

We are not impressed with the argument advanced by respondent in support of his contention that the cash distribution was to the extent of the earned surplus from earnings of the Trust Company and taxable as a dividend. His argument that the corporation never intended to stop business or liquidate its stockholdings was effectively answered by the Circuit Court of Appeals for the Second Circuit in Commissioner v. Quackenbos, supra, wherein that court stated that section 115 (c) nowhere limits distributions such as those here involved to payments made in the course of winding up a corporation, and that a redemption of a part of a corporation’s stock need not necessarily relate to a winding up of its business.

There remains for our consideration respondent’s alternative contention that in the event we decide, as we have, that the distribution in question was not essentially equivalent to a distribution of a taxable dividend under section 115 (g) of the Revenue Act of 1932, petitioner did not sustain any recognizable loss on the transaction. As to this contention we think the respondent is correct. Although the Trust Company reduced its outstanding capital stock by exactly one-half, it did not distribute to its stockholders a like proportion of its assets. Not only did it not distribute any of its paid-in or earned surplus, but it actually increased its paid-in surplus to the extent of $100,000. Furthermore, petitioner and the other stockholders of the Trust Company retained the same proportionate interest in such paid-in and earned surplus after the reduction of the capital stock as they had before the reduction took place. Under such circumstances, we think the alleged loss claimed by petitioner was not in fact realized as he still owned the same proportionate interest in the undistributed assets as he had before. In our opinion, the alleged loss should be added to and be considered as a part of the basis of the remaining stock of the Trust Company, the benefit of which, petitioner will receive when he in some future year disposes of such remaining stock. See Hellman v. Helvering, 68 Fed. (2d) 763; Charles M. Haft, 20 B. T. A. 431; and Bed Rock Petroleum Co., 29 B. T. A. 118. Cf. Commissioner v. Wright, 47 Fed. (2d) 871; and Florence M. Quinn, 85 B. T. A. 412.

Petitioners rely principally upon the two cases of John B. Williams, 28 B. T. A. 1279, and Alfred E. Fuhlage, 32 B. T. A. 222; appeal dismissed, 79 Fed. (2d) 998. In the Williams case both parties agreed that the distribution there of $400,000 was a distribution in partial liquidation and the only question left for the Board to decide was whether the said liquidating dividend was in payment for 1,083 shares of stock or 1,666 shares. In the Fuhlage case it was held, as we have held here, that the distribution was not essentially equivalent to the distribution of a taxable dividend. The additional finding was made that the amount which was paid to the taxpayer constituted an amount distributed in partial liquidation of the company; but no such finding is justified under the facts now before us. As pointed out sufra there was not in fact “a partial liquidation of a corporation.” No part of the surplus or undivided profits account of the Trust Company was distributed to the stockholders. On the contrary, such account was augmented through the contribution by the stockholders of $100,000 to it.

The transaction not having resulted in the realization of a recognizable loss, it follows that the respondent did not err in disallowing the claimed deduction.

Judgment will be entered uder Rule 50.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

      (g) Redemption of Stock.—If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable ^dividend.

       SEC. 115. DISTRIBUTIONS BX CORPORATIONS.

      (h) Definition of Partial Liquidation.—As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

       Surrendered 58 shares.


author: Smith :

text:
    Lillia L. Morris, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66790.
    Promulgated September 8, 1937.

      A. T. Holmes, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the determination of the liability of the petitioner for the payment of a deficiency in income tax of $1,111.82 for 1925 assessed against Thomas Morris, deceased. On May 2, 1932, the respondent addressed a letter to Mrs. Lillia L. Morris, 1301 Main Street, La Crosse, Wisconsin, reading in material part as follows:

You are advised that the determination of the tax liability of Thomas Morris, deceased, La Crosse, Wisconsin, for the calendar year 1926 discloses a deficiency in income tax in the amount of $1,111.82, which deficiency, plus interest as provided by law, it is proposed to assess against you under the provisions of section 280 of the Revenue Act of 1926, as fiduciary of said decedent under the provisions of section 3467 of the Revised Statutes.

On March 11, 1926, Thomas Morris, of La Crosse, Wisconsin, filed an income tax return for the calendar year 1925. The tax liability on the return was $38.69. Upon audit of the return the respondent determined a deficiency against Thomas Morris of $1,111.82. He sent a notice of deficiency to Thomas Morris dated May 3, 1928, which was within the time prescribed by law. On May 19, 1928, Thomas Morris filed a petition with this Board, Docket No. 38783, for a re-determination of the deficiency. Thomas Morris died September 17, 1928, and by order of the Board entered January 12, 1929, Lillia Morris, petitioner herein, and administratrix of the estate of Thomas Morris, deceased, was substituted as petitioner. The deficiency was sustained by an opinion promulgated in that proceeding on March 31, 1931, and a decision was entered on the same date of a deficiency in income tax for 1925 in the amount of $1,111.82. The deficiency was assessed by the respondent against Thomas Morris on October 17, 1931, together with interest in the amount of $372.82. The deficiency notice of May 2, 1932, above referred to, followed. No part' of the deficiency in tax assessed against Thomas Morris has been paid and there is now no property in the estate of Thomas Morris from which the tax, together with interest, can be collected.

In this proceeding the petitioner contends that she is not a transferee of the assets of the estate of Thomas Morris within the meaning of section 280 of the Revenue Act of 1926; that she is not liable as a fiduciary under section 280 of the Revenue Act of 1926, or under section 3467 of the Revised Statutes in respect of the payment of any tax due from the estate of Thomas Morris; and that the respondent erred in holding that the statute of limitations had not run against this claim.

Section 280 of the Revenue Act of 1926 provides in part as follows:

(a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :
******
(2) The liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of the taxpayer.
Any such liability may be either as to the amount of tax shown on' the return or as to any deficiency in tax.
(b) The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:
(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; * * *

Section 3466 of the Revised Statutes provides in part:

Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all the debts due from the deceased, the debts due to the United States shall be first satisfied; * * *

Section 3467 of the Revised Statutes provides:

Every executor, administrator, or assignee, or other person, who pays any debt due by the person or estate from whom or for which he acts, before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate for the debts so due to the United States, or for so much thereof as may remain due and unpaid.

The petitioner administered the estate of her husband and paid the debts owed by the estate, other than that due the United States representing the deficiency in income tax for 1925. On August 14, 1931, she made a final accounting in Probate Court of La Crosse County, Wisconsin. By final judgment entered October 16, 1931, the final account was approved.' By such judgment it is provided:

That there is a residue in her hands for distribution amounting to $724.00 cash and $4,000 of Liberty Bonds, $3,000 of which are pledged to the Batavian National Bank to secure a note of Paul Morris of $2,500 and of Howard Morris of $275 which notes it is believed that the principal debtors will pay, thereby releasing the pledged Liberty Bonds of $3,000.

There is clearly no merit in the petitioner’s contention that the statute of limitations has run against the claim of the respondent for the deficiency in tax due from Thomas Morris, deceased, for the year 1925 in the amount of $1,111.82, together with interest as provided by law. The respondent had under section 280 of the Revenue Act of 1926 one year after the expiration of the period of limitation for assessment against the taxpayer to send notice of tax liability under section 280. The assessment against Thomas Morris on October 17, 1931, was within the period of the- statute of limitations and the notice to the petitioner on May 2, 1932, was likewise within the one-year period allowed by the statute for liability under section 280.

The petitioner contends that she is not a transferee of the assets of the estate of Thomas Morris and that as a distributee of his estate she received only $241.33. It is immaterial, however, as to what amount she received from the estate of her husband as a distributee. The estate of her husband of which she took possession as administratrix was much in excess of the amount required to pay the deficiency in tax. for 1925, together with interest as provided by law. She had knowledge of that tax liability by reason of the proceeding in Docket No. 38783. Under section 3467 of the Revised Statutes she was required to pay the tax liability of her husband and under section 3466 of the Revised Statutes the claim of the United States had priority over other debts.

In Irving Trust Co., 36 B. T. A. 146, we held that a trustee in bankruptcy which distributed the assets of the bankrupt without first providing for the payment of a debt due the United States is not personally liable under section 280 (a) (2) of the Revenue Act of 1926, and section 3467 of the Revised Statutes where it appears that the trustee was not chargeable with knowledge of the debt.. In our opinion we said:

* * * “It is only when the assignee has notice of the claim of the government that he incurs personal liability for making distribution of the estate without providing for the claim.” United States v. Barns, 31 Fed. 705. The claim may be listed in the schedules of the bankrupt, notice may be given to the trustee, or the trustee may learn of the debt in some other way. If the trustee has knowledge of the debt, it matters not how that knowledge was obtained. The trustee can not disregard or ignore the debt, and if he does, his breach of duty renders him liable personally. United States v. Kaplan, 74 Fed. (2d) 664. “It is enough if the trustee be in possession of such facts as that a faithful and fair discharge of his duty would put him on inquiry.” United States v. Clark, 25 Fed. Cases 447, 451. But he is not personally liable for a tax without notice which should put a reasonably prudent man upon inquiry. Livingston v. Becker, 40 Fed. (2d) 673; United States v. Eyges, 286 Fed. 683. No case is cited which holds a fiduciary personally liable where he was not chargeable with knowledge of the debt due the United States.

It is immaterial that the deficiency determined by the respondent to be due from Thomas Morris was not assessed until after she had filed her final account in the Probate Court at La Crosse, Wisconsin. The determination of tax liability by the respondent, of which the petitioner had knowledge, was correct unless modified by the Board of Tax Appeals. Her failure to pay the deficiency in tax or to make any provision for the payment thereof out of the assets of the estate of her husband involves the petitioner in personal tax' liability under section 3467 of the Revised Statutes.

Judgment will be entered for the respondent.


author: Arundell :

text:
    Marbara Corporation, (Formerly Newport Water Corporation), Petitioner, v. Commissioner of Internal. Revenue, Respondent.
    Docket No. 67870.
    Promulgated September 8, 1937.

      J. R. Harmon, Esq., for the petitioner.

      S. B. Anderson, Esq., for the respondent.
   OPINION.

Arundell :

The first step in the several transactions outlined that is of moment in these proceedings is the purchase by the petitioner of stock of the two old Rhode Island companies for $3,314,490.15 cash. Thereafter, through exchanges and liquidations, pursuant to plans of reorganization, it acquired in place of that stock the bonds and the stock of the newly organized Rhode Island corporation. It is stipulated that the exchanges and liquidations took place pursuant to plans of reorganization and counsel for the parties are in agreement that there was no gain or loss to the petitioner on those transactions whereby the new bonds and stock were acquired in place of the stock of the old Rhode Island companies. It follows that the basis to the petitioner for gain or loss on the new bonds and stock together is the same as the basis of the stock of the old Rhode Island companies in its hands, which basis is the cost thereof in the amount of $3,314,490.15.

The next step, and the one which gives rise to the controversy here, is the exchange by the petitioner of a part of the new bonds for its own bonds outstanding in the hands of the public. On this transaction the petitioner says it sustained a loss. It has been held the sale of bonds acquired in the manner that the new bonds were acquired by this petitioner may result in gain or loss. Ohio Central Telephone Co., 28 B. T. A. 96. In that case the taxpayer acquired for cash all the stock of six corporations. The six corporations exchanged all their assets for preferred and common stock and bonds of a seventh; the six distributed the stock and bonds so received to the taxpayer, and the taxpayer sold all of the bonds and the preferred stock to outside interests for an amount which exceeded by $163,090.86 the cost of the stock of the six corporations. We held: (1) That the sale of the preferred stock was a non-taxable transaction by reason of the affiliation of the taxpayer and the seventh coirporartion; (2) that the sale of bonds was a taxable transaction, following United States v. Kirby Lumber Co., 284 U. S. 1; (3) that the entire gain of $163,090.86 should be included in income because of the taxpayer’s failure to establish the cost, separately, of the stock and bonds. Sales and exchanges are treated alike by the statute, save for the enumerated non-recognition situations, and the exchange in this case is to be treated as the sale was in the Ohio Central Telephone case, that is as resulting in gain or loss. Neither party points to any of the non-recognition provisions as applicable to the exchange of the new bonds for petitioner’s bonds and we are of the opinion that none of them do apply.

The point wherein this case differs from that of the Ohio Central Telephone case is that here the petitioner has made an allocation of cost among the three classes of securities of the new Rhode Island Corporation. It works out the allocation this way: $42,500 face value of the bonds were sold at an average price of 96.6; 3,250 shares of the 10,000 preferred shares were sold at $90 per share; all of the 10,000 common shares were sold for $555,000. This establishes the aggregate market value of the three classes of securities to be as follows:

On these figures the ratio of the value of the bonds ($1,642,200) to the total value ($3,097,200) is 53.02 per cent. Applying this percentage to the carried over basis of $3,314,490.15 (original cost of the old securities) gives a basis of $1,757,342.67 applicable to the $1,700,000 face value of new bonds, which amounts to $103.37 for each $100 face value. The figure of $103.37 applied to the $1,660,800 face amount of new bonds exchanged for a like face amount of old bonds gives a total basis for such new bonds of $1,716,768.96. On the issue of old bonds at 93 the petitioner realized $1,544,544. The difference between the amount realized on the sale of the old bonds and the basis of the new bonds exchanged therefor represents a loss to the petitioner. That difference amounts to $172,224.96. However, that loss should be offset by the amount of amortization taken as a deduction in petitioner’s return, $4,650.24, leaving $167,574.72 as the net amount of loss sustained and deductible.

Decision will be entered under Rule 50.