author: Mujrdock :

text:
    Central Republic Bank & Trust Company, Trustee Successor by Consolidation to Chicago Trust Company, Trustee Shepard’s Michigan Avenue Additions No. 2 and No. 3, Trust No. 2030, 208 So. LaSalle Street, Chicago, Illinois, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67420.
    Promulgated April 22, 1936.

      Benjamin M. Price, Esq., and Ferris E. Hurd, Esq., for the petitioner. v

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

Mujrdock :

Recent decisions of the courts indicate that this trust is an association taxable as a corporation within the meaning of those terms as used in the Revenue Acts of 1926 and 1928. Morrissey v. Commissioner, 296 U. S. 344; Swanson v. Commissioner, 296 U. S. 362; Commissioner v. Coleman-Gilbert Associates, 296 U. S. 369; Commissioner v. Combs, 296 U. S. 365; Commissioner v. Vandergrift Realty & Investment Co., 82 Fed. (2d) 387. In the latter case the court said:

* * ⅜ the Supreme Court indicates very clearly in Morrissey v. Gonvnvis-sioner, supra, that little consideration should be given to the form of organization under which the trust is operated, but rather that the true rule is that purpose and actual operation of the trust should be controlling in determining whether or not the trust shall be classified as an association for tax purposes.

The Supreme Court, in the Morrissey case, clearly indicated also that a trust created as a convenient method by which persons become associated for dealings in real estate, the development of tracts of land, and the sale of properties are differentiated from the ordinary trust and are associations taxable as corporations. The present trust was “created to enable the participants to carry on a business and divide the gains which accrue from their common undertaking.” “These attributes make the trust sufficiently analogous to corporate organization to justify the conclusion that Congress intended that the income of the enterprise should be taxed in the same manner as that of corporations.”

Counsel for the petitioner points out that Mr. Chief Justice Hughes, in his opinion in the Morrissey case, said that “ ‘Association’ implies associates”, and counsel argues that in the present case Komiss had no associates, since he was the sole beneficiary. However, the fact was developed on cross-examination that the wife and niece of Komiss had contributed substantial parts of the purchase price of the lands. Komiss could not remember how much they had contributed, and he was vague as to just how they were interested. But we think it is proper to conclude from a consideration of his entire testimony, that his wife and his niece had interests in the land which persisted, at least as beneficial interests under the trust, even though Komiss was named as the sole beneficiary in the trust instrument. Thus the evidence shows that his wife and his niece were beneficiaries although not named as such in the trust instrument. Even if this were not so, nevertheless, Shepard was an associate of Komiss in the joint undertaking. He was to furnish services rather than land. But he certainly associated himself with Komiss and the trustee in a joint undertaking in such a way as to bring this case within the cases above cited. Furthermore, he was a beneficiary under the trust. The petitioner cites the case of Mark L. Gerstle, 33 B. T. A. 830, but that case is distinguishable from the present case on its facts. The petitioner also cites The Highlands, Trust No. 1546, 32 B. T. A. 760, but that case was decided before the Supreme Court decided the four cases upon which the present decision is based.

Decision will he entered for the respondent.


source: Caselaw Access Project

author: Leech :

license: Public Domain

text:
    David Gross, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 79463-79466, 80767, 80768, 81082.
    Promulgated April 22, 1936.

      P. Robert G. Sjostrom, Esq., and W. W. Arner, O. P. A., for the petitioners.

      Mason B. Leming, Esq., and James D. Head, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith : Roland A. Wilson ; Margaret Leiman, Executrix, Estate of Henry Leiman, deceased; W. J. Leiman; C. O. Anderson ; George Stecher; S. P. Toland.

   OPINION.

Leech :

These proceedings, consolidated for hearing and decision, ask redetermination of income tax deficiencies and penalties determined for the year 1931 in the following amounts:

The issue, presented in each case, is the correctness of respondent’s action in including in income of the several petitioners an amount representing the fair market value of stock and cash received by them as stockholders of the Tampa Box Co. upon the acquisition of assets of that company by the Lei'man-Weidman Box Co., as follows:

In each case of the last three named petitioners, the additional issue is presented of the penalty proposed for assessment for delinquency in the filing of a return for 1931.

Respondent has determined the deficiencies upon the theory that the distributions in question were ones made in liquidation of the Tampa Box Co. and taxable to the petitioners under section 115 (c) of the Revenue Act of 1928. Petitioners contend that the stock of the Leiman-Weidman Box Co. received by them was a distribution in connection with a reorganization as defined in section 112 (i) (1) of the Bevenue Act of 1928 and that the distribution to petitioners of the shares of stock was a nontaxable distribution under the provisions of section 112 (g) of the Bevenue Act of 1928.

The facts are formally stipulated and we include by reference the stipulation filed as our findings of fact. Briefly stated, the facts are that the Tampa Box Co., a Florida corporation, and Weidman, Fisher & Co., a copartnership, both located at Tampa, Florida, had been engaged for many years in the manufacture of containers for cigars.

In 1980 the stockholders of the Tampa Box Co. were the petitioners David Gross, Boland A. Wilson, C. O. Anderson, W. J. Leiman, George Stecher, and S. P. Toland, together with Henry Leiman, now deceased, whose administrator is petitioner under Docket No. 79465. In addition to these one Walter Smith, not a party to these proceedings, was the owner of 50 shares of stock.

In 1930 a plan.was evolved by the stockholders of the Tampa Box Co. and Weidman, Fisher & Co. to organize a new corporation, the Leiman-Weidman Box Co., to acquire and, operate these two businesses. Shortly prior to the close of that year the stockholders of the Tampa Box Co. duly authorized the directors to convey to the new corporation, when organized, all its operating assets, retaining only certain assets consisting of cash, stock, bonds, and accounts receivable, and to accept, in exchange, stock of the new corporation in an amount equal to the appraised value of the assets conveyed.

The new corporation, Leiman-Weidman Box Co., was organized December 29, 1930, with an authorized capital stock of 10,000 shares of preferred stock of a par value of $100 per share and 5,000 shares no par value common stock. In pursuance of the plan there were conveyed to the new corporation by the Tampa Box Co. assets of a total net value of $747,890, as follows:

Accounts receivable_,_$52,486. 06
Notes receivable_ 1, 800. 00
Inventories_ 382,157. 88
Land _,_ 68, 582. 81
Improvements, buildings, and equipment_ 170,874. 59
Prepaid expenses-,_ 4, 488. 71
Cash__ 67, 500. 00

The assets thus transferred to the new corporation constituted 80.69783 percent of the total value of all of the assets of the Tampa Box Co. In exchange for these assets the new corporation issued 6,750 shares of preferred and 3,375 shares of its common stock direct to the stockholders of the Tampa Box Co. in individual amounts in proportion to their stockholdings. This action was taken at the direction of the Tampa Box Co.

After this transfer of assets by the Tampa Box Co. it had remaining assets and liabilities, exclusive of capital stock, as follows:

On January 1, 1931, the partnership of Weidman, Fisher & Co. transferred to the new corporation approximately 96 percent of the partnership assets. These assets had an appraised value of $359,-537.25. In exchange for these assets the new corporation issued direct to the members of the partnership 3,250 shares of preferred and 1,625 of common stock.

Immediately upon the transfer of these assets to the new corporation the latter took possession of the transferred property of both the Tampa Box Co. and the partnership and continued the operation of the business of both. The officers and directors of the new corporation were selected from the officers of the old corporation and the partnership. Following the conveyance of these assets the Tampa Box Co. and the partnership did no further manufacturing business.

On January 19, 1931, the Tampa Box Co. paid a cash dividend of $120,000 to its stockholders from the assets retained. After the payment of this dividend it had remaining, net assets of $50,199.11, consisting of accounts receivable, cash, and bonds. By the payment of the dividend in question its capital of $100,000 was impaired to the extent of $49,800.89. It filed an income tax return for the calendar year 1931 reporting the corporation as “Inactive” and that its “Assets [had been] turned over to Leiman-Weidman Box Co. for stock $747,-890.00.” In January 1982 a meeting of the stockholders of the Tampa Box Co. was held and the secretary reported that such company was still holding assets in the aggregate amount of $49,800.89. He suggested that $40,000 of this amount be distributed as a dividend to stockholders and that the company then be reincorporated, under the laws of Florida, for the sole purpose of maintaining ownership of the name “Tampa Box Company”, which was valuable, and because it might be otherwise desirable to maintain its legal existence. The action recommended was taken, and the distribution of $40,000 made. It is now maintained as a wholly inactive corporation with a capital of $10,000.

The petitioners contend that the circumstances under which the-Leiman-Weidman Box Co. acquired these two manufacturing businesses bring the transaction within the heretofore cited provisions of the Revenue Act of 1928 as a reorganization and that the distribution of the stock of the Leiman-Weidman Box Co. was in pursuance of a plan of reorganization and, consequently, not taxable. It is their contention that the Tampa Box Co., the partnership of Weidman, Fisher & Co., and the Leiman-Weidman Box Co. were all “parties to a reorganization” within contemplation of the statute.

We think it clear beyond the necessity for argument that if petitioners are entitled to exemption of tax upon the stock distributed, that exemption must depend upon whether the transfer of the assets of the Tampa Box Co. to the Leiman-Weidman Box Co., considered without reference to the conveyance of assets of the partnership, brings the transaction within the statute. The language of the section is clear. The reorganization there contemplated is one in reference to the acquisition of assets or stock of one “corporation” by another. A transfer by a partnership may be without tax consequence under section 112 (b) (5) of the Revenue Act of 1928, since that section applies to “persons”, but such a transaction is not within the reorganization provisions, which are limited specifically to transactions between corporations.

It necessarily follows that if this distribution to stockholders of the Tampa Box Co. is nontaxable, it is so because the transfer of assets by that corporation to the Leiman-Weidman Box Co. constituted a reorganization within the definition of section 112 (i) (1). Petitioners do not contend that the transaction is either a strict merger or consolidation or that it falls within the subparagraphs (B), (C) and (D) of the foregoing section. Their position is that the transaction is within the purview of the parenthetical clause of subsection (A) since it resulted in the acquisition by the Tampa Box Co. of a majority of the voting stock and a majority of the total number of shares of all other classes of stock of the Leiman-Weid-man Box Co. and was also an acquisition by the latter company of substantially all of the assets of the Tampa, Box Co.

Let us consider these contentions. The Tampa Box Co. is the corporation whose business is acquired. The Leiman-Weidman Box Co. is the acquiring corporation in the sense that the word “acquire” is used in the parenthetical clause of subsection (A). This is the construction placed upon that section by article 574 of the Commissioner’s Regulations 74 and has been recognized as correct by the decisions of both the courts and the Board. In Minnesota Tea Co. v. Commissioner, 76 Fed. (2d) 797, the court quoted with approval the ruling in G. C. M. 1153, VI-1 C. B. 138, that:

Section 203 (h) (1) (A) is not inconsistent with section 203 (li) (1) (B). One supplements the other. For example, a transfer of all the assets of a corporation constitutes a reorganization under the second part of definition (A) irrespective of the element of 80 per cent control demanded by definition (B). Again, a transfer of but a part of the assets of a corporation can never, of itself, result in a reorganization under section 203 (h) (1) (A), but it does result in a reorganization under section 203 (h) (1) (B) if there is present an additional element, namely, immediate control of the transferee corporation by the transferor or its stockholders, or both.

In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, it is recognized that subsection (A) of section 112 (i) (1) is limited to transactions involving the acquisition by the continuing corporation of property or stock of the discontinuing corporation. So also in Georgia M. Spangler, 29 B. T. A. 263, where, as here, a part of the assets of one corporation were transferred to a newly organized corporation for all of the stock of the latter, we held that such transaction did not constitute a reorganization under subsection (A) of the parenthetical clause, but under the provisions of subsection (B). In the present case the facts admittedly do not bring the transaction within the provisions of subsection (B), since neither the Tampa Box Co., its stockholders, nor both, were in control of the Leiman-Weidman Box Co. after the transfer by reason of ownership of 80 percent or more of its stock.

We hold that the acquisition by the Tampa Box Co. of the majority of the stock of the Leiman-Weidman Box Co. did not constitute a reorganization under subsection (A). We are further of the opinion that the Leiman-Weidman Box Co. did not acquire substantially all of the assets of the Tampa Box Co. The record establishes the fact that the Leiman-Weidman Box Co. acquired assets of a total value of $747,890, that these included all of the operating assets of the Tampa Box Co., together with certain notes and accounts receivable and cash, and that the assets transferred constituted 80.69783 percent of the total assets of the Tampa Box Co. It is true that the Tampa Box Co. has remained inactive following this conveyance. But, in the disputed transfer, the Tampa Box Co. retained net assets of nearly $180,000. These were approximately 20 percent of its total assets before the transfer. About 80 percent of its assets were conveyed to the new corporation. That was not substantially all of its assets. Arctic Ice Machine Co., 23 B. T. A. 1223. In our judgment, the authority of this case is not weakened by the decision of the Supreme Court in Nelson Co. v. Helvering, 296 U. S. 374. In that case, the Supreme Court treated the Elliott-Fisher Co. as having acquired substantially all the assets of the John A. Nelson Co., although the latter retained assets of a value of $100,000. The record there does not show the percentage of its total assets that were thus retained. However, the John A. Nelson Co. received, in the transfer, cash and preferred stock in the amount of $3,250,000.' Assuming that assets in an equivalent value were transferred for that consideration, then the assets in the amount of $100,000, retained by that company, were less than 4 percent of the assets it transferred.

Nor is our conclusion that the questioned transfer here did not constitute substantially all the assets of the transferor corporation changed by the fact that within a few days after the conveyance of its assets to the Leiman-Weidman Box Co., the Tampa Box Co. distributed the greater portion of its retained assets in the form of a liquidating dividend to its stockholders. Alice V. St. Onge, 31 B. T. A. 295.

In our opinion, the disputed transaction disclosed here falls within section 112 (b) (5) of the Bevenue Act of 1928. Both the Tampa Box Co. and the partnership are “persons” as that term is defined by section 2 (a) (1) of the Bevenue Act of 1926, and the transfer in question clearly included properties owned by them, in exchange for all of the stock of the transferee corporation, issued to them in proportion to their ownership of the property conveyed. It follows that, as to the Tampa Box Co., there was no gain or loss upon this transfer, but that the distribution of this stock by it to its own stockholders through its direction to the Leiman-Weidnian Box Co. constituted a distribution by the Tampa Box Co. in partial liquidation. The fact is established that it was the purpose of the Tampa Box Co. to liquidate and that this distribution was a part of the plan completed by further distributions which reduced its capital stock to a nominal amount. Such distributions are taxable to these petitioners under section 115 (c) of the Revenue Act of 1928.

There is no controversy as to the amount of gain realized by petitioners upon the distributions to them by the Tampa Box Co. Accordingly, the deficiencies, as determined by respondent, are approved. With respect to the petitioners Anderson, Stecher, and Toland, respondent has proposed negligence penalties of 25 percent. Anderson and Stecher did not file income tax returns for the year 1981. Toland’s return for that year was not filed until May 7, 1935, and no cause for his failure to file a timely return is shown. Under these circumstances the penalties have been properly imposed. Revenue Act of 1928, sec. 291; Moulton Green, Trustee, 24 B. T. A. 1121; Gray Printing Co., 4 B. T. A. 1264.

Judgment will be entered for the respondent.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.. '
      *******
      (c) Distributions in liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock,, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.

       SBC. 112. RECOGNITION OE GAIN OR LOSS.
      * * # * * * *

      (i) Definition of reorganization. — As used In this section and sections 113 and 115—
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation ol at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

       (g) Distribution of stoch on reorganization.- — If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

      Laws of Florida, eh. 10096, approved June 1, 1925.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      * * * * ⅜ * *
      (b) Exchanges solely in hind.—
      (5) Transfer to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       SBC. 2 (a) When used in this Act—
      (1) The term “person” means an individual, a trust or estate, a partnership, or a corporation.


author: Aiíundell :

text:
    Fremont C. Peck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78941.
    Promulgated April 22, 1936.

      J. Sterling Moilstead, Esq., for the petitioner.

      George D. Brdbson, Esq., for the respondent.
   OPINION.

Aiíundell :

The respondent disallowed the petitioner’s claimed deduction of his contribution to Symes Foundation on the ground that the Foundation does not come within the purview of section 23 (n) of the Revenue Act of 1932. The cited section allows deductions for gifts to any fund or foundation organized and operated exclusively for religious, charitable, or educational purposes.

The matter of a deduction of a contribution to Symes Foundation was before us in a proceeding brought by this petitioner in Docket No. 76293. That proceeding involved the year 1931. There the respondent had allowed the deduction and by amended answer alleged that he erred in so doing. In o-ur opinion in that case we held the respondent’s evidence .insufficient to affirmatively establish his case. Both parties here take the view that our prior holding is not res adjudicaba of the issue in this case. We agree with that view. Exemption once allowed does not necessarily carry over to subsequent years. Cf. D. F. Strickland, 32 B. T. A. 804. Moreover, the burden of proof in the two cases is different; in the former case the respondent had the burden of proving the Foundation not exempt, while here the petitioner is required to prove his right to a deduction.

The petitioner in this case claims that the Symes Foundation is •a charitable, educational, and religious corporation. In order to come within the above cited provision of the statute, the taxpayer must show that the recipient of his contribution is both organized and operated exclusively for the purposes specified by the statute. J. Noah Id. Slee, 15 B. T. A. 710; affd., 42 Fed. (2d) 184. It is obvious that the Symes Foundation itself was not operated exclusively for the specified purposes. It conducted no charitable, educational, or religious enterprises and gave no aid financially or otherwise to any other organization that did. Its activities were limited to clearing titles to land. If we are permitted to look beyond the Symes Foundation in search of the ultimate recipient of the property that it hopes to acquire, we are unable to find it. The charter of the Foundation does not name a recipient and the Foundation has not designated one. The statute, as we read it, is confined in its operation to gifts to organizations in existence or to gifts which create exempt organizations, Bok v. McCaughn, 42 Fed. (2d) 616, and may not be extended to situations where the beneficiary either has not been organized or has not been identified. The petitioner says that a disallowance on this ground would be analogous to disallowing a deduction of a donation made to found a charitable hospital. There is a wide difference between the two cases. In the supposed case the object would be the particular hospital; here the recipient of the Foundation’s funds, if and when acquired, might be any one of a number of institutions or even one whose organization is not now contemplated. We think that we would be going far beyond the statute if we attempted to say that a donation has been made to a charitable, educational, or religious institution where no institution is named or designated with sufficient particularity that it can be identified. The petitioner testified that the board of trustees of the Foundation has on it a preponderance of trustees of Adelphi College, and it was understood that that college would be the recipient of any recoveries by the Foundation. Passing the matter of the lack of proof as to whether or not Adelphi College is an educational institution, this testimony does not bind the Foundation to contribute to the college. Moreover, the charter and bylaws of the Foundation do not require that the object of its aid, if and when given, be an exempt institution. While the Foundation itself was organized as a nonprofit corporation, it does not follow that its object of applying “the principles of evangelical Christianity in human culture” by aiding institutions under Christian auspices (art. Ill, bylaws) would necessarily be achieved through an exclusively religious, charitable, or educational institution. It is conceivable that a corporation might be organized and operated along evangelical lines and still not be organized and operated exclusively for religious, charitable, or educational purposes. The respondent is sustained on this issue.

The deductions claimed as expenses and depreciation on the Plaza Street house after its abandonment as a residence are not allowable. The statute (sec. 23 (a), Revenue Act of 1932) allows only the deduction of expenses incurred in “trade or business”, and only for depreciation of “property used in the trade or business.” (Sec. 23 (k), Revenue Act of 1932.) An abandoned residence is not converted into business property by the mere listing with an agent for rent or sale. Morgan v. Commissioner, 76 Fed. (2d) 391; Rumsey v. Commissioner, 82 Fed. (2d) 158. Cf. DeFord v. Commissioner, 29 Fed. (2d) 532; William H. Upmeyer, 22 B. T. A. 971; Frances G. Smith, 23 B. T. A. 1134; D. A. Belden, 30 B. T. A. 601.

The salary of the secretary employed to assist in petitioner’s varied activities is a deductible business expense. We think that the respondent places more stress than is warranted by the evidence on the fact that the secretary took care of petitioner’s correspondence other than that directly connected with his publishing business. This, as we read the evidence, was only incidental to her chief employment as secretary to the petitioner in the conduct of his various business affairs.

Reviewed by the Board.

Decision will be entered under Rule 50.

Leech concurs in the result.

Smith dissents.


author: SteRnhagen:

text:
    Parkview Memorial Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60826.
    Promulgated April 22, 1936.

      Arthw J. Lacy, Esq., for the petitioner.

      Thomas F. Gdllaham,, Esq., for the respondent.
   OPINION.

SteRnhagen:

The subject of cemetery maintenance funds has beexi frequently considered. A mere appropriation to a reserve set up by a taxpayer to provide for his contractual obligations does not serve to lessen his taxable net income either by way of exclusion from gross or by way of deduction, irrespective of whether the accounting system be a cash system or an accrual system. If, however, there is a trust which the law recognizes, whether express or implied, and a prescribed part of the contract price received for a lot can be said to be received in trust, such part is excluded from gross income; or if, although not received in trust, a part is necessarily immediately turned over to an established trust, such part is deductible. The facts must in each case be examined, as well as the corporation’s legal obligations under the local statutes of its creation and operation, its charter, bylaws, and resolutions, its contracts, accounts and practices. See Portland Cremation Association v. Commissioner, 31 Fed. (2d) 843; Acacia Park Cemetery Association v. Commissioner, 67 Fed. (2d) 700; Memphis Memorial Park, 28 B. T. A. 1037; affd., 84 Fed. (2d) 1008; Commumity Mausoleum Co., 33 B. T. A. 19.

It can not be found from the evidence that the petitioner has either set up a trust or made contributions to a trust. The Michigan statute (sec. 10446, Compiled Laws of Michigan, 1915) which the petitioner relies upon did not expressly require a trust during the years in question. It provides that after the petitioner has fully paid for its land it shall reserve two-thirds of the sales receipts above current expenses and improvements as a maintenance fund, such fund to be accumulated until, in the opinion of the directors, it is large enough, when properly invested, to produce income sufficient for perpetual maintenance. During the years 1927 and 1928 petitioner’s land was not fully paid for, and its expenses and improvements apparently consumed substantially all its income. It was therefore not required by the Michigan statute to put aside any of its sales proceeds in trust, and it can not be found from the evidence that in fact it did so. In so far as its income was used to meet expenses, the Commissioner appears to have permitted the deduction. In so far as petitioner’s proceeds were used for permanent improvements, it had no right to a deduction, Revenue Act of 1926, sec. 216; Revenue Act of 1928, sec. 24, but only to have its investment cost increased. Under its sale contracts, petitioner was required to maintain the lots and the cemetery, but this can not be construed as an undertaking presently to establish a trust. The directors’ resolutions which are set forth in the findings undertake only to establish a maintenance fund after the grounds have been laid out and embellished according to the plan adopted, and it appears from the evidence that the time to begin the reservation of such a fund had not yet arrived. Since, therefore, it can not be found that a trust was set up or that any part of the amount received for the sale of its lots was impressed with a trust, and it appears only that the petitioner was under a contractual obligation to maintain its properties and at some indefinite future time to begin the establishment of a trust, it can not be concluded as a matter of law that the respondent’s determination was in error.

Judgment will be entered for the respondent,

       See the cases collected in Law of Federal Income Taxation, Paul and Mertens, vol. 2, §§ 14.14, 14.15.


author: Seawell:

text:
    Mountain Producers Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44573.
    Promulgated April 23, 1936.

      Harold D. Roberts, Esq., Randolph E. Paul, Esq., and Gharles Molnnis, Esq., for the petitioner.

      R. P. Hertzog, Esq., Conway N. Kitchen, Esq., and V. F. WeeMey, Esq., for the respondent.
   OPINION.

Seawell:

There is no controversy as to the right of the Wyoming Associated Oil Corporation to an allowance for depletion on its interest in the properties in question; nor is there any dispute as to what the allowable depletion is, on the basis of cost, which is stipulated. The main problem for consideration and determination is what is meant by “gross income” for the purpose of computing depletion on the percentage basis. There is no disagreement on the proposition that the taxpayer may avail itself of whichever basis results in the greater depletion.

Under the contracts between the Wyoming Associated Oil Corporation and the Midwest Refining Co., the latter company took delivery of the oil purchased “at the outlet gates of the measuring tanks located at or near the wells.”

The average field price of oil or market price of oil in the Salt Creek Field, Wyoming, during the year 1925 was $1.808605 per barrel. In behalf of the Wyoming Associated Oil Corporation (and in behalf of petitioner) it is contended that the “gross income” upon which depletion allowance of 27½ percent applies should be based on the market value of the oil produced or at least on the amount actually received, plus the operating expenses of the Midwest Refining Co., which in the consolidated return was claimed as $2,215,862.23, now stipulated to be $2,816,520.04.

Section 204 (c) (2) of the Revenue Act of 1926 provides:

In the case of oil and gas wells the allowance for depletion shall be 27½ per centum of the gross income from the property during- the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.

It is specifically stated in the statute that the allowance for depletion shall not exceed 50 percent of the “net income of the taxpayer (computed without allowance for depletion) from the property.” We are of the opinion and hold that, in arriving at the amount of depletion allowable under said section, development expense should not be deducted from the gross income from the property in arriving at the net income therefrom for the purpose of applying the depletion limitation of 50 percent of the net income. See Ambassador Petroleum Co. v. Commissioner, 81 Fed. (2d) 474. In the instant case, in our opinion, it is logical to conclude that the words “gross income” to which the rate of 27½- percent applies means the gross income of the Wyoming Associated Oil Corporation for the year 1925 from its property subject to depletion. See Everett J. Crews, 38 B. T. A. 36, 49.

It is argued in behalf of the petitioner that in the particular circumstances of the instant case, if the allowance for depletion on a percentage basis is limited to 27½ percent of the amount actually received by the Wyoming Associated Oil Corporation for the oil produced from the properties subject to depletion, it does not receive as great an allowance as if it were operating the properties itself, since in that event the amount it received from the oil would be greater. Such might be the situation of any owner of oil properties which does not choose to operate its properties itself. It is the insistence of the respondent that the amount received by any holder of an interest in oil properties other than the one actually operating the property is the gross income which is subject to the 27½ percent depletion deduction, and, regardless of the fact that such amount is net in so far as the cost of producing the oil is' concerned, the taxpayer is not permitted in such cases to base the percentage allowance on the amount received plus the cost of operations or on the market price of the oil produced. If the base determined by the respondent for computing percentage depletion is not considered satisfactory, the taxpayer, as we have heretofore indicated, may compute its allowance for depletion on the basis of cost, if that method results in a greater depletion allowance. See section 204 (a) and (b) of the Revenue Act of 1926. Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312.

There are numerous cases involving the application of percentage-depletion, but we are aware of none in which the peculiar circumstances shown in the instant case were present.

In Helvering v. Twin Bell Oil Syndicate, supra, the question for decision was as to the total allowance for depletion permitted and its apportionment between lessor and lessee where the income is derived from operation under an oil and gas lease. The Supreme Court decided the depletion allowance permitted an assignee or lessee named in an oil and gas lease should be limited to 27½ percent of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer. The lessor, likewise, was entitled to a depletion allowance of 27½ percent of the gross income received by it from the oil and gas production. The royalties paid out by the Twin Bell Oil Syndicate were obviously a part of the gross income from the property, but nevertheless as held by the Supreme Court the royalties so paid could not be considered a part of the gross income to be used for computing the depletion allowable to the taxpayer.

It is insisted in behalf of the petitioner that under the provisions of the agreements with the Midwest Refining Co. whereby the properties were operated, the cost of the operations and development expenses were a part of the purchase price paid the Wyoming Associated Oil Corporation for the oil and should, therefore, be considered as a part of the “gross income from the property.” It is not shown that the Wyoming Associated Oil Corporation included in its return for 1925 any such expense as part of its gross income. Such expense as the Midwest Refining Co. incurred in rendering alleged services to the Wyoming Associated Oil Corporation, under circumstances shown, was not, in our opinion and we so hold, income to the latter.

Under the contract between the parties, the petitioner contends that the market value of the oil produced should be taken as the gross income for the purpose of computing percentage depletion, on the theory that the value of the services rendered by the Midwest Refining Co. in operating the leases was a part of the purchase price of the oil and that the value of such services should be assumed or considered to be the difference between the market value of the oil and the contract price.

There is, in. our opinion, no sound basis for the assumption that the value of the services rendered by the Midwest Refining Co. in producing the oil should be considered as a part of gross income of the Wyoming Associated Oil Corporation. It is natural and reasonable, however, to assume that the Midwest Refining Co., by purchasing all of the oil which was produced under the leases in question for a number of years and assuming the burden and risks incident to the operation and development thereof during that period, paid less for the oil than if it were buying the oil on the open market after it was produced and without assuming any burden in connection therewith. The value fixed or placed by the parties upon the services rendered would seem to be none other than the actual cost of such services, which is the amount actually expended by the Midwest Refining Co. in producing the oil and not necessarily the difference between the market value and the contract price of the oil. There is no evidence nor reason apparent to us to justify the assumption that such costs as stipulated do not represent the full cost of operation of the properties.

Cases in which taxpayers are permitted to use the field market price for the purpose of computing depletion are those in which the product was not sold until it had been converted into a refined product or transported a considerable distance to the consumer. A portion of the selling price in that event naturally represented an amount received for the conversion or for the transportation which can not be used as the basis for computing depletion. See Brea Canon Oil Co., 29 B. T. A. 1134; aff'd., 77 Fed. (2d) 67; certiorari denied, 296 U. S. 604; Consumers Natural Gas Co., 30 B. T. A. 1263; aff'd., 78 Fed. (2d) 161; certiorari denied, 296 U. S. 634; Greensboro Gas Co., 30 B. T. A. 1362; aff'd., 79 Fed. (2d) 701; certiorari denied, 296 U. S. 639.

In the class of cases cited, sufra, it was necessary to allocate the amount received, and the market price of the oil was assumed to be the portion of the selling price which was received for the raw product, the balance representing the amount attributable solely to manufacturing and transporting the product.

The market price of the oil in those cases was merely used as a basis of allocation of the total amount received in the absence of a more definite basis for determining the amount of gross income subject to depletion or in cases where the gross income could not be otherwise ascertained.

In the instant case, the Wyoming Associated Oil Corporation did not conduct any manufacturing operations or transport the product to individual consumers; in fact, it did not itself operate the property and produce the raw material. There is, therefore, nothing to allocate or segregate in this case.

The respondent allowed percentage depletion on the gross income which the Wyoming Associated Oil Co. is shown to have actually received in 1925 pursuant to the contracts entered into in 1923, and to allow such sum to be arbitrarily increased by the amount of operating expenses of the Midwest Refining Co. or to the market price of the oil in effect during 1925, we hold, would be allowing the Wyoming Associated Oil Corporation depletion on a basis in excess of that authorized by the statute. Any allowance for depletion is a matter of grace and unless Congress has provided for depletion there can be no deduction therefor. Darby-Lynde Co. v. Alexander, 51 Fed. (2d) 56; certiorari denied, 284 U. S. 666. Congress no doubt intended that the allowance for depletion be as uniform as possible, though at times it might appear that there were “unjust and unequal results.” Helvering v. Twin Bell Oil Syndicate, supra.

The fact that the Wyoming Associated Oil Corporation, by reason of its failure to operate its oil properties itself, may receive, as heretofore indicated, less depletion than it would have received had it operated them or less than other taxpayers who operated their own similar properties is immaterial. There are manj? reasons why the depletion allowance to the taxpayer may not be the same where it operates the properties and where it does not. Many different facts and circumstances must be taken into consideration in determining the depletion in different cases and naturally, in consequence, depletion results may vary. While this was well known to Congress, it provided, as one of the methods that a taxpayer might adopt, that depletion may be computed at the rate of 27½ percent of the gross income, though such income would vary in different cases and under different circumstances, as all taxpayers would not receive the same prices for their product and some might operate their properties themselves while others might do so through others, as was done in the instant case. In other words, Congress saw proper to base percentage depletion allowance on gross income • actually received by the taxpayer from its property or interests therein.

The record shows that the respondent in his computation of- the 27½ percent depletion used as a base the amount of gross income which the Wyoming Associated Oil Corporation actually received from the Midwest Refining Co. during 1925. We are of the opinion and hold that no error was committed in using such base for that computation. We think, for reasons briefly stated herein, that the base for computing percentage depletion should not, in the particular circumstances of this case, be either the market price of the oil produced from the said properties or the amount of money re-eeived by the Wyoming Associated Oil Corporation from sale of oil to the Midwest Refining Co. increased by the amount of the cost of services rendered by the Midwest Refining Co. in the matter of the oil production.

The second assignment of error is based primarily on the decision of the Supreme Court of the United States in Burnet v. Coronado Oil & Gas Co., 285 U. S. 393. In that case, which followed the court’s earlier decision in Gillespie v. Oklahoma, 257 U. S. 501, the Supreme Court held that the income derived by the Coronado Oil & Gas Co. under oil and gas leases executed to it by the state upon portions of the public school lands of the state was exempt from Federal income tax, for the reason that the leases to the said company were instrumentalities of the state for the purpose of “carrying out her duty in respect of public schools. To tax the income of the lessee arising therefrom would amount to an imposition upon the lease itself.” In so deciding, the Court stated that the doctrine of Gillespie v. Oklahoma, supra, should be applied “strictly and only in circumstances closely analogous to those which it disclosed.”

The respondent contends that the circumstances of the instant case are not “closely analogous” to those in Burnet v. Coronado Oil & Gas Co., supra; that the instant case is clearly distinguishable from it and therefore not controlled by the principle therein enunciated and applied.

On February 1, 1923, a trust agreement was entered into between the Midwest Oil Co. and the Wyoming Associated Oil Corporation, under which the Midwest Oil Co. was to hold in trust for the Wyoming Associated Oil Corporation one-half the benefits and net proceeds realized by the Midwest Oil Co. from a lease of October 1, 1919, which it held from the State of Wyoming, covering school section 36 embraced in the trust.

The lease agreement of October 1,1919, was superseded by another lease, dated April 19, 1923, between the same parties. It was this latter lease that was in force during the taxable year (1925) involved herein. It was executed between the State of Wyoming and the Midwest Oil Co. solely. It contained a provision against assignment to any one without the consent of the State of Wyoming. The record does not disclose any assignment thereof, either with or without such consent.

The income which the Wyoming Associated Oil Corporation received from the aforesaid school section 36, held by the Midwest Oil Co., was by virtue of the declaration of trust of February 1, 1923, made by the Midwest Oil Co. prior to the lease of April 19, 1923, which superseded that of October 1, 1919. There was no lease of said land to the Wyoming Associated Oil Corporation by the State of Wyoming. The Wyoming Associated Oil Corporation had no contractual relationship with the State of Wyoming, which leased said school land section in question to the Midwest Oil Co., solely.

The burden of operating the lease, the payment of royalties, and the responsibility for compliance with the numerous provisions of the lease agreement rested directly upon the Midwest Oil Co., which was solely responsible to the State of Wyoming. The declaration of trust under which the Wyoming Associated Oil Corporation realized its income from this school land, in our opinion, is not an instrumentality of the State of Wyoming through which the state exercised sovereign power of maintaining and operating its public schools. Therefore, the situation, in so far as the Wyoming Associated Oil Corporation is concerned, not only is not “closely analogous” to the situation in Burnet v. Coronado Oil & Gas Co., supra, but is different in the material point which entitled the Coronado Oil & Gas Co. to tax immunity in that case.

The facts and circumstances in the instant case are not in all respects the same as those in Wanless Iron Co., 29 B. T. A. 834; aff'd., 75 Fed. (2d) 779; certiorari denied, 295 U. S. 765, but, in our opinion, are sufficiently similar in their essential aspects to make applicable and controlling, on the issue now being discussed, the principles therein enunciated and the authorities therein cited. In the Wanless Iron Co. case, supra, the petitioner claimed exemption from tax on income realized by it on certain mineral lands owned by the State of Minnesota and leased to one Wanless, who assigned the leases to the petitioner therein, and, subject to subsequent subleases, the petitioner had since been the owner of the leases. Neither the original lessee and assignor nor the petitioner, the assignee and sublessor, ever extracted or sold ore from the lands. The sublessees were the only ones that produced and sold ore from the lands. The royalty paid the state was by the sublessees. The petitioner there paid no royalty to' the state. Its claim of tax exemption in the circumstances of that case was denied by the Board, and the determination of the Board was affirmed by the United States Circuit Court of Appeals, as heretofore stated.

In the Wanless case the original lease provided that the lessee might sublet the same. In the instant case there was no such provision, but, on the contrary, one against assignment without approval of the state, the laws of Wyoming forbidding the assignment of state mineral leases except upon its written consent. See Wyoming Revised Statutes, 1931, Ann., ch. 91, art. 806.

Under the agreement of February 1, 1923, referred to in our findings of fact, it is the Midwest Refining Co. that contracted to do the actual operations under certain leases (which included the school land heretofore mentioned) in the Salt Creek Oil Field.

As stated by the Court of Claims in Marland v. United States, 3 Fed. Supp. 611, “The immunity from taxation applies only where the tax would be a real and direct burden upon the state’s exercise of its governmental functions.” See same case, 53 Fed. (2d) 907; certiorari denied, 290 U. S. 658. There is no proof here that the tax asserted would be a “real and direct burden” upon the State of Wyoming. Nothing in the record indicates that the imposition or payment of the tax asserted in this instance would in any way burden or interfere with the state in the exercise of its governmental functions. The execution of the declaration of trust of February 1, 1923, which entitled the Wyoming Associated Oil Corporation to share equally with the Midwest Oil Co. in the benefits and proceeds derived from the lease of section 36, was a distinct transaction and trust between private owners to which the state was not a party and the income realized as a result thereof is, in our opinion, in the same status as income realized from the sale of a state lease, which was held not to be exempt in the Marland case above cited and in Rice Oil Co. v. United States, 7 Fed. Supp. 414. See also Willcuts v. Bumn, 282 U. S. 216, in which an exemption was denied to income realized from the sale of municipal bonds the interest on which is exempt from tax. Eckstein v. United States, 10 Fed. Supp. 231 (Ct. Cls.); Hobart Iron Co., 29 B. T. A. 855; and Bankline Oil Co., 33 B. T. A. 910. Cf. Metropolitan Building Co. v. United States, 12 Fed. Supp. 537.

The income which the Wyoming Associated Oil Corporation received from the said school land section 36 was by virtue of the declaration of trust in its favor by the Midwest Oil Co. Such did not create any privity of contract or constitute any contractual relationship whatever with the State of Wyoming.

It is insisted by petitioner’s counsel that the exclusion from consideration herein of oral evidence tendered for the purpose of showing that the State of Wyoming recognized the Wyoming Associated Oil Corporation as its direct lessee of said school section is error. The evidence offered was received in order that the record might show what it was, but it was with the understanding that it would be stricken as inadmissible upon respondent’s objection then made, petitioner’s counsel being granted an exception to such action so taken. We think and hold that in so ruling no error was committed. The lease of the school section of land by the State of Wyoming was made in writing to the Midwest Oil Co. and only to it. The oral testimony offered and excluded from consideration in the determination of the issue involved would (if admitted and considered) have violated a well recognized rule of evidence. “Parol testimony can not be received to contradict, vary, add to or subtract from the terms of a valid written instrument.” Jones on Evidence (Civil Cases, 3d Ed.), sec. 434, p. 656. See also Garden City Feeder Co. v. Commissioner, 75 Fed. (2d) 804; Pugh v. Commissioner, 49 Fed. (2d) 76, in effect affirming 17 B. T. A. 429; certiorari denied, 284 U. S. 642.

After carefully considering the evidence, arguments, and authorities relative to this issue, though all have not been discussed herein, we are of the opinion and hold that the respondent did not err in his determination that the $185,438.83 added to taxable income in the deficiency notice is not exempt, but is subject to income tax.

3. The third assignment of error relates to depletion and the cost basis to be used in computing depletion in lieu of percentage depletion in the event that depletion based on cost should be greater than such percentage depletion. The stipulations enumerate the numerous tracts involved, including the aforesaid section 36, and state as to each the unrecovered capital sum returnable on January 1, 1925, through depletion upon the basis of cost.

The petitioner contends that it is entitled to a greater amount of depletion than was allowed under the percentage computations as computed and allowed by the respondent. We have herein determined the principles to be applied in determining the 27½ percent depletion based upon gross income and also those applying to depletion based on cost.

Under the facts as stipulated and established by evidence, we are of opinion and hold that the petitioner is entitled to a recomputation under Bule 50 and to have allowed as depletion whichever amount is the greater — depletion based upon cost, or percentage depletion based upon gross income computed as we have indicated.

Decision will be entered under Rule SO.


author: Black : McMahon, Matthews,

text:
    Knowles D. White, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ralph M. Walker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70767, 70768.
    Promulgated April 24, 1936.

      A. W. Glapp, Esq., for the petitioners.

      O. W. Swecher, Esq., for the respondent.
   OPINION.

Black :

These proceedings, which have been consolidated, are for the redetermination of deficiencies in income tax for 1930 in the respective amounts of $631.23 and $875.91. The only question presented for our determination is whether the respondent erred in adding to the partnership income reported by the petitioners for the taxable year their proportionate shares of the sum of $16,134.02, which amount was treated by the respondent as an increase in the partnership income growing out of a transaction by which, in pursuance of an agreement entered into in 1927 by the partnership and its creditors, the partnership was permitted to take as a credit in 1930, on a note which it had executed in behalf of its creditors, interest payments made during the years 1923 to 1926, inclusive, amounting to $16,134.02.

A separate stipulation of facts was filed in each proceeding. These stipulations are identical except as they relate to a segregation of each partner’s share in the alleged income. No oral testimony was received at the hearing and no separate findings of fact are necessary. Such parts of the stipulations as seem necessary to an understanding of the issue to be decided, follow:

The petitioners, Knowles D. White and Ralph M. Walker were members of the partnership, known as the Walker Electrical Company, Columbus, Georgia, and they shared profits and losses in the ratios of 100/363 and 263/363, respectively. The said partnership was a successor to a partnership known as Walker Electric & Plumbing Company, which partnership had been composed of the petitioner, Ralph M. Walker, D. T. Beggs and S. S. Dean. In 1923, and before executing the agreement hereinafter set forth D. T. Beggs withdrew from the partnership. At the time of his withdrawal he was released from all liability as to the partnership debts and in turn received no part of the partnership assets. In 1925 S. S. Dean died'. S. S. Dean’s estate was also released from all liability as to the partnership debts and in turn received no part of the partnership assets.
In 1923, the affairs of Walker Electric & Plumbing Company had become substantially involved and the partnership was unable to pay its creditors in full. On May 16, 1923, the creditors of Walker Electric & Plumbing Company entered into an agreement witli Walker Electric & Plumbing Company, under the terms of which a creditor’s committee was appointed, composed of E. R. Black, who was at that time President of Atlanta Trust Company, and H. E. West, with the General Electric Company. The bank creditors, under the terms of this agreement, advanced $20,000.00 to provide working capital for needs of the business, and the commercial creditors agreed to continue to furnish goods as needed for the carrying out of contracts present and future, and all amounts then due to all creditors who were parties to the agreement were extended to January 1, 1924, in the form of notes bearing interest at six per cent. A few minor creditors were paid off in cash. It was agreed that after the banks had been paid for the money advanced, and the creditors paid for materials subsequently furnished, that any excess funds accruing to the partnership should be paid pro rata to the banks and commercial creditors.
At subsequent meetings of the creditors’ Committee, at which the creditors, or their representatives, were also present, this agreement was extended from time to time, and was still in. effect in 1927.
Early in 1927, Walker Electric & Plumbing Company began negotiations to get the creditors to discontinue the requirement that interest be paid.
The creditors did agree to discontinue interest as of February 1, 1927, and! at that time one note was given to Atlanta Trust Company, as trustee, for all creditors, covering the entire indebtedness which had been deferred, which note was payable on demand and non-interest bearing.
During the year 1927, after negotiation the creditors revised their agreement with the partnership, Walker Electric & Plumbing Company, so that, when the total payments made subsequent to that date together with the principal and interest payments made prior to 1927, equalled the face value of the notes payable, the creditors would cancel the unpaid balance of the said notes. In other words, the creditors agreed that, upon the payment by the partnership of an additional sum which when added to the principal and interest already paid would equal the principal of the notes, they would apply the interest paid from 1923 to 1927 as payments on the notes.
At the time that the creditors were requested to discontinue the collection of interest, the creditors, in a meeting of March 15, 1927, passed a resolution in respect of which the facts are recited in the minutes, as follows:
“After discussion of the interest charge already paid by the Company on its deferred indebtedness, and action by the Government in connection with their claim for taxes for the years 1918, 1919 and 1920, we being given to understand the Government is willing to compromise for a small payment provided they are given assurance that by such action, and as a result of further consideration by the deferred creditors, the Walker Company will be al)le to work out of its difficulties; the following resolution was unanimously adopted:
“Resolved that there be no further interest from February 1st, 1927, charged to deferred indebtedness and that the Merchandise Creditors endeavor to credit the Walker Company indebtedness with the back interest received on deferred indebtedness to the principal of the indebtedness, and that report be made by each creditor upon this question.”
The taxes referred to in said resolution were, in fact, compromised with the Government in October, 1927.
On December 31, 1927, the partnership debts amounted to $216,699.57, and its assets amounted to $206,615.08.
Walker Electric & Plumbing Company continued to make payments to its creditors until the close of 1929, and at December 31, 1929, owed, on the basis of the 1927 agreement, the various commercial creditors $5.00 each. These balances were paid .during the year 1930. At the time the final payments were made the creditors returned the partnership note marked paid. At this time the difference between the face of the note and the total payments made amounted to $16,134-02. Upon receipt of the said note the partnership debited its notes payable account with the item of $16,134.02 and credited the investment account of its members for their proportionate amount of unpaid balance, namely $16,134.02.
⅜ * * ⅜ * ' ⅜ «
The interest payments made by the partnership on the notes during the years 1923 to 1926 inclusive were claimed and allowed as expense deductions in the partnership income tax returns filed for the said years.
During the year 1927 the partnership, Walker Electric & Plumbing Company, earned in excess of $20,000.00; for 1928 it earned approximately $68,000.00; for 1929 the Walker Electrical Company’s return, which was accepted by the Commissioner as rendered, disclosed a net income of $133,717.97, and for the year 1930 the partnership income amounted to approximately $75,000.00 after eliminating the item of $16,134.02 here in controversy. All of the foregoing profits are before deducting salaries to the partners'.
The partnership Walker Electric & Plumbing Company had sustained losses of $43,033.22 in 1923, $56,519.68 in 1924 and $37,773.02 in 1925 and had earned $20,712.86 in 1926.
Prom 1923 to 1927 the payments on principal to the commercial creditors amounted to $9,743.30.
The returns of Walker Electric & Plumbing Company and Walker Electrical Company were filed on the accrual basis.

The balance sheet of the partnership which was attached to the stipulations shows that its net worth at December 31, 1929, was $84,881.25.

The interest payments made by the partnership on its indebtedness during the years 1923 to 1926, inclusive, were claimed and allowed as expense deductions in the partnership income tax returns filed for those years. That being so, it seems clear that if these interest payments had been refunded to the partnership in cash in 1930, such refunds would have been income to the partnership for 1930. Cf. Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320; Askin & Marine Co. v. Commissioner, 66 Fed. (2d) 776; Burnet v. Sanford & Brooks Co., 282 U. S. 359. But such refunds of interest to petitioner were not made in cash in 1930. They were made, however, in the equivalent of cash by the partnership creditors allowing the partnership to use as a credit on the principal of its indebtedness the $16,134.02 in question. Cf. Albert J. Sullivan, 16 B. T. A. 1347; Stevenson Consolidated Oil Co., 23 B. T. A. 610. In the latter case we said:

Both petitioner and respondent are in agreement that this exchange of stock for assumption and agreement to pay liabilities was a taxable transaction. Both treat it as a transaction in which the petitioner received a complete acquittance from its creditors of $220,055.85 indebtedness and by which thereafter the Sunburst Oil and Refining Company became substituted as a debtor to the creditors for $220,055.85 instead of petitioner. In this state of facts, petitioner’s acquittance of $220,055.85 of its indebtedness to creditors became to it the same as cash received in that amount for the 250,000 shares of stock which it transferred to the Sunburst Oil and Refining Company.

In the instant case there was no substitution of debtors such as there was in the above cited case, hut there was a complete acquittance of $16,134.02 of the partnership indebtedness by the creditors.

Petitioners contend that forgiveness of indebtedness does not result in taxable income, and in support of their contention cite Meyer Jewelry Co., 3 B. T. A. 1319; John F. Campbell Co., 15 B. T. A. 458; aff'd., Burnet v. Campbell Co., 50 Fed. (2d) 487; Eastside Manufacturing Co., 18 B. T. A. 461; Progress Paper Co., 20 B. T. A. 234; E. B. Higley & Co., 25 B. T. A. 127; Simmons Gin Co., 16 B. T. A. 793; aff'd., 43 Fed. (2d) 327; and Towers & Sullivan Manufacturing Co., 25 B. T. A. 922.

In all the above cited cases it will be noted that the taxpayers were insolvent during the year in which they received the benefit of the composition settlement. In the Meyer Jewelry Oo. case we pointed out that “the evidence shows it could not have in fact paid whether voluntarily relieved of payment or not.” Likewise, in the appeal of E. B. Higley & Co., supra, we said:

It has heretofore been held that foregiveness of indebtedness does not result in income * * *. In this proceeding and in the decisions cited above, the forgiven debtor was insolvent. The debt was forgiven so that the business might be rehabilitated and continued as a going concern. The parties contemplated no profit from the transactions, which merely relieved the taxpayer from a portion of its liabilities.

In cases where the facts disclosed the taxpayer was solvent the forgiven debt has been included in taxable income. B. F. Avery & Sons, Inc., 26 B. T. A. 1393. In our decision in that case we said:

Why was this not an. accession of income in plain, popular terms, whether a forgiveness of indebtedness or a revision of the original contract? While in a sense it was a return of expenditures made in purchasing its machinery and producing and selling its merchandise, still these expenditures were made in conducting its business for the purpose of making profits. The use of fixed accounting periods requires that the amount by which expenses, once deducted, because paid or accrued, are reduced by later adjustments must be taken into income in the year of the adjustment. Only in this way can the amount of the taxpayer’s reported income be made to agree with its actual income.

We think the instant case falls within the rule of B. F. Avery & Sons, Inc., supra.

It was in the year 1930, which is before us, that the partnership took into account the $16,134.02 in question. The stipulation shows that in 1930 the partnership was entirely solvent. It had assets largely in excess of all of its liabilities and had a net income of approximately $75,000, exclusive of the $16,134.02 in controversy.

In the case of United States v. Kirby Lumber Co., 284 U. S. 1, the Supreme Court said:

* ⅜ * Here there was no shrinkage of assets and the taxpayer made a clear gain. As a result of its dealings it made available $137,521.80 assets previously offset by the obligation of bonds now extinct. ⅜ * * The defendant in error has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here.

The forgiveness of indebtedness or adjustment of indebtedness, or refund of interest previously paid, whichever it may be called, did not take place in 1927. The agreement was that upon the payment by the partnership of additional amounts which, when added to the principal and interest already paid, would equal the principal of the notes, the creditors would apply the interest paid from 1923 to 1926, inclusive, as payments on the notes.

This event took place in 1930 and for reasons already stated we think the $16,134.02 in question was income to the partnership in that year. We sustain the determination of respondent.

Reviewed by the Board.

Decision will be entered for respondent.

McMahon,

concurring: It is, in effect, found by the majority that the stipulated facts show that in 1930 the partnership discharged its obligations by the giving of consideration in an amount of $16,134.02 less than the face of such obligations, through the crediting by the creditors of that amount of interest, paid previous to 1930, in satisfaction of the indebtedness to that extent existing in 1930; and that the partnership was solvent in 1930. The question of law presented by such factual situation is whether taxable income was derived in 1930 as a result of the discharge of indebtedness in that amount.

In Helvering v. American Chicle Co., 291 U. S. 426, the Supreme Court held that where a corporation in 1914 purchased all the assets of another company and in part payment therefor assumed certain bonds of such other company and in 1922 retired some of the assumed bonds for less than their face value, the difference between the retirement price and the face valúe constituted taxable income to the corporation in 1922. The Supreme Court there stated in part:

The case before us is this:
In connection with the purchase of the assets of another company in 1914, respondent assumed — promised to pay — more than $2,000,000 of the seller’s outstanding bonds. During 1922, 1924 and 1925 it purchased a considerable number of these bonds in the market at less than their face. The Commissioner assessed the difference between these two amounts as income.
We find nothing to distinguish this cause in principle from United States v. Kirby Lumber Co., 284 U. S. 1, 52 S. Ct. 4, 76 L. Ed. 131. The doctrine there announced is controlling here. Bowers v. Kerbough-Empire Co., 271 U. S. 170, 46 S. Ct. 449, 70 L. Ed. 886, is not applicable. The final outcome of the dealings was revealed — the taxpayer suffered a loss. Here, for aught we know, there was substantial profit — certainly, the record does not show the contrary. Doubtless, respondent’s books indicated a decrease of liabilities with corresponding increase of net assets.

The Supreme Court thus held in the American Chicle Co. case, notwithstanding that in the Kirby case, referred to in the above quotation, the taxpayer discharged its own obligations which had been issued at par for cash; and in the latter case the Supreme Court stated:

* * * As a result of its dealings it made available $137,521.30 assets previously offset by the obligation of bonds now extinct. We see nothing to be gained by the discussion of judicial definitions. The defendant in error has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here. * * *

See Twin Ports Bridge Co., 27 B. T. A. 346.

Section 213 of the Revenue Act of 1926 defines “gross income” to include, among other things, “or gains or profits and income derived from any source whatever”; and the Supreme Court, in the American Chicle Co., in effect, and in the Kirby case expressly, defined this very phraseology to include the difference between the face of fixed obligations of a taxpayer and the amount below that at which such obligations are discharged, there being there, as here, no showing that such difference did not result in taxable gain. The instant pro-: ceeding is governed by the American Ohicle Co. case and the Kirby case. Here, as in those cases, it appears that the petitioner discharged its obligations at less than face, resulting in taxable income to it; and there is here no showing to the contrary.

As pointed out herein, the stipulated facts show that in 1930 the partnership was solvent. Its assets exceeded its liabilities and it had a large net income. As stated in Commissioner v. Simmons Gin Co., 43 Fed. (2d) 327: “There is a distinction between the release or discharge of a liability to a solvent and to an insolvent taxpayer.” B. F. Avery & Sons, Inc., 26 B. T. A. 1393, is to the same effect.

Meyer Jewelry Co., 3 B. T. A. 1319; Porte F. Quinn, 31 B. T. A. 142; Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95; and Burnet v. Campbell Co., 50 Fed. (2d) 487, are distinguishable from the instant proceeding. In Meyer Jewelry Co. the evidence showed that the taxpayer “could not have, in fact, paid whether voluntarily relieved of payment or not.” In Porte F. Quinn the evidence established that the cancellation of indebtedness did not make available assets to the taxpayer and that the taxpayer was insolvent. In Dallas Transfer & Terminal Warehouse Co. v. Com missioner it was shown that the taxpayer was insolvent, and conveyed away, completely disposed of, its only assets referred to therein. The Circuit Court there distinguished the Kirby case by stating that in the Kirby case the taxpayer had greater “clear” or net assets than it had before the discharge of the obligations, whereas in the Dallas case, having thus parted with such assets, it did not. In Burnet v. Campbell Co. it appeared that the taxpayer was in financial distress in that its creditors, all of them so far as the reports show, agreed to compromise their claims against the taxpayer and that the taxpayer was probably insolvent. It may be added that there the taxpayer probably also had no assets left after the composition.

It may be further added that Meyer Jewelry Co., supra, and Burnet v. Campbell Co., supra, were decided prior to the Supreme Court decisions in the Kirby case and the American Chicle Co. case, which cases of the Supreme Court are therein expressly distinguished by the Supreme Court from Bowers v. Kerbaugh Empire Co., 271 U. S. 110, relied upon by the Circuit Court in the Campbell Co. case. In the Campbell Co. case the Circuit Court also relied upon Meyer Jewelry Co., which is distinguishable from the instant proceeding, as hereinabove pointed out. In view of the decision of the Supreme Court in the Kirby and American Chicle Co. cases, the doctrine of Meyer Jewelry Co. and Burnet v. Campbell Co. should in any event be limited to the peculiar facts and circumstances there presented.

Eastside Manufacturing Co., 18 B. T. A. 461; Progress Paper Co., 20 B. T. A. 234; E. B. Higley & Co., 25 B. T. A. 127; and Towers & Sullivan Manufacturing Co., 25 B. T. A. 922, are all distinguishable from the instant proceeding upon the facts. However, if there is anything in any of them in conflict with the views here set forth they are, to that extent, in error and should not be adhered to.

For the foregoing reasons I concur in the result reached by the majority.

Matthews,

dissenting: The majority opinion taxes petitioners, as members of a partnership, with their proportionate shares of $16,-134.02, which amount is held to be income for 1930, and it is pointed out that the partnership was solvent in that year. But the partnership was still insolvent in 1927, when it executed one demand note to cover the entire indebtedness which had been deferred, which note did not bear interest, and the creditors further agreed that whenever the total payments made on this note, together with the principal and interest payments made on their claims prior to 1927, should equal the face value of the note the unpaid balance thereof would be canceled. The creditors were willing to discontinue charging interest and to revise the agreement which they had made with the partnership in 1923 in order to assist the partnership in “working out of its difficulties” and to pay the balance of the creditors’ claims.

I am of the opinion that, under these circumstances, so much of the partnership indebtedness as was equal to the interest payments made from 1923 to 1926, inclusive, was forgiven by the creditors in 1927 upon condition that the partnership pay the entire principal amount of the indebtedness. It appears to me that the partnership was actually relieved in 1927 from paying an amount to its creditors which the evidence shows it could not have then paid. Clearly the parties contemplated no profit, under the terms of the 1927 agreement. Although the partnership' undoubtedly received a benefit in that it was enabled to continue in business, and it made a profit during the next few years, it does not follow that the partnership derived any gain or income, within the meaning of the Constitution and the revenue acts, when the final payments were made in 1930 and the note was marked paid and returned by the creditors. Meyer Jewelry Co., 3 B. T. A. 1319; Simmons Gin Co., 16 B. T. A. 793; aff'd., 43 Fed. (2d) 327; Porte F. Quinn, 31 B. T. A. 142; Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95, reversing this Board’s decision reported at 27 B. T. A. 651.

As was said by the Court of Appeals for the District of Columbia in Burnet v. Campbell Co., 50 Fed. (2d) 487, affirming 15 B. T. A. 458, where it was held that the cancellation by creditors of a part of their claims against a debtor corporation which was in financial distress in order to secure payment of the balance thereof did not produce taxable income to the debtor corporation:

* * * We do not believe that the term “income” as commonly understood applies to the partial cancellation by a creditor of a debt due to him from a disabled debtor, in order that such debtor may thereby be enabled to pay the balance of the debt. “The fact that after the transaction the plaintiff’s balance sheet had improved was not sufficient to constitute ‘a gain derived from capital.’ If anything it was a gain accruing to capital, and, as such, under the Eisner and Phellis eases, was not taxable income.” Kerbaugh-Empire Co. v. Bowers, 300 Fed. 938; Aff’d. 271 U. S. 170.

In my opinion the facts of the instant case are distinguishable from those in B. F. Avery & Sons, Inc., 26 B. T. A. 1393, cited in the majority opinion, where the cancellation of a part of the taxpayer’s indebtedness served to reduce the cost price of goods purchased by him.

Smith and Arundell agree with this dissent.


author: Leech:

text:
    Arthur U. Crosby and the Morristown Trust Company (a Corporation), Two of the Executors of the Last Will and Testament of Katharine Huntington Morgan, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79652.
    Promulgated April 24, 1936.

      Robert E. Burke, Esq., and Evert L. Bono, Esq., for the petitioners.

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

Leech:

Petitioners ask redetermination of a deficiency in income tax in the amount of $2,192.66 for the year 1932. The facts are found as formally stipulated.

Henry K. Morgan died, testate, on July 26, 1931, owning an estate valued at $961,868.62.

The executors named in his will were duly appointed by the Surrogates Court of the County of Morris, State of New Jersey, and qualified as such. Katharine Huntington Morgan, one of the executors, died on the 22d day of October 1933, and the Morristown Trust Co., of Morristown, New Jersey, is the surviving trustee of the estate of Henry K. Morgan, deceased.

Katharine H. Morgan, surviving wife of Henry K. Morgan, deceased, elected to accept the rights to the property of the decedent, as provided for in the will, in lieu of her dower and statutory rights.

The last will and testament of Henry K. Morgan, deceased, provided, so far as here material, as follows:

Second: If my wife, Katharine Huntington Morgan, should survive me, I give and bequeath to her all my books, pictures, bric-a-brac, furniture, automobiles and other goods and chattels. If she should die before me, I give and bequeath the same to my daughter, Emily Morgan Crosby.
Third: I give Five Thousand Dollars to Arthur U. Orosby to hold in trust) for Katherine Orosby for whose benefit the income therefrom shall be used until she shall arrive at the age of twenty-five years when she shall receive the principal.
To Wyman Whittemore I give Ten Thousand Dollars on the following trusts:
Five Thousand Dollars thereof shall be held for Mary Emerson Whittemore who shall receive the benefit of the income therefrom until she reaches the age of twenty-five years.
The remaining Five Thousand Dollars thereof shall be held for Louise Adams Whittemore who shall receive the benefit of the income therefrom until she reaches the age of twenty-five years.
If any of said three beneficiaries should die before me then the legacy to the one so dying shall lapse and become part of the residue of my estate and pass as provided in my said will.
Each beneficiary surviving me shall at my death have an absolute vested interest in the amount set aside for her benefit, notwithstanding the fact that I have directed that payment of the principal shall not be made until she shall reach the age of twenty-five years.
A release from the Trustee named for each beneficiary shall be a complete acquittance to my executors.
Fourth : I make the following bequests:
(1) To my daughter Emily Morgan Orosby I give Fifty Thousand Dollars:
(2) To Katherine Huntington Brooks (known in religion as Sister Katharine Angela) I give Ten Thousand Dollars.
(3) To Mary Brooks Whittemore of Boston, Massachusetts, I give Ten Thousand Dollars:
(4) To the Rector, Wardens and Vestrymen of St. Peter’s Church of Morris-town, New, Jersey, I give the sum of Five Thousand Dollars in trust to he invested in safe securities and the interest thereon to be used for the worthy poor of the Parish:
(5) To the Morristown Memorial Hospital, I give Five Thousand Dollars:
(6) To the Evergreen Cemetery of Morristown, New Jersey, I give Five Hundred Dollars for the perpetual care of my lot ini said cemetery.
Fifth : All the residue and remainder of my entire estate, both real and personal of every description and wheresoever situated, I give, devise and bequeath to my executors said Katharine Huntington Morgan and the Morristown Trust Company of Morristown, New Jersey, in trust nevertheless for the following uses and purposes:
They shall hold my said estate as one fund and shall invest the same and keep the same invested and shall pay the sum of Eighteen Thousand Dollars a year in quarter yearly payments of Four Thousand Five Hundred Dollars each to my said wife Katharine Huntington Morgan, so long as she shall live.
All income from my said estate that may remain after the payment of said annuity of Eighteen Thousand Dollars to my said wife, shall be paid, to my daughter Emily Morgan Crosby so long as she shall live.
At the death of my said wife my said daughter shall receive the whole income from my estate so long as she shall live.
At the death of my said daughter the income to which she may have been entitled at the time of her death shall be paid to her child or to her children in equal shares if she should leave more than one.
If at the death of my said daughter, my said wife shall still be living, then at the death of my said wife the income which she had been receiving from my said estate shall be paid to the child or children of my said daughter Emily as aboye provided.
During the minority of any child or children of my said daughter the income to which he or she shall be entitled shall be paid to his or her guardian.
At the expiration of twenty-one years from the death of my daughter the trusts established by this will and held for her benefit, shall terminate and if my said wife shall then be dead the whole of the principal of my estate shall be paid, transferred and set over to the issue of my said daughter per stirpes and not per capita.
If, however, at the expiration of twenty-one years from the death of my said daughter my said wife should still survive, then I direct my said Executors and Trustees to set aside a fund sufficient in their opinion to provide said annuity of Eighteen Thousand Dollars for my said wife during the remainder of her life.
At her death the fund so reserved shall be at once paid, transferred and set over to the surviving issue of my daughter per stirpes and not per capita.
If at any time before the arrival of the time for distribution of the fund held for the benefit of my said daughter and her issue they should all be dead and if my said wife should then survive, then in that event she shall receive the whole income from my said estate until the time of her death, when my said estate shall be distributed as below provided.
If at the time for the final distribution of my said estate under the above provisions of this will, both my wife and my daughter shall be dead and if no issue of my said daughter should then survive, then in that event I direct my surviving Executor and Trustee to pay, transfer, convey and set over my estate then remaining to said Mary Brooks Whittemore, or if she should also then be dead to her issue per stirpes and not per capita.
Sixth : I make, constitute and appoint the said Katharine Huntington Morgan and the Morristown Trust Company of Morristown, New Jersey, the Executors of this last Will and Testament, and I direct that they shall not be required to give bond or other security for the faithful performance of their duties as such Executors in this or any other State.
I fully empower my said Executors and the survivor of them, to sell at either public or private sale any or all real estate of which I may die seized and to make good and sufficient conveyances thereof.
Seventh: I empower my Executors to hold in the trust established by this will any and all stocks, bonds or other securities which I may own at the time of my decease. I fully empower them, if in their judgment it should seem wise, to sell the same or any part thereof, and to re-invest in other good and safe securities. It is my intention not to limit such investments to the securities in which trust funds may be legally invested by my trustees.

Pursuant to the provisions of the will of the decedent, Henry K. Morgan, there was paid to Katharine H. Morgan, surviving wife of Henry K. Morgan, during the year 1932, the sum of $18,000, wholly from income of the Henry K. Morgan estate.

Of the sum of $18,000 so paid to Katharine H. Morgan, $9,000 thereof was reported as income in the Federal income tax return of Katharine H. Morgan for 1932, the year which is now in question. This $9,000 was paid during the last six months of the year 1932. The sum of $9,000 thus received in 1932 was omitted from her income tax return for this year. This payment was made to her during the first six months of the year 1932, which was during the period of administration of the estate of Henry K. Morgan. No deduction was claimed in the return of the estate of Henry K. Morgan for the sum paid to Katharine H. Morgan during the period of administration.

The income tax return of Katharine H. Morgan for the year 1932 showed an income tax due in the sum of $5,102.32, which tax was duly assessed and paid.

Katharine H. Morgan died, testate, on October 22, 1933. In her will, Wyman Whittemore, Arthur U. Crosby, and the Morristown Trust Co., of Morristown, New Jersey, were named as its executors. The will was duly admitted to probate in the County of Morris, State of New Jersey, and the executors named therein were duly appointed and qualified as such.

Respondent added to taxable income of petitioners’ decedent for 1932, the unreported item of $9,000 so received by her from the estate of her deceased husband under the terms of his will. The pending deficiency resulted.

The sole issue submitted is whether all or any part of this sum of $18,000 thus received by petitioners’ decedent was taxable to her, as income.

The Revenue Act of 1932 is applicable. Section 22 (b) (3) provides:

SEC. 22. GROSS INCOME.
⅜ ⅛* -⅜ ⅝ ⅜ ⅜ ⅜
(b) Exclusions from Gross Income. — Tbe following items shall not be included in gross income and shall be exempt from taxation under this title:
(3) Guts, bequests, and devises. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).

If the contested item of $18,000 received by petitioners’ decedent during the taxable year from the testamentary trust created by her deceased husband, Henry K. Morgan, was a “bequest”, none of it is taxable to decedent, under that provision.

It was a “bequest” if payable from the corpus of the trust, as well as its income. Burnet v. Whitehouse, 293 U. S. 148. And the source of its payment, in any instance, does not change that status. Helvering v. Pardee, 290 U. S. 365; Burnet v. Whitehouse, supra; Union Trust Co. of Pittsburgh, Trustee, 34 B. T. A. 284, and cases cited therein.

But, since the disputed amount was currently distributable by that trust to petitioners’ decedent, it was taxable to her, as respondent determined, if, and only if, it was payable to her, solely from income of the trust. Revenue Act of 1932, sec. 162 (b); Irwin v. Gavit, 268 U. S. 161.

Our query then is to determine whether the disputed amount of $18,000 thus received by petitioners’ decedent, during the taxable year, was payable only from income of the trust or was payable from either that income or the trust corpus.

This, of course, is determined from the intent of the creator of the trust. And that intent, in turn, must be found in the testament creating the trust.

The construction of the will under consideration is controlled by New Jersey law. De Vaughn v. Hutchinson, 165 U. S. 566.

The general rule in construing an instrument creating an annuity, to answer the pending question, is that in the absence of express restriction, or its equivalent, corpus may be used for the payment of an annuity when income is insufficient. 3 C. J., p. 212; Smith v. Fellows, 131 Mass. 20. See Steelman v. Wheaton, 72 N. J. Eq. 626 ; 66 Atl. 195; aff'd., 73 N. J. Eq. 743; 70 Atl. 1102.

Approaching the present controversy, we find the testator gave absolute monetary bequests to his three daughters. That, to his daughter Emily Morgan Crosby, the residual beneficiary of the immediate trust before us, amounted to $50,000. Except for the bequest of the testator’s “books, pictures, bric-a-brac, furniture, automobiles and other goods and chattels”, the controverted will contains no bequest to petitioners’ decedent except the disputed “annuity.”

Although so-called “annuities” may be payable from income alone (Delaney v. Van Aulen, 84 N. Y. 16; Irwin v. Wollpert, 128 Ill. 527; 21 N. E. 501), the term really has a definite meaning in the law of this case which distinguishes it from “income” as such. Thus, it is defined to be “ * * * a stated sum per annum, payable annually unless otherwise directed. It is not income or profits, nor indeterminable in amount, varying according to the income or profits, though a certain sum may be provided out of which it is to be payable.” Booth v. Ammerman, 4 Bradf. Sur. (N. Y.), 129, cited with express approval in Steelman v. Wheaton, supra. See also, Burnet v. Whitehouse, supra; Peek v. Kinney, 143 Fed. 76.

The word “annuity” is used twice by the testator in describing the gift to his widow, here in dispute. Among the numerous bequests and provisions of the will, that term is used in connection with no other gift or bequest.

The will contains four trusts other than that now under immediate examination. In each of them the source of the payments to the beneficiaries is expressly limited to income from or interest on the corpus. No such express limitation appears in reference to the gift of the annuity to petitioner’s decedent.

Respondent argues that the repeated references in the provisions of the will creating the disputed trust, which imply that the contested “annuity” is payable from income, is the equivalent of an express provision limiting the payment of the controverted annuity to income alone. We disagree. In our judgment, in view of the large residuary estate composing this trust, we think those references imply no more than an expectation and belief that the income of the trust would be ample to meet the annuity payments to his widow. Such expectation and belief is not enough to restrict the source of payment of this annuity to income alone. Pierrepont v. Edwards, 25 N. Y. 128. See also Steelman v. Wheaton, supra.

The setting apart of a fund as a source of income from which an “annuity” is payable, does not preclude its payment from corpus, if necessary. The gift over, upon termination of the trust, of the “whole of the principal of my estate” and the later described contingent bequest over of the fund to be conditionally reserved “to provide said annuity,” may well have been used, not with the idea of preventing any needed use of trust corpus to pay the disputed annuity, but to avoid any controversy as to the intended ultimate disposal of the trust corpus. In any event, under the law of New Jersey, as we understand it, neither provision effects a limitation of the payment of the annuity to income, alone. In Steelman v. Wheaton, supra, the pending question was one of those presented upon facts, in our judgment, at least as favorable to the respondent’s theory as those disclosed by the record here. The disputed bequest in that case was contained in the following testamentary words as recited in the opinion of the trial court:

I hereby instruct, authorize and empower my executor hereinafter named, as soon as it is convenient after my decease, to invest a sufficient sum or sums of money of my estate., with good and- sufficient security, approved by the orphans’ court of the county in which this will is probated, which will bear twelve hundred ($1200.00) dollars interest annually; and this sum of twelve hundred ($1200.00) dollars I give and bequeath to my wife Arabella Wheaton, during her natural life, and if she again does not marry; which sum of twelve hundred ($1200.00) dollars, is to be paid annually to my said wife, by my executor, in payments quarterly of three hundred ($300.00) dollars each, and upon her decease or upon her again marrying, or upon my decease, if I should survive my said wife, I give and bequeath the sum or sums of money which my executor is authorized to invest for the use of my wife, to my daughter, May Steelman, if she be living.

The New Jersey courts held those words effected the bequest of an annuity payable from corpus or income.

We, therefore, conclude here that all of the contested item of $18,000 was received by petitioners’ decedent during the taxable year as an “annuity”, payable from corpus or income, and that it was, therefore, a “bequest” within the provisions of the Revenue Act of 1932, section 22 (b) (3), supra, upon the receipt of which she is not here taxable. Burnet v. Whitehouse, supra; Helvering v. Pardee, supra; Union Trust Co. of Pittsburgh, Trustee, supra, and cases cited therein.

Decision will he entered under Rude 50.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      ⅜ * * * * * *
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiariesj and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (e) of this section in the same or any succeeding taxable year.