author: Yan Fossan:

text:
    Niels A. Christensen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72424.
    Promulgated September 24, 1935.

      Howard F. Burns, Esq., for the petitioner.

      Arthur Carnd/wff, Esq., for the respondent.
   opinion.

Yan Fossan:

This proceeding was brought to redetermine a deficiency in the income taxes of the petitioner for the year 1930 in the sum of $19,122.74.

The issues are:

(1) Whether the entire amount, $296,511.44, of a judgment paid to the petitioner in 1930 as a result of a suit for patent infringement was income to him, or if such sum should be reduced by $103,589.34, representing the amount equivalent to royalties and interest arising prior to March 1, 1913.

(2) The inclusion by the respondent of certain portions of the judgment which were garnisheed by the petitioner’s creditors.

The facts were stipulated and in so far as material are as follows:

During the year 1909 the petitioner sued the National Brake & Electric Co, for an infringement of a patent, expiring March 21, 1916, developed by and belonging to him. The litigation continued until 1930, when a judgment for $296,511.44 in favor of the petitioner was paid. The judgment was computed by allowing the petitioner royalties for the period from December 1, 1906, to March 21, 1916, corresponding to royalties fixed in a contract between the parties in effect prior to December 1, 1906. The total amount of such royalties was $128,692.17, the costs were $5,281.22 and the interest allowed, $162,538.05. No exemplary damages were awarded. The royalties were computed on a fiscal year basis and were also segregated as to before and after March 1, 1913. The total amount of the principal of such royalties and interest thereon from December 1, 1906, to February 28, 1913, inclusive, was $103,589.34.

Out of the proceeds of the judgment the petitioner paid $198,589.90 as his ordinary and necessary business expenses relating to the litigation. All such expenses were incurred in their entirety after March 1, 1913, and were paid during 1930. The net income from the judgment was $97,927.54.

The petitioner filed his income tax return for 1930 on the cash receipts and disbursements basis and included therein $4,399.41 as income derived from the judgment. The respondent determined that the amount of taxable income derived therefrom was $97,927.54 and thus increased the petitioner’s income from such judgment by $93,528.13.

• Before any part of the above judgment was paid, summonses in garnishment were served at the instance of the American Timber Holding Co. and Merrill Griswold, impounding funds aggregating $23,000 in the hands of the clerk of the Circuit Court of Milwaukee County. On February 9, 1932, the clerk paid $7,500 to the American Timber Holding Co. and $15,500 to Merrill Griswold to apply on judgments held by them against the petitioner. A further sum of $4,300 was impounded by garnishment proceedings brought by J. W. Pereles to whom the sum was paid on August 1,1931.

The sum of $6,000 was placed in escrow by the petitioner and the National Brake & Electric Co. for the benefit of Edward Friedman, to whom, with others, that amount was finally paid on February 26, 1932. The said sums of $23,000, $4,300, and $6,000 were a part of the amount paid by the National Brake & Electric Co. in 1930 in satisfaction of the petitioner’s judgment against it. All of the claims and debts mentioned were controverted by the petitioner.

The respondent’s position is that on March 1, 1913, the petitioner had an unliquidated claim for damages in tort for the infringement of his patent; that the amount recoverable on that claim was uncertain, conditional, and contingent on March 1, 1913; and that since he recovered a lump sum covering damages for the entire period from December 1, 1906, to March 21,1916, such entire lump sum was income to him in 1930.

It scarcely need be repeated that income accrued prior to March 1, 1913, should be considered as capital and is not taxable as income. Southern Pacific Co. v. Lowe, 247 U. S. 330. The question here involved is but one step removed. Is income which accrued prior to March 1,1913, but not received until 1930 taxable in the latter year?

In Safety Car Heating & Lighting Co. v. United States, 5 Fed. Supp. 276, a comparable situation was under consideration. The court there said:

Taking up the issues in the order of their statement, we are first called upon to answer the question as to whether or not the net amount received by plaintiff in settlement of a patent suit instituted prior to March 1, 1913, and settled in 1925 is taxable income in the latter year. The net amount attributable to infringement prior to March 1, 1913, is as stated $153,621.72, and the entire amount to the day of settlement in 1925 was $176,531.95. The sum is thus apportioned because the amount allocated to the period prior to March 1, 1913, is dealt with by the plaintiff as a nontaxable asset, while defendant contends it is income for the year 1925 and taxable as such.
The values with which we are concerned had their source in a claim or chose in action, and on March 1, 1913, that chose in action had not been valued or fixed in terms of money. That it existed cannot be denied, and that it had value cannot be ignored. Nor can it be said to be a thing the value of which could not be ascertained with legal certainty as of March 1, 1913. Actually, its value was so ascertained and fixed by a special master who arrived at his conclusions in terms of money by the use of admissible facts and mathematical calculations. Article 90 of Regulations 65 expressly provides that unconditional claims arising prior to March 1, 1913, whether presently payable or not, are not taxable as income accruing subsequent to that date. The prosecution of the infringement suit was necessary in this case only because the infringer refused to recognize the law and the facts, which at all times were there to be construed in plaintiff’s favor. To hold that the unjust necessity for this suit constituted a condition precedent to the vesting of rights or title in plaintiff as to the damages inherent in the chose in action, would be to assume that the title did not vest because an unsound and illogical attack upon it was made, and this is, of course, absurd. When infringement was found by the decree of the District Court of the Western District of New York, its effect related back to the date of the patent and also to March 1, 1913. The reasoning upon which the conclusion here is arrived at need not be further enlarged upon, since it follows the clear logic of Hewes v. Heiner, Colleetor (D. C.) 24 F. (2d) 748, affirmed (C. C. A.) 30 F. (2d) 787. In that case, the March 1, 1913, taxable value of land, the legal title to which was then in litigation, was considered. Both the District Court and the Circuit Court of Appeals held in effect that the existence of litigation as to the title had no bearing upon the value of the land for tax valuation purposes. ' And so here, while the ascertainment of the value of plaintiff’s choses in action was dependent upon the outcome of litigation, such litigation merely fixes the value of the pre-existing rights or title.
The plaintiff settled its right to $501,180.32 for the sum of $200,000. This netted, after deducting expenses, $176,531.95, of which latter amount $153,621.72 was attributable to infringements prior to March 1, 1913. On this sum plaintiff paid a tax of $19,970.82. This tax was erroneously levied and collected, and should be returned with interest thereon from the day of payment.

The observations there made apply with equal pertinence here.

In Buffalo Union Furnace Co. v. Helvering, 72 Fed. (2d) 399, reversing 23 B. T. A. 439, as to this point, which involved the “ unjust discrimination” of railroads against the plaintiff in refusing to “ spot ” its cars, a service rendered to others, the court said:

* * * With so much of it as is properly apportioned against the period from March 1, 1913 to March 31, 1914, we think that the income should have been surcharged and that the commissioner was right.
Not so, however, as to the period from August 1, 1905, to March 1, 1913. The unlawful discrimination of the roads, if it existed, was a tort which gave rise to a cause of action as soon as the taxpayer was damaged; that is, when it was forced to “ spot ” the ears. The fact that the claim might be contingent is here irrelevant; the important point is that the transaction as a whole took place before the date when an income tax became constitutional. As the taxpayer could not deduct any parti of the expense from its income before March 1, 1913, there was no reason for surcharging its income in later years; both items must be possible of entry in an income tax return. To put it in another way, there can be no charge in such cases except as a gain. The taxpayer entered the income tax zone, so to say, with certain claims against the railroads for past torts. Park v. Gilligan, 293 F. 129 [4 Am. Fed. Tax Rep. 3628]; Safety C. H. & L. Co. v. U. S., 5 F. Supp. 276. So far as these were eventually paid at a greater amount than t¡heir value on March 1, 1913, it might be possible to surcharge the income. There is no such proof here, and it would be fantastic to hold the taxpayer on the theory that it had not shown the value of the claims on March 1, 1913. So far as tike Board surcharged the income with that portion of the settlement properly apportionable to the period before March 1, 1913, we think it was wrong. • * *

In William J. Kyle, 15 B. T. A. 1247; affd., 43 Fed. (2d) 291, the Board had for consideration a case involving payment for services rendered in part prior to March 1, 1913, payment being made in 1920 in satisfaction of a judgment obtained in 1915. We there held that the portion of the amount received in 1920 which represented the proven value of the completed services rendered, prior to March 1, 1913, plus interest thereon to that date, was not taxable income in 1920.

The logic of these oases is resistless. They are ample support for petitioner’s contentions.

The parties have stipulated that the judgment obtained by the petitioner was computed by allowing him royalties corresponding to royalties fixed in the contract between him and the Brake Co. in effect prior to December 1, 1906. Thus, the basis of the judgment was definitely established by facts existing prior to March 1, 1913, and the amount to which the petitioner was then entitled was $103,-598.34. On the basic date the petitioner had a claim against the National Brake & Electric Co. for an infringement of his patent. That claim was definite, determinable, valid, and enforceable. The number of articles manufacturer by the Brake Co., inviolation of the patent prohibition was ascertainable. A yardstick for measuring the amount recoverable on each unit had already been set up by the expired contract between the parties. Clearly that claim or right was property (Hyatt Roller Bearing Co. v. United States, 43 Fed. (2d) 1008) and possessed value. There remained nothing to be done by either the petitioner or the Brake Co. that could affect in any way the real value of his right to damages for patent infringement. He had a right to demand (and had done so by suit begun in 1909) and to receive such damages. The fact that the value of his right had not been definitely fixed in money by a legal tribunal does not destroy that value nor prevent our finding it from the facts.

The stipulated facts sufficiently establish that the sum of $103,-589.34 was attributable to the period before March 1, 1913. Therefore, the judgment obtained by the petitioner in 1930 was, to that extent, not taxable to him in that year. Since our decision results in a net loss it becomes unnecessary to consider the second issue.

Decision wild be entered for the yetitioner.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    United Business Corporation of America, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32742.
    Promulgated September 25, 1935.

      James P. Qwigley, Esq., and Robert J. Heberle, Esq., for the petitioner.

      Harold Allen, Esq., and R. H. Transue, Esq., for the respondent.
   OPINION.

Van Fossan:

This proceeding seeks redetermination of income tax deficiencies in the amounts of $15,399.97 and $38,657.74 for the calendar years 1922 and 1923, respectively.

The asserted deficiencies include the additional tax at 25 percent of petitioner’s net income for each of those years, assessed by respondent pursuant to his certification that in his opinion petitioner’s accumulation of gains and profits and additions to surplus for 1922 and 1923 were unreasonable for the purposes of its business and Ms determination that such unreasonable accumulations of profits were for the purpose of preventing the imposition of surtaxes upon petitioner’s stockholders, within the ambit of section 220 of the Eevenue Act of 1921.

Petitioner having waived its assignment of error involving a claimed deduction for alleged obsolescence of buildings and equipment, the sole issue is whether, for the years 1922 and 1923, petitioner is subject to the additional tax at 25 percent under section 220, supra, as determined by the respondent.

A portion of the facts were stipulated, including numerous schedules of figures and other exhibits. Such stipulation is included herein by reference. Also, a portion of the facts were adduced by testimony. A brief resume of the facts will suffice.

Petitioner is a Washington state corporation with its principal office at Syracuse, New York. It has an authorized capital stock of $6,000,000, divided into 60,000 shares of common stock of the par value of $100 each. Petitioner was organized on or about April 1, 1920, by Burns Lyman Smith and his advisors, for the purpose of transferring to it certain properties owned by Smith, particularly his large real estate holdings in Seattle, so that in the event of an emergency he would be able to sell a portion of his stock more readily than an interest in his real estate, consisting of large office buildings, and, further, so that in the event of his death the stock of the petitioner corporation could be more readily distributed among his heirs, including two minor children. The corporation was authorized to purchase, sell, and deal in real and personal property and to borrow and lend money. All of its issued capital stock has been held by Smith, except for three qualifying shares.

In 1910 Smith inherited real and personal properties, of great value, from his father, and in 1920 he inherited additional similar properties from his mother. During the period April 1, 1920, to December 31, 1923, he paid into or transferred to the corporation cash, land, buildings, stocks, bonds, and securities, and received therefor the corporation’s capital stock and/or credits to his personal account as follows:

All of the securities paid into or transferred to the corporation consisted of shares of stock of numerous domestic corporations, except for five different issues of bonds having a total face value of $10,100. The corporation’s balance sheets disclose the following:

Of the corporation’s notes payable, the amounts of $189,000 for 1921, $115,090 for 1922, and $110,169.64 for 1923 represent those made payable to Smith, who discounted them at various banks and paid the proceeds over to the corporation. Also, of the corporation’s notes payable, the amounts of $50,000 for 1921, $103,500 for 1922, and $50,000 for 1923 represent notes payable to various banks, and endorsed by Smith, but none of such notes were in default.

The corporation’s books and records further disclose the following:

No salary was paid to Smith by the corporation during 1920 to 1923, inclusive.

No dividends were declared by petitioner during any of the years 1920 to 1923, inclusive. A 3 percent dividend was declared for each of the years 1924 and 1925.

From April 1, 1920, to the close of the year 1923, the following payments were made by Smith on account of his demand notes given to the corporation:

During the years 1922 and 1923 Smith was worth approximately three quarters of a million dollars in addition to his interest in the corporation, and had the financial ability to meet his obligations to the corporation.

For each of the years 1917 to 1923, inclusive, Smith, as an individual, sustained a net loss (exclusive of dividends received), received dividends, had taxable income or loss, and paid taxes, as follows:

Petitioner contends that its large annual additions to surplus were for the purpose of building up that account or fund to an amount equal to the outstanding mortgage, so as to insure itself a strong financial position. Such mortgage represented a $700,000 encumbrance in 1920 on the office buildings (in which the corporation had a net equity of approximately $2,000,000) paid in by Smith for stock in that year. The mortgage was for a long term and called for annual curtailments of $50,000. The record reveals no necessity for building up a surplus equal to the principal amount of the outstanding long term mortgage. Nor does the record substantiate the alleged purpose underlying the large annual additions to surplus. In our opinion it establishes the very purpose proscribed by the statute. While increasing its surplus beyond its ordinary business needs, by failing to declare dividends, the corporation was increasing greatly its liabilities in notes payable, apparently by borrowing from banks to make loans to Smith, the corporation’s sole stockholder. Smith had the use of the corporation’s funds in an amount greatly in excess of its surplus from 1920 to 1923, inclusive, and, so far as the record discloses, made no payments of interest thereon except for the very small amount paid in 1923, as shown above. Thus it can not be contended that the corporation’s loans to Smith constituted real investments by the former.

Furthermore, the corporation received as nontaxable income large amounts in dividends on domestic corporation stocks which had been paid in or transferred to it by Smith, who prior thereto had received the dividends on such stocks, as taxable income.

We conclude that the respondent was correct in holding that the petitioner corporation was availed of during 1922 and 1923 for the purpose of preventing the imposition of the surtax upon its stockholders by permitting its gains and profits to accumulate beyond the reasonable needs of its business, instead of distributing them. Cf. United Business Corporation of America, 19 B. T. A. 809; affd., 62 Fed. (2d) 754; certiorari denied, 290 U. S. 635, wherein the Board had before it the same question as to the taxable year 1921 and the basic facts and circumstances therein closely parallel those in this proceeding.

The respondent’s contention that such prior decision, involving this same taxpayer, is res judicata, as to the present proceeding, is without merit. The application of section 220, supra, in any particular taxable year is wholly dependent upon whether the facts and circumstances pertaining to that year bring the taxpayer within the scope of that section — that is, was the corporation availed of for the prohibited purpose during the taxable year in question, irrespective of a finding by the Board and the courts that it was so availed of in a prior taxable year. We do not deem it necessary to enter into a discussion of the principle of res judicata, when clearly such principle is not applicable here.

Petitioner contends that the presumption of correctness, ordinarily attaching to the respondent’s determination of a deficiency in income tax liability, is not available to respondent and that, moreover, since this proceeding involves not an ordinary deficiency, but an additional tax imposed by section 220, supra, in the nature of a penalty, the burden of proof rests on respondent. These contentions, raised on brief, have not been properly pleaded so as to raise issues of law calling for the Board’s decision thereon. However, the Board’s determination of the sole issue, namely, whether petitioner is subject to the additional tax imposed by section 220, supra, is not based on the failure of petitioner’s proof to overcome the presumption ®f correctness of respondent’s determination, but is an affirmative finding upon careful consideration of all the evidence of record.

Reviewed by the Board.

Decision will be entered for the respondent.

       Sec. 220. That if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 25 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall he computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax: Pro vided, That if all the stockholders or members of such corporation agree thereto, the Commissioner may, in lieu of all income, war-profits and excess-profits taxes imposed upon the corporation for the taxable year, tax the stockholders or members of such corporation upon their distributive shares in the net income of the corporation for the taxable year in the same manner as provided in subdivision (a) of section 218 in the case of members of a partnership. The fact that any corporation is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not he construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is unreasonable for the purposes of the business. When requested by the Commissioner, or any collector, every corporation shall forward to him a correct statement of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed, and of the amounts that would be payable to each.


author: Smith:

text:
    Stanley S. Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42053.
    Promulgated September 25, 1935.

      Joseph D. Peeler, Esq., Melvin D. Wilson, Esq., and E. P. Adams, O. P. A., for the petitioner.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Smith:

In the opinion of the Circuit Court of Appeals for the Ninth Circuit remanding this case to the Board, the court stated:

We do not know from this statement of the Board whether or not they believed the testimony of the husband and wife with reference to the oral agreement between them. If they disbelieved this testimony by reason of the acts of the husband and wife which were more or less inconsistent with their testimony that they had made such an agreement, of course the oral agreement cannot be considered by us. On the other hand, if the Board were acting upon the legal proposition that the agreement if made was not binding or enforceable such conclusion is directly in the teeth of the statute of California (Cal. Civ. Code §158) which permits the husband and wife to enter into an agreement with relation to their property, and agree that they shall hold their property in some form other than as community property is altogether clear from the authorities. In this connection it should be observed that there is a distinction between those cases in which the question involved is whether or not the earnings of one of the spouses is taxable to that spouse as his or her separate income, and those cases in which the question is whether or not after the property has been thus acquired its status has been or can be changed by the agreement between the parties. Such cases as Lucas v. Earl, 281 U. S. Ill; Belcher v. Lucas, 89 F. (2d) 74; and Helvering v. Hickman, 70 F. (2d) 985, deal with the taxability of income to the spouse which earned it and do not deal with the income derived from property which has been acquired by the spouses and is held by them under the contracts entered into between them modifying the status of the property as authorized by §158 of the Civil Code of California.
The proper conclusion with reference to the deficiency tax in the case at bar revolves around the question of whether or not the husband and wife made the agreement that the property then owned or subsequently acquired by them should be owned by them as tenants in common as distinguished from community property ownership, each owning a one-half interest therein as his or her separate property. If such an agreement were made it would necessitate a different conclusion from that arrived at by the Board. * » * If the Board of Tax Appeals believes that such an agreement was made, the presumption in favor of the ruling of the Commissioner, and the more general presumption that property acquired by the spouses and not shown to have been acquired by gift, devise, or bequest or descent (Cal. Civ. Code §§ 162, 163, 164; Pedler v. Commissioner, supra), is community property are overcome.

Upon our amended findings of fact and in view of the opinion of the Circuit Court of Appeals, we are of the opinion that the petitioner is liable to income tax upon only one half of the income from the properties owned by the petitioner and his wife during the tax years in question.

Reviewed by the Board.

Judgment will be entered wnder Rule 50.


author: Leech :

text:
    Cecil H. Gamble, Executor of the Estate of Mary H. Gamble, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60840.
    Promulgated September 26, 1935.

      Laurence Graves, Esq., and Ihe Lanier, Esq., for the petitioner.

      Harold Allen, Esq., R. H. Transue, Esq., and F. T. Donahoe, Esq., for the respondent.
   OPINION.

Leech :

Petitioner, as executor of the estate of Mary H. Gamble, seeks redetermination of a deficiency of $496,693.26 in estate tax determined by respondent. The issues raised by the assignments of error are to be determined by the ascertainment of two facts: (a) Whether certain gifts made by petitioner’s decedent within two years prior to her death, the value of which has been included by respondent in computing her net estate subject to tax, were made in contemplation of death within section 302 (c) of the Revenue Act of 1926, and (b) the value on January 5, 1929, of 21,641 shares of common stock of the Procter & Gamble Co. of Cincinnati, Ohio, respondent having included 6,143 shares of this stock, which had been made the subject of gifts by the decedent, 14,475 shares owned by her directly, and 1,023 shares in which she owned a four-fifteenths interest at the time of her death, at a value of $280 per share.

Certain facts were stipulated and, in addition, considerable testimony was introduced at the hearing. Upon the first issue it is shown that the decedent died on January 5, 1929, at the age of 73 years, following an illness of pneumonia of a virulent type, lasting six days. She was the widow of David B. Gamble and at the time of her death was possessed of a very large estate. The decedent was a woman of active mind and habits, devoting the greater part of her time to public welfare, educational, and religious work. She was a large contributor to various public activities and served actively in the management of a number of educational and religious enterprises.

Decedent left surviving her, three sons, Cecil H. Gamble, the petitioner, Sidney D. Gamble, and Clarence J. Gamble. She had, for many years, made her home in California but had a custom, each year, of visiting her sons who lived in the East. In October 1928 she came East and, while staying with her son, Clarence J. Gamble, in Philadelphia, Pennsylvania, she was taken ill with pneumonia and died. Decedent, in the two years prior to her death, made certain gifts which have been included by respondent in her gross estate, at a total value of $1,983,914.72, in determining the pending deficiency. These gifts and the dates thereof are as follows:

(1) February 8, 1927 — 55 shares of Procter & Gamble common stock to Louise G. Gamble, wife of petitioner.
(2) January 19, 1928 — 126 shares of Union Oil Associates to each of her three sons.
(3) February 16, 1928 — 152 shares of Gamble Co. common stock to each of her three sons.
(4) June 26, 1928 — 9 shares Cincinnati Time Recorder Co. stock to Cecil II. Gamble and 8 shares oí that stock to each of her other two sons.
(5) Juno 28, 1928 — 1,170 shares Cincinnati Time Recorder Co. stock to Cecil II. Gamble and 1,172 shares each to Sidney D. Gamble and Clarence J. Gamble.
(C) November 21, 1928 — to New York Trust Co. in trust for Blanche E. Wachob:
54 shares Cincinnati, New Orleans & Texas Pacific Ry. preferred stock
50 shares Cleveland Electric Ilium, preferred stock
20 shares Dayton Power & Light Co. 6% preferred stock
50 shares New York, Chicago & St. Louis R. R. preferred stock
100 shares Pennsylvania Ohio Power & Light Co. preferred stock
$5,000 Herschide Land Trust
(7) December 28, 192S — 1,000 shares of Procter & Gamble common stock to each of her three sons.
(8) January 4, 1929 — -1,088 shares of Procter & Gamble common stock to Cecil H. Gamble, 1,000 shares to each of her other sons.

Of the common stock of the Procter & Gamble Co. included in the transfers of December 28, 1928, and January 4, 1929, 6,000 shares were transferred by the petitioner in compliance with directions given by the decedent in November 1928, some days prior to her last illness. The petitioner had charge of decedent’s business affairs and, for some years, had made all transfers of stock for her under a general power of attorney held by him. The remaining 88 shares of this stock, included iu the transfer of January 4, 1929, represented 80 shares of stock which, had been given by decedent to Blanche E. Wachob in 1923, plus a stock dividend of 8 shares received thereon. These shares were merely transferred through decedent for the reason that Mrs. Wachob wished this stock to be included in the trust which had been created for her benefit by decedent.

It is unnecessary to set out the many facts established by the record and bearing upon tbe decedent’s state of health and mind at the time these gifts in question were made and her purpose in making them. It will suffice to say that a careful study of these facts convinces us that the several gifts were not made by decedent in contemplation of death within the purview of section 302 of the Revenue Act of 1926. Not only does the proof indicate that petitioner was in good health for a woman of her age, at the time these gifts were made, but that her plans at that time contemplated active participation in various charitable and religious enterprises in the future. Definite and moving reasons for making the gifts, other than contemplation of death, are disclosed here.

The decedent had made many gifts of property to her three sons, of whom she was very fond. She was generous and thoughtful and had made numerous gifts of stocks and securities to individual friends and associates. Respondent has, however, only included in the gross state certain gifts made within the two years immediately preceding her death. The gift of 55 shares of Procter & Gamble stock to her daughter-in-law, the wife of petitioner, is shown to have been for the purpose of helping in the furnishing of a new home which her son and his wife had just acquired. The Union Oil Associates stock, given her three sons on January 19, 1928, was speculative stock acquired by decedent from her husband’s estate and required close observation. It was transferred to her sons at the suggestion of petitioner as were the transfers of 152 shares each of Gamble Co. stock. This latter corporation was organized for the purpose of holding securities of corporations and real estate foreign to the State of Ohio. The Cincinnati Time Recorder stock was transferred to her sons for the reason that decedent felt that responsibility for the management of this company was one that her sons should assume, practically all of the stock of the company having been owned by decedent’s husband. Mrs. Wachob, for whom a trust was created, was a close friend of decedent and her companion. Decedent, in the past, had made her gifts of stock and we see in the circumstances surrounding this particular gift nothing more than a desire on the part of decedent for the comfort and welfare of this friend through possession of an independent income.

These transfers, together with the later transfer of 6,000 shares of Procter & Gamble common stock to her three sons, were discussed with her and advised by petitioner. Decedent was interested in her sons’ active participation, in charitable work and in their contributing to public enterprises financially as well as in services. The disputed gifts to those sons were made, in our opinion, for the purpose of making it possible for them, through an increase in their incomes, to take the active part in, these public enterprises desired by decedent, and possibly to reduce decedent’s income taxes. All of the gifts here in question were, in our opinion, of the same character and made for the same reasons influencing the making of many earlier gifts which were not and are not even asserted here to have been made by decedent in contemplation of death.

The respondent does not now, since the hearing of this proceeding, contend that the transfers in question were made in contemplation of death. He states in his brief: “ In view of evidence presented at the healing, respondent does not now urge this issue.” We hold that the several gifts in question were not made by decedent in contemplation of death and their value is not subject to inclusion in the gross estate. United States v. Wells, 283 U. S. 102; Vaughn v. Riordan, 280 Fed. 742; Safe Deposit & Trust Co. v. Tait, 3 Fed. Supp. 51; Off v. United States, 35 Fed. (2d) 222; Rea v. Heiner, 6 Fed. (2d) 389; Llewellyn v. United States, 40 Fed. (2d) 555; Delaware Trust Co. v. Sandy, 53 Fed. (2d) 1042.

With respect to the second issue, the value of the common stock of the Procter & Gamble Co. at the time of decedent’s death, there is much testimony in the record, including that of expert witnesses.

The Procter & Gamble Co. was an old concern of established reputation and doing a large business in a class of necessities used in every household. It was established originally in 1837. It owned a number of subsidiary corporations. It manufactured Ivory Soap and Crisco, a cooking compound, and its production constituted aj> proximately 39 percent of the hydrogenated lard substitutes and about 40 percent of the glycerin used in this country. The common stock had a par value of $20 per share. Its earnings on this common stock had increased from $6.90 per share for 1923 to $12.06 for 1928 and $14.83 for 1929. The regular dividend rate on the common stock in 1913 was 16 percent. This was consistently advanced to 20 percent in 1916, 25 percent in 1925, 35 percent in 1926, and 40 percent in 1927. In addition to these regular cash dividends, special cash dividends were paid in several of the years mentioned. Supplemental to these regular and special cash dividends, a stock dividend on the common stock was paid in each year from 1915 to 1929.

The book value per share of the common stock on J une 30 of the years 1924 to 1929 was as follows:

June 30, 1924_$43. 00 June 30, 1927_$51.13
June 30, 1925_ 45.39 June 30, 1928_ 54.43
June 30, 1926_ 48.24 June 30, 1929_ 58. 95

The progress of the company had been rapid and consistent. In the year preceding decedent’s death, the net earnings of the company, after payment of dividends on its preferred stock, interest on its bonds, and deducting reserves for depreciation, losses, and taxes, amounted to $15,068,074, and for the following year were $18,536,471. These earnings were available to the common stock of the company, which, in those two years, was outstanding in the amount of 1,250,000 shares, and of which, it must be remembered, a very substantial part had been issued in stock dividends.

On July 15, 1929, the Procter & Gamble Co. and J. P. Morgan & Co. of New York City executed an agreement under which the Procter & Gamble Co. agreed to increase its authorized common stock from 1,250,000 shares of $20 par value to 7,500,000 of no par value, to exchange 6,250,000 of the new no par common for the 1,250,000 shares of no par common and to list the new no par common on the New York Stock Exchange not later than August 7, 1929. This agreement also provided that the Procter & Gamble Co. would sell to J. P. Morgan & Co. 150,000 shares of the new no par common for $66% per share and that J. P. Morgan & Co. should have an option to purchase 100,000 additional shares of such stock on or before February 12, 1930, at $80 per share. The 150,000 shares were purchased at $66% per share. The option mentioned was exercised. Negotiations leading up to this agreement started in February 1929, and the agreement incorporated in the instrument of July 15, 1929, was reached sometime after June 25, 1929. From June 1917 to June 29, 1929, the average price on the Cincinnati Stock Exchange, at which this common stock sold, was approximately $379 per share on sales of 1,444 shares. This common stock was not listed on the New York Stock Exchange, but was listed and sold on the Cincinnati Stock Exchange and in “ over-the-counter ” transactions by 'brokers on the New York Curb Exchange. Thirty-two thousand and fifty-one shares of this stock were sold on the Cincinnati Stock Exchange during 1928. On January 5, 1929, the date of decedent’s death, there were 958 shares sold on that exchange. The value of $280 per share at which this stock was included for estate tax purposes by respondent, was its average price on the Cincinnati Exchange on that date.

Respondent premises the correctness of this action on the authority of section 802 of the Revenue Act of 1926, and article 13, Regulations 70, construing that section. Petitioner contends that, since the above statutory provision uses the term “ value ” and not “ fair market value ” as is used in income tax provisions of that act, the cited construing regulations are without statutory authority and that “ value ” as used in section 302, supra, means “ real or true value based upon a sound economic determination.”

It is not deemed necessary here to decide that contention. However, the soundness of such position is, at least, doubtful, in view of the consistent reenactment of prior similar provisions, all containing the word “ value ” and the substantially similar construing regulations. Zellerbach Paper Co. v. Helvering, 293 U.S. 172. Both the courts and this Board, under similar circumstances, have apparently interpreted the term as meaning “ fair market value.” Ithaca Trust Co. v. United States, 279 U.S. 151; Laird v. Commissioner, - Fed. (2d) -; affirming 29 B.T.A. 196; Frank J. Kier, 28 B.T.A. 633.

It is true that the Third Circuit Court of Appeals, in Heiner v. Crosby, 24 Fed. (2d) 191, held that determining fair market value of stock at a particular time in an income tax case was a question of fact in the determination of which actual sales, though evidentiary, were not always conclusive. It was there said that where such sales did not, because of their circumstances, signify a fair market value, resort should be had to other evidence to determine that fact, including competent opinion testimony. This rule was extended to include the determination of “ value ” in an estate tax case by the same Circuit Court in the case of Laird v. Commissioner, supra. That is the practical effect of paragraph 3 of the cited and applied regulations, which paragraph petitioner also argues should be controlling here. But this record does not, in our judgment, establish any such circumstances surrounding the sales upon which the present disputed valuation was based.

The petitioner’s argument from the testimony that the sale of a block of stock here involved would depress such a comparatively narrow market as that basing the questioned valuation, and thus constitute such a circumstance, has been refuted. Walker v. People, 192 Ill. 106; 61 N.E. 489. See Ithaca Trust do. v. United States, supra. Particularly is this so where, as here, no sufficiently supporting-evidence appears. Frank J. Kier, supra.

The petitioner’s testimony that this common stock had a riskless loan value of $200 on the critical date is not convincing of the existence of those circumstances mentioned in the opinion of the court in Heiner v. Crosby, supra, and premising the application of the cited paragraph of the regulations. It does not tend to establish error in the pending determination. Nor is the evidence contained in the balance sheets of the company for 1929 and prior years, its earnings and dividend record for the same period, nor its prospects. The effect of both is quite the opposite.

Petitioner contends the contract, including the listing of petitioner’s stock on the New York Stock Exchange, together with the sale and option to J. P. Morgan & Co., furnishes such support. We can not agree. That bare transaction, privately arranged and consummated, occurring some months after the basic date,1 and including not only a sale to J. P. Morgan & Co. of 150,000 shares upon a basis of $333 per share for the present stock but also an option, exercised shortly thereafter, for 100,000 shares on a basis of $400 per share, in our judgment, does not establish error in the respondent’s determination. That transaction may, also, rather support it.

There was testimony that the sales prices on the Cincinnati Stock Exchange were incompetent or weakened as evidence of value for present purposes because that market was controlled to some extent through small-lot sales made for the purpose of forcing up the market. As to this, we are convinced neither of the existence of such a practice nor any substantial result affecting the present question, if it did exist. The records of sales of the Cincinnati Stock Exchange show that there was very little fluctuation in the price of Procter & Gamble common stock for some time before and after the basic date, and then the stock advanced in price.

Aside from the question of relevancy of the expert testimony here received, a careful consideration of it does not affect our conclusion.

Respondent’s determination is presumed to be correct. Whether “ value ” as used in the applicable statutory provision means “ fair market value ” determinable under the controlling regulations, or “ real or true value based upon a sound economic determination ” as contended by petitioner, the respondent’s determination of a value of $280 per share for the Procter & Gamble common stock as of January 5, 1929, is sustained.

Judgment will be entered wider Bule 50.


author: Mellott :

text:
    Donald Francis Campbell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51052.
    Promulgated September 26, 1935.

      George F. Mulligan, Esq., for the petitioner.

      Paul D. Page, Esq., for the respondent.
   OPINION.

Mellott :

Petitioner contends that the boards possess and exercise governmental functions, and that he was an employee rendering personal service to political subdivisions of states “ in connection with the exercise of an essential governmental function.” Respondent contends that petitioner was an independent contractor.

We have found that petitioner was engaged in rendering actuarial services to private individuals and corporations and that he realized and reported a net income of more than $10,000 from the practice of such profession during each of the years in question, exclusive of the amounts received from the four annuity and benefit funds.

In connection with his work for the annuity and benefit funds in question, petitioner was not required to give any specific amount of time per day, per week, or per month. He performed the same type of work which was performed for various insurance companies. He, like petitioner in the case of Milo R. Maltbie, 31 B. T. A. 614, took no oath of office, gave no bond, held no statutorily defined position, employed his own assistants, retained the right to hire or fire them and to use them indiscriminately on all of his business as an actuary, either for one or more of the boards, or for other clients. All of the work was performed in his own office and with his own employees. In that case, as in many similar cases, we held that the petitioner was an independent contractor and not an employee of a state or political subdivision thereof, and that his income was not exempt from the Federal tax. To the same effect see also Robert G. Gordon, 5 B. T. A. 1047; S. P. Freeling, 7 B. T. A. 1238; George W. Fuller, 9 B. T. A. 708; W. J. Howard, 10 B. T. A. 62; affd., 280 U. S. 526; R. Clipston Sturgis, 10 B. T. A. 1394; R. E. L. Johnson, 25 B. T. A. 359; Richard F. Burges, 25 B. T. A. 1191; affd., 69 Fed. (2d) 609; Edgar N. Finn, 31 B. T. A. 439; 81 Fed. (2d) 1018.

The facts in the instant case are quite similar to those in the case of Metcalf & Eddy v. Mitchell, 269 U. S. 514, which we have frequently cited. In that case it was held that exemption from the tax would not be granted where

* * * The income of one who is neither an officer nor an employee of government and whose relation to it is that of contract, under which there is an obligation to furnish service, for practical purposes not unlike a contract to sell and deliver a commodity. In such a situation it cannot be said that tbe tax is imposed upon an agency of government in any technical sense, and the tax itself cannot be deemed to be an interference with government, or an impairment of the efficiency of its agency in any substantial way.

It is ingeniously argued that the creation, maintenance, and operation of the funds in question was the exercise of an essential governmental function, the purpose of the funds being similar to the purpose underlying the creation by the state of an industrial board for administering the Workmen’s Compensation Act, which this Board in Robert P. Bay, 28 B. T. A. 1169, held to be an essential function of government. We do not deem it essential for the determination of this case to pass upon this question. The state undoubtedly has the right to undertake the enterprise in question, and the fact, if it be a fact, that it is undertaken for what the state conceives to be the public benefit, does not in itself establish immunity.

In the case of Burges v. Commissioner, 69 Fed. (2d) 609, affirming the ruling of this Board, it was held that the salary received by a lawyer as general counsel for a drainage district was not exempt ■where the relation was that of attorney and client, even though the district possessed and exercised governmental functions. To the same eifect see Helvering v. Powers, 293 U. S. 214, affirming the decision of this Board rendered in the case of Leland Powers, Executor, 26 B. T. A. 1381.

We hold that the undisputed facts show petitioner to be an independent contractor and not an officer or employee of a state or political subdivision. It follows that respondent’s contention must be sustained. Petitioner is not entitled to the exemption contended for, and the amounts received by him from the various funds should have been included in his income for the years in question.

Judgment will be entered for the respondent.


author: SteRNiiagen:

text:
    Frank A. and Sarah Weinstein, Petitioners, v. Commissioner of Internal Revenue, Respondent. Sarah Weinstein, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank A. Weinstein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41353-41355.
    Promulgated September 27, 1935.

      R. M. O^ELara, Esq., for the petitioners.

      John E. Marshall, Esq., and Maurice Parshall, Esq., for the respondent.
   OPINION.

SteRNiiagen:

The Commissioner determined the following deficiencies in income tax and the following penalties:

In Docket 41354, the respondent in his brief admits that the determination against Sarah Weinstein for 1925 was erroneous, and concedes that “ the Board may find that there is no deficiency and no penalty due by Mrs. Weinstein for 1925.” This docket will therefore be closed by the entry of a judgment of no deficiency and no penalty.

In Dockets 41353 and 41355 no attempt is made by either petitioner to set aside or disprove on the merits the Commissioner’s determination as to the tax deficiency. Sarah Weinstein, however, urges that as to her there is no liability for 1923 because, (1) the return was not shown to be a joint return to which she was a party, so as to impose upon her any joint or several liability; and, (2) the .statutory four year period of limitation had expired as to her before the notice of deficiency, a waiver signed by Frank Weinstein, which extended the period, being ineffective as to her. Frank, for all years, urges that the penalties can not be sustained because the respondent has not proved the fraud, as the statute requires him to do, section 907 (a), Revenue Act of 1924, as amended by section 601, Revenue Act of 1928.

The Commissioner, for 1923 and 1924, determined joint deficiencies upon joint returns. Petitioners now admit the correctness of this as to 1924, but the wife disputes it for 1923. In their joint petition and amended petition for both 1923 and 1924, separately verified by each, they expressly allege that they filed joint returns for both years. The allegation is admitted in respondent’s answer. This made further proof on the subject unnecessary. We therefore find as a fact that the petitioners were husband and wife who, for 1923, filed joint returns. Both are therefore jointly and severally liable thereunder. Joseph Carroro, 29 B. T. A. 646.

The wife contends that as to 1923 any liability which she might have had has lapsed because as to her the statutory period of limitation of four years prescribed by Revenue Act of 1926, section 277, expired on March 25, 1928, before the determination of the deficiency or any assessment was made. She argues that a waiver given by the husband alone, which amply extended the time as to him, may not be held effective as to her. This question, however, is only significant if the return is not false or fraudulent with intent to evade tax. For, by section 278 (a), Revenue Acts of 1924 and 1926, and section 276, Revenue Act of 1928, “ in the case of a false or fraudulent return with intent to evade tax * * * the tax may be assessed at any time.” Thus it must first be decided whether these returns were fraudulent; and, if so, there is no statute of limitations and no occasion for a waiver. The provision for an unlimited period for assessment is, by the terms of the statute, an impersonal provision applying to the situation arising from a fraudulent return. As to Frank, who signed a waiver, and Sarah, who did not, the assessment upon a fraudulent return may be made at any time.

After fully considering all of the evidence, we can not reasonably escape the finding of fact that the joint returns of 1923 and 1924 and the separate return of Frank for 1925 were false and fraudulent, with intent to evade tax, and we so find. This finding relieves the Commissioner of any statute of limitations upon assessment. We also find, as provided in section 275 (b), Revenue Acts of 1924 and 1926, and section 293 (b), Revenue Act of 1928, that the deficiency, or a substantial part thereof, for each year is due to fraud with intent to evade tax. This finding requires the assessment of an additional amount equal to 50 per centum of the deficiency, and sustains the respondent’s determination.

The petitioners tacitly, through their deliberate failure to contest, admit that the Commissioner’s determinations of their omissions from gross income and overstatements of deductions resulting in understatements of taxable net income are correct. These understatements were not trivial, but substantial. They were gross understatements. For 1923, net income shown on the return was $23,-624.07; the correct net income was determined to be $237,129.95. For 1924, the return stated net income at $39,975.94; the correct net income was determined to be $123,783.10. For 1925, the return stated a loss of $22,035.98; the respondent determined net income of $178,964.67.

Without narrating the evidence in detail, all of which was introduced by respondent in recognition of the burden of proof imposed upon him by the statute, it shows that for each year the returns were incorrect to such an extent and in respect of items of such character and magnitude as to compel the conclusion that the falsity was known and deliberate; such as the understatement or complete omission of profits on specific transactions in real property, gross overstatement of merchandise costs and operating expenses, and deduction of fictitious losses. If these items of falsity were in any way explainable, the petitioners chose not to produce the explanation or exculpatory circumstances. The evidence is sufficient to establish affirmatively an intent by a false return to evade tax.

Judgment will be entered for respondent in Dockets I¡.1353 and ¡¡1355 for the deficiencies and penalties, and for petitioner in Docket ¡¡135¡¡.


author: Black : Akundell,

text:
    Louise C. Moore, Executrix, Estate of Edward W. Moore, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58720.
    Promulgated September 30, 1935.

      T. G. Thompson, Esq., and John E. Money, Esq., for the petitioners.

      Arthur E. Fast, Esq., and E. D. Thomas, Esq., for the respondent.
   OPINION.

Black :

This case involves a deficiency in estate tax imposed by the Revenue Act of 1926 and depends upon the question of whether or not the proceeds of certain .life insurance policies are includable as part of the gross estate of Edward W. Moore, deceased. In the deficiency notice the respondent determined the deficiency at $36,655.76, based upon the inclusion of the value of a number of life insurance policies in the decedent’s gross estate. By affirmative allegations in his amended answer the respondent seeks to include in the gross estate certain other life insurance policies and to increase the deficiency to $50,319.50. This procedure is permissible. Louis M. Weiller et al., Executors, 18 B. T. A. 1121.

The facts were stipulated in writing and there is, therefore, no necessity for separate findings of fact.

The decedent, Edward W. Moore, died May 8, 1928, and the case falls under the Revenue Act of 1926, section 302 (g), as follows:

Sec. 302. Tlie value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated * * *.
* * * * * * *
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of tlie amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

All of the policies in controversy were taken, by the decedent prior to the Revenue Act of 1926 and prior to the Revenue Act of 1918, which first imposed a tax upon life insurance as part of a decedent’s estate. In the petition and amendments thereto petitioners questioned the constitutionality of section 302 (g) of the Revenue Act of 1926 in its application to policies which were issued and in effect prior to the effective date of the Revenue Act of 1918. However, at the hearing and on brief, petitioners elected not to argue the question of constitutionality.

Where, as here, the policies were taken out before the effective date of the act, but the insured died after the effective date of the act, and retained some of the elements of ownership until his death, the act applies and is not unconstitutional. Chase National Bank v. United States, 278 U. S. 327; Reinecke v. Northern Trust Co., 278 U. S. 339; Heiner v. Grandin, 44 Fed. (2d) 141; H. T. Cook et al., Executors, 23 B. T. A. 335; affd., 66 Fed. (2d) 995; Jacob K. Newman et al., Executors, 29 B. T. A. 53.

In his deficiency notice the respondent included in decedent’s gross estate proceeds of insurance amounting to $45&,942.87, which after allowing the $40,000 exemption left $413,942.81 subject to taxation. In his amended answer respondent listed for taxation additional policies in the sum of $151,624.11, and prayed that the deficiency be increased accordingly.

The following 16 policies, all of which were included by the respondent in decedent’s gross estate in the deficiency notice, reserved the right in the insured to change the beneficiaries:

Under the decisions of the courts and this Board, where the right to change the beneficiary is reserved to the insured at the time of his death the value of such policies is considered part of the decedent’s gross estate and should be included therein for estate taxation purposes. Chase National Bank v. United States, supra; Reinecke v. Northern Trust Co., supra; Heiner v. Grandin, supra; H. T. Cook et al., Executors, supra; Jacob K. Newman et al., Executors, supra.

All of the above mentioned policies were properly included in decedent’s gross estate, but several of them that were payable in installments should not have been included at full face value, but for the commuted value only. This commuted value has been stipulated and should be used in a redetermination of the deficiency under Rule 50.

A second group of policies included by respondent in his deficiency notice is as follows:

In these policies, which were installment policies, there was no right reserved to the insured to change the beneficiaries. We have held in several cases that where the policy of insurance does not reserve to the insured the right to change the beneficiary, the proceeds of the policy are not includable as a part of decedent’s estate. Helena Liebes, Executrix, 20 B. T. A. 731; affirmed on other points, 63 Fed. (2d) 870; Philip W. Blood et al., Executors, 22 B. T. A. 1000; David A. Reed et al., Executors, 24 B. T. A. 166. These cases all cite, as principal authority for their ruling, Reinecke v. Northern Trust Co., 278 U. S. 339.

All of the policies included in group II above, although they reserved no right to the insured to change the beneficiary, contained the following provisions: Paragraph 7 of the General Provisions ”, reading: “ The insured may, without the consent of the beneficiary, receive every benefit, exercise every right, and enjoy every privilege conferred upon the insured by this policy.”

Among the privileges and rights granted the insured were the following:

(1). — Receive in Cash the Dividend and Bonus then apportioned, and continue the Policy by payment of the same premium as previously; or,
(2). — Receive in Cash the Dividend and Bonus then apportioned, and receive Non-participating Paid-up Insurance, payable in one sum, as fixed by the Table on the second page, and discontinue this Policy; or,
(3). — Receive the Entire Cash Value, as stated below, in Cash, and discontinue this Policy; or,
(4). — Receive the Entire Cash Value, as stated below, converted into an Annual Income for Life, and discontinue this Policy; or,
(5). — Receive the Entire Cash Value, as stated below, converted into Nonparticipating Paid-up Insurance, payable in one sum at the death of the Insured, and discontinue this Policy.
If a selection of one of the Optional Settlements is not made as above, the Policy will be continued upon payment of the same premium as previously, and the Dividend and Bonus then apportioned will be payable in Cash.
* * * ‡ * * #
The Insured may obtain Cash Loans on the sole security of this Policy, on written request at any time after premiums have been paid in cash for three full years, if this Policy is then in full force. The Insured shall pledge this Policy as collateral security for such loans, in accordance with the terms contained in the Company’s form of Policy Loan Agreement then in use. The amount of loan available at any time is stated in Column 1 of the Table below, and includes Loans then unpaid. Interest will be at the rate of 5% per annum, payable in advance to the next anniversary, and annually in advance on that date and thereafter. If any Loan remains unpaid at the death of the Insured, and the amount of said Loan is not repaid in Cash before the first Instalment becomes payable under this Policy, the amount insured by this Policy shall not be paid in Instalments, as specified on the first page hereof, but shall be paid in one sum, namely $22,986. — from which shall be deducted the amount of said Loan and any other indebtedness due on this Policy.

We think that, under the provisions of the policies of the group just quoted, the insured clearly had an interest in them and their proceeds, which was not extinguished until his death and brings them within the Commissioner’s regulations and numerous Board and court cases, Cf. Sampson v. United States, 1 Fed. Supp. 95; Edith Huggard Sharp et al., Executors; 30 B. T. A. 532; Caroline W. Edwards et al., Executors, 31 B. T. A. 879.

Petitioner contends, however, that the authorities just above cited are not applicable because the contracts of insurance involved in group II are Ohio contracts, or, if not Ohio contracts, then New York contracts, where the policies were issued, and that in either event such policies are not includable in decedent’s estate because under the laws of both Ohio and New York the insured at the time of his death had no rights in the policy which could be exercised without the consent of the beneficiary.

The general rule of law as to contracts of all kinds is that they are to be governed as to their nature, validity, and interpretation by the law of the place where they were made, unless the contracting parties clearly appear to have had some other law in. view. 12 Corpus Juris, p. 449. This rule applies to contracts or policies of insurance. Liverpool & Great Western Steam Co. v. Phenix Insurance Co., 129 U. S. 397; Equitable Life Assurance Society v. Pettus, 140 U. S. 226; Mutual Life Insurance Co. v. Cohn, 179 U. S. 262.

The decedent was a resident of Ohio when the policies described in group II were taken out through Ohio agencies o,f the companies, and he was a resident of Ohio at the time of his death. Therefore, we think the law of Ohio governs the particular matter which we are now discussing.

The rule prevailing in Ohio is stated in Ohio Jurisprudence, vol. 22, sec. 268, as follows:

In the case of ordinary life insurance, the rights of the beneficiary attach immediately and become vested when the policy in which he is named as such is issued and the contract completed, unless the right is expressly given or reserved subsequently to designate a new beneficiary or avoid his rights. And the vested interest of the beneficiary, since it cannot be cut off except by his consent, cannot be divested by forfeiture clauses contained in the premium notice sign by the assured alone, and a policy on the life of the husband, when made payable to liis wife, her executor, administrator or assigns, creates a vested interest in her the moment it is issued.

The following Ohio cases are cited: Manhattan Life Insurance Co. v. Smith, 44 Ohio St. 156; Union Central Life Insurance Co. v. Buxer, 62 Ohio St. 385; Aetna Life Insurance Co. v. Penn, 4 Ohio N. P. (N. S.) 97; Douglas v. Metropolitan Life Insurance Co., 11 Ohio N. P. (N. S.) 513; Teepen v. Schlacther, 18 Ohio N. P. (N. S.) 33; Schlacther v. Teepen, 24 Ohio O. C. (N. S.) 30.

Notwithstanding the Ohio law quoted and urged by petitioners in their brief, we think the policies involved in this group are a part of decedent’s gross estate, and that to include them is not in violation of Ohio law.

It will be noted that in the quotation which' we have made from section 268, vol. 22, Ohio Jurisprudence, it is provided that the rights of the beneficiary attach immediately and become vested when the policy in which he is named as such is issued and the contract completed, “ Unless the right is expressly given or reserved subsequently to designate a new beneficiary or avoid his rights? (Emphasis supplied.) As to certain rights and privileges of these policies, it is plain that the insured reserved the right to exercise them without securing in any way the consent of the beneficiary. This right existed at the time of decedent’s death and makes the policies includable as a part of decedent’s estate under the authorities above cited and does no violence to Ohio law.

The case of Emily King Parker et al., Trustees, 30 B. T. A. 342, a case involving the inclusion of policies of insurance in an Ohio decedent’s gross estate, is distinguishable on its facts.

These policies in group II were installment policies, however, and should not have been included at their face value, but at their present or commuted value only. This commuted value has been stipulated and should be used in a redetermination of the deficiencies under Rule 50.

In his amended answer the respondent seeks to include in the decedent’s gross estate the following policies, amounting to $151,624.11:

In none of these policies was the right to change the beneficiary reserved. They contained provisions for cash surrender values and loan values, and other provisions similar to those contained in the policies described in group II. However, they did not contain that particular provision noted as to policies in group II and which we think is the determinative factor as to the inclusion of the policies in group II, to wit: “ The insured may, without the consent of the beneficiary, receive every benefit, exercise every right and enjoy every privilege conferred upon the insured by this policy.”

Petitioner makes the same contention as to the policies in group III as was made respecting the policies in group II, to wit, that they were all Ohio contracts, and that under the laws of the State of Ohio the insured had no right to surrender the policies for their cash surrender value or borrow their loan value by putting up the policies as collateral security, without the consent of the beneficiaries. We think petitioner’s contention as to the policies in group III must be sustained.

In Emily King Parker et al., Trustees, supra, three ordinary participating life 20-installment bond policies were taken out in 1903 by the decedent. The wife of the insured was named beneficiary with no right to change the beneficiaries. The insured could surrender the policies for cash in 1923, but not thereafter. They contained provisions for paid up insurance for extended insurance in case of default of premiums, and for loans on the policy upon legal assignment of the policies to the company as collateral security. We held that the insured could not borrow on the policies without the beneficiary’s consent, under the laws of Ohio, where the contracts were signed by the insurance company, and of Missouri, where the insured lived, made application, and received the policies. We further held that at the time of his death decedent had no interest in the policies which he could exercise without the consent of the beneficiary and the proceeds thereof should be excluded from the gross estate, following Levy's Estate v. Commissioner, 65 Fed. (2d) 412, and Reinecke v. Northern Trust Co., 278 U. S. 339. Cf. Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Commissioner, 79 Fed. (2d) 295.

As to the policies described in group III above, we hold for petitioner.

Reviewed by the Board.

Decision will be entered under Bule 50.

Akundell,

dissenting: I disagree with the majority report in so far as it holds that the proceeds paid under policies contained in group II should be included in decedent’s gross estate.

Leech agrees with this dissent.


text:
    The Cleveland Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52868.
    Promulgated September 30, 1935.

      Paul L. Holden, Esq., and H. J. Crawford, Esq., for the petitioner.

      Bruce A. Low, Esq., Dean Kimball, Esq., and L. H. Bushbroolc, Esq., .for the respondent.
   OPINION.

Van Fossan:

The notice o,f deficiency as to which this proceeding is prosecuted disclosed deficiencies aggregating $547,089.57 for the years 1922, 1924, 1925, 1926, and 1927 and an overassessment of $44,983.77 for 1928. Error was alleged in the determination of allowable depreciation. The case came on for hearing and the parties stipulated that the correct tax liability of petitioner for the several years was as follows:

It was further stipulated that “ no portion of the overpayment of $83,126.37 is claimed by the petitioner, since no formal claim for refund of this amount was filed within the period of limitations prescribed therefor.”

The sole issue before us relates to the filing of an alleged claim for refund for 1926, as to which the parties stipulated “ that the above stipulated amounts of deficiencies and overassessments shall be conclusive upon both parties but that either party may introduce evidence with respect to whether or not a claim for refund in the sum of $54,475.42 was properly filed and, if so, whether it was filed in due time for the year 1926.”

The parties also stipulated the following:

That $54,475.42 of the total overassessment for 1926 amounting to $65,055.33 resulted from findings of the Revenue Agent in his report of June 11, 1930. The tax for 1926 was paid in four installments as follows:
March 18, 1927_ $64,924.79
June 15, 1927_ 64, 924.79
Sept. 16, 1927_ 70,335.19
Dec. 15, 1927_ 70,335.19
Total-$270, 519.96

From the above it appears that the parties are in agreement as to all matters excepting solely whether a sufficient claim for refund was timely filed for 1926 so as to satisfy the requirements of section 504 (c) of the Revenue Act of 1934. As to this issue testimony was heard.

The facts established by the record as to a refund claim for 1926 are that on June 11 or 12, 1930, the revenue agent had completed his audit of petitioner’s tax returns for the years 1922 to 1929, and had prepared a proposed report on the same which he exhibited to Paul E. Wilson, an official of petitioner. Subsequently a typed copy of the report was furnished to petitioner. This report showed an over-assessment of $54,475.42 for 1926'.

Among the papers prepared by the revenue agent and exhibited to petitioner on June 11, 1930, was a claim for refund made out on Treasury form 843. This paper was signed and acknowledged by Wilson on June 11, 1930, and on June 14, 1930, with a letter of transmittal addressed to C. F. Foutzahn, Collector of Internal Revenue, Federal Building, Cleveland, Ohio, was delivered to an office messenger to take the same to the company’s mail room. Wilson took the precaution of telephoning the- mail room to assure himself the document would be included in the outgoing 12 o’clock mail and taken to the post office.

With the delivery to the messenger the direct evidence ceases. The messenger was not identified. No one testified to placing the letter in the mails. The only evidence on this point dealt with the general methods of handling and posting the company mail.

The record reveals no evidence of delivery to the post office, of receipt by the collector’s office, of transmittal to the Commissioner’s office in Washington, nor of its receipt in Washington. There is no record in any of the files of the sort customarily kept of refund claims, i. e., no card in the collector’s file of claims for refund, no notation under “ remarks ” in the “Assessment List ”, no letter of acknowledgment from the collector nor any retained copy thereof, no retained copy of letter of transmittal to the' Commissioner in the files of the collector, no record of receipt in the Commissioner’s office and no correspondence in the Commissioner’s office dealing with the claim.

The only shred of testimony as to receipt, and on this slender reed petitioner leans heavily, is found in the statement of an employe of the Commissioner’s office to petitioner’s attorney that he recalled seeing such a claim, although this he weakened by retraction on reflection, and a statement by this same employe in reference to petitioner’s claim for refund for 1926 found in the discussion of petitioner’s claims for other years. Though this testimony gives us pause, we are forced to the conclusion by the overwhelming preponderance of the evidence that petitioner never filed a claim for refund for the year 1926.

Deficiencies for the several years and in the amounts above set out are hereby redetermined.

Decision will he entered under Rule 50.


text:
    W. M. Ritter Lumber Company, Petitioner, et al., v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42833-42836, 43604-43606, 48749, 57319-57322.
    Promulgated September 30, 1935.

      J. S. Seidmam, Esq., and Frank E. Seidhnan, G. P. A., for the petitioner.

      Philip- M. Olark, Esq., and Stanley B. Pierson, Esq., for the respondent.
   supplemental opinion.

Leech :

On March 31, 1934, the Board promulgated its opinion in the above entitled proceedings, reported at 30 B. T. A. 231, decision thereunder to be entered pursuant to Rule 50. To date, neither party has submitted a proposed redetermination as provided for by Rule 50, and the Board has not entered its final decision.

Issue No. 9 involved, inter alia, the question of the application of the net losses of the Red Jacket Jr. Coal Co. (referred to as the Jr. Co.) for 1924 and succeeding years. Upon authority of prior decisions, the Board held (first paragraph at top of page 269 of the published report) that the two fractional parts of the calendar year 1924, the period prior to and the period subsequent to affiliation, each constituted a “ taxable year ” within the meaning of section 206 (b) of the Revenue Acts of 1924 and 1926.

Such holding is directly contrary to the recent decision of the Supreme Court in Helvering v. Morgan's, Inc., 293 U. S. 121. Upon authority of that decision, we hereby modify the above mentioned paragraph of the reported opinion to now hold, that, as to the Jr. Co., the two periods, January 1 to July 31, 1924, prior to affiliation, and August 1 to December 31, 1924, during affiliation, together constituted one taxable year, the calendar year 1924, in applying any of the Jr. Co.’s net losses to its own net income.

In all other respects, the reported opinion stands as that of the Board.