text:
    Phillip W. Haberman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank W. Collins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54426, 59149, 62542.
    Promulgated August 10, 1934.

      Bernhard Knollenberg, Esq., for the petitioners.

      John E. Marshall, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined deficiencies as follows:

The parties have disposed of all issues save one which is common to all three proceedings. A stipulation of facts was filed.

Haberman was vice president and general counsel, and Collins was secretary, of the Commercial Investment Trust Incorporated at all times material hereto. That corporation was a subsidiary of the Commercial Investment Trust Corporation. Haberman, on June 1, 1926, entered into a, contract with Commercial Investment Trust Corporation, and the Commercial Investment Trust Incorporated joined in that contract. The contract is in the form of a letter from the Commercial Investment Trust Corporation, addressed to and accepted by Haberman. It is in part as follows:

Nuw .York, June 1, 1926.
Mr. P. W. Haberman,
New Ywlc, City,.
Dear Sir: • ■
For some time past you have been in the employ of Commercial Investment Trust Incorporated, a subsidiary of this. Corporation, under a year to year contract and in addition to salary thereunder you have received from time to time additional compensation in cash. We write this letter to confirm our understanding that the earlier arrangement of said subsidiary with you has been cancelled and you are to be employed by it in the same capacity as before for a period of three years beginning January 1, 1926, during which employment you will not engage in or devote, your, time to any other enterprise. Your compensation is to be as follows:
(1) A cash salary payable in equal monthly installments. For the first year such salary is to be $25,000. Unless altered by agreement between us the salary of the second year and of the third year will be the same.
(2) Additional compensation in the form of a right, hereby given you to purchase 3,600 shares of common stock of Commercial Investment Trust Corporation on terms advantageous to you, one-third of which amount you are permitted to purchase in each of the three years on the terms more fully set out in the succeeding- paragraphs.
All of the above mentioned shares of stock have been issued and fully paid for by others than yourself. Certificates numbered.as hereinafter set forth have been made out in your name, endorsed by you and deposited with us as security for an advance of $126,000 made to you by us to assist you in purchasing the stock. This sum, together with interest at the rate of 5 per cent per annum from January 1, 1926 on the unpaid balance thereof as it exists from time to time, you will by acceptance of this letter agree to repay to this Corporation. If you fail to take up any of the allotments of stock hereinafter described at the time and on the terms stated, all your rights as to all stock held in your account are automatically terminated, but you shall then be under no obligation to the Corporation with respect to the loan or otherwise subject to liability because of your failure to take up the stock; but if you shall have made prepayment of or on account of any stock not at such time deliverable to you the amount of such prepayment shall be refunded to you.
An account in your name has been opened by the Corporation and you are now charged therein with an indebtedness in the amount of the advance above named and are credited with the number of shares of common stock above stated deliverable from time to time as herein provided. The above shares of stock for the purposes of this agreement are divided into three equal parts of 1,200 shares each, called respectively Allotments A, B, and C.
A. If you shall repay to the Corporation on or before January 2, 1927, the sum of $42,000 together with interest on the entire balance of your account to the date of payment, you will be entitled to receive Allotment A on January 2, 1927 (but not before that date unless the Corporation shall elect to advance the date of delivery) free and clear of all indebtedness provided that on July 1, 1926 you were still in the employ of a subsidiary or affiliated company and provided further that if for any reason you shall on or before June 30, 1926, cease to be in such employ, then upon repayment on or before July 1, 1926, of one-half of the sum above stated in this Paragraph “A” together with interest on the entire balance of your account to the date of payment, you will be entitled to receive one-half of Allotment A and you will have no further rights or obligations hereunder, or with respect to any of the stock allotted to you.
B. If you shall have taken and paid for Allotment A and after January 2, 1927, and on or before January 2, 1928, you or your assigns (as hereinafter limited) shall repay to the Corporation the sum of $42,000 together with interest on the entire balance of your account to date of payment, you, or your assigns as the case may be, will be entitled to receive Allotment B on January 2, 1928 (but not before that date unless the Corporation shall elect- to advance the date of delivery) free and clear of all indebtedness provided that on July 1, 1927 you were still in the employ as aforesaid, provided further that if for any reason you shall after December 31, 1926, and on or before June 30, 1927, cease to remain in the employ of a subsidiary or affiliated company, then upon repayment on or before July 1, 1927, of one-half of the sum above stated in this paragraph “ B ” together with interest on the entire balance of your account to the date of payment, you or your assigns (as hereinafter limited) will be entitled to receive one-half of Allotment B, and neither you nor your assigns shall have any further rights or obligations hereunder or with respect to any of the stock allotted to you.
C. If you, or your assigns as the case may be, shall have taken and paid for allotments A and B and after January 2, 1928, and on or before January 2, 1929, you or your assigns (as hereinafter limited) :shall repay to the Corporation the sum of $42,000 together with interest on the entire balance of your account to date of payment, you, or your assigns as the case may be, will be entitled to receive Allotment C on January 2, 1929 (but not before that date unless the Corporation shall elect to advance the date of delivery) free and clear of all indebtedness provided that on July 1, 1928, you were still in the employ as aforesaid and provided further that if for any reason you shall after December 31, 1927, and on or before July 1, 1928, cease to remain in the employ of a subsidiary or affiliated company, then upon repayment on or before July 1, 1928, of one-half of the sum above stated in this paragraph “ C ” together with interest on the entire balance of your account to the date of payment, you or your assigns (-as hereinafter limited) will be entitled to receive one-half of Allotment O, and neither you nor your assigns shall have any further rights or obligations hereunder or with respect to any of the stock allotted to you.
All of your rights with respect to Allotment B or Allotment C, or both, at any time may be assigned by you to your wife, or to any child or children of yours, but to no other person without our written consent thereto. After written notice to the Corporation of any such assignment the Corporation will look to such assignee or assignees for repayment of the indebtedness with respect to the Allotment involved. -
While any stock not theretofore taken up by you is being held for your account, cash dividends when received thereon will be credited first to interest on the loan to you, then to the principal thereof; stock dividends when received will be added to the respective Allotments of stock held for your account, and certificates representing any rights to subscribe issued to the record holder of the stock immediately upon receipt will be turned over to you or your assigns as above defined.
As further consideration for this agreement, you shall be entitled to have credited upon your indebtedness, if any (or paid to you if there shall then be no indebtedness or the Corporation shall elect to make payment), on January 2, 1927, 1928 and 1929 respectively, an amount equivalent to the saving in corporate income tax resulting from the deduction of amounts to be credited (or paid) to you under this contract for the preceding years, excluding the amount payable under this paragraph. It is our understanding that under the existing tax laws such a deduction is allowable for the sum of' the amount payable under this paragraph and all cash dividends and the value of all stock rights paid or issued to you during the year with respect to stock not deliverable hereunder at the time of such payment or issue, together with the excess, over $35 per share, of the fair market value at- date of delivery, of any stock which during the year is delivered to you hereunder or which this corporation shall be unconditionally obligated during the year to deliver to you, free and clear of all restrictions hereunder less interest .paid or charged hereunder on your indebtedness during the year. On or about December 31, 1926, and on or about December 31, 1927 and on or about December 31, 1928 you will be advised of the amount to be claimed by the corporation as a deduction from its taxable net income on account of the payment to you or the liability to pay to you the items above mentioned, and you will also be advised of the amount to be reported by the Corporation as paid to you with respect to such items. If for any reason the Corporation is denied any portion of such deduction, you shall be charged with or shall repay an appropriate portion of the amount credited or paid to you under this paragraph as the anticipated saving in corporate income tax which is not in fact saved by reason of such disallowance.
The opportunity to purchase stock under- the terms hereof shall continue even if your employment should change so that some other subsidiary or affiliated company of the Corporation should be your employer; but it is at all times dependent upon your continuance in the employ of one of our subsidiary or affiliated companies. Vou are to understand that if you cease to continue in such employ (unless such cessation be by death) your rights hereunder (and the rights of your assignees) terminate .as hereinbefore stated whether the discontinuance is voluntary or involuntary on your part.
% * ♦ , & * *
The undersigned Company, a subsidiary of the above mentioned Commercial Investment Trust Corporation, being the company in the foregoing letter referred to as and which is the employer of the addressee, to whom the foregoing letter is addressed, joins in the execution of the foregoing agreement for the purpose of accepting,:the benefits thereby conferred upon it and of assuming and being bound by the obligations and liabilities thereby imposed upon it.
June 1, 1926.
Commebcuai, Investment Trust Incorporated
[Signed] By Edwin C. Vogel,
... Vice-President.

Collins on the same day entered into a contract which was identical with the above contract except for his name and the amounts. His salary was to be $12,500 in cash and a right to purchase 900 shares.

Haberman received 1,200 shares of Commercial Investment Trust Corporation stock on January 2, 1928, and 1,200 shares on January 2, 1929, pursuant to his contract. He completed the cash payments of $35 per share for the first 1,200 shares in 1927 and for the second 1,200 shares in 1928. ;

Collins received 300 shares of Commercial Investment Trust Corporation stock on January 2, 1928, pursuant to his contract. He completed the cash payments of $35 per share for this stock in 1927.

Both taxpayers kept their accounts and filed their income tax returns on a cash receipts .and disbursements basis.

The fair market value of the Commercial Investment Trust Corporation common stock was $57 per share'on June 1, 1926, $62 per share on January 2, 1928, and $71.50 per share on January 2, 1929;

The Commissioner added $32,400 to Haberman’s income for 1928 as additional salary, being the difference between the cost of 1,200 shares of Commercial Investment Trust Corporation stock at $35 per share and its fair market value of $62 per share. For 1929 he added $43,800 to Haberman’s income as “Income from Commercial Investment Trust, Inc., increased ”, but the record contains no further details or explanation of this adjustment.

The Commissioner added $8,100 to Collins’ income for 1928, representing the difference between the cost of 300 shares of Commercial Investment Trust Corporation stock at $35 per share and its fair market value of $62 per share.

The sole question for decision is whether or not the Commissioner erred in making these additions to income. The petitioners argue, first, that the contracts were for the purchase of stock and iio income results from a purchase of stock by an employee from an employer at less than fair market value. The same argument based upon the same court decisions was fully considered in the case of Albert Russel Erskine, 26 B.T.A. 147. The Board held that the contract there in question was essentially one of employment and all that was realized therefrom by the petitioner was compensation for services and income at the time received. There is no need to repeat the discussion of the ErsJdne case. The contracts in question here were obviously contracts of employment providing for the payment of compensation for services to be rendered by these petitioners. All that each received under these contracts was income, including cash and other valuable rights and benefits. Sec. 22 (a), Bevenue Act of 1928; Eegulations 74, arts. 51 and 53.

An alternative argument of the petitioners is that they had agreed to retain the stock purchased under their, contracts and, consequently, the value of the stock would not be the saíne as that of free stock. Haberman testified that in discussions preceding the execution of the contracts the president of the Commercial Investment Trust Corporation laid it down as a condition precedent to any of the executives having the opportunity to accept this contract and sign it, the understanding that the stock would be acquired by these executives for permanent investment and not for speculation.” It does not appear that Collins knew of this attitude on the part of the president. No such restriction was embodied in the contracts. No time was fixed during which the stock would not be disposed of. The record does not show that there was any restriction upon sales of the stock which would make any particular stock less valuable than other stock. Cf. James Couzens, 11 B.T.A. 1040, 1163, 1164; Wilbur F. Burns, 30 B.T.A. 163; 173 et seq.; T. W. Henritze, 28 B.T.A. 1173; William C. Newman, 10 B.T.A. 158; affd., 40 Fed. (2d) 225; rehearing denied, 41 Fed. (2d) 743; certiorari denied, 282 U.S. 858; Rodrigues v. Edwards, 40 Fed. (2d) 408. The Commissioner has used certain values and the parties have stipulated that those values are correct values of the Commercial Investment Trust Corporation stock. No other values have been proved. Thus in no event would this argument aid the petitioners (cf. Fesler v. Commissioner, 38 Fed. (2d) 155, affirming 13 B.T.A. 1356; certiorari denied, 281 U.S. 755), for without some definite value the Board would be unable to determine a definite tax liability differing from that determined by the Commissioner.

Finally the petitioners contend that their income was received, if ever, when the right to subscribe for stock at less than market value unconditionally vested in them; this right, with respect to one half of allotment B, unconditionally vested in them on July 1, 1927, and, with respect to the other one half of that allotment, on December 31, 1927; therefore on the cash receipts and disbursements basis they received this alleged income in 1927 and not in 1928 as determined by the Commissioner. A similar argument would be applied to show that income from rights to purchase allotment C was received in 1928 and not in 1929 as determined by the Commissioner. Collins would thus escape tax entirely, since 1927 is not before the Board and the Commissioner has neither made an alternative contention nor furnished evidence to show that Collins was entitled to purchase allotment C. Haberman would also escape paying some tax on that theory. However,- we believe that there are fatal defects in that argument. These petitioners had to comply with the terms of their contracts in order to derive anything of value, over and above their cash salaries, from those contracts. Their rights with respect to allotment B did not entitle them to receive the allotment until January 2, 1928. Their rights were useful and valuable only as a means of purchasing stock. The stock purchase could not be made final and complete until January 2, 1928. Thus the petitioner’s rights under the contracts were not consummate until that date. Until that date the petitioners could have undone all that had been done previously in respect to that allotment by not taking the allotment. The value of the petitioners’ rights to purchase allotment B was dependent upon the difference between the fair market value of the stock on the date of delivery of the certificates, January 2, 1928, and the cost of the stock to the petitioners, $35 per share.- Prior to January 2,1928, the market value of the stock on that date would be an unknown factor and consequently the value of the rights would be purely speculative and not a cash equivalent. These rights were unlike stock-purchasing rights, which entitle the holder to make an immediate purchase. The Commissioner did not err in holding that the value of the rights with respect to allotment B on January 2,1928, was income on that day rather than in 1927, and in holding that the value of the rights with respect to allotment C on January 2, 1929, was income on that day, where the taxpayers were on a cash receipts and disbursements basis.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Adams:

license: Public Domain

text:
    Gertrude McGinley, Trustee, William McGinley Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49320, 59472.
    Promulgated August 10, 1934.

      Lawrence Tarrlton, Esq., for the petitioner.

      DéWitt M. Evans, Esq., for the respondent.
   OPINION.

Adams:

Deficiencies in income tax of $6,960 for 1926 and of $1,799.97 for 1929 are in controversy in these consolidated cases. The facts as stipulated in both cases, with the exhibits, are adopted by reference as part of our findings. The only question for determination is whether one trust with five beneficiaries was created under a declaration of trust, or five separate trusts, each with one separate beneficiary, were created.

On February 1, 1926, William McGinley executed a. declaration of trust to his wife, Gertrude McGinley, as trustee for the benefit of his five children, by which he assigned and transferred to the trustee 12,500 shares of the capital stock of the Fulton Oil Co. and 12,500 shares of the capital stock of the Rice Oil Co.

The declaration provided that the trustee was “ to hold said shares of stock, to collect all the income and dividends thereof and after paying therefrom any taxes or other public charges and any necessary expenses of carrying out these trusts, to invest and re-invest the residue thereof as part of the original trust estate.”

The instrument further provided :

The said trustee shall act at all times without bond; and shall have the right to sell, trade or transfer any part or all of the trust estate herein created at any time as the same may seem expedient, and may loan or re-invest the proceeds of sale in other stocks or bonds as may best serve the interests of the trust estate.
My said Trustees shall divide said Trust estate hereby created into five (5) equal shares, one (1) share to be held in trust for each of my five (5) children, Thomas K. McGinley, John Jacob McGinley, Mary Emily McGinley, Richard McGinley, and Jane McGinley.
When any one of my said children shall have arrived at the age of twenty-one (21) years my said Trustee shall pay over to said child the income on his share of said trust estate until he shall have attained the age of thirty-five (35) years whereupon my said Trustee shall pay and deliver over to said child his share of the principal of said trust estate.

The remaining portion of the declaration of trust related to the-devolution of the interest of any child dying before becoming 35 years of age, and to the appointment of succeeding trustees in the event of the death of the original trustee.

The care and management of the trust property were performed by the trustor, William McGinley, but the income therefrom was paid to the trustee. It does not appear that there was a division of the trust property into five separate portions or trusts. Only one of the children had become of age in 1929 and no payment of any part of the income had been made to him. The income was accumulated and there was no segregation of principal or income.

For the year 1926 the total amount of the income from the trust property was $75,000, which the trustee returned on Form 1041, showing each beneficiary’s share to be one fifth of the whole amount. In making payment of the taxes assessed she used separate checks for each beneficiary’s portion of the tax.

The petitioner contents that there were five trusts created by the trust instrument and the tax for the year in question should be computed on the basis of five separate trusts and not on the basis of a single trust.

Respondent cites and relies upon section 219, Revenue Act of 1926, and section 161 (a) (1), Act of 1928, which provide in substance that income accumulated or held for future distribution under the terms of a trust shall be taxed to the trust estate, and it is urged that, as the income here was to be accumulated until each child reached 21 years of age, the entire income from the trust property should be taxed as one entity.

It is possible of course to create more than one trust by the same written instrument, but in order that this may be accomplished the intent should clearly appear from the writing itself. An examination of this declaration of trust discloses that the singular number is used nine times in referring to the trust property, and the plural “ trusts ” only three times, and two of these refer to the conditions of the trust rather than to separate trusts.

The clause which directs a division into five shares provides, “ shall divide said trust estate hereby created ” and the next clause provides that when any child arrives at the age of 21 years “ my said trustee shall pay over to said child the income on his share of said trust estate until he shall have attained the age of thirty-five years, whereupon my said trustee shall pay and deliver over to said child his share of the principal of said trust estate.”

It will be observed that there is nothing said about separate trusts, but the direction is to divide the trust estate into five equal shares and that the income from each child’s share shall be paid to it and its share of the principal of “ said trust estate ” upon the happening of certain events.

We note that in the second clause of the declaration of trust the trustee is directed to collect all the income from the trust property and, after paying all the necessary expenses, “to invest and reinvest the residue thereof as part of the original trust estate.” There is no direction to segregate the income into five shares and thereafter to treat each share as the property of a beneficiary to be accumulated and be paid over to him. Cf. Lynchburg Trust & Savings Bank v. Commissioner, 68 Fed. (2d) 356. On the other hand, the income is to be merged with the original trust estate. We think this direction is inconsistent with the theory of five separate trusts. At the hearing the petitioner’s attorney would not assert that the declaration of trust was ambiguous, when asked by the presiding member. If the instrument is not ambiguous, and we do not think it is, the intention of the donor must be ascertained from the instrument and not from his testimony given several years later as to what he intended to do. Cf. Colton v. Colton, 127 U.S. 300.

The petitioner in his brief calls our attention to William, B. Mc-Ilvaine et al., Trustees, 29 B.T.A. 304. That case is readily distinguishable from the instant case upon the facts. There, the deed gave the parties broad powers to alter or modify the instrument. The parties agreed that the original instrument created only one trust with three beneficiaries. It was, however, later amended and specifically modified to create three separate trusts. As so amended the instrument differed from the one before us in that respect.

We think that one trust estate with five beneficiaries was created. In several recent cases trust deeds substantially like that in controversy here have been similarly construed. J. C. Wynne et al., Trustees, 28 B.T.A. 125; Margaret B. Sparrow, 18 B.T.A. 1; Johnson v. United States, 65 Ct. Cls. 285; State Savings Loan & Trust Co., Trustee, 25 B.T.A. 228; affd. 63 Fed. (2d) 482; Langford Investment Co., Trustee, 28 B.T.A. 222; John J. Rauers et al., Trustees, 28 B.T.A. 516; Canal Bank & Trust Co. et al., Executors, 30 B.T.A. 390.

Decision will be entered for the respondent.


author: Arundkll :

text:
    Emory R. Buckner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket. No. 72669.
    Promulgated August 14, 1934.

      George E. Cleary, Esq., for the petitioner.

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

Arundkll :

A deficiency of $7,500 in income tax asserted by the respondent for the year 1930 arises from his inclusion in petitioner’s income of $30,000 paid to him out of funds of the city of New York. Petitioner claims that the $30,000 was paid for services rendered as an officer of the State of New York; hence is exempt from Federal tax. Respondent has denied exemption. Whether petitioner was an officer of the state is the only issue.

The facts were stipulated at length and in detail, and we adopt the stipulation filed as our findings of fact. A summary of the salient facts will be enough for the purpose of this report.

Petitioner is an attorney at law and from 1928 to 1930 was a member, successively, of two partnerships engaged in the practice of law in New York City. On April 5, 1928, the Governor of New York directed the attorney-general of that state to “attend in person or by one of your assistants or deputies ” an extraordinary special and trial term of the Supreme Court for Queens County, to appear before the grand jury for the purpose of managing and conducting inquiries into any wilful or corrupt misconduct in office of public officers and unlawful acts of others in connection therewith, and further to manage, prosecute, and conduct the trials in case indictments were found, and:

* * * that in person or by your assistant or deputy in the place and stead of the District Attorney of Queens County, you exercise all the powers and perform all the duties conferred upon you by said section 62 of the Executive law and this requirement made thereunder * * *.

On April 6, 1928, the attorney-general designated petitioner as special assistant attorney-general to perform the duties directed in the governor’s order of April 5. The letter from the attorney-general to petitioner reads as follows: ■

I hereby designate you a Special Assistant Attorney General for the purposes herein specified, to wit:
To appear for the Attorney General of the State of New York and attend in such capacity an Extraordinary Special and Trial Term of the Supreme Court appointed by the Governor of the State of New York on the 6th day of April, 1928 to be held at the Court House at Long Island City, Queens County, New York, on the 16th day of April, 1928, at ten o’clock in the forenoon of that day and to continue so long as it shall be necessary for the purpose of inquiring into any wilful or corrupt misconduct in office of public officers and any and all unlawful acts of any and all persons of every description in connection, therewith in the same county of Queens, and for such other proper matters as may come before said court, and that you appear before the grand jury drawn for said term of Court and before any grand jury or grand juries which shall be drawn and sit for any later term or terms of said court for the purpose of managing and conducting in said court and before said grand juries or said other grand juries any and all proceedings, examinations and inquiries and any and all criminal actions and proceedings which may-be had or taken by or before said grand jury or said grand juries concerning or relating to its inquiry into any wilful or corrupt misconduct in office of public officers and any and all unlawful acts of any and all persons of every description in connection therewith in the said county of Queens, and further to'manage, prosecute and conduct the trial at said term of court or at any term at which any and all indictments which may be found against any public officers or other persons may hereafter be tried and that in the place and stead of the District Attorney of Queens County you exercise all the powers and perform all the duties conferred upon the Attorney General by § 62 of the Executive Law and a certain order of the Governor given under the hand and seal of the Governor of the State of New York on the 6th day of April, 1928, which said order superseded the District Attorney of said County of Queens in the premises and in such actions and proceedings the said District Attorney of the County of Queens shall exercise only such powers and perform such duties as are required of him by you.
Very truly yours,
[Signed] Albert Ottin&er
Attorney General.

On April 16, 1928, petitioner took an oath, of office [required by Article XIII of the Constitution of the State of New York to be taken by members of the legislature, and all officers executive and judicial ”] and the oath subscribed by him was filed with the secretary of state.

During 1928 petitioner and certain special deputy assistant attorneys-general conducted an investigation into the conduct in office of public officials of Queens County, and charges were presented to the grand jury, which returned an indictment against Maurice E. Connolly, president of the Borough of Queens, Frederick Seely, an assistant engineer employed by the city of New York, and John M. Phillips. The latter, Phillips, died after the indictment and prior to any trial. Thereafter petitioner and his assistants, the special deputy assistant attorneys-general referred to above, prepared for trial of the case against Connolly and Seely, and in October 1928 petitioner tried the case and the defendants were convicted under count one of the indictment, which charged conspiracy to cheat and defraud the city of New York of property. Defendants appealed to the Appellate Division of the Supreme Court of the State of New York. Petitioner and his assistants prepared the brief for the state on the appeal and in November 1929 petitioner argued the appeal before the Appellate Division, which affirmed the conviction (227 App. Div. 167; 287 N.Y.S. 308). Defendants appealed to the Court of Appeals of the state, and petitioner and his assistants prepared the state’s brief on that appeal and in March 1930 petitioner argued the case for the state in the Court of Appeals, which affirmed the conviction (253 N.Y. 33'0; 171 N.E. 393).

During the investigation and trials of the above cases petitioner maintained a separate office for himself and assistants. Prior to October 6, 1928, the office was at No. 2 Lafayette Street, New York, and thereafter in the building of the Association of the Bar of the City of New York. The lease agreement for the latter office was entered into between the Bar Building, Inc., and the attorney-general of the state. The expenses of the office and the amounts paid to petitioner and his assistants were paid by the city of New York out of public funds on vouchers issued by the attorney-general of the state to the comptroller of the city of New York.

Petitioner’s services in the matters above outlined were at all times subject to the orders of the attorney-general of the state and petitioner at various times was in touch with the attorney-general by conferences and communication with reference to those matters. Petitioner was at all times subject to call for the conduct of the investigation and litigation for which he was appointed, although such services did not occupy his entire tune and attention.

In 1930 petitioner received the sum of $30,000 for services rendered in the above mentioned investigation, trial and appeals, all of which services were performed pursuant to his designation by the attorney-general as special assistant attorney-general.

The $30,000 so received by petitioner was included for 1930 in the information return filed by the firms of which petitioner was successively a member in that year. Petitioner received his distributive share of other income of those firms during the period in which he was engaged in the proceedings above outlined, and his distributive share for 1930 was in excess of $30,000. In petitioner’s income tax return for 1930 he excluded from his distributive share of firm income the $30,000 received from the city of New York, and the respondent has added that amount to his reported taxable income. It is stipulated that if the $30,000 received by petitioner is subject to Federal income tax there is a deficiency of $7,500, and if that amount is exempt from tax there is no deficiency.

The petitioner in this case was designated a special assistant attorney-general in the same way that the taxpayers received their designations in Commissioner v. Murphy, 70 Fed. (2d) 790, and George Z. Medalie, 30 B. T. A. 1283, in both of which exemption was denied. In this case, as in those cited, petitioner has failed to establish that he was appointed to an office under section 61 of the Executive Law of New York, as he claims, rather than employed under section 65, as urged by the respondent. On authority of those cases we hold that the compensation received by petitioner for his services as special assistant attorney-general is not exempt from Federal income tax.

In view of the stipulation of the parties that, if the amount received by petitioner is held to be subject to tax, the deficiency is the amount determined by the respondent, we have no occasion to go into a suggested question of whether any part of the $30,000 loses an exempt status by reason of being paid into a partnership.

Decision will be entered for the respondent.


author: Leech :

text:
    Fremont C. Peck, et al., Executors of the Will of Clara S. Peck, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61520, 61521.
    Promulgated August 14, 1934.

      J. Sterling Halstead, Esq., for the petitioners.

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

Leech :

The propriety of including the dividends and a part of the proceeds of the sale of the Woolworth stock, as gain thereon, in the income of petitioners’ decedent, and petitioners, for 1928, rests upon the relationship between petitioners’ decedent and the Times, existing, by virtue of the written agreements appearing in the findings of fact, at the receipt of these funds by the Times. Although these two agreements are not identically worded, we have no hesitation in concluding, as apparently the parties here concluded, that their meaning and intent was the same.

Whether the transfer of the Woolworth stock was a loan, as respondent contends, or a sale, which petitioners urge, petitioners’ decedent, Clara S. Peck, legally could, and actually did, by the recited agreements, reserve to herself the right to the dividends paid thereon. Bettendorf v. Commissioner, 49 Fed. (2d) 173.

Although the contested dividends were undoubtedly received by the Times, they were derived ” — which is the word used in the applicable statute — by decedent and petitioners. Cf. Shellabarger v. Commissioner, 38 Fed. (2d) 566; Marion Stone Burt Lansill, 17 B.T.A. 413.

The Times received these dividends, either as agent for Mrs. Peck, or the petitioners, in their collection, or as trustee for the same purpose. Cf. Bettendorf v. Commissioner, supra. If the former construction is accepted, petitioners’ decedent, Mrs. Peck, and petitioners, are clearly liable as the taxpayers deriving the income therefrom, even though neither she nor petitioners actually received it from the Times. The receipt of income by an agent for that purpose is receipt by the principal. Maryland Casualty Co. v. United States, 251 U.S. 342; Frank E. Best, 26 B.T.A. 1070; S. W. Forrester, 23 B.T.A. 942.

If the status of the Times be construed as that of a trustee, then these dividends, immediately upon their receipt, became distributable under the terms of the express trust within which they were collected, and were thus taxable to the distributees thereunder, though never actually distributed. Kevenue Act of 1926, section 219 (b)(2). Cf. Bettendorf v. Commissioner, supra. Accordingly, petitioners’ assignment of error in reference to respondent’s inclusion of the dividends in computing the contested deficiencies, is overruled.

But this controlling relationship between the Times and petitioners’ decedent, in its effect here upon any profits on, or proceeds from, the sale of the Woolworth stock by the Times, was different from that relating to the dividends.

Certainly, if the controverted transfer of the stock to the Times were a sale, no income could have been derived by petitioners’ decedent, or petitioners, in its later sale by the Times. Though not a sale, the same result follows upon the present record.

The purpose of the transfer to the Times was merely to relieve its financial difficulties, in accomplishing which, Mrs. Peck was obviously deeply interested. In effectuating this purpose by the transfer of the Woolworth stock under the terms of these agreements, no idea of securing pecuniary profit to her is apparent. No agency or trust was created under which this stock was to be sold for petitioners’ decedent, or petitioners. She intended to and did provide for the return to her of an equal number of shares of the same stock borrowed and the payment to her of any dividends paid thereon in the meantime, or, in the event of the sale of the stock, the equivalent thereof. However, no obligation upon the Times to account to petitioners’ decedent, or petitioners, for any part of the proceeds of their sale of this stock, directly or indirectly, resulted from these agreements, or otherwise.

Under the terms of the recited agreements, decedent loanéd this stock, not money, as in the case of Frank E. Best, supra. In exchange for the promises of the Times contained in these agreements, petitioners’ decedent transferred the stock, together with all incidents of ownership therein, except the right to enjoy the dividends thereon. These incidents of ownership, so transferred, included the right to sell or hypothecate the stock for its own account. The Times exercised this right. No gain was derived by petitioners’ decedent, or petitioners, in such sale. Provost v. United States, 269 U.S. 443; James v. United States, 63 Ct.Cls. 379. The assignment of error directed to the inclusion of such gain in the computation of the disputed deficiencies, is sustained.

Decision wHl be entered under Rule 50.

       Sec. 213 (a), Revenue Act 1926. The term “ gross income ” includes gains, profits, and Income derived * * *.


author: Leech:

text:
    North American Reassurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52674, 60678.
    Promulgated August 14, 1934.

      William E. Hotchkiss, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

Leech:

On January 5, 1934, the Board promulgated its opinion in these consolidated proceedings, reported at 29 B.T.A. 683, but the final decision has not been entered, due to the granting of a motion to withhold its entry pending the decision of the Supreme Court in the case of Rockford Life Iris. Co. v. Commissioner, 292 U.S. 382.

Respondent has now filed a motion for reconsideration and revision of the Board’s opinion with respect to its holding that petitioner was entitled to a deduction for depreciation upon furniture and fixtures used in the underwriting, as well as the investment department, of its business. The hearing in the proceeding occurred January 16, 1933. On August 18, 1932, upon motion granted by this Board, respondent filed an amended answer herein, praying a specific increase in the deficiencies. Cf. Cascade Milling & Elevator Co., 25 B.T.A. 946. Respondent now also moves that the Board grant that prayer. Such motion is well founded and, therefore, is hereby granted.

Under the cited decision of the Supreme Court in Rockford Life Ins. Co. v. Commissioner, supra, petitioner herein is not entitled to a deduction for depreciation on its furniture and fixtures used in the underwriting department of its business. Accordingly, our opinion heretofore promulgated is now modified to so hold.

The stipulation of facts in these proceedings, set out in our prior opinion, discloses that in determining the deficiencies in controversy, the respondent allowed for the years 1926 to 1928, inclusive, depreciation at the rate of 10 percent on the stipulated cost of all furniture and fixtures used in the business, and, further, that for the year 1929, respondent allowed depreciation at the rate of 10 percent on the cost of furniture and fixtures used only in the investment department. The cost of the furniture and fixtures used only in the investment department for each of the years in controversy is stipulated. We now conclude that, in determining the deficiencies for the years 1926 to 1928, inclusive, respondent erred in allowing depreciation on furniture and fixtures used in petitioner’s underwriting department, and that his prayer for an increase in the deficiencies for those years should be granted. Our prior opinion is, therefore, further modified to so hold.

Decision will be entered under Buie 50.


author: SteRniiagen:

text:
    A. D. Geoghegan, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. A. D. Geoghegan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64134, 64135.
    Promulgated August 14, 1934.

      Justin V. Wolff, Esq., for the petitioners.

      Frank B. ScElosser, Esq., for the respondent.
   OPINION.

SteRniiagen:

The respondent’s determination treats the shares sold by petitioner in 1927 as being some of those acquired in 1925 and measures the gain as the difference between the cost of such shares and the total sale price. Petitioner contends that the basis to be used as to 1,800 shares is the cost of those shares which he bought in 1927. The foundation upon which petitioner rests is his present testimony that he intended to sell the later acquired shares.

We think, however, that the evidence shows otherwise. It shows that, if any identification as to shares could have been recognized, he actually used the earlier certificates and that his only intention was “not to disturb his original investment” any more than he could help. Clearly the identity of shares or certificates did not affect his investment. His investment was fro tanto the same whether he retained one certificate or sold one group of shares or another. It was not until he learned that his taxes were affected that he realized a possible importance in which shares or certificates he used. But this was long after the event. So we say that, even if mere intent is controlling, cf. Howbert v. Penrose, 38 Fed. (2d) 577, the intent to sell the later shares is not proven.

But if actual intent were proven by petitioner’s oral' testimony at the hearing, it would still be true that he voluntarily sold shares from the earlier block and used the earlier certificate for the purpose of delivery. This actual conduct is more important as evidence of his intent than his afterthought. His secretary’s accounting does not determine what petitioner had done as a matter of law.

Since we think that, even assuming that the shares are susceptible of identification, the respondent correctly held that the petitioner sold the earlier, it is unnecessary to consider whether they were identifiable. If they were not, the first in, first out rule sustains the determination. Howbert v. Penrose, 38 Fed. (2d) 577; Skinner v. Eaton, 45 Fed. (2d) 568; Snyder v. Commissioner, 54 Fed. (2d) 57; Heinz v. Commissioner, 70 Fed. (2d) 461; Burdett Stryker, 21 B.T.A. 561; Christian F. Leng, 22 B.T.A. 149; J. T. Hedrick, 24 B.T.A. 444; Estate of Richard B. Twner, 26 B.T.A. 1204; Mary E. Horner, 28 B.T.A. 360; John A. Snyder, 29 B.T.A. 39; Ralph H. Seelye, 29 B.T.A. 695.

Judgment will be entered u/nder Rule 50.


author: Matthews:

text:
    Robert J. Kleberg, Caesar Kleberg and Richard King, Executors of the Estate of Henrietta M. King, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52632.
    Promulgated August 15, 1934.

      Leroy G. Dernnan, Esq., for the petitioners.

      John H. Pigg, Esq.j for the respondent.
   OPINION.

Matthews:

The income tax deficiency involved is $22,375.31 for the year 1926. The petitioners also claim an overpayment of $11,364 for the same year.

The sole matter in controversy is the deductibility in 1926 as a statutory net loss, under section 206 (a)(1), (b), and (g) of the Bevenue Act of 1926, of $155,820.68 claimed by petitioners to have been sustained in 1925. Whether there was such a net loss depends in turn upon the deductibility from-petitioners’ gross income for 1925 of items in the aggregate of $241,574.69, representing cost of ranch operations during this taxable-period, from decedent’s death on March 31, 1925,.to December 31,' 1925. No question is made by the respondent as to these expenditures being “ ordinary and necessary expenses ” under section 214 (a) (1), and, from the facts stipulated as to their character, we have made the finding that they were ordinary and necessary expenses. As such they were properly deductible from petitioners’ income for 1925 unless they should be disallowed under the respondent’s contention.

Eespondent contends that the petitioners did not sustain a statutory net loss for the year 1925, for the reason (a) that the items of expenses upon the basis of which the claimed loss is predicated have been properly allowed by the Commissioner as deductions from the' petitioners’ gross estate in computing estate tax liability, and (b) that the estate elected to claim and to receive the benefit and advantages flowing from the allowance of the expenses as deductions from its gross estate for estate tax purposes and is, therefore, es-topped to deny that it made such election.

The petitioners contend (1) that, disregarding the relationship of the items to the estate tax return, they are deductible in the income tax return; (2) that, even if the items were allowed in computing the Federal estate tax, they are, nevertheless, deductible in computing income tax, and (3) that the facts in reference to the handling of the items in the estate'tax return were not such as to estop taxpayer from deducting them in computing income tax.

Petitioners also contend that the items were not allowed in the estate tax return. From a careful examination of all of the documents submitted in evidence and of the facts stipulated, we are of the opinion and have so found that the items were allowed as a deduction in determining the amount of the deficiency in estate tax which was finally agreed upon.

The facts do not support respondent’s contention that petitioners “ elected ” to take these expenses as estate tax deductions rather than as income tax deductions. Petitioners filed their original income tax return for the period April 1 to December 31, 1925, on March 13,1926, in which the disputed items of expenses were claimed as deductions. ' They were also claimed in the amended income tax return filed on March 15, 1927. The original estate tax return was not filed until April 27, 1926. ‘ As the income tax deductions in controversy were originally claimed prior to the estate tax deductions, and simultaneously with the latter, through succeeding years, there is nothing upon which to rest an “ election ” by petitioners in favor of the estate tax deductions. Cf. Tide Water Oil Co., 29 B.T.A. 1208.

It is not necessary to a decision of the issue before us to determine whether the amounts in question were properly allowed as “Miscellaneous Administration Expenses” in computing the Federal estate tax liability. Assuming that such amounts were properly allowed as deductions in computing estate tax, whether they are deductible in computing income tax is determined by the provisions of the statute imposing the income tax.

The estate tax and the income tax are different in kind and wholly disparate in their incidence. Darcy v. Commissioner, 66 Fed. (2d) 581; Ernest P. Waud et al., Executors, 6 B.T.A. 871; Waud v. United States, 48 Fed. (2d) 444; Ernest M. Bull, Executor, 7 B.T.A. 998; George E. Widener, 8 B.T.A. 651; Fannie E. Lang, 23 B.T.A. 854; affd., 61 Fed. (2d) 280; 289 U.S. 109; Helen G. Carpenter, 27 B.T.A. 282.

■ The estate tax is an excise tax on the transfer of property occasioned by death. The measure of the tax is the net estate of the decedent, which is the value of the gross estate less certain statutory deductions. Only the property owned by decedent at the time of his death is included in gross estate, while some of the deductions allowed are for claims and expenses arising after death. Whether such expenses should be allowed conditionally or unconditionally, or whether any deductions should be allowed, was wholly within the discretion of Congress.

The income tax is an annual tax imposed upon the net income received by the taxpayer in the taxable year. Net income is gross income less deductions. While Congress cannot by legislative fiat make something income which is not income, it is a matter wholly within the discretion of Congress as to what deductions shall be allowed in computing the net income subject to tax, and whether such deductions shall be granted conditionally or unconditionally. Commissioner v. Independent Life Ins. Co., 292 U.S. 758.

Deductions allowable in computing the estate tax are determined under the provisions of the statute imposing an estate tax. Deductions allowable in computing income tax are determined under the provisions of the statute imposing the income tax. If an item is properly deductible under some provision of the estate tax law in determining the net estate subject to the tax, and the same item is also deductible under a provision of the income tax law in determining the net income of the estate subject to income tax, that fact does not militate against the allowance in either levy.

Under the provisions of section 219 (a) (3) of the Kevenue Act of 1926 the income received by estates of deceased persons during the period of administration or settlement of the estate is subject to income tax. Paragraph (b) of the same section provides that the tax shall be computed upon the net income of the estate and shall be paid by the fiduciary, and that such net income shall be computed in the same manner and on the same basis as provided in section 212. Under the provisions of section 212 the term “ net income ” means the gross income as defined in section 213, less the deductions allowed by sections 214 and 206.

Section 214 provides that “ In computing net income there shall be allowed as deductions: (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * This deduction is an unconditional allowance of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

The executors carried on the ranching business of the estate from the date of decedent’s death through the period here involved and subsequent thereto. In carrying on such business, expenses were necessarily incurred. In 1925 the gross income derived during the period April 1 to December 31 was over $400,000. Among the ordinary and necessary expenses incurred in earning this income were the items here in issue in the total sum of $244,574.69. Such amount is, therefore, deductible in determining the net income subject to tax. Since the deduction of these amounts resulted in a net loss, as defined in section 206, such net loss is deductible in computing net income for 1926.

Judgment will be entered under Bule 50.


text:
    George W. Davison, as Executor under the Last Will and Testament of Roswell Eldridge, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50355.
    Promulgated August 28, 1934.

      Alfred T. Davison, Esq., and Evelyn L. MacKenzie, Esq., for the petitioner.

      F-. T. Horner, Esq., for the respondent.
   OPINION.

Leech:

This proceeding seeks redetermination of a deficiency of $30,319.06 in estate tax determined by respondent against petitioner as executor of the estate of Roswell Eldridge, deceased.

Three errors are assigned. The first is upon respondent’s action in including in decedent’s gross estate $6,840, as representing the value of certain real estate in Texas, and is disposed of by the stipulation of the parties that the correct amount subject to inclusion under this item is $3,420. The second is upon respondent’s action in including in the gross estate $481,650, as the value of certain gifts made by him to individuals prior to his death. This is disposed of by stipulation that the correct amount for inclusion on this account is $212,242.50. This leaves for consideration by us only the last issue. This is the correctness of respondent’s action in refusing to allow deduction of any amount in determining the net estate, as representing the value at the time of decedent’s death, of certain bequests of property provided by the will to go under certain conditions to several charitable institutions.

The facts are not in dispute. Petitioner is the executor of the estate of Roswell Eldridge, a resident of Nassau County, New York, at the time of his death on January 27, 1927. Petitioner’s decedent, by his will, left his residuary estate in trust, the income therefrom to be paid his widow, Louise U. Eldridge, during her lifetime, the corpus to be distributed upon her death to those whom she might designate and appoint by her last will. It was further provided that in the event of her failure to exercise the power of appointment granted, the income of the trust was to be paid to her mother, Louisa U. Skidmore, for life, and upon her death the corpus was to be distributed in various amounts to several beneficiaries. Among these beneficiaries were the following, which were to receive the amounts set out:

The Rector and Inhabitants of the Parish of Hempstead in Queens County, Long Island, in communion with the Church of England as by law established (otherwise known as St. George’s Church)— $100,000
The Friends’ Boarding Home of Concord Quarterly Meeting, West-chester, Pa_ 260, 000
Nassau Hospital, Mineóla, New York_ 50,000

All of the three beneficiaries named above are religious or charitable corporations within the meaning of section 303 (a) (3) of the Revenue Act of 1926.

The will of petitioner’s decedent was probated in Nassau County, New York, and petitioner was qualified as executor on April 22, 1927. Louisa TJ. Skidmore died at the age of 92, on June 5,1927. On January 24, 1933, Louise TJ. Eldridge, the widow of petitioner’s decedent, filed in the Surrogate’s Court of Nassau County the following renunciation or disclaimer of the power of appointment granted her by decedent’s will:

Suiuiogatb’s Cotjrt, County of Nassau:
In the Matter of the Last Will and Testament of Roswell Eldridge, Deceased.
I, the undersigned, Louise U. Eldridge, Do Hereby Forever Renounce, Surrender and Give Up, all and any power or powers of appointment given to me under and by virtue of the paragraph marked “(b)” of the subdivision marked “ Fourth ” of the Last Will and Testament of Roswell Eldridge, deceased, dated July 24, 1925, which Last Will and Testament was duly admitted to probate by the Surrogate’s Court of the County of Nassau on the 22nd day of April, 1929, and a copy of which is hereto annexed, and I hereby make known, declare and agree that I have not and shall not exercise such power of appointment and have not and shall not give any direction or make any disposal of the income or principal of the trust fund created by paragraph marked “ (b) ” of subdivision marked “ Fourth ” of the said Last Will and Testament of Roswell Eldridge, deceased, dated July 24, 1925, and a copy of which is hereto annexed, so that and to the end that there shall at all times be an absence of any direction by me and so that and to the end that upon my death the principal of the trust fund created by said paragraph marked “ (b) ” of subdivision marked “ Fourth ” of said Last Will and Testament of Roswell Eldridge, deceased, shall be paid as provided in subparagraphs marked “(1)”, “(2)”, “(3)”, “(4)”, “(5)” and “(6)” in the said paragraph marked “(b)” of said subdivision marked “ Fourth ” of said Last Will and Testament of Roswell Eldridge, deceased.
This renunciation is irrevocable.
This agreement and renunciation shall constitute and be an agreement by and between myself, the said Louise U. Eldridge, and the United States of America, and the Commissioner of Internal Revenue of the United States, and the United States Board of Tax 'Appeals and each of them, and their and each of their successors, and I hereby admit, make known and declare that the consideration for this renunciation and agreement is the representation made by me to said Commissioner of Internal Revenue and to said United States Board of Tax Appeals that I have not and will not exercise the power of appointment hereby renounced and also (still continuing with the statement of the consideration for this renunciation and agreement), any action taken by said United States Board of Tax Appeals or said Commissioner of Internal Revenue or both, upon or by virtue of this renunciation, so that and to the end that the gifts to charities contained in sub-paragraphs marked “(3)”, “(4)” and “(5)” in said paragraph marked “(b)” of said subdivision marked “ Fourth ” of said Last Will and Testament of Roswell Eldridge, deceased, shall be absolute gifts to the charities therein named, and I further admit, make known and declare that this renunciation is made for the purpose of making said becjuests to charities exempt from all inheritance tax, transfer tax and estate tax and death duties of every kind.
This agreement and renunciation shall also constitute and be an agreement between myself and my nephews and niece named in sub-paragraphs marked “(1)”, “(2)” and “(6)” of said paragraph marked “(b)” of said subdivision marked “ Fourth ” of the said Last Will and Testament of Roswell Eldridge, deceased, and the consideration therefor is my love and affection for them.
In Witness Whereof, I have hereunto set my hand and seal this 24th day of January, 1933. .
[Signed] Louise U. Eldridge.

Respondent, in determining the deficiency here in question, disallowed a deduction of $273,588, taken by petitioner as the value at the time of death of his decedent of the three bequests of $100,000, $250,000, and $50,000, above set out.

Section 303 (a) (3) of the Revenue Act of 1926 provides:

Seo. S03. Por the purpose of the tax the value of the net estate shall be determined— *
(a) In the case of a resident, by deducting from the value of the gross estate—
* * * . * * * *
(3) The amount of all bequests, legacies, devices, or transfers, to or for the use of * * * any corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual * * *.

Respondent contends that the bequests in question were contingent upon the failure of decedent’s widow to exercise the power of appointment granted, and if now vested, are so only because of, and from the date of, the renunciation above set out, which was nearly six years after decedent’s death. He argues that no vested remainder interest was taken by either of the charities on the death 'of decedent, and the matter is accordingly controlled by Humes v. United States, 276 U.S. 487, as the right to the deduction is determined by the conditions existing at that time. Ithaca Trust Co. v. United States, 279 U.S. 151.

Petitioner, on the other hand, contends that by the will of his decedent vested remainder interests were created in the several charities, under the law in New York State, subject to divestiture by the exercise of the power of appointment granted the decedent’s widow. He relies upon Matter of Lansing, 182 N.Y. 238; 74 N.E. 882; Matter of Haggerty, 112 N.Y.S. 1017; affd., 194 N.Y. 550; Matter of Haight, 136 N.Y.S. 557; Matter of Chapman, 117 N.Y.S. 679; Matter of Ripley, 106 N.Y.S. 844; affd., 192 N.Y. 536; Matter of Hoffman, 146 N.Y.S. 898; affd., 212 N.Y. 604.

Petitioner further contends that upon the failure to exercise the power or upon the exercise of the power in favor of the party who would take the property in the event the power were not exercised, the property passes to the remainderman under the will, and with this we agree. Matter of Lansing, supra; Estate of Helen M. V. Grant, 13 B.T.A. 174. He argues, further, that decedent’s widow, having the right to refuse the grant of the power (Hill v. Sangamon L. & T. Co., 134 N.E. (Ill.) 112; Tillett v. Nixon, 104 S.E. (N.C.) 352), and having filed her formal renunciation, the legal effect is as if no such power had been granted by the will.

We agree that the effect in such case, as to the remainderman, in determining bis right to possession or interest in the property upon the death of the life tenant, is as if the provision of the will granting the power had never- been included. It is this question that the court has had for consideration in the cases cited by petitioner’s counsel, and this must be kept in mind when considering the language .of the courts in those cases holding that upon the refusal of a donee under a will to accept the gift the next party in interest takes as if the refused gift had never been made and his title relates back to the date of the death of the testator. Albany Hospital v. Hanson, 214 N.Y. 435; 108 N.E. 812.

In the present case, the question for consideration is not what interest will be received by the several charities as a result of the provisions of the will and the renunciation of the power of appointment nearly six years after decedent’s death, but what interest was vested by the decedent by his will in these charities, determined and valued as of the date of his death. It is only the value of such interest that may be deducted under section 308 of the Revenue Act of 1926, set out above. This principle is most clearly stated by the late Chief Justice Taft in Y.M.C.A. v. Davis, 264 U.S. 47, as follows:

Congress was thus looking at the subject from the standpoint of the testator and not from the immediate point of view of the beneficiaries. It was intending to favor gifts for altruistic objects, not by specific exemption of those gifts but by encouraging testators to make such gifts. Congress was in reality dealing with the testator before Jiis death. It said to him “if you mil malee such gifts, we’ll reduce yow death ditties and, measure them not by your whole estate but by that amount, less what you gime. * * * [Italics supplied.]

In Mississippi Valley Trust Co. et al., Executors, 28 B.T.A. 387; affd., 72 Fed. (2d) 197, we said:

The so-called estate tax, by virtue of which this disputed deficiency arises, is not a succession tax, but an excise on the transfer of the decedent’s estate at his death. The rights of the parties hereto are determined entirely by the will of decedent. They accrued finally when the will became effective, the date decedent died, December IS, 1929. Knowlton v. Moore, 178 U.S. 41, 57; Y.M.C.A. v. Davis, 247 U.S. 47; New York Trust Co. v. Eisner, 256 U.S. 345; Ithaca Trust Co. v. United States, 279 U.S. 151; Edwards v. Slocum, 264 U.S. 61.

In that case we held that if a power granted by the testator to make a gift, and exercised, resulted in the appointee taking as under the will, the estate so created did not constitute a gift to charity by the testator within contemplation of section 303 (a) (3) of the Revenue Act of 1926, because at the time of death, the certainty that any gift to charity would be affected could not be determined. On this point we said:

The deficiency here arises from a Federal estate tax act, which has its own criteria, irrespective of local law, Weiss v. Wiener, 279 U.S. 333, and is an excise on the transfer from decedent of rights extinguished by his death. It is imposed at death and before the beneficiary receives the gift. So, continuing the logical development of judicial interpretation of this controlling statutory provision, every fact must have been known or ascertainable then, at the imposition of the tax, to bring the gift within the protection of the quoted section. Knowlton v. Moore, supra,; Y.M.C.A. v. Davis, supra; New York Trust Co. v. Eisner, supra; Ithaca Trust Co. v. United States, supra; Edwards v. Slocum, supra. Cf. Hadley v. Forsee, 303 Mo. 418; 101 S.W. 59. It is immediately apparent that the exercise of a discretionary testamentary power of appointment could not satisfy this requisite.

In the cited case, we had the question of a power granted to make a gift. Here we have a power granted to defeat it. Our reasoning in that case that the necessary element of certainty, as of the date of decedent’s death, that a charity would benefit through his will, precluded a deduction to his estate under section 303 (a) (3) of the Revenue Act of 1926, appears to apply with equal force to the situation here presented. We think, under the reasoning of Y.M.C.A. v. Davis, supra, the testator rrmst make certain Ms gift to charity to entitle his estate to the claimed deduction.

Aside from the question of certainty, absent in the present case, it appears to us that even were it admitted that the rule of law contended for by petitioner’s counsel, that vested estates in the several charities were created by decedent’s will, it must be admitted that when so created and for more than five years thereafter, they were subject to divestiture by the exercise of the power granted decedent’s widow. Applying the rule laid down in Y.M.C.A. v. Davis, supra, our inquiry is, What did the testator give?, with the mandate of Ithaca Trust Oo., supra, that the gift be valued as of the date of his death, upon the facts then existing. The answer would necessarily be that he gave vested estates in certain amounts, all subject to complete divestiture by an individual in the exercise of her discretion. What was the value of such a gift, when given? What was its value at any time prior to the filing of the formal “ renunciation ” nearly six years later? We know of no basis upon which any value could be determined. Whether it would ultimately be worth anything depended upon future and uncontrollable events, either a purely voluntary renunciation of the power by the donee, or her voluntary refusal to exercise it in her will.

The estates granted these three charities, even if vested, had no determinable value for nearly six years, and then the value accrued to them from the act of decedent’s widow in renouncing her power of appointment. Petitioner argues that, it having been the intention of the widow ever since decedent’s death to carry out his wishes in reference to these charities, the chance of divestiture was so slight as not to affect the value of the vested estates. This argument does not impress us. The holding in Ithaca Trust Co. v. United States, supra, that the power granted the trustees to invade the corpus for the benefit of the life tenant, in view of the size of the estate, could not be deemed to lessen the present value of the remainder interest, has no application here. In that case the extent to which the power could be exercised was measured by the necessities of support of an individual, something determinable with reasonable certainty, and in that case less than the actual income anticipated. The same situation existed in First National Bank v. Snead, 24 Fed. (2d) 186, where the same result was reached. In the present case we have no such condition. The power here under consideration was one which might be used to defeat absolutely the vesting in possession of the remainder interests, as granted by the testator, and, until renounced, was subject to exercise upon the unrestricted whim, caprice, or desire of an individual.

We sustain respondent upon his disallowance of the deductions taken by petitioner on account of the provisions of the will in respect to the three charities in question.

Decision will be entered wader Buie 50.


author: Aeundell :

text:
    The Consolidated Royalty Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65886.
    Promulgated August 28, 1934.

      Frank W. MondeTl, Esq., and Wm. H. MondeTl, Esq., for the petitioner.

      James K. Polk, Jr., Esq., and B. D. Daniels, Esq., for the respondent.
   OPINION.

Aeundell :

Petitioner claims, first, that the sums of $4,500 in 1929 and $1,500 in 1930 should not have been included in gross income because they were not its property, but were merely collected for and paid over to Eigdon and Howell. In the alternative, petitioner contends that the payments were royalties and deductible as expenses.

Eigdon and Howell did not assign to petitioner a royalty interest, and so it cannot be said that petitioner collected any royalties to be paid over to them. Under paragraph third of the assignment they were to receive $6,000 per year until $60,000 was paid. While it was provided that the payment of $6,000 annually was subject to the condition that that amount was realized “ from the royalty oil herein assigned,” the fact is that Eigdon and Howell had no royalty interest to assign. All they had was an undivided interest in the Johnson claims which were then the subject of. controversy among various claimants. No lease or other muniment of title to the oil or the land had then been obtained. In this respect the case differs from Looney v. United States, 26 Fed. (2d) 481; affd., 29 Fed. (2d) 884, cited by petitioner. In that case there was a dispute as to the ownership of a certain .royalty interest in the production from a proven field. A compromise was reached whereby the parties claiming adversely to Looney withdrew their claims in consideration of their receiving the royalties on the interest in dispute until such royalties amounted to $200,000. The court held that Looney “ parted with all right or interest in or to the royalty ” until it amounted to the sum stated. Consequently such royalties were not income to Looney. Here, as above pointed out, there was no royalty interest, as such, in existence when the assignment of December 22, 1920, was executed. The effect of that assignment was to remove Higdon and Howell as owners of an interest in. the claims and any leases that might be obtained to the lands, and pro tanto enlarge the interests of the assignees. We are accordingly of the opinion that the assignment from Higdon and Howell affords no ground for excluding from petitioner’s gross income any sums realized from the operation of leases subsequently acquired.

What we have said above indicates our view of the alternative claim for deductions of the amounts paid to Higdon and Howell. There was no royalty interest assigned by them and no royalties as such were payable to them. The substance of the contract was a conveyance to the assignees of an undivided interest in unpatented claims to land, and payments made thereunder were capital expenditures. The question here is similar to that decided in Comar Oil Co. v. Burnet, 64 Fed. (2d) 965, affirming 24 B.T.A. 688. In that case the taxpayer acquired oil and gas leases, agreeing to pay therefor certain sums in cash and further sums out of the oil and gas produced from the leased premises. The opinion of the court reads in part:

We think the statute makes plain distinction between rentals or other payments for the continued use or possession of property to which the taxpayer has not taken title or in which it has no equity on the one hand, and rentals or other payments for the continued use or possession of property to which the taxpayer has taken title or in which it has an equity on the other hand. The former rentals are deductible; the latter are not.
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In the case at bar, it is clear that title to the property was taken by the petitioner.

In the present case the instrument of assignment operated to vest the assignees with title to whatever interest the assignors had, hence the payments made were for the acquisition of a capital asset and were not royalties or rents paid for the right to explore and develop. In view of our holdings above it is unnecessary to consider the contention of counsel for respondent that petitioner is estopped to claim deductions for 1929 and 1980 because of its acceptance of a settlement for prior years, 1922 to 1925, based on a capitalization of payments made to Higdon and Howell.

Decision will be entered for the respondent.


author: Seawell:

text:
    Frances B. Eldredge, J. Hampden Dougherty, Jr., and City Bank Farmers Trust Company, Executors of the Estate of Seneca D. Eldredge, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Myron G. Darby, Petitioner, v. Commissioner of Internal Revenue, Respondent. Natt T. Wagner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert F. Hawkins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52988, 52989, 53378, 53379, 62887, 62922, 63191, 64502.
    Promulgated August 29, 1934.

      Abraham Lowenhaupt, Esq., Stanley Waite, Esq., and J. Hampden Dougherty, Jr., Esq., for the petitioners.

      Brooks Fullerton, Esq., for the respondent,
   OPINION.

Seawell:

The respondent determined deficiencies, now in controversy, as follows:

A stipulation and accompanying exhibits contain the facts upon which the cases were submitted. The stipulation provides:

1. That the eight above captioned cases be consolidated for the purpose of hearing and decision.
2. Eldredge & Company was a partnership formed in 1919 and was, during the years 1927 to 1929, inclusive, a dealer' in securities, including securities the income from which is exempt from Eederal Income Tax.
3. During the year 1927, the firm of Eldredge and Company consisted of four partners whose interests in the net income, after partners’ drawing accounts and interest on capital had been .deducted from net income, were as follows:
$95,000.00 of
such income Remainder
Seneca D. Eldredge-;-55% 49%%
Myron G. Darby_25% 22%%
Robert E. Hawkins-20% 18 %
Natt T. Wagner_ 10 %
4.During the year 1929, the firm of Eldredge and Company consisted of four partners whose interests in the net income, after partners’ drawing accounts and interest on capital had been deducted from net income, were as follows:
Seneca D. Eldredge_40%
Myron G. Darby_25%
Robert F. Hawkins_20%
Natt T. Wagner_15%
5. During the year 1927, Eldredge and Company realized net gain in the amount of $353,263.30 from the purchase from states or subdivisions thereof of securities (the interest from which was exempt from Federal Income Tax) issued by such states or subdivisions thereof and the sale of such securities at a profit, and during the year 1929 realized net gain in the sum of $276,872.27 from the same sources. Transactions of the kind referred to in this paragraph are sometimes herein referred to as gains from dealing in tax-free securities.
6. It is customary for a state, city or other governmental unit or subdivision, which desires to raise funds by issuing tax-free securities, to sell such securities to a dealer or group of dealers. This method of disposing of securities is. and in 1927 to 1929 was, almost invariably utilized by government bodies in order to be certain of obtaining the desired amount of funds upon a definite date.
7. An arrangement by the body politic for a sale of its securities to a dealer facilitates the projects of the public officials with respect to determining the rate of interest, the maturity date and the other provisions to be set out in tax-free securities which are about to be issued.
8. The business of acting as a dealer in tax-free securities consists of purchasing such securities from the governmental body or unit by which the same are issued, as obligor, and reselling such securities to the investing public.
9. Tax-exempt securities are disposed of by governmental bodies by sale in the open market which is usually the result of negotiation or competitive bidding. An imposition of income tax upon the gain derived from a resale of such securities is a factor in the determination of the amount the dealer will bid, and tends to decrease the amount of the bid.
10. In the event that the gains from tax-free securities mentioned in paragraph 5 are taxable under the applicable revenue statutes, the deficiencies as shown by the deficiency notices attached to the petitions in the above entitled cases are correct.
11. In the event that said gains are not taxable under the applicable revenue statutes, the respective net income corrected ” of the respective petitioners, as shown in the deficiency notices, should be decreased by their respective portions, as above shown, of the gains thus determined not to have been taxable.
12. Photostatic copies of the Federal Income Tax Returns for the partnership of Eldredge and Company for 1927 and 1929 and for each of the said four partners for 1927 and 1929 are submitted herewith, hereby referred to and made a part of this stipulation of fact.

Seneca D. Eldredge, a resident of the State of New York, died testate about October 9, 1981, and shortly thereafter the petitioners in Docket Nos. 53378 and 64502 were duly appointed and qualified as executors of his estate and have since so served and are still acting as such.

The only issue raised by the pleadings which is insisted upon by the petitioners is stated in brief in their behalf, as follows:

These cases raise just one legal question, namely: Can the Commissioner of Internal Revenue oblige the partners in Eldredge & Company to pay an income tax upon such profits of said firm as result from the business of purchasing direct from the issuing states or municipalities the public obligations of such governmental bodies and reselling these identical securities to the investing public? The Commissioner ruled that such profits are subject to Federal income tax. Petitioners appeal to the Board, contending that the Commissioner’s ruling is erroneous and that such a tax would be unconstitutional.

The respondent asserts that the Constitution does not prohibit Congress from passing acts authorizing the imposition of an income tax on gains derived by a dealer who purchases in the open market directly from a state or municipality public obligations or bonds issued by it and later sells them at a profit, under the same or similar circumstances as existed in the instant cases.

In behalf of the petitioners, it is insisted that the issuing and selling of bonds of their own issue by states or their municipalities is an essential governmental function and the sale of such bonds, therefore, is not subject to interference or restriction by the Federal Government, by taxation or otherwise. It is further insisted, and is stated in the stipulation, that it is customary for a governmental unit or subdivision thereof, which desires to raise funds by issuing tax-free securities, to sell such securities to a dealer or group of dealers and that an imposition of an income tax upon the gain derived by a dealer from a resale of such securities is a factor in the determination of the amount the dealer will bid and tends to decrease the amount of his bid.

In support of petitioners’ contention several authorities are cited. Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, is cited to sustain the assertion made in the brief that it is clear that the imposition of a tax on the dealer’s profits “ must operate on the power to borrow before it is exercised ” and shows that the Federal income tax can not constitutionally be applied to the gains or profits here in question. The above partial quotation is from the Pollock case, supra, wherein Chief Justice Marshall is quoted as saying in Weston v. City Council of Charleston, 2 Pet. 449, 468, “ The right to tax the contract to any extent, when made, must operate upon the power to borrow before it is exercised and have a sensible influence on the contract.”

In our opinion there is quite a difference in the imposition of a Federal tax on the profits of a dealer who realizes the profit from the resale of securities he has purchased directly from a state or municipality, and the imposition of such a tax on any bond or contract of the state or municipality itself. The fact that the imposition of such a tax in the latter case would be unconstitutional, in our opinion, does not warrant the conclusion drawn by petitioners’ counsel that a Federal tax imposed on a dealer’s profits from the. resale of such securities would likewise be unconstitutional, on the theory that it would place a burden upon the state, county, or municipality in the disposal of such bonds or securities. In our opinion, the taxing of the' dealer’s profits arising from resale of bonds, though a possible factor in the determination of the amount the dealer may bid for the bonds, is a very minor item in such determination. The major factors by which the dealer would be influenced almost entirely would be (1) the amount he believes the public will pay for the bonds and (2) the amount which his competitors may bid, both being matters of opinion and the exercise of good judgment.

In our opinion, and we so hold, the interference with governmental functions of the state or municipality, under the circumstances shown by the record, is so remote and insignificant that the imposition of the tax in question is not unconstitutional.

The petitioners’ counsel in their brief cite Metcalf & Eddy v. Mitchell, 269 U.S. 514, and, as sustaining their insistence, quote therefrom as follows: “ this Court has repeatedly held that those agencies through which either government immediately and directly exercises its sovereign powers, are immune from the taxing power of the other.” (p. 522.) Immediately preceding the quotation is this statement by the Court: “Just what instrumentalities of either a state or the Federal government are exempt from taxation by the other'cannot be stated in terms of universal application. But” — (then follows petitioners’ quotation).

The fallacy of the petitioners’ argument and reliance on the brief quotation from Metcalf & Eddy v. Mitchell, supra, is in the assumption that Eldredge & Co. in the purchase and sale of the securities was an agency or instrumentality through which certain states or subdivisions thereof were immediately and directly exercising their sovereign powers.

The facts stipulated, in our opinion, show that the partnership of Eldredge & Co. was not an instrumentality of the states or municipalities in the purchase of bonds or securities in which the partnership was dealing. The partnership was clearly an independent contractor. It acquired the bonds or securities by arm’s length negotiations or as the result of competitive bidding.

As shown by the record, except for the actual purchase of the bonds or securities by the partnership of Eldredge & Co., there was no contractual relation between the states or municipalities and the partnership. The contract of purchase was consummated at the time the offer was accepted, the bonds delivered, and payment made. There was no executory contract in effect. There was no occasion or right on the part of the states to exercise any supervision over the partnership. There was nothing in the contract of purchase which would give the states any such right. When the purchase was effected the partnership was at liberty to hold or sell the bonds as it chose. Its election to do the one or the other did not in any way affect the obligations of the states on the bonds. It is obvious that the partnership was not an officer, employee, or instrumentality of the states or municipalities.

Numerous authorities are cited by the respondent to sustain his contentions and the validity of the tax imposed in the instant cases, but we do not think much discussion of them necessary. The principles which are controlling herein are, in our opinion, so fully discussed and clearly enunciated in Willcuts v. Bunn, 282 U.S. 216; Group No. 1 Oil Corp. v. Bass, 283 U.S. 279; Burnet v. Coronado Oil do Gas Co., 285 U.S. 393; Fox Film, Corp. v. Boyal, 286 U.S. 123; Fullilove v. United States, 71 Fed. (2d) 852; 293 U.S. 586, and other cases cited, as to make further discussion of them unnecessary.

The petitioners in their reply brief undertake to show that the facts in the instant cases are so different from those in Willcuts v. Bunn, supra, that the principles enunciated in the latter and approved in later cases are not applicable to the former. Some points of difference are indicated and emphasized, but, in our opinion, they are not such as to render inapplicable the principles enunciated in the cases above enumerated.

The tax in question is not imposed because the petitioners or the partnership of Eldredge & Co. purchased bonds or securities from any state or municipality. The immediate transaction or contract between the state or municipality and Eldredge & Co. with respect to the bonds purchased does not give rise, as we have before indicated, to any taxable income. The tax is imposed on the profits reaped by the dealer when he sells the bonds in the open market to the buying public. The tax does not operate upon the state’s contract the instant it was made and has no sensible influence upon such contract. Weston v. Gity Oowncil of Charleston, supra,

The petitioners complain and assert that there is discrimination against them in the imposition of a tax on the profits on the dealer’s sale of tax-exempt bonds when the dealer is not permitted to deduct from income the interest paid on a loan which was made to purchase or carry such bonds or securities. Congress has taken the view that when income (interest) earned by the bonds is exempt from tax, interest paid on loans to carry the bonds may not be deducted from income, and in so enacting, we discover nothing illegal or discriminating in such law. The question so raised by the petitioners has been too long and too often decided adversely to petitioner’s insistence to require discussion. “ The classification complained of is not arbitrary, makes no improper discrimination, does not result in defeating any guaranteed exemption, and was within the power of Congress,” as was said by the Supreme Court, in deciding the same principle or question on facts similar to those in the instant cases, in Denman v. Slayton, 282 U.S. 514.

Having thoroughly considered the authorities cited and arguments presented by counsel on both sides, we are of the opinion and hold that the partnership of Eldredge & Co. was not an employee or instrumentality of the states or municipalities from which it purchased securities the income from which is exempt from Federal income tax, but was an independent contractor, and that the taxing of the profits arising from the resale of such securities purchased directly from a state or municipality in the open market is too remote to constitute an interference with or restriction upon the governmental functions of the state and does not cast a substantial burden upon it.

Judgment will he entered for the respondent in each of aforesaid dockets.