author: Disnet:

text:
    William A. Hines, Petitioner, v. Commissioner of Internal Revenue, Respondent. Marietta R. Marlow, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ernest W. Marlow, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 87899, 87400, 87401.
    Promulgated October 28, 1938.

      William A. Hines, Esq., pro se.

      Ernest W. Marlow, Esq., for petitioners Ernest W. Marlow and Marietta R. Marlow.

      John D. Kiley, Esq., L. H. Rushbrooh, Esq., Philip D. Hams, Esq., and Oliver L. Bright, Esq., for the respondent.
   OPINION.

Disnet:

Aside from interest in the amount of $2,500 for the six-month period prior to October 1, 1933, which was returned as taxable income, none of the fee or interest thereon was actually received by the partnership in 1933. The respondent included the amount of the fee, plus interest in the amount of $1,250 for the period from October 1, 1933, to the close of the year, in gross income of the partnership on the ground that it was constructively received in 1933. He adheres to the doctrine upon brief before us.

The inclusion in the partnership’s gross income of an amount for interest accrued on the full amount of the fee for the three-month period after October 1, 1933, was a clear violation of the well settled rule that taxpayers on the cash basis are not subject to tax on accrued items of income. Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269; Great Southern Life Insurance Co., 33 B. T. A. 512 (521). On this issue the respondent is reversed.

It was announced in John A. Grander, 3 B. T. A. 231, that the doctrine of constructive receipt should be sparingly applied. See also Adolph Zukor, 33 B. T. A. 324. In Cecil Q. Adams, 20 B. T. A. 243; affd., 54 Fed. (2d) 228; we said: “But, in general, income should not be construed to have been received prior to the date of actual receipt except where a taxpayer turns his back upon income or does not choose to receive income which he could have if he chose.” The doctrine will not be applied except in a clear case. Hal E. Roach, 20 B. T. A. 919. In C. E. Gullett, 31 B. T. A. 1067, we said:

* * * that amounts due from a corporation but unpaid, are not to be included in the income of an individual reporting his income on a cash basis unless it appears that the money was available to him, that the corporation was able and ready to pay him, that his right to receive was not restricted and that his failure to receive resulted from exercise of his own choice.

Other statements of the doctrine are to the same effect. William Parris, 20 B. T. A. 320; Helvering v. Gordon, 87 Fed. (2d) 663.

The petitioners argue that the agreement between the partnership and the Foundation was the only one entered into for payment of the fee and that we must look to it alone for the amount to be paid and the time of payment. They have overlooked the fact that by a provision of the agreement the liability of the Foundation was limited to the unpaid portion of the fee at the time of completion of the transfer of the residuary estate. This term of the agreement gave the executors the right to pay part or all of the fee to the partnership at any time prior to completion of the transfer. Thus the understanding had with the executors was not limited, as alleged, to mere approval of the reasonableness of the fee, but conferred upon the partnership no right to require payment from the executors.

The employment of the petitioners as counsel rendered the executors personally liable for a reasonable fee, subject to reimbursement by way of a credit in their accounts. 24 C. J. 66; Parker v. Day, 155 N. Y. 383; 49 N. E. 1046; Platt v. Platt, 105 N. Y. 488; 12 N. E. 22. Counsel in such cases do not acquire a lien against assets of the estate for the amount of their charges. Platt v. Platt, supra; Waite v. Willis, 42 Ore. 288; 70 Pac. 1034; Rickel v. Chicago, Rock Island & Pacific Railway Co., 112 Iowa, 148; 83 N. W. 957. The executors did not at any time in 1933 unqualifiedly agree to pay the fee or set aside in an account or otherwise a fund from which to pay it. The partnership limited its right to receive payment from the executors to such amount as the executors, in their discretion, elected to pay prior to the transfer of tbe assets of the estate to the Foundation. They made no payment, and when the transfer had been accomplished the executors were under no obligation to pay until at least after default by the Foundation. The terms of the agreement with the Foundation did not compel it to pay the fee within the taxable year, and none of it was paid.

It is stipulated that the partnership was retained “to attend to the probate of said will and to attend to all matters incident to the administration of the estate and to the distribution of the assets thereof.” For services as counsel for the administration of the estate it was agreed between the partnership and the executors, in 1933, that $250,000 was a reasonable fee, but the executors did not agree to pay such amount in 1933 or otherwise, and never paid it. The statute of New York provides that commissions of executors or administrators are not earned until the services have been rendered and the account settled. The same applies in logic to the attorneys’ fees here involved. At the time of discussion of the reasonableness of $250,000 as attorneys’ fees, and at the time of the proposition between the attorneys, executors, and residuary legatee on April 24,1933, the attorneys’ services had not been completed. Federal estate tax proceedings were still pending, the executors’ final account had not been settled in the ordinary manner of probate, and, though the statute permitted that such final accounting be dispensed with by settlement and distribution satisfactory to the residuary legatee, that was not done until December 1933. Until that date it is obvious that the attorneys had no right to demand their fee from the executors. By and previous to that time, however, a tripartite agreement between the attorneys, executors, and residuary legatee had provided for payment of attorneys’ fees by the residuary legatee throughout a possible period of five years. The rights against the residuary legatee had their inception upon the legatee’s taking over the assets — but the attorneys’ services were not yet finished. Clearly, we think, the attorneys could not successfully have maintained an action against the executors for the $250,000 fee at the time they agreed with the executors and residuary legatee to accept it within, five years. They had not yet performed perhaps the most important part of the stipulated services, “to attend to all matters incident to * * * the distribution of the assets” of the estate. In fact, since the partnership considered the activities of the Friedsam Foundation, the residuary legatee, as a final step in the completion of the administration of the estate of the decedent and a continuation of the legal services of administering it, and will not charge further fee for services rendered it, it is apparent that the services, payment for which is here involved, were not completed even with full transfer of the assets of the estate to the Friedsam Foundation. No principle of constructive receipt requires, we think, that the attorneys’ fees not yet fully earned, and not yet available tq the attorneys for that reason, be considered income received, contrary to agreement (entered into prior to right to make demand) that they be received over a possible period of five years — as in fact they were received.

While questions of the kind involved here are controlled by the peculiar facts of the case, the facts prevailing in several decided cases suggest the answer here. In Edwards v. Keith, 231 Fed. 110, the court, in deciding that commissions received by an insurance agent on renewal premiums paid on policies of insurance written prior to March 1, 1913, are includable in taxable income in the year of receipt, pointed out that counsel who completed his services for a client in October 1915 and received his pay therefor in February 1916, pursuant to a bill rendered in December 1915, was not taxable until 1916 on the amount received. In Freeman v. United States, 71 Fed. (2d) 969; certiorari denied, 293 U. S. 621, the taxpayer had the power, as executor of three estates, to pay himself in 1916 for services rendered in that year, or wait until he prepared partial or final accounts in subsequent years. He exercised the right to have the services he performed in 1916 paid in 1917, when he prepared partial accounts. The court held that the amount received in 1917 was taxable in that year, and that no part of it could be allocated to 1916. In Charles Stewart Mott, 30 B. T. A. 1040; affd., 85 Fed. (2d) 315, the taxpayer as trustee of trusts created by him for the benefit of his children had the right under the provisions of the trust agreements to deduct and retain annually as compensation for his services a sum equal to 3 percent of the gross income of the trusts. He made no charge for his services and received nothing. It was held that the doctrine of constructive receipt did not apply. The case of S. A. Wood, 22 B. T. A. 535, is to the same effect.

The case of William Parris, supra, is not to the contrary. There the amount owing for oil sold was standing to the credit of the taxpayer on the books of the pipe line company and was available to him upon presentation of an executed division order. Here there was no unqualified agreement on the part of the executors or the residuary legatee to pay in 1933 upon demand. The income was not subject to the command of the partnership and at no time in 1933 were the petitioners in a position to enjoy the income as in Corliss v. Bowers, 281 U. S. 376. It was error for the respondent to include the fee in gross income of the partnership for 1933 on the ground that it was constructively received.

The respondent contends in a supplemental reply brief that the agreement of the Foundation to pay the fee should be treated as the equivalent of the cash received within the taxable year. He argues that the agreement to pay was an evidence of indebtedness received in payment for services and “fully equivalent to a promissory note, or a certificate of stock” and that it “represented a payment of the claim in property by the debtor.”

Gross income includes compensation for services rendered “in whatever form paid.” Sec. 22 (a), Revenue Act of 1932. Regulations promulgated under the statute provide that “Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income.” Art. 53, Regulations 77.

Numerous cases are cited by the respondent as establishing the doctrine that income may be derived in the form of money’s worth. The cases relied upon involved in general the receipt in connection with sales and as compensation for services rendered, stock, bonds, notes, or tangible property. It is well settled that property of that sort may be taxed to the recipient at its fair market value. The respondent does not claim, aside from the constructive receipt theory already discussed, that the right reserved by the executors to pay the fee in whole or in part prior to the transfer of the residuary estate to the Foundation was equivalent to receipt by the partnership of taxable income in the amount of $250,000 or any other amount. He relies only upon the promise to pay made by the residuary legatee as resulting in taxable income to the partnership in 1933.

The agreement of the Foundation to pay the fee was evidenced by the letter of April 24, 1933, and a resolution adopted by the Foundation on April 27, 1933, which the respondent characterizes as a chose in action and claims “admittedly had a value of at least $250,000.” Generally a promise to pay a specified sum of money in the future does not create more than an account receivable in the hands of the creditor, a nontaxable item of taxpayers reporting, as here, on the cash basis. The result would have been no more if the executors, instead of reserving a right to pay prior to the happening of a certain event, had unconditionally promised to pay, for instance, on July 1, 1934. The undertaking of the Foundation created an unconditional obligation on its part to pay a definite sum of money sometime within five years and in its essential characteristics was no different from an ordinary promise to pay by a person primarily liable. The written promise of the Foundation was a property right and no doubt had some value to the partnership. “Such rights are sold, if at all, only by seeking out a purchaser and higgling with him on the basis of the particular transaction” and ordinarily do not have a fair market value. Bedell v. Commissioner, 30 Fed. (2d) 622. The respondent has never determined, and the petitioners do not admit, that the promise of the Foundation had a fair market value in 1933 of any amount.

We fail to see that the partnership, by agreeing to look to the Foundation for payment within five years, acquired, for income tax purpose, something unlike what it had before the promise was given. In general, taxation is levied upon profits realized and not deferred. Commissioner v. Garber, 48 Fed. (2d) 526. In San Jacinto Life Insurance Co., 34 B. T. A. 186, a petitioner on a casb basis received a demand promissory note as additional evidence of liability of a maker for overdue interest on a series of notes. We field tfiat there was no income received. In Great Southern Life Insurance Co., supra, a note and the security therefor and a claim for overdue interest was surrendered in exchange for certificates of indebtedness of debtor’s receiver, and we were of the opinion that the transaction was a mere renewal, resulting in no income until payment or other disposition of the certificates receive^.- f

In William J. Kyle, 15 B. T. A. 1247; affd., 43 Fed. (2d) 291; cer-tiorari denied, 282 U. S. 896, we heTd that a judgment obtained in 19lNforTegal services rendered prior thereto did not represent payment of the claim and that the taxpayers, who reported their income on the cash basis, did not realize taxable income from their services until 1920, when the judgment was paid. Herein, the rights acquired by the partnership in 1933 were inferior to the rights it could have acquired if it had been in a position to reduce its claim to judgment, or had actually done so. As a judgment creditor it could have levied upon property, whereas under the terms of the agreement entered into it was in no position to demand payment in 1933. Yet the above citation indicates that even a judgment obtained would not be taxable in 1933 as income.

Since herein the agreement among the partnership, executors, and residuary legatee provided for payment by the residuary legatee less any amounts paid by executors prior to completion of transfer of the assets of the estate, it is apparent that the promise of residuary legatee to pay was not accepted by the partnership wholly in lieu of rights against the executors; but, assuming that it was so accepted, it is obvious that, as in fact appears on the face of the agreement itself, the services of the attorneys’ partnership had not been completed and must continue further. An implied agreement for the continuation and completion of such services is plain. Therefore there was a continuation of contractual rights held by the partnership, involving personal services, the failure to perform which would affect and give rise to defense to the obligation to pay. The new agreement was not accepted as fayment, but merely as another agreement to fay, in part for services yet to be rendered. No promissory note was received, and no security given. It would have required evidence outside of the agreement as to whether such services had been performed, a question any prospective purchaser of the agreement would consider. C. W. Titus, 33 B. T. A. 928, and cases cited. Such a situation is not one, we think, which lends itself to the application of the principle of receipt of equivalent of cash. The line of division between contracts so to be considered, and those to be excluded, is not easy to trace, but here the partnership received nothing more from the Foundation than nonnegotiable written evidence of an agreement to pay a definite sum of money at an indefinite time in the future, an account receivable not includable in its gross income. We think this situation is properly classed outside the limits of those where property may be considered equivalent to cash.

The partnership received no property from the Foundation in 1933 taxable as income for services rendered.

Decision will be entered for the petitioners.


source: Caselaw Access Project

author: Disney:

license: Public Domain

text:
    A. J. Crowhurst & Sons, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83788.
    Promulgated October 28, 1938.

      Jesse K. Robinson, Esq., and Max Gissen, O. P. A., for the petitioner.

      G. W. Broohs, Esq., and E. W. G. Huffman, Esq., for the respondent.
   OPINION.

Disney:

The only question for our determination here is as to whether the petitioner may amend a capital stock tax return under section 215 (d) and 215 (f) of the National Industrial Eecovery Act, 48 Stat. 195, 208. Petitioner’s contentions are (a) that first “returns” as used in the statute is intended to mean “the return for the first year”; (b) that a declaration made in ignorance of, or under a mistake as to the real nature and extent of, taxpayer’s rights, does not constitute binding election precluding the filing of an amended return; and (c) that the statute, if construed to prevent such second filing, is unconstitutional as violative of the Fifth Amendment.

So far as the first proposition is concerned, as to the intent and effect of the statute, we have held, in William A. Webster Co., 37 B. T. A. 800, and in Haggar Go., 38 B. T. A. 141, that the return may not be amended. We find no essential difference as to the facts of filing between those cases and the instant matter, and though petitioner cites Glenn v. Oertel Co., 97 Fed. (2d) 495 (C. C. A., 6th Cir.), holding to the contrary, we, with due respect for' that court, as stated in Haggar Go., supra, adhere to our earlier decisions and hold that the statute does not permit filing of an amended return. Scaife & Sons Co. v. Driscoll, 94 Fed. (2d) 664; certiorari denied, 305 U. S. 603.

Petitioner urges, however, as its second proposition, that ignorance or a mistake as to petitioner’s rights, that is, a mistaken belief by the certified public accountant filing the return for petitioner that net worth was the proper declaration of value, is such mistake or ignorance as to prevent the first filing being an election, under familiar principles as to effect of ignorance or mistake upon election of remedies. Petitioner, however, is in error, we think, in thinking that there is herein involved a question of election. The question was not one of election between two courses, but merely of declaration of a value for coiporate stock as required by the statute. Petitioner, due to misunderstanding of the meaning of statute and regulations, declared a value which it now contends was erroneous. We discern no application here of principles controlling election. The situation in Haggar Co., supra, was not dissimilar to that herein. Therein par value of stock was declared as the value; here the declaration was total of par value of stock and surplus, or net worth. Beliance upon the regulations as cause of confusion or mistake is hardly convincing, for the regulation, it seems to us, not only does not justify the conclusion reached by petitioner’s tax consultant, but the same numbered paragraph affirmatively reminds the taxpayer that the original declared value is not subject to any amendment either by the Commissioner or the corporation. The regulation referred to by petitioner states that the corporation “should look to the net worth of the corporate assets [which petitioner did], including its surplus and undivided profits as shown by the books, also to the franchise, good will, outstanding contracts, the earning capacity of the corporation, and the market value of its shares of stock.” Tet petitioner disregarded all of these elements except net worth. The error is not such in any event, in our opinion, as to be basis for appeal to equitable principles of election, if same were applicable here.

Finally, petitioner urges unconstitutionality of the statute, if construed to prevent filing of second declaration of value. Glenn v. Oertel Co., supra, is quoted, but the language therefrom does no more than suggest that serious constitutional questions arise, in connection with the present question. The case does not hold the statute unconstitutional. We are unable to say that deprivation of the privilege of filing amended returns is deprivation of due process under the Fifth Amendment. On the contrary, due process principles seem to be satisfied by the process specified and permitted by the statute— filing the original declared value. Deprivation of property must amount to arbitrary or capricious confiscation thereof. The obvious reasons forming the basis for the statute here considered negative, it seems to us, any idea of arbitrariness or confiscation. Chicago Telephone Supply Co. v. United States, 23 Fed. Supp. 471; certiorari denied, 305 U. S. 628, upheld the constitutionality of a similar statute, sections-701 and 702 of the Eevenue Act of 1934. No such clear demonstration of unconstitutionality appears here as to call for our conclusion to that effect. Rita O’Shaughnessy, Executrix, 21 B. T. A. 1046.

We therefore conclude that the petitioner had no right to file a second or amended declaration of value of corporate stock, and that the respondent properly took into consideration the original declaration of value in determining deficiencies. It having been stipulated that in such case the deficiencies determined by respondent in the sum of $3,976.32 excess profits tax and $163.07 income tax are all due and assessable,

Decision will he entered for the respondent.


author: Black :

text:
    Edward E. Denniston, Executor of the Estate of Eleanor H. Denniston, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Anna H. Denniston, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Pennsylvania Company for Insurances on Lives and Granting Annuities and Joseph S. Clark, Trustees and Transferees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 86175, 86573, 86579.
    Promulgated November 1, 1938.

      Murray H. Spahr, Esq., and Joseph S. Ciarle, Esq., for the petitioners.

      E. C. Algire, Esq., for the respondent.
   OPINION.

Black :

The Commissioner determined that the value of the property transferred by decedent by the deed of trust of May 12, 1915, as to which the power of appointment was relinquished March 16, .1982, was $316,606.96 at the date of decedent’s death and included it as a part of her gross estate. This will sometimes hereinafter be designated as item 1 of the Commissioner’s determination. He determined that the value of the property transferred by decedent to her daughter, Anna H. Denniston, by the two deeds dated May 19, 1932, was $55,000 at the date of decedent’s death and included it as a part of her gross estate. This will sometimes hereinafter be referred to as item 2 of the Commissioner’s determination. Petitioners concede the correctness of these valuations and therefore we have made no findings of fact as to them.

The reasons why the Commissioner included the value of the property above referred to as item 1 in decedent’s gross estate are stated in the deficiency notice as follows:

Under the deed of trust created by the decedent on May 12, 1915, the decedent reserved the income for her lifetime. The trust provided that upon decedent’s death the trust property should be held “for such parties and persons and for such uses, intents and purposes and estates therein as the said Eleanor S. Denniston at the time of her death may by any last will and testament or instrument in the nature thereof direct, provide, limit and appoint.”
As the decedent retained a life estate and the right to dispose of the remainder by deed or will, no gift or transfer of any vested interest was accomplished by the deed of May 10, 1915. The transfer of the remainder was completed on March 16, 1932, the date the decedent relinquished the right to dispose of the property by her will. Accordingly, as the transfer was actually made on March 16, 1932, and the decedent retained the income to the date of her death, the transfer comes within the provision of Section 302 (c) of the Revenue Act of 1926, as amended by joint resolution of March 3, 1931, as amended by Section 803 of the Revenue Act of 1932.
Where the grantor of a trust reserves the power to dispose of the trust corpus by will, the trust is subject to a power to alter, amend, or revoke within the meaning of Section 302 (d) of the Revenue Act of 1926. Commissioner v. Chase National Bank, Administrator of estate of Vivien Helen De LaPoer Beresford, deceased, U. S. C. C. A. (2d) Cir. March 2, 1936. The relinquishment by the decedent on March 16, 1932, of the power to dispose of the trust property by her will is held to have been made in contemplation of death, and the value of the trust property is included in the gross estate under the provisions of Section 302 (d) of the Revenue Act of 1926.

The sole reason why the Commissioner included item 2 in decedent’s gross estate, as stated in the deficiency notice, is because he determined that the conveyances were made in contemplation of death. There was no reservation of income for life by decedent as to the real estate properties in item 2 and the Commissioner does not contend that as to them the joint resolution of March 3, 1931, and section 803 of the Revenue Act of 1932 apply.

Therefore, as to both items 1 and 2 which were included in decedent’s gross estate, we have the common issue of contemplation of death. As to the value of the property included in item'l, we have the additional question as to whether the joint resolution of March 3, 1931, and section 803 of the Revenue Act of 1932, are applicable.

If the relinquishment of the power of appointment and the two conveyances by deed were all executed in contemplation of death, then it becomes unnecessary to decide whether the joint resolution of March 3, 1931, and section 803 of the Revenue Act of 1932 are applicable to the relinquishment of the power of appointment executed March 16, 1932. We shall therefore take up first and decide the issue as to contemplation of death.

The petitioners argue in their brief that under the language of the revenue acts in force at the time of decedent’s death there is no statutory presumption that decedent executed the documents in question in contemplation of death, notwithstanding they were executed less than two years prior to her death. We shall, for the purposes of this opinion, assume petitioners are correct in that contention. Respondent does not argue to the contrary in his brief. We have not reached the conclusion on this issue, which we shall hereinafter state, because of any statutory presumption. We have reached it from a consideration of all the facts in evidence.

We may remark however that, assuming that there is no statutory presumption that the conveyances were executed in contemplation of death because of the fact that they were executed less than two years prior to decedent’s death, and it is certain that there is no conclusive statutory presumption to that effect, cf. Heiner v. Donnan, 285 U. S. 312, nevertheless the determination of the Commissioner in his deficiency notice that the relinquishment of the power of appointment and the two conveyances by deed were each made in contemplation of death is prima facie correct. That is so because of the general presumption of law which supports the correctness of the Commissioner’s determination and requires evidence to overcome it. See American Security & Trust Co., et al., Executors, 24 B. T. A. 334.

The burden of proof is therefore on the petitioners in the instant case to overcome the correctness of the Commissioner’s determination. For reasons which we shall presently state, we do not think they have done so.

The same evidence in the record applies to both items 1 and 2 on this issue of contemplation of death. If the relinquishment of the power of appointment was executed in contemplation of death, the value of the property in item 1 is includable in decedent’s gross estate by reason of section 302 (d) of the Revenue Act of 1926, printed in the margin.

If the gift of the property conveyed by the two deeds to Anna H. Denniston dated May 19, 1932, were made in contemplation of death, then the value of the property in item 2 would be includable in decedent’s gross estate under section 302(a) and (c) of the Revenue Act of 1926, as amended by the joint resolution of March 3, 1931, printed in the margin.

The language italicized in section 302(c), as printed in the margin, was added by the joint resolution of March 3, 1931, and, while that language was in full force and effect at the time of the conveyances in question, nevertheless it is plain that it has no application to the real estate conveyed by the deeds of May 19, 1932, because those deeds did not reserve any interest to the decedent. The remainder of section 302(c) does apply if these conveyances were made by decedent in contemplation of death.

Were the relinquishment of the power of appointment executed March 16, 1932, and the deeds of conveyance of the real estate made May 19, 1932, executed in contemplation of death? The leading case on the meaning of the phrase “in contemplation of death” is United States v. Wells, 283 U. S. 102, wherein the Supreme Court, in speaking of that phrase, said: “The provision is not confined to gifts causa mortis, which are made in anticipation of impending death, are revocable, and are defeated if the donor survives the apprehended peril.”

If the provision was so narrowly confined, then it would be clear that the conveyances here involved were not made by decedent in contemplation of death. The evidence shows that she was in a reasonable degree of good health when she made them and that no fear of early and impending death influenced her. True the decedent was about 75 years of age when she made the conveyances and was not as active as in her younger years, but she was of an optimistic, hopeful frame of mind and her health was as good as could have been expected for one of her years. Perhaps better than the average of that age.

However, as pointed out by the Supreme Court in the Wells case, the transfer does not have to be made in contemplation of impending death to fall within the ambit of the statute. If the motive of the transfer is testamentary in character, that brings it within the statute. The Supreme Court in the Wells case used the language “dominant motive” when discussing the motives which lead up to transfer.

However the Second Circuit, in the recent case of Farmers Loan (& Trust Co. v. Bowers, 98 Fed. (2d) 794, held that where there was an important and substantial death motive such as the avoidance of estate taxes, the provision “in contemplation of death” applies. The court, in discussing the words “dominant motive” as used by the Supreme Court in the Wells case, among other things, said:

We cannot believe that the general reasoning of the opinion should be taken to exempt gifts inter vivos from taxation where there is an important death motive such as the avoidance of estate taxes. Judge Soper, discussing United States v. Wells in Tait v. Safe Deposit & Trust Co. of Baltimore, 74 F. (2) 851, (CCA 4) (35-1 USTC, par. 9058), pertinently remarked that:
■<⅜ * * a transfer is taxable * * * if the purposes associated with death enter into and form a substantial although a less compelling part of the inducing motives. Apart from the difficulty of appraising the relative value and effect of concurring motives, such a transfer falls within the language of the estate tax act and within the purpose it was designated to meet.”

In the instant case it seems reasonably clear from the evidence that one of the dominant and controlling motives which actuated decedent in executing the relinquishment of the general power of appointment which was reserved in the trust indenture of May 12, 1915, was that her estate after her death would not have to pay the estate tax which would be levied if the power of appointment were outstanding at the time of her death.

Likewise, it seems reasonably clear from the evidence that one of the dominant and controlling motives for the conveyances of the real estate by decedent to her daughter, Anna H. Denniston, by deeds dated May 19, 1982, was to escape estate taxes which would result if ownership of the property were in decedent at the time of her death. A strong circumstance to support this view, we think, is that the two conveyances of real estate of May 19, 1932, divested Mrs. Denniston of all the property which she owned, including the home in which she lived and her summer home in Maine, except her life interest in the income from the property conveyed by the deed of trust of May 10, 1915. We think it is reasonable to say that parents do not usually give all their property to their children, including the home that shelters them, unless there is some kind of a testamentary motive in mind.

There were doubtless, as petitioners argue, other motives which entered into these transfers. For example, it seems reasonably clear from the evidence that the escaping of a prospective gift tax entered into decedent’s decision to relinquish the power of appointment and to make the conveyances of the real estate to her daughter on the dates the instruments were executed. There was no gift tax in force at the time of the several conveyances, but one was being talked of in Congress and the press at that time and the evidence establishes to our satisfaction that one of the things under consideration by decedent when she executed the relinquishment of the power of appointment, March 16, 1932, and the conveyances of the real estate, May 19, 1932, was the prospective gift tax which was imposed by the Revenue Act of 1932, which became effective June 6, 1932.

While we think it is correct to hold on the evidence that the motive to escape the imposition of a prospective gift tax was an important factor in moving decedent to make these conveyances, nevertheless, as already stated, we must hold from the evidence that one of the dominant and controlling motives which influenced decedent to execute the conveyances was to avoid estate taxes.

We think there would be no profit in discussing in detail the testimony of the several witnesses who testified at the hearing. Much of their testimony is directed to the fact that Mrs. Denniston was a healthy woman all of her lifetime, with a hopeful and optimistic outlook on life, until' within a few weeks of her death, that she was in good health for one of her age at the time she executed the conveyances in question and was not in fear of early death at the time she executed them, and that she had made up her mind that she wanted to complete in her lifetime gifts to her children of all her property, except the life estate in the income from the property which had been transferred by trust indenture on May 19,1915. All this we accept as true.

It is also shown, however, by petitioners’ own witnesses that, while Mrs. Denniston was in good health at the time she discussed with her lawyers the question of relinquishing the power of appointment and executing the deeds of conveyance of the real estate to her daughter, the burden of the discussion centered around the saving of estate taxes and the avoidance of prospective gift taxes. Most of the discussion with her lawyers seems to have been carried on in Mrs. Denniston’s behalf by her two sons-in-law; nevertheless, they appear to have been acting in her behalf and she was fully cognizant of what was going on and the motives for executing the conveyances were hers. One of the dominant and controlling motives being the avoidance of estate taxes, it must be held, on the authority of United States v. Wells, supra, and Farmers Loan & Trust Co. v. Bowers, supra, that the relinquishment of the power of appointment executed March 16, 1932, and the conveyances of real estate made May 19, 1932, were executed by decedent in contemplation of death.

On this issue the Commissioner is sustained.

The transferee petitioners under Docket Nos. 86513 and 86519 admit liability as transferees for whatever deficiency, if any, the Board may find to be due in Docket No. 86115, plus interest as provided by law.

Inasmuch as we have sustained the Commissioner on the issue respecting “in contemplation of death” and the inclusion in decedent’s gross estate of both items 1 and 2, and inasmuch as there is no dispute as to values,

Decision will be entered in Docket No. 86175 that there is a deficiency in estate tax in the amount of $%5,005.0%. In Docket Nos. 86573 and 86579 decision will be entered in each proceeding that the petitioner therein is liable for the full amount of the deficiency determined in Docket No. 86175 pins interest as provided by law.

Reviewed by the Board.

      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.

       The 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—
      (a) To the extent of the interest therein of the decedent at the time of his death:

        V ⅜ * * * * ⅜
      (e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the transferor has retained for Ms life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and fuU consideration in money or money’s worth. * * * Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death, but prior to the enactment of this act, without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. [Italics ours.]


author: Murdock :

text:
    Mary S. Peabody, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79907.
    Promulgated November 4, 1938.

      Peter L. Wentz, Esq., for the petitioner.

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

Murdock :

The Commissioner determined a deficiency of $5,920.01 in the petitioner’s income tax for 1932. The only issue is whether the Commissioner erred in disallowing a deduction of $31,156.15 claimed as a loss on account of the worthlessness of preferred and common stock of the Middle West Utilities Co. The facts are hereby found as stipulated. There is no question of the cost or ownership of the stock. The dispute is limited to whether the stock became worthless in 1932, as the petitioner contends, or whether it still had some value during that year. The petitioner deducted the cost of the stock as a loss on her return for 1932. The Commissioner denied the deduction, saying that “an examination of the affairs of this corporation discloses that the stock did not become completely and permanently worthless during the year 1932.”

The Commissioner now relies almost entirely upon the decision of the Board in the case of George H. Horning, 35 B. T. A. 897. Horning was there claiming a loss on common and preferred stock of the Middle West Utilities Co. on the ground that it became worthless in 1932. Thus the issue there was identical with the issue here. The headnote and the statement of the question in the opinion indicate that the petitioner failed for lack of proof. Each case of this kind must be decided upon the evidence presented in that particular case. All of the evidence introduced in the Homing case to show worthlessness in 1932 has been introduced here, together with important additional evidence. The petitioner contends that all of this evidence now shows worthlessness of these two classes of stock in 1932.

The Middle West Utilities Co. (hereafter called Middle West) was a holding company incorporated under the laws of Delaware. Its assets consisted largely of stocks and bonds of subsidiaries. The latter were engaged in supplying electric service or were holding the securities of subsidiaries which were so engaged. There was considerable pyramiding of the holdings in the group. An involuntary petition in bankruptcy was filed on April 15, 1932, in a Federal District Court hi Illinois, praying that Middle West be adjudicated a bankrupt. The court on the same day appointed receivers. The receivership resulted from the inability of Middle West to finance its obligations. The bankruptcy proceedings never came to an adjudication. Middle West had controlled eight large utilities systems and two large investment companies. It lost its entire eastern subsidiary group through bankruptcy and foreclosure during 1932. That group had earned 40 percent of the entire gross income of the Middle West group. But Middle West still served 2,882 communities. The book value of the assets of Middle West as of December 31, 1932, was $623,514,849.69. The liabilities shown upon its books at that time were $62,823,604.99 less than the above amount, so that the book value of the preferred and common stock was $62,823,604.99.

A committee for the holders of serial gold notes of Middle West in the amount of $40,000,000 made an appraisal of the assets and liabilities of Middle West and made a report dated November 12, 1932. This appraisal showed assets worth $13,526,879.20 and liabilities of $5T,080,460.56, not including capital stock. The appraisers estimated that some of the liabilities might be eliminated and that as much as 28 percent might be received by creditors including the note holders. It did not include among the assets certain securities having a book value of $90,486,925.77. The parties to the present proceeding have stipulated facts relating to the latter assets which indicate that those assets were worth much less than $5,000,000 at the close of 1932.

Quotations on Middle West securities were as follows:

Attempts were made to reorganize Middle West under section 77B of the Bankruptcy Act. An appraisal was made of its assets for that purpose, pursuant to a court order. The appraiser determined that the value of the assets on July 23, 1934, was $50,973,827 and that the liabilities exceeded the assets. The excess was over $15,000,000. A plan was finally agreed upon and was confirmed by the court on November 27,1935. There was a statement in the plan that the assets of Middle West were much less than its liabilities and the preferred and common stockholders had no equity in its assets. The plan provided, however, that preferred stockholders should receive one share of $5 par value stock of the new company and a warrant to purchase one additional share for each four shares of the old preferred owned. It also provided that common stockholders should receive one share of the new common and a warrant to purchase an additional share for each 100 shares of old common owned. The warrants gave the right to purchase the new share on a sliding scale beginning at $8. Although the petitioner had taken no part in the court proceedings, she received her allotment of new shares and warrants, 20.5 shares and 20.5 warrants for her 82 shares of preferred and 21.64 shares and 21.6’4 warrants for her 2,164 shares of common.

Price ranges on November 27, 1935, were as follows:

New stock_$8. 00 -$S. 25

Warrants_ 3.25 -> 3.75

Old common- . 125- . 25

Old preferred_ 2. 50 - 3.00

The Middle West Utilities Co. was being operated at the close of 1932, its common and preferred stock had a substantial book value at that time, the common and preferred stock was quoted on the exchange, and in the final reorganization in 1935 the common and preferred stockholders received new shares and warrants for their old stock. The evidence in the record shows beyond doubt that the book value of the stock at the close of 1932 was a wholly unreliable guide to the real value of the stock. Although the old stock was still quoted at the close of 1932, the quoted prices were so low that they would scarcely justify or support a sale of an interest as large as that of this petitioner. The common was as low as it could possibly be quoted on the exchange. The petitioner received new shares and warrants in the latter part of 1935 in exchange for her old preferred and common stock. The value of the new property received was $500 or less, whereas the cost of her old stock was in excess of $31,000. The new shares and warrants were given to the old stockholders despite the fact that those stockholders had no equity whatsoever in the assets of the old corporation. The corporation, although operating, was placed in the hands of receivers during 1932 and it lost many of its properties during that year by bankruptcy and foreclosure, including its entire eastern subsidiary group. The appraisal of the committee for the note holders, together with the evidence as to the value of certain assets which were excluded from that appraisal, shows that the value of the assets of the company at the close of 1932 was at least $40,-000,000 less than its liabilities, not counting the common and preferred stock as liabilities. As has been stated above, the present record contains important evidence which was not presented in the Morning case. For example, the evidence relating to actual value of the $90,486,925.77 book value of assets was not presented in that case and apparently the loss of the eastern group was not shown. The evidence as a whole fairly preponderates in favor of the finding which we hereby make, that this common and preferred stock was worthless at the close of 1932. Cf. John B. Marsh, 38 B. T. A. 878. It follows that the petitioner is entitled to the deduction claimed.

Decision will be entered v/nder Bule 50.


author: Disney :

text:
    Frank Aranow, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84115.
    Promulgated November 4, 1938.

      Harris Berlaclc, Esq., for the petitioner.

      Gerald W. Brooks, Esq., and Percy G. Young, Esq., for the respondent.
   OPINION.

Disney :

The sole issue raised by the errors assigned is whether or not the sum of $34,450 received by the petitioner as fees for his services as referee, special guardian, or guardian ad litem, under court appointments as set forth in our findings of fact, is exempt from Federal income tax.

In view of the circumstances and conditions under which the fees in question were earned by and paid to the petitioner, there is in the instant case, in our opinion, no occasion or necessity for attempting to draw any distinction or difference between petitioner’s fees as referee, special guardian, or guardian ad litem, since all are alike subject to, and controlled by, the principles enunciated and applied in court decisions to which we shall briefly refer, deeming it unnecessary to enter into a lengthy discussion of the cases which we consider are determinative and controlling of the issue in the instant case.

Notwithstanding the earnest insistence by counsel for the petitioner that the principles enunciated and applied in Helvering v. Gerhardt, 304 U. S. 405, have no bearing on the issue in the instant case, we can not accept that view. It is true the facts and circumstances shown in Helvering v. Gerhardt, supra, and in cases cited and approved therein, are not identical with those in the instant case, but in that case there is laid down a principle that immunity is based upon an actual (and not merely conjectural) burden upon the state function.

In the instant case, it is apparent that the functions of government or any judicial functions are not in fact burdened by the imposition of the Federal income tax upon the fees or compensation received by the petitioner as referee, special guardian, or guardian ad litem in the instances described in our findings of fact, for the compensation or fee was in no instance paid or borne by the state or by any of its political subdivisions, but was paid out of the funds involved in the litigation or from the estate or interest of the individual, for whom petitioner was serving as special guardian or guardian ad litem under appointment by some court.

In petitioner’s reply brief herein it is stated that in the case of Helvering v. Gerhardt, supra, a petition for a rehearing was filed, in which an argument is made that the change in the tax law effected by the decision in that case should not be applied retroactively. Petitioner insists that in the instant case, in view of the fact that the law at the time of the filing of the taxpayer’s return was expressed by the decisions of this Board in the cases of David K. Cochrane, 26 B. T. A. 1167, and Walter G. Winne, 27 B. T. A. 369, the law as therein stated, if considered changed by the decision in Helvering v. Gerhardt, supra, “Port Authority cases,” should not be permitted to affect taxes accrued in 1933.

The Supreme Court on October 10,1938, denied rehearing, the effect of which is also to deny the request that the decision therein be not applied retroactively.

In the case of Saxe v. Shea, 98 Fed. (2d) 83, decided since the hearing herein, the identical question in issue in the instant case was before the court, under practically identical circumstances, and the same statutes (except that therein there was no appointment as guardian ad litem or by the City Court of New York City), and it was there decided that the fee or compensation received by the referee or special guardian was subject to Federal income taxation. The court follows and applies Helvering v. Gerhardt, supra, saying:

This limiting principle we believe to be controlling of the case at bar. None of the appellant’s compensation came from the state treasury; it was paid by the parties litigant or out of an estate under the court’s control. By no possibility can the imposition of the tax increase to the state the cost of administering justice. Conceivably an income tax upon the salary of a judge paid from the state treasury may require the official’s salary to be correspondingly raised in order to obtain his consent to serve and thereby increase the cost to the state of its judicial department. Cf. Helvering v. Curren, 90 F. (2d) 621, 622 [37-2 USTC Par. 9351] (C. C. A. 2). But this cannot happen in the case of a referee or special guardian whose compensation is paid by the litigants. The tax upon such compensation will be absorbed by the taxpayer without effect upon the state, as fully as the tax upon that part of his income arising from his professional employment as an attorney at law. In the light of the Gerhardt opinion we believe that the source of the appellant’s compensation is alone enough to defeat his claim of constitutional immunity from federal income taxes, although prior to that decision the lower courts had expressed divergent views on this question. * * *

Tbe case also considers tbe question as to whether tbe petitioner as referee or special guardian was an officer or employee of tbe state or political subdivision thereof, under the statutory exemption of such officer or employee, under section 1211 of the Eevenue Act of 1926. We do not have before us such statutory exemption, since the Eevenue Act of 1932 did not contain same, but the regulations in effect during the taxable year herein did extend the immunity to such officer or employee. However, such regulations define officer as one whose tenure is continuous and not temporary, and define employee as one whose services are continuous, not occasional or temporary. The court in Saxe v. Shea, supra, therefore holds that petitioner there was not such officer. A regulation attempting to create an exemption is void. Langstaff v. Lucas, 9 Fed. (2d) 691; affd., 13 Fed. (2d) 1022; certiorari denied, 273 U. S. 721; Maurice S. Avidan, 38 B. T. A. 951. Petitioner was, therefore, neither an officer nor an employee of the state or a political subdivision thereof.

The principles enunciated and applied in the decision of Saxe v. Shea, supra, are in our opinion controlling in the instant case, and we therefore are of the opinion and hold that the compensation received by the petitioner as referee, special guardian, and guardian ad litem is subject to Federal taxation and the respondent did not err in his determination with respect thereto.

Decision will be entered for the respondent.


text:
    The Rollestone Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Rollestone Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Freeland Process Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Midwest Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Southern Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Southwestern Development Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44576, 44577, 44578, 50216, 50217, 50218, 50219, 50220, and 50221.
    Promulgated November 8, 1938.

      Thomas D. Lyons, Esq., and T. O. Hart, Esq., for tía© petitioners.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Murdock :

Ordinary dividends are not taxable to corporations, since they are deductible in computing net taxable income, but distributions made in partial or complete liquidation, to the extent that they exceed the corporation’s basis for gain on the stock, are taxable when received by corporations, since they are not deductible. Secs. 234 (a) (6) (A), 201 (a), (c), (d), and (g), Eevenue Act of 1924, and corresponding sections of the Eevenue Act of 1926. The principal question here is whether the distributions made by Continental to its stockholders, the Eollestone Corporation, Eollestone Investment Co., and Freeland Process Co., in 1924, 1925, and 1926 were ordinary dividends or whether they were amounts distributed in complete or partial liquidation of Continental. That question is not res adjudicator,. It was not decided in the case cited by the petitioners. Continental disposed of the principal part of its assets on February 8,1922, under its agreements with Transcontinental. Practically all of its remaining assets were sold to Eoland Oil Co. on March 11, 1922. Thereafter, Continental was merely receiving the payments under the aforesaid contracts. It had no income during the period here in controversy from any other operations. It did not engage in any drilling operations during that period. It received from Transcontinental during the period from 1922 to 1926, inclusive, $3,962,545.61, and distributed to its stockholders during that period $3,588,322.45. The stockholders, on January 18, 1922, had resolved that the corporation should be liquidated as speedily as possible and the assets distributed to the stockholders. Everything that it did thereafter during the period here in controversy was consistent with this resolution to liquidate. Continental, in its petition to the Board and on its income tax returns, alleged that it was in the process of liquidation and was not engaged in producing or selling oil, but was merely acting as a receiving and disbursing agent for the funds realized from the sale. Continental furnished an affidavit to the Commissioner to the same effect. The evidence clearly establishes the fact that Continental was in the process of liquidation during 1924, 1925, and 1926, and that the distributions here in question were amounts distributed in partial or complete liquidation of the corporation within the meaning of those terms as defined in the Revenue Acts of 1924 and 1926.

It should be noted that “amounts distributed in partial liquida-/ tion” is defined as meaning a distribution by a corporation in com-] píete cancellation or redemption of part of its stock, or one of a( series of distributions in complete cancellation or redemption of alii or a portion of its stock. Each of the distributions here in question^ seems to have been one of a series of distributions intended to be in complete cancellation or redemption of all of the stock of the corporation when the series was completed. The following quotation from Fred T. Wood, 27 B. T. A. 162, is in point:

* * * Liquidation has been defined as the operation of winding up the affairs of a corporation by realizing upon its assets, paying its debts and appropriating the amount of its profit or loss. W. E. Guild, 19 B. T. A. 1186, and cases there cited. It differs from the normal operation of the corporation for current profit in that it ordinarily results in the winding up of the corporation’s affairs. There must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. It contemplates an impairment of capital or a retirement of outstanding stock, though a distribution, if one of a series of distributions in liquidation, may be a liquidating dividend even if it, of itself, does not impair capital. Liquidation can not be brought about by mere declaration, and the question of whether a corporation is in liquidation is therefore one of fact: See W. E. Guild, supra; James P. Gossett, 22 B. T. A. 1279, affd., 60 Fed. (2d) 484; Martha Briggs Phelps, 20 B. T. A. 866; affd., 54 Fed. (2d) 289; E. G. Perry, 9 B. T. A. 796; Milton Tootle, Jr., 20 B. T. A. 892.

It does not make any difference that a part of the distributions made in the taxable years might be deemed to have been from earnings and profits. UeTbrnich v. HeTbnan, 276 U. S. 233; Gossett v. Commissioner, 59 Fed. (2d) 365; HoTmby Corporation v. Commissioner, 83 Fed. (2d) 548. Nor does the fact that the stock continued to be held by the stockholders without formal dissolution, prevent the distributions from being in liquidation. Frelmort Realty Corporation, 29 B. T. A. 181. The drilling operations engaged in in 1930 and 1933 were insignificant and unimportant, since even then there was no intent to maintain the corporation as a going concern. Holmby Corporation v. Commissioner, supra. Neither is it important that Continental was allowed depletion on the interest in the leases until the terms of the contract were fulfilled in 1929.

The next question is whether the basis of these petitioners for gain or loss on the Continental shares was reduced by the distributions in 1922 and 1923. The Commissioner does not concede that the effect of those distributions is determined by the Revenue Act of 1921. However, he does not make any argument or cite any authorities to the effect that the Eevenue Act of 1921 is not controlling. That act differed materially from subsequent acts, since it contained no provision for reducing the basis by distributions made in partial or complete liquidation. Distributions under that act were presumed to be from earnings, if earnings were available, in cases like this, and distributions from accumulated earnings were taxable only as dividends. The Commissioner states in his brief that he can not tell whether or not Continental had accumulated earnings sufficient to pay these distributions of 1922 and 1923, but the evidence shows to our satisfaction that earnings were available. There is no provision in the Eevenue Acts of 1924 and 1926 making the provisions of those acts relating to the reduction of basis by distributions in liquidation retroactive so as to cover distributions made prior to the enactment of those acts. Therefore, we conclude that the distributions of 1922 and 1923 did not serve to reduce the petitioners’ bases for gain or loss on the Continental shares. Cf. Elizabeth, P. Patterson, 33 B. T. A. 57; Lewis D. Newman, 9 B. T. A. 158, 161.

Another issue for decision is the basis for gain which the Continental shares had in the hands of the three petitioners. They acquired their Continental shares on January 10, 1922. Section 204 of the Eevenue Acts of 1924 and 1926 provide that the basis for determining gain or loss from the sale of property acquired after February 28, 1913, shall be the cost of such property, with certain exceptions. One of the exceptions is that “if the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 * * *, then the basis shall be the same as it would be in the hands of the transferor,” where no gain or loss was recognized to the transferor under the law applicable to the year in which the transfer was made. Sec. 204 (a) (8). These three petitioners acquired their Continental shares by the issuance of their stock in connection with a transaction described in paragraph 4 of subdivision (b) of section 203. The latter section provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for the stock in such corporation and immediately after the exchange such person dr persons are in control of the corporation. No gain or loss from those transfers was recognized under the Eevenue Act of 1921, which was the law applicable to the year in which the transfers were made. See section 202 (c) (3) (A) of the Eevenue Act of 1921. The provisions of the Eevenue Acts of 1924 and 1926 above referred to apply to all such transfers made after December 31, 1920, by the express language of those provisions. The transactions whereby E. H. Eollestone and C. L. Freeland transferred their Continental shares to the Rollestone Investment Co. and the Freeland Process Co. were no part of any plan of reorganization and the Continental stock was not, as to these two petitioners, stock of a corporation a party to a reorganization. Consequently, the bases of the Continental stock in the hands of Rollestone Investment Co. and Freeland Process Co. are the same as the bases for gain or loss which the Continental shares had in the hands of E. H. Rollestone and C. L. Freeland, or $2.25 for each Continental share.

The situation in regard to Rollestone Corporation needs further consideration. A. A. Rollestone owned and transferred to the Rolle-stone Corporation 80,554 shares of Continental stock. That was more than 50 percent of the total outstanding stock of Continental at that time. There was no other kind of stock outstanding at that time. Thus the transfer from A. A. Rollestone to the Rollestone Corporation amounted not only to an exchange within section 208 (b) (4), but also to a reorganization within the definition of that term as contained in section 203 (h) (1) (A) of the Revenue Acts of 1924 and 1926. Thus, the Continental shares transferred by A. A. Rollestone to the Rollestone Corporation, being stock of a corporation a party to a reorganization (section 203 (h) (2) of the Revenue Acts of 1924 and 1926), are expressly excluded from the exception made in 204 (a) (8) and are subject to the general rule of (a), unless some other exception applies. Such shares are specifically excluded from paragraphs (6) and (7). The other excepting paragraphs of section 204 (a) obviously are likewise inapplicable. It follows that the basis of the Rollestone Corporation for gain or loss on the Continental shares is the cost of the shares to the Rollestone Corporation, as provided in the general rule of section 204 (a). The Rollestone Corporation acquired the Continental shares by the issuance of all of its own stock then outstanding, and the cost of the Continental shares was the value of the Rollestone stock. That value, in turn, was the same as the total value of the Continental stock acquired, or 80,554 times $25. Ida I. McKinney, 32 B. T. A. 450, 456; E. F. Simms, 28 B. T. A. 988; Reliance Investment Co., 22 B. T. A. 1287; George A. Richer, 10 B. T. A. 11; William Ziegler, Jr., 1 B. T. A. 186; Manufacturers Paper Co. v. Commissioner, 89 Fed. (2d) 684.

The issue relating to the deductibility of the alleged losses of the subsidiaries, the A. A. Rollestone Co. and Puritan Mining Co., in 1925 and 1926 was not clearly presented. The amount of the losses claimed on the returns, as well as the amount disallowed by the Commissioner, does not appear. No amount is mentioned in the pleadings. The contention is made in the petitioner’s brief that the petitioners are “entitled to a deduction of several hundreds of thousands of dollars for dry hole expenses.” The evidence does not show how much was spent, how much might have been expense, how much capital, or the amount of any loss deductible in either year. The Board can not make any approximation for either year. The evidence fails to show that the Commissioner erred.

Decisions will be entered under Bule 50.

         Alexander v. Continental Petroleum Co., 63 Fed. (2d) 927.

       The excluding parenthetical clause “(other than stock or securities in a corporation a party to the reorganization)” of sections 204 (a) (7) ana (8) of the Revenue Acts of 1924 and 1926 were eliminated in the Revenue Act of 1928 in order to prevent possible evasion. See sections 113 (a) (7) and (8) of the Revenue Act of 1928 and Finance Committee Report, Report No. 9870, 70 Cong., 1st sess., p. 27. This was new legislation and was not retroactive. Stires Corporation, 28 B. T. A. 1; Bolmby Corporation, 28 B. T. A. 1092, 1102; John R. Thompson Securities Corporation, 33 B. T. A. 1011; 6. C. M. 7285, C. B. IX-1, 181.


author: Hm,:

text:
    Mellbank Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80008.
    Promulgated November 8, 1938.

      W. A. Seifert, Esq., D. D. Shepard, Esq., Floyd F. Toomey, Esq., and 'William H. Qusaly, Esq., for the petitioner.

      Ralph ‘E. Smith, Esq., and William T. Cullen, Esq., for the respondent.
   OPINION.

Hm,:

The sole issue for decision in this case is whether or not petitioner is subject to tax under section 104 of the Revenue Act of 1932. Respondent has determined that it is so taxable. Petitioner had no net income for 1932 ordinarily taxable to a corporation, but sustained a net loss in tlie amount of $15,738.18, as adjusted by respondent under section 21 of tlie applicable statute. In determining tlie deficiency respondent included in petitioner’s income tbe amount of $114,182.50 representing dividends received in the taxable year, and thus computed net income of $98,444.32 under section 104 (c). If petitioner is not within the purview of that section, there is no tax due.

Section 104 (a) subjects any corporation to a tax equal to 50 per centum of its net income, in addition to the tax imposed by section 13, if it was formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. And subdivision (b) provides that the fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.

In the deficiency letter respondent held only that petitioner was “subject to taxation under the provisions of section 104 of the Revenue Act of 1932.” It was not indicated whether such holding was based upon the premise that petitioner corporation was “formed” for the prohibited purpose, or that it was “availed of” in the taxable year for such purpose, or both; nor did the deficiency letter hold that petitioner was a “mere holding or investment company” or that its gains and profits had been permitted to accumulate beyond the reasonable needs of the business. On brief respondent urges all of these grounds in support of his determination. We shall, therefore, consider seriatim the various factors stated.

The first, and of primary importance, is whether or not petitioner was formed for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. This question, we think, must be answered in the negative.

At the time of the formation of petitioner on December 12,1929, and until May 10,1932, R. B. Mellon was its sole shareholder. For some years prior to 1929, Mellon had been engaged in the banking business, and had acquired stocks in numerous banks in the general vicinity of Pittsburgh, Pennsylvania. Because of his other activities Mellon was unable to supervise personally the management and control of the banks in which he was interested, and he also wished to have available a group of banks in western Pennsylvania in the event branch banking should be legalized. Accordingly, on October 1,1929, Mellon engaged F. R. Denton to formulate plans for an organization to supervise and coordinate the activities of the banks in which he was already interested and to arrange for the acquisition of stock in other banks in the same area. Denton had had considerable banking experience, and had been a national bank examiner for about seven years. He was then Assistant Chief National Bank Examiner in the office of the Comptroller of the Currency. After making an investigation Denton recommended to Mellon the formation of a corporation to manage the banks in which Mellon owned, or contemplated purchasing, stock. This was a common practice at that time. Pursuant to that recommendation, the Mellbank Corporation, petitioner herein, was organized.

Of course, the fact that petitioner was organized primarily for the purpose of managing a group of banks is not conclusive evidence that there was not also another purpose of its formation, namely, to enable Mellon to escape surtax, and petitioner has the burden of proving that there was no purpose to prevent the imposition of such tax. R. L. Blaffer & Co., 37 B. T. A. 851, 856. However, Den-ton testified at considerable length and in detail concerning the situation which lead to the formation of the petitioner corporation. The actuating motives were ample to justify the organization of such a corporation, and they were business reasons, wholly unrelated to any purpose to prevent the imposition of the surtax upon Mellon, the corporation’s sole stockholder. The matter of taxation was never mentioned. We find nothing in the record to justify our disbelieving Denton’s testimony on this point, even if it can be said that he was an interested witness. His testimony is not inconsistent with but is corroborated by other evidence. We have no hesitation in concluding that petitioner was not formed for the prohibited purpose. Cf. C. H. Spitzner & Son, Inc., 37 B. T. A. 511, 518.

Was petitioner, during the taxable year, a mere holding or investment company, or were its gains and profits permitted to accumulate beyond the reasonable needs of its business? If so, such facts, or either of them, would constitute prima facie evidence of a purpose to escape the surtax. Obviously, petitioner was not a mere holding or investment company. It had no investments in, and was not holding any corporate stocks, other than stocks of its member banks, which was necessary to enable it to carry on its business of managing, supervising, and operating those banks. This appears, notwithstanding that Mellon owned large amounts of stocks in other corporations, as evidenced by the fact that in his individual returns for 1930 and 1931 he reported dividends in excess of $5,600,000 and $4,800,000, respectively.

Nor did petitioner accumulate its gains and profits beyond the reasonable needs of its business. On the contrary, it appears from the facts found that such accumulation was greatly inadequate to meet such needs. Petitioner’s purpose in carrying on such business was not to save its shareholders from surtax, as in Rands, Inc., 34 B. T. A. 1094, 1102, but to safeguard its investments in the stock of member banks with a view to increasing its gains and profits, some of which would be taxable to it upon receipt and all of which would be taxable upon distribution to its shareholders. We are clearly of the opinion that the evidence in this case does not raise any prima fade presumption of a purpose to escape surtax.

Was petitioner in foot availed of during the taxable year for the purpose of preventing the imposition of the surtax upon the shareholders through accumulation of its gains and profits? Its net accumulation of gains and profits for the taxable year was $98,444.32. Its failure to distribute this amount is the basis of respondent’s determination of the deficiency. At the end of the taxable year petitioner’s total earned surplus or total accumulation of gains and profits amounted to $364,673.73,

The fact that Mellon transferred certain bank stocks to petitioner corporation had the actual effect of relieving him of the surtax which would have been attributable to the accumulated dividends if they had been distributed. “The statute, however, does not operate merely because of such actual effect; it operates if such effect was the purpose.” R. L. Blaffer & Co., supra; Cecil B. deMille, 31 B. T. A. 1161, 1174; affd., 90 Fed. (2d) 12; C. H. Spitzner & Son, Inc., supra. And while it is reasonable to infer that the effect of a voluntary act is among the purposes of the actor, such presumption can not be indulged when the facts indicate otherwise.

What then are the facts in this case with respect to whether or not the gains and profits accumulated by petitioner in 1932 were beyond its reasonable business needs? At the close of the taxable year the bank depression was rapidly approaching a crisis. It resulted in the National Bank Holiday in the early part of March 1933. Numerous banks failed in the Pittsburgh area. In the preceding year, 1931, there had been a run on the Citizens National Bank of Washington, Pennsylvania, a member of the Mellbank group, and it was necessary for It. B. Mellon personally to deposit a million dollars in cash in that bank in order to meet the run on its deposits and prevent the closing of the bank. At the beginning of 1931 petitioner had only $17,687.23 in cash and little if any additional liquid assets. It was therefore unable to go to the aid of the Citizens National Bank. Again, on January 7, 1932, Mellon was required to contribute $200,000 in cash to the paid-in surplus of petitioner in order to enable petitioner to pay the balance due on its subscription to stock of one of its member banks being reorganized to prevent failure. During 1932 petitioner deposited $270,000 in the affiliated banks to enable them to meet demands for withdrawal of funds. In 1933 petitioner deposited in excess of $1,185,000 with affiliated banks to meet withdrawal of funds and thus prevent closing; and petitioner contributed more than $1,-439,000 to the capital of affiliated banks necessitated by their financial condition. These funds were borrowed from petitioner’s stockholders and increased its loans payable in 1933 to $3,174,200. In the same year petitioner’s paid-in surplus was reduced more than $4,000,-000 on account of depreciation in value of the stocks it owned in member banks. During 1933 petitioner received total dividends of only $40,017.92 on investments in excess of $6,000,000 in bank stocks, and its operating expenses exceeded its total gross income by the amount of $15,544.18.

The history of petitioner’s operations to the close of the taxable year 1932, its financial status at that time, together with the conditions in the banking business which might reasonably be anticipated for 1933, certainly rendered inadvisable the distribution of any portion of petitioner’s current earnings. The amount accumulated was wholly inadequate to meet its reasonable and legitimate business needs. If there had been any distribution, it would have immediately become necessary for petitioner to borrow a corresponding amount, or for its stockholders to contribute such amount to paid-in surplus, in order to protect its business and prevent large losses of both capital and income. We hold, therefore, that petitioner was not availed of in the taxable year for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.

Reviewed by the Board.

Judgment will he entered for the petitioner.


author: Murdock:

text:
    William Park, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 87423, 90026.
    Promulgated November 8, 1938.

      Joseph GilfiTlm, Esq., for the petitioner.

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

Murdock:

The Commissioner determined deficiencies in income tax of $2,731.40, $2,508.57, and $2,772.67 for 1932, 1933, and 1934. The Commissioner, in determining the deficiency for each year, disallowed a deduction of $9,000 claimed as interest paid on a note to tbe petitioner’s wife. The correctness of this action is the only issue not settled by agreement. The facts were stipulated and are found as stipulated.

The petitioner made, executed, and delivered his collateral demand note for $150,000 to his wife in Pennsylvania on December 14, 1923. The note bore interest at 6 percent. The delivery of the note was made as an absolute gift. The note was under seal. It was secured by 6,000 shares of American Stores Co. stock. The note was unpaid during the three years here involved, and during those years the petitioner paid annually $9,000 as interest on the note.

The applicable statutes allow a deduction for all interest paid within the taxable year on indebtedness. Sec. 23 (b), Eevenue Acts of 1932 and 1934. The only question is whether this interest was on indebtedness. The Commissioner argues that, since this note was a gift there was no consideration for the promise to pay, and, consequently, there was no enforceable obligation. He says there is no difference between a mere promissory note and a note under seal. The petitioner concedes the correctness of the Commissioner’s argument as applied to a mere promissory note but contends that, under the common law in effect in Pennsylvania, a note under seal imports a consideration even though it was given as an absolute gift.

“Indebtedness”, as used in section 23 (b), is not defined in the statutes. The Board and a court have used the definition that “indebtedness”, in this connection, means something owed in money which one is unconditionally obligated or bound to pay, the payment of which is enforceable. W. S. Gilman, 18 B. T. A. 1277; affd., 53 Fed. (2d) 47. The question of whether or not this note was enforceable in accordance with its terms depends upon the law of Pennsylvania, where it was given and where the parties reside. One case cited by the petitioner is Balliet v. Fetter, 314 Pa. 284; 171 Atl. 466. There a judgment note under seal was delivered as a gift. The court said that instruments under seal are not subject to the defense of want of consideration, “as early as Yard v. Patton, 13 Pa. 278, it was definitely settled that the presence of a seal was not merely presumptive evidence of consideration, but actually imports a consideration, and a host of cases extending down to Killeen's Estate, 310 Pa. 182, 165 A. 34, have followed this rule”, and this was not changed by the Negotiable Instruments Act, which made a note under seal negotiable but did not destroy the significance of the seal. Yard v. Patton and Killeen's Estate, cited in the above quotation. This distinction between a sealed instrument and one not under seal is also recognized in In re Kern's Estate, 171 Pa. 55; 33 Atl. 129, and in Storm v. United States, 94 U. S. 76. Thus, a note under seal in Pennsylvania is, and always has been, an enforceable obligation, even though the maker gave it as an absolute gift to the payee. Furthermore, a collateral note is enforceable, at least to the extent of the collateral, regardless of whether or not it is under seal. Dando's Appeal, 94 Pa. 76.

The cases cited by the respondent, showing that in other jurisdictions a seal is of no significance, and holding that no deduction is allowed if the note is not enforceable, are not in point. This note was given in a state where it created an indebtedness. The law of that state determines whether or not it created a legally enforceable obligation to pay. Cf. W. S. Gilman, supra; Erie Railroad Co. v. Tompkins, 304 U. S. 64; Poe v. Seaborn, 282 U. S. 101. The last cited case also answers the respondent’s argument for a uniform rule as to all states. No question is raised of the right of a wife to enforce her rights against her husband. The interest is deductible.

Eeviewed by the Board.

Decisions will be entered under Rule SO.

Mellott and DisNet, dissent.


author: Muedock :

text:
    Estate of A. C. O’Laughlin, Deceased, First National Bank of Chicago as Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84319, 86966.
    Promulgated November 9, 1938.

      Elden McFarland, Esq., and J. F. Riordan, Esq., for the petitioner.

      Frank B. Schlosser, Esq., and Arthur Clark, Esq., for the respondent.
   OPINION.

Muedock :

The Commissioner has taxed the income of the six trusts to the grantor, the decedent in this case. The petitioner contends that no part of the income of the trusts is taxable to the decedent. It seems obvious that the income of the trusts for the year 1934 is taxable to the decedent under section 166 of the Revenue Act of 1934. That section is entitled “Revocable Trusts” and provides that “where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested — (1) in the grantor * * * then the income of such part of the trust shall be included in computing the net income of the grantor.” The decedent, the grantor, of these trusts, had the power to revest in himself title to all of the corpus of the trusts after the close of 1934. That is, he had the power to revoke the trusts after 1934, and upon revocation the corpus and the income of the trusts would revest in him. The situation falls squarely within the above quoted statutory provision. Cf. Warren E. Corning, 36 B. T. A. 301.

Section 166 of the Revenue Act of 1932 differs from section 166 of the Revenue Act of 1934 in that it relates only to trusts where the grantor has the power to revest title to a part of the corpus in himself “during the taxable year.” The first issue as it relates to the years 1932 and 1933 must be decided under the provisions of the Revenue Act of 1932. Section 166 of that act does not apply, since the decedent did not have the power to revoke the trusts within either of the taxable years 1932 or 1933.

Sections 167 of the Revenue Acts of 1932 and 1934 are entitled “Income for Benefit of Grantor,” and provide that there shall be included in computing the net income of the grantor such part of the income of the trust as “is, or in the discretion of the grantor or of any person not liaving a substa.

of such part of the income may^yerae interest in ⅛6 dispositioil distribution to the grantor.” The accumulated for future not only could be but was accumulated , , ,. the trusts up to the date of the decedent’s ctu^ y inception^f ments provided that the income could be accumui^^ ^rug^ jns¿ru trustees directed the trustee to accumulate it. The , -c< on January 15,1932, about fifteen days after the creation'v t ^ and before any income was ready for distribution, advised tim to accumulate the income. That income was retained by the tru ⅞ until after the close of 1934, and thereafter the decedent, by revoking the trusts, could have had all of that income for his own. Section 167 applies unless the discretion to accumulate was in one having an interest adverse to that of the grantor. It is contended that John J. O’Laughlin, the brother of the decedent and one of the advisory trustees, had a substantial adverse interest in the disposition of the income of the trusts, since he was to receive one-seventh of the income of each trust. The trust instruments created by the decedent would indicate that John J. O’Laughlin had a substantial adverse interest to that of the decedent, at least in the disposition of one-seventh of the income of -each trust. But there is other evidence which has a bearing on that point.

The parties were considering the tax consequences of their acts on December 31, 1931, and had advice of counsel in that connection. Six separate trusts instead of one trust were used, upon the advice of counsel. One reason for that decision might have been the expected saving in taxes. The trust instruments provided that John J. O’Laughlin should have a one-seventh interest in the income and corpus of each. A separate trust for him would have accomplished almost the same result, except for his “adverse interest” in all of the trusts. If there was any reason for the selection of the particular method used, other than an attempt to bring the trusts within the provisions of section 167, such other reason has not been disclosed in this record. Taxpayers are not to be penalized, of course, for selecting a method which results in less tax than might have been due under some other method. Nevertheless, the foregoing circumstances need not be disregarded in the decision of this case. Cf. William, C. Rands, 34 B. T. A. 1107, 1115. Apparently the only function of the advisory trustees during the life of the grantor was to direct the trustee to accumulate the income. No reason appears for giving the advisory trustees authority to decide about accumulations except the purpose of avoiding the application of section 167. John J. O’Laughlin testified that he had no understanding or agreement with the decedent whereby he and his cousin Charles would direct accumulation of the income from the decedent’s trusts. However, the explanation given for the prompt direction to accumulate the income is not at all convincing. Furthermore, John J. O’Laughlin testified that the trusts which he and his cousin created at the same time that the decedent created the trusts here in question were drawn pursuant to the same general plan and were along the same general lines as those of the decedent. It may be that the decedent was a beneficiary and an advisory trustee in the John J. O’Laughlin trust. The conclusion might be drawn fairly from this entire record that the interest of John J. O’Laughlin in the distribution of the income from the trusts was not actually a substantial adverse interest when compared to that of the decedent. However, the respondent does not particularly press this point and the evidence in regard to the other trusts is not clear. For these reasons and for the further reason that there is another ground for the decision, it will not be rested upon the application of section 161.

There was little real substance to these trusts as they were worked out by the parties, and even if the trusts do not fall fairly within the provisions of section 167, nevertheless, the income of those trusts is taxable to the decedent on principles set forth in- the following decisions of this Board: Benjamin F. Wollman, 31 B. T. A. 37; William C. Rands, supra; and Warren H. Corning, supra. The Board held in each of those cases that the income of a trust was taxable to the grantor because the trusts were lacking in substance and left in the grantor substantial rights and interests in the trust property as well as rather complete powers of control over and management of the trust property. The grantor could thus use the trust property in many ways for his own benefit and had the “substance of enjoyment” of it. The Government is not required to tax trusts as separate taxable entities where the terms of the trust instrument and the manner of conducting the trusts indicate that they are not entitled to be distinguished from the grantor for tax purposes. The control which the decedent in the present case had over the trust property was as great as, if not greater than, that enjoyed by the grantors in some, or all, of the above cited cases. He retained practically complete dominion and control over all of the property listed as trust property, including the income. It does not appear that he transferred any of the securities to his name as trustee. Although he could not distribute the trust income to himself under the terms of the trust instrument during the years 1932, 1933, and 1934, he managed, with the assistance of the advisory trustees, to keep that income intact during all of those years until he had a right to revoke the trust. He could get not only the income but also the corpus by revoking the trust. He died in December 1936, without ever having revoked the trust and without ever having distributed any of the income of tbe trust. Thus during the years 1935 and 1936, up until the time ox his death, he had the power to revoke the trusts and to take the accumulated income and principal thereof for his own. It is immaterial that he did not exercise this power. The important thing is that he had it. The three cases mentioned were cited and relied upon by the respondent in his brief. The petitioner has not even attempted to distinguish those cases. The Commissioner did not err in taxing to the decedent the income of the trusts for the years 1932, 1933, and 1934.

The sale of the bonds by the decedent to the corporation was bona fide and gave rise to the deductible losses claimed by the petitioner. The decedent was the most important officer of the corporation and owned a large minority of the stock of the corporation. Nevertheless, the disposition which he made of the bonds was complete, final, and for a fair consideration. He retained the note of the corporation which he received in payment for the bonds and he later used that note to purchase other bonds from the corporation, but there is nothing about those circumstances to justify the Commissioner’s action in disallowing the losses.

Decision will be entered wider Rule 50.