text:
    Continental Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5057, 20050, 21842, 28733.
    Promulgated September 23, 1931.

      W. R. Brown, Esq., for the petitioner.

      Eugene Meacham, Esq., and O. E. Lowery, Esq., for the respondent.
   OPINION.

Lansdon:

These are proceedings under Rule 62 (b) of the Board’s rules of practice. The hearing in the first instance, which was had on January 21, 1930, was limited by order of the Board to the issues other than special assessment. A decision was rendered disposing of such issues (20 B. T. A. 818) on March 24, 1930, and leave was granted for further proceedings under Bule 62 (b) and (c).

The principal facts, which are contained in a voluminous stipulation filed at the former hearing, are stated in our earlier report and need not be repeated here. At the hearing on March 26, 1931, which Avas limited to the issues stated in subdhdsion (b) of Buie 62, the parties filed a “second agreed statement of facts,” which we shall summarize because of its length, but which is incorporated by reference as a part of this report.

The petitioner Avas incorporated to construct and operate a meatpacking plant in Brazil, under a management contract dated January 4, 1913, between the petitioner, the Sulzberger Products Company, and Sulzberger & Sons Company. Land for use as a plant site AA'as conveyed to petitioner by its majority stockholder for a consideration of Bs. 135,406$921 (approximately $43,600). The plans prepared for the plant disclosed an estimated cost of $5,000,000. Sulzberger & Sons Company, through its purchasing department, AA'hich Avas made available to petitioner, aided the latter in purchasing material for construction at the lowest prices. No charge was made to the petitioner for such services of Sulzberger & -Sons Company and no payment was made by the petitioner for such services. Neither was there capital stock issued therefor. The plant erected for petitioner cost $1,153,784.98.

During the taxable years 1918, 1919 and 1920 the greater part of the meats and other products of the petitioner’s packing plant Avere sold by Archer & Company, Limited, a subsidiary of Sulzberger & Sons Company. The sales were made largely through stalls leased by Archer & Company, Limited, in the Smithfield Market in London. Such leaseholds had a reasonable market value of $150,000 over and above the rent payable. The petitioner paid no rent or charge for the use of the stalls other than the commissions fixed by contract dated January 4, 1913.

Prior to January 1, 1918, the Brazil Bailway Company and/or the Sorocabana Baihvay Company, which were affiliated with the Brazil Land, Cattle & Packing Company, transported materials for construction of the packing plant Avithout any freight charge, and transported other materials for construction of the plant at less than the usual or customary freight rate.

The Sorocabana Bailway Company owned and operated a narrow gauge railway, with tracks one meter wide, from the Sao Paulo to the petitioner’s packing plant. Prior to January 1, 1918, it constructed a third rail from Sao Paulo to the petitioner’s plant, so as to transport cars running on tracks one and six-tenths meters in width. Such third rail served no other industry and was solely for the benefit of the petitioner. No charge was made to petitioner for the construction or use of said third rail other than the freight charges as shown in paragraph 8 of the stipulation.

Prior to January 1, 1918, and without cost to the petitioner, the Brazil Eailway Company surveyed the land for the construction of .petitioner’s plant, arranged for railroad tracks to serve it, excavated and filled the site, built viaducts and constructed a substantial railway station at the petitioner’s plant for the sole accommodation of the petitioner and its employees. Trains were operated between Sao Paulo and petitioner’s plant, transporting petitioner’s employees at nominal fares.

Prior to and throughout the taxable years 1918, 1919 and 1920, the Brazil Eailway Company furnished the petitioner with land adjacent to its packing plant upon which the petitioner erected a pumping station and laid pipe lines and sewers. No charge was made to the petitioner for the use and occupancy of the land.

Eeceivers were appointed for the Brazil Eailway Company and the Brazil Land, Cattle and Packing Company in the latter part of 1914. Thereafter it was impossible for petitioner to secure additional capital from its stockholders as provided for in the contract of August 15,1912, which is quoted in our former report (20 B. T. A. 818). As a result of its inability to secure additional capital, petitioner did not have sufficient money with which to conduct its business and finance the sale of its products in the European and United States markets. Arrangements were therefore made with bankers in the United States and London whereby drafts were drawn for approximately 70 per cent of the market value of shipments. The drafts, together with all shipping documents endorsed in blank, were then delivered to the bankers’ South American correspondent and petitioner received cash for the face of the drafts. The correspondent forwarded the drafts and shipping documents to the bankers, who delivered the shipping documents and/or the goods to Wilson & Company, and/or Archer & Company, Limited, selling-agents for the petitioner, upon receiving a trust receipt from such concerns which provided that the goods and/or the proceeds would be held in trust by Wilson & Company and/or Archer & Company, Limited, as the property of the said bankers until the draft was paid. As and when the goods were sold the proceeds were paid to the bankers until the drafts and all interest and other bank charges were paid. The balance of the proceeds of the goods, if any, after payment of storage, insurance, handling charges, and commissions, was remitted to the petitioner in South America. During 1918, petitioner’s total sales were $10,398,919.11, its export shipments $7,917,430, and drafts drawn against such export shipments $4,324,223. During 1919 total sales were $13,933,473.97, export shipments $9,114,-525.43, and drafts drawn against such export shipments $5,727,663.83. While the drafts drawn by petitioner against shipments approximated 41 per cent of total sales, other packing companies used this method of finance only to the extent of from 5 to 10 per cent of total sales. During 1918 and 1919 petitioner’s total indebtedness was as follows:

The Sorocabana Kailway Company established a special rate for the transportation of meats and packing-house products from petitioner’s packing plant at Osasco to the petitioner’s branch house or wholesale market in Sao Paulo. From January 1, 1918, to March, 1919, such rale was Ks. 14$400 (approximately $3.81) per car; from March, 1919, to February, 1920, the rate was Ks. 12$600 (approximately $3.28) per car. In February, 1920, the government took over the Sorocabana Kailway and advised the petitioner that it would thereafter have to pay the regular rate of Ks. 22$500 (approximately $5.75) per car. The petitioner was advised by traffic managers of other railroads and legal authorities that the rate of Ks. 22$500 was fair and reasonable and that the previous rate had been preferential and was procured only because the Sorocabana Kailway was interested in the petitioner’s business. The number of cars transported from the petitioner’s packing plant to its branch bouse in Sao Paulo varied from 63 to 143 per month, with an average of about 95 per month.

The Sorocabana Kailway Company entered into a traffic agreement with the Mogyana Kailway Company for the transportation of cattle from Compinas to the petitioner’s packing plant. This agreement was in effect throughout 1918 and 1919 and provided preferential rates for shipment of cattle to the petitioner’s packing plant. This agreement was canceled when the government took over the operation of the Sorocabana Kailway in February, 1920.

The respondent has made no allowance to petitioner for invested capital purposes on account of "any of the above advantageous benefits.

The petitioner’s income, invested capital, and taxes for the years involved have been computed by the respondent in the following amounts:

Section 327 (d) of tbe Revenue Act of 1918, under which petitioner’s claim for special assessment arises, provides:

Wliere upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328.

The single question now before the Board is whether or not there were abnormal conditions affecting petitioner’s capital or income for tbe period here involved which would entitle it to the benefits of section 328 of the Revenue Act of 1918. The petitioner contends that there were numerous such abnormal conditions affecting its capital or income as follows: (1) That petitioner’s minority stockholder. Sulzberger Sons Company, rendered valuable services in connection with tbe construction of petitioner’s plant without receiving compensation therefor; (2) that petitioner’s products were sold in London by Archer & Company, Limited, a subsidiary of Sulzberger & Sons Company, through valuable stalls in the Smith-field Market without any payment by petitioner for the use of such stalls; (3) that companies affiliated with petitioner’s majority stockholder transported materials for the construction of petitioner’s pacldng plant without any freight charge or at less than the customary rate; (4) that the Sorocabana Railway Company, which was affiliated with petitioner’s majority stockholder, constructed a third rail from Sao Paulo to petitioner’s plant without any charge to petitioner other than for freight carried; (5) that the Brazil Railway Company surveyed the land on ■which petitioner’s plant was to be built, constructed railroad tracks, built, viaducts, excavated and filled the plant site, furnished land upon which petitioner erected a pumping station, pipe lines and sewers, and rendered various other services for which it received no compensation other than charges for freight carried; (6) that because of insufficient working capital, petitioner was compelled to borrow money on the credit of its minority stockholder by drawing drafts against shipments of merchandise; and (7) that petitioner received preferential freight rates from companies affiliated with its majority stockholder.

In support of its claim for special assessment the petitioner cites Viscose Co., 3 B. T. A. 444; National Casket Co., 3 B. T. A. 954; D. N. & E. Walter & Co., 4 B. T. A. 142; J. M. & M. S. Browning Co., 6 B. T. A. 914; Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; Mesta Machine Co., 12 B. T. A. 523; Rothschild Colortype Co., 14 B. T. A. 718; Farnsworth, Hoyt Co., 16 B. T. A. 309; William Wilson Co., 18 B. T. A. 1107; Woodbury Shoe Co., 19 B. T. A. 433; and Superior Tube Co., 20 B. T. A. 749. The facts of the instant proceeding do not bring the petitioner within the rule established in the above cases. Here the petitioner has not received property which should be taken into invested capital, for the facilities used by it without charge or at nominal cost belonged to other corporations and never became its property. Nothing in the record indicates that petitioner has been denied credit in invested capital for the total capital actually at risk in its business. The stalls in Smithfield Market were not used directly by petitioner and were at no time its property. Sales of petitioner’s products through such stalls were made by Archer & Company, Limited, which concern received customary commissions on sales for petitioner. The third rail constructed by the Sorocabana Railway Company from petitioner’s plant to Sao Paulo represented an investment by that company and was, at all times, a part of its capital rather than petitioner’s. It received a return on its investment by charging petitioner for freight hauled.

While the services rendered to petitioner without charge or at nominal charges, set forth as contentions (1), (3), (5) and (7), may have affected petitioner’s income, we are of the opinion that no such abnormality has been established as contemplated by the statute. There can be no doubt that because of such advantageous arrangements and fortunate conditions petitioner’s income was greatly increased, but we do not understand that Congress intended to favor corporations merely because they were able to earn a large income, even though it resulted partly from their favorable connections with another corporation. In our former report we quoted at length from a management contract by which petitioner engaged G. F. Sulz-berger to manage the construction and operation of its plant in consideration of payment to him of $60,000 per annum. In accordance with its terms the contract was assigned to Sulzberger Products Company, the stock of which was owned by Sulzberger & Sons Company. While the parties have stipulated that no charges were made and there was no payment for the services contributed to petitioner by the Sulzberger Companies, we are inclined to the opinion that such services were contemplated by the $60,000 annual management fee and that indirectly petitioner did pay for the services rendered to it.

The preferential freight rates granted to petitioner by its majority stockholder and corporations affiliated with such stockholder were, of course, beneficial to petitioner and doubtless increased its net income. We think it is a fair presumption, however, that such an arrangement was also beneficial to the railway companies, since their chief object in organizing petitioner was to build up traffic for their lines (20 B. T. A. 818) and that such rates were granted in an effort to stimulate the raising of cattle at points distant from petitioner’s plant, which would mean increased revenue for the railroad company. Certainly we do not think such favorable conditions are grounds upon which petitioner may get its tax reduced by securing special assessment.

There is nothing more usual in the export business than the drawing of drafts against shipments of merchandise. A concern doing an export business requires less capital than one which sells its products in a domestic market extending credit to its customers for from 30 to 90 days as is the custom in the United States. We, therefore, give little weight to the testimony that petitioner borrowed money by- drawing sight drafts against shipments in an amount from four to eight times larger than other meat-packing companies and that because of such fact petitioner’s capital was abnormally low and its borrowings abnormally high. Because petitioner was located in South America, and was, therefore, largely doing an export business, its normal capital requirements were lower than other meat-packing companies.

We can not agree with petitioner that the drawing of drafts in the manner outlined above constituted the borrowing of money 'on the credit of petitioner’s minority stockholder. The latter was, in each instance, the consignee of petitioner’s products, to .act as agent in selling the same. Acceptance by the consignee of a draft drawn by the petitioner is in the nature of an advance on the merchandise rather than a borrowing of money on the credit of the consignee. The acceptance of a draft by the drawee makes him primarily liable and he does not guarantee payment of another’s obligations.

We think the respondent correctly denied petitioner’s application for special assessment.

Decision will be entered wider Rule 50.


source: Caselaw Access Project

author: Murdock :

license: Public Domain

text:
    Robert B. Honeyman, jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 27791.
    Promulgated September 24, 1931.

      Robert B. Honeymcm, Esq., for the petitioner.

      J. A. Adams, Esq., and Frank A. Surine, Esq., for the respondent.
   OPINION.

Murdock :

The only material fact about which there is much controversy between the parties is the date of payment of the Federal estate tax of $47,400.77 on the estate of Jean Stewart. The petitioner now claims this tax was not paid until 1924, is not deductible in 1923, and must be deducted in 1924. His wife filed a separate return for 1924 and the question of her right to deduct this payment for 1924 is before us in a related case. The Commissioner contends that the payment was made as of some date in November, 1923. It is true that the petitioner’s wife tried to make the payment in 1923 by a tender of Liberty bonds and a check, and she thought she had paid the tax, but the tender was never accepted and the bonds were turned back to her and she received interest on them in 1924. The matter was finally adjusted in 1924 and Liberty bonds were accepted by the Government in partial payment of the tax. Apparently they were not the precise bonds previously tendered (which had been mutilated and had to be reissued), but this does not matter. It is now to the petitioner’s advantage to allow his wife to claim the deduction in 1924. For the purpose of a deduction under section 703 of the Revenue Act of 1928, we hold with the petitioner that on the cash basis the payment was not deductible in 1923 and the Commissioner did not err in this connection.

The deficiency notice was mailed before the enactment of the Revenue Act of 1928, containing section 703. Under that section the estate and inheritance taxes paid within the taxable years 1922 and 1923 are allowed as deductions to the beneficiary who claimed them through the petitioner on his joint returns. The fiduciary returns mentioned in the findings of fact are not the returns referred to in section 703 and the “ claim ” must be construed to mean the substantial application of the amounts of the taxes in arriving at taxable net income. Frances E. B. Lentz et al., 21 B. T. A. 1336. Here, as in the Lentz case, it clearly appears from the various returns that the fiduciaries did not in fact apply the tax against their town taxable incomes and did not claim the deductions, but the petitioner did apply the tax against his and his wife’s taxable income and in this way he alone claimed the deduction.

The deficiencies, if any, must be recomputed. The petitioner must be allowed as deductions $193,444.25 for 1922, representing Federal estate tax paid on the Jean Stewart estate; $82,976.04 for 1923, representing New York inheritance tax paid in connection with the Jean Stewart estate; and $53,440.98 for 1923, representing Federal estate tax paid on the Julia B. Stewart estate. He shall not be allowed any deduction for 1923 representing any part of the $47,-400.77 yiaid as Federal estate tax on the Jean Stewart estate. The income and credits to which Marian Stewart Honeyman is entitled as a beneficiary of the Jean Stewart estate and the Julia B. Stewart trust shall, of course, be properly applied in such recomputations. The respondent’s first allegation is contrary to the facts; his second is supported by the evidence. Recomputation under Rule 50 will straighten out the matters mentioned in his other allegations so far as there is any evidence relating to them.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Murdoch :

text:
    Marian Stewart Honeyman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 27792.
    Promulgated September 24, 1931.

      Robert B. Honeyman, Esq., for the petitioner.

      J. A. Adams, Esq., and Frank A. Surme, Esq., for the respondent.
   OPINION.

Murdoch :

Since the mailing of the deficiency notice the Revenue Act of 1928, containing section 703, has been enacted. The petitioner is entitled to deduct the Federal estate tax of $47,400.77 under that section if it was paid in 1924. See Robert B. Honeyman, Jr., 24 B. T. A. 126. In 1923 and 1924 the petitioner’s books were kept and her income was reported on the basis of cash received and disbursed. She delivered her check and some Liberty bonds to the Collector in payment of the tax. She probably thought she had paid the tax and a deduction was taken in the joint return filed for that year. But the tender was not accepted by the Government in 1923 and it was not until late in 1924 that the’same or similar bonds were accepted and the tax actually paid. This settlement was adjusted to November, 1923, but to one on a cash basis a payment can not be dated back. The Government would not accept payment of the tax in 1923. Flow can it successfully contend now that payment was made in that year for the purpose of a deduction under section 703? The petitioner claimed the deduction for each year and the Commissioner disallowed it in each. Now the. petitioner seeks to take the deduction in 1924 rather than in 1923, probably because it will offset more income in 1924 than in 1923. The bonds were hers in 1924, and only in that year were they accepted by the Government. The disbursement was made in 1924. We hold for the petitioner.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Van Fossan :

text:
    The Cleveland Trust Company, Executor of the Estate of E. C. Henn, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Dora V. Henn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 13227, 26919.
    Promulgated September 24, 1931.

      David A. Gasleill, Esq., and Grover Higgins, Esq., for the petitioners.

      Arthur Garndwff, Esq., for the respondent.
   OPINION.

Van Fossan :

The first issue in these proceedings is whether or not the agreement executed by E. C. and Dora V. Henn on April 30,1917, constitutes a trust Avithin the meaning of section 219 of the Revenue Act of 1918. If the document is construed not to be such a trust, then the losses resulting from the sales of property deposited with the Cleveland Trust Company, the trustee named in that instrument, are deductible from the gross incomes of the petitioner, Dora V. Henn and E. C. Henn, whose estate is now represented by the said Cleveland Trust Company as executor.

The facts in this case and the phraseology of most pertinent provisions of the so-called trust agreement are strikingly similar to those set forth in N. H. Boynton, 11 B. T. A. 1352. E. C. Henn exercised the powers reserved to him and his co-maker in'the so-called trust agreement to a greater extent than did Boynton. The ownership and control of the property nominally included in the corpus of the trust estate were lodged in Henn and his wife as fully as if no agreement had been executed. See Selah Chamberlain et al., 19 B. T. A. 126; Stoddard B. Eaton, 22 Fed. (2d) 184. Under the principles laid down in Corliss v. Bowers, 281 U. S. 376, taxation relates to the actual command over and benefits arising from the property taxed. In the case at bar the settlors had full power to control both the corpus of the estate and the income therefrom to the extent of revesting themselves of the corpus and the income therefrom by withdrawing either the corpus or the income as they saw fit. Only a formal notice of such withdrawal, called a “revocation,” was necessary in order to comply with the terms of the trust agreement. Grace Whitney Hoff, 20 B. T. A. 86. That the practical operation of the trust agreement, as well as its theoretical construction, served to lodge in the settlors all control and other incidents of ownership is conclusively shown by the fact that it became imperative to execute a new instrument in order to give the trustee the exclusive right and authority to manage the trust property. Under the original agreement the trustee had no power to conserve and protect the estate, it could not object to the so-called “ revocation ” notices of withdrawals of cash and other assets, and it had no right to select what securities or other property should be added to the trust fund. Furthermore, the Supreme Court of Ohio in Union Trust Co. v. Hawkins, 161 N. E. 545, held that an alleged trust agreement, similar to that of April 30, 1917, did not constitute a valid and binding trust, but was merely an appointment of the trustee as the managing agent of the. settlor, acting under her direction.

We are of the opinion that the agreement of April 30, 1917, did not create a trust within the meaning of section 219 of the Revenue Act of 1918.

The respondent urges that the execution of the trust agreement by two persons who own individually the property constituting the corpus of the trust estate, and the consequent requirement of a joint revocation, transforms the agreement from one of agency to a trust instrument within the purview of the statute. He asserts that thus the interest of each settlor was adverse to that of the other and that, therefore, each was deprived of individual control. He admits that if the trust properties had been jointly owned at the time they were placed in the trust the principles laid down in the Boynton case would govern.

In view of our decision that the agreement under consideration was one of mere agency and not a trust instrument, it is immaterial that there were two persons therein. It is a well settled principle of law that joint principals may designate a common agent. Mechem’s Law of Agency, vol. 1, p. 132; Tiffany on Agency, p. 194. See George L. Craig, 7 B. T. A. 504. In the case at bar the principals had a community of interest in the successful conduct of the activities which the agent was appointed to carry on. Necessarily, such identity of purpose connotes a convergency rather than a divergency of interest. The principals could terminate the agency agreement at any time by their joint action. A termination of the agreement would only restore to them the form of ownership, the substance of which they continued to enjoy during the period covered by the agreement.

The rule laid down in Reinecke v. Northern Trust Co., 278 U. S. 339, holding that since the power to revoke or alter was dependent upon the consent of the one entitled to the beneficial, and, consequently, adverse interest, the trust had passed from the control of the settlor, obviously does not apply under the facts in this case. Therefore, the petitioners may deduct from their respective incomes the loss resulting in 1920 from the sales of property forming a part of the corpus of the so-called trust fund deposited with the Cleveland Trust Company in accordance with the provisions of the agreement of April 30, 1917.

The second issue is whether there was a gain or loss resulting from the sale of 1,500 shares of the capital stock of the National Acme Company. This issue rests upon a proper identification of the stock of the National Acme Company purchased in 1919 and sold in 1920. The petitioners have shown clearly that the shares of capital stock of the National Acme Company sold in 1920 for $39,694.50 were the same shares purchased by them in 1919 and represented by certificates Nos. 1545 to 1554, inclusive, and Nos. 1608 to 1612, inclusive, for an aggregate price of $55,221.75. At the time of purchase the certificates were deposited with the trustee and became a part of the corpus of the trust fund. They were withdrawn therefrom under the usual “ revocation ” notices and sol'd in December, 1920. By thus identifying the share so bought and sold, and the cost and sale price thereof, the petitioners have established a basis for the calculation of gain or loss in the transaction. Article 39, Regulations 45, does not apply. Howbert v. Penrose, 38 Fed. (2d) 577; Towne v. McElligott, 274 Fed. 960. Cf. Albert W. Finlay, 17 B. T. A. 828; John A. Snyder, 20 B. T. A. 778; Burdett Stryker, 21 B. T. A. 561. The loss of $15,527.25 sustained in 1920 upon the sale of the said 1,500 shares of stock of the National Acme Company is allowed.

Reviewed by the Board.

Decision will be entered under Bule SO.


author: Van Fossan:

text:
    The Amalgamated Sugar Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39185.
    Promulgated September 24, 1931.

      H. O. Bickford, Esq., for the petitioner.

      J. B. Jolmston, Esq., for the respondent.
   OPINION.

Van Fossan:

We will first consider the issue relating to the applicability of the statute of limitations. The petitioner relies on Section II, G (c) of the Revenue Act of 1913, which provides, in part, as follows:

All assessments shall be made and the several corporations, * * * shall be notified of the amount for which they are respectively liable * * * provided, That every corporation, * * * shall pay the taxes due under its assessment within one hundred and twenty days after the date upon which it is required to file its list or return of income for assessment; except in cases of refusal or neglect to make such return, and in eases of false or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained as provided for in this section or by existing law, and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such corporation, * * *

The petitioner, moreover, contends that section 250 of the Revenue Act of 1921 does not repeal or supersede the provisions of Section II, G, of the Revenue Act of 1913.

Section 250 (d) provides in part as follows:

The amount of income, excess-profits, or war-profits taxes due under any return made under this Act * * * shall be determined and assessed by the Commissioner within four years after the return was filed, and the amount of any such taxes due under any return made under this Act for prior taxable years or prior income, excess-profits, or war-profits tax Acts, * * * shall be determined and assessed within five years after the return was filed * * * Provided further, That in the case of a false or fraudulent return with intent to evade tax, or of a failure to file a required return, the amount of tax due may be determined, assessed, and collected, and a suit or proceeding for the collection of such amount may be begun, at any time after it becomes due.

The terms of this section are clear and unmistakable. If no return was filed the tax may be determined, assessed and collected at any time after it becomes due. See Charles H. Stange, 282 U. S. 270. The Lewiston Sugar Company filed no return for the period from March 1, 1914, to December 19, 1914, inclusive, nor was any return made for it by the Commissioner. Under similar circumstances we have held repeatedly that a return was required. Paso Robles Mercantile Co., 12 B. T. A. 750; affd., 33 Fed. (2d) 653; certiorari denied, 280 U. S. 595; Sweets Company of America, 12 B. T. A. 1285; Norwich Woolen Mills Corporation, 18 B. T. A. 303. Since no return was filed by the transferor, the statute ox limitations did not run and the provisions of section 280 (b) of the Revenue Act of 1926 are not applicable. The liability against the transferor may be asserted at any time. Hill Goldwater, 21 B. T. A. 73.

The petitioner challenges the liability of itself as transferee solely on the theory that assessment against it is barred by the operation of section 280 (b) (2) of the Revenue Act of 1926. The provisions of that section apply only in cases in which the period of limitation has expired, but assessment was made against the transferor within such period. In the case at bar there was no period of limitation and, hence, the ensuing words of limitation relating to the transferee do not apply. From the facts we find ample ground to conclude that the petitioner is liable as transferee for the deficiencies in income tax asserted against the Lewiston Sugar Company for the period from March 1 to December 19,1914', inclusive.

Reviewed by the Board.

Judgment will he entered for the respondent.

Matthews dissents.


author: Moeeis:

text:
    Jackson-Wermich Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32307.
    Promulgated September 24, 1931.

      J. D. Peeler, Esq., for the petitioner.

      Arthur Oarnduff, Esq., for the respondent.
   OPINION.

Moeeis:

The principal question for consideration is whether the petitioner is an “ association ” within the meaning, of section 2 of the Revenue Act of 1921 and, therefore, taxable as a corporation under section 230 of said act, or whether it is an ordinary common law trust, as it contends.

Section 704 of the Revenue Act of 1928 is inapplicable, for the reason that the petitioner did not file a return as a trust, but filed an ordinary “ Corporation Income Tax Return ” on Form 1120 for the period in question. See Russell Tyson et al., infra.

The respondent relies upon Hecht v. Malley, 265 U. S. 144; Lansdowne Realty Trust et al., 20 B. T. A. 119; and Russell Tyson et al., 20 B. T. A. 597. It is proper to state at the outset that we consider those cases clearly distinguishable upon all of the vital fact elements involved.

In Heeht v. Medley, supra, the Supreme Court adopted the following definitions of the word “ association ”:

* * * It has been defined as a term “ used throughout the United States to .signiíy a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise.” [Citations.] “ In the United States, as distinguished from a corporation, a body'of persons organized, for the prosecution of some purpose, without a charter, but having the general form and mode of procedure of a corporation.” Webst. New Internat. Diet. “ [U. S.] An organized but unchartered body analogous to but distinguished from a corporation.” * * *

And, concluding that the petitioners were “ not merely trustees for collecting funds and paying them over,” but were “ associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises,” it held that they were “ to be deemed associations within the meaning of the Act.”

In the Lansdowne case', supra, which was. reversed on appeal, 50 Fed. (2d) 56, the Board held that the trust was not “merely passively holding property and- collecting income therefrom,” but “ It was engaged in maintaining and renting a building which it owned. being thus similar to the Hecht Real Estate Trust,” and held that it was taxable as an association.

In Russell Tyson et al., supra, the Board, upon the evidence adduced, held that the petitioner was an association, and in doing so directed attention to the similarity between that case and the Lansdowne case.

Respecting the distinctions referred to by the respondent in Wilson Syndicate Trust, 14 B. T. A. 508; affd., 39 Fed. (2d) 43, we find that he urged the same point in Dauphin Deposit Trust Co., Trustee, 21 B. T. A. 1214, and our views in the matter are there set forth as follows:

The Commissioner, however, urges the inapplicability of the foregoing case because of the statements of the court that:
“ ⅜ * * A distinction is to be made between an agreement between individuals in the form of a trust and an express trust created by an ancestor, although they may have some features in common. The controlling distinction is that one is a voluntary association of individuals for convenience and profit, the other a method of equitably distributing a legacy or donation. Congress has recognized this distinction, classing the former as associations, to be taxed as corporations, and at the same time providing for a separate and distinct method of taxing the income of estates and trusts created by will or deed, classing them together for that purpose. * * * ”
But we do not understand the court to lay down the rule that all express trusts created by an ancestor are to be treated as trusts and not as associations and all agreements between individuals in the forms of trusts are to be considered as associations. In general, we think it is true that the circumstances surrounding the creation of a given trust are strong evidence as to its purpose, but of more importance is whether the trust is carrying on business for profit, or whether it is merely in existence for the distribution of property, and we think the court recognized this fact in the statements quoted above. * * *

We deduce, therefore, from the foregoing and other cases bearing upon this question, that the really significant tests for determining whether an alleged trust is to be treated as an association for tax purposes or not are whether the certificate holders have voluntarily associated themselves together in “the general form and mode of procedure of a corporation ” and are organized to and in fact are engaged in the active conduct of a business for profit, or whether the trustees are merely holding the property and collecting the income therefrom and distributing it to those beneficially interested. Hecht v. Malley, supra; White v. Hornblower, 27 Fed. (2d) 777; E. A. Landreth Co. et al., 11 B. T. A. 1; Dauphin Deposit Trust Co., Trustee, supra; and Lloyd M. Willis et al., 22 B. T. A. 564.

As to what may be termed the purely formal test, that is, whether the trust enjoys the same form and manner of organization as a corporation, it must be said that the petitioner here does not. In the first place, while the name of an enterprise is of little or no importance, it may, and probably should, be considered as one of the elements bearing upon its implied relationship with the public. If an unincorporated body uses a name commonly employed only by those incorporated, the reasonable inference may be, and usually is, that it is incorporated, and consequently it will be dealt with by the public as though it were a corporation. On the other hand, if the term ‘‘ trust ” is i i ployed, as here, the public is put upon notice; consequently, there can be no possible misunderstanding. Cf. E. A. Landreth, supra, where the corporate name there used was commented upon as an element of consideration.

The petitioner here was unchartered, and was organized under no State statute, but was created by a trust indenture under the general trust laws of the State, as in Wilson Syndicate Trust, supra, where the petitioner was held to be a trust and not an association. The trust had no officers such as are common to corporations, nor did it have any body of officials even resembling a board of directors. It was conducted by trustees, so designated in the declaration of trust, who were self appointed by reason of the fact that they were the creators of the trust. The trustees, according to the declaration of trust, were required to serve without compensation and they were unrestricted as to their terms of office. Upon the resignation of either trustee he himself was empowered to select and appoint his own successor, and in case of the death of a trustee or the resignation thereof without the appointment of a successor the surviving trustee was vested with such authority. In no case, therefore, did interest holders have any power whatsoever over the appointment or selection of trustees, except where both should expire at the same time, in which event both of the trustees would be appointed by not less than 30 per cent of the beneficial interests under the trust. Cf. Extension Oil Co., 16 B. T. A. 1028; affd., 47 Fed. (2d) 65. And in this particular the trust theory is eminently stronger here than in Wilson Syndicate Trust, supra, for there the trustees could be removed by the interest holders.

Nor does it appear that the certificate holders had any control whatsoever over the management and operation of the trust, a factor which, while not determinative of the issue, is important and should be considered. Lloyd M. Willis et al., supra, and E. A. Landreth, supra.

The trust employed no seal, it had no by-laws, and it held no official meetings. In fact it does not appear that any meetings were ever held except, of course, as business was discussed between the two trustees upon informal meeting.

It has been urged that there was indirect control over the trustees by the beneficial interests through their right to amend or modify the declaration of trust, but it must be borne in mind that such an amendment or modification was possible under the said trust agreement only by the joint “consent of the trustees and the consent of the owners of fifty-one or more of the interests of beneficial interest ” under the trust.

Therefore, we can see little or no similarity between the manner and form of this trust or ’anization and that of a regularly chartered corporation, except possibly that it issued “ Interest Receipts ” having some of the characteristics of stock certificates, but this factor alone will not “ convert it into a corporation,” Extension Oil Co., supra; “ something more is required than the mere issuance of so-called shares.” Myers, Long & Co., 14 B. T. A. 460.

It is perfectly possible that under the declaration of trust the trustees may have been “required to receive oil, gas and other products from said oil well,” in which event, being compelled to engage in the marketing of said oil, it may have been engaged in a business within the meaning of the decided cases. The fact is, however, that it was never required to do so and we doubt seriously, considering all of the other agreements entered into, that it was ever contemplated that the trust should receive oil and gas and other products from the well or anything else other than the proceeds therefrom. See C. H. Atherton et al., 19 B. T. A. 1112.

A brief resume of the events leading up to the creation of this trust will bear out the real purpose of its creation and existence. To begin with, Evans procured the lease to the property in his own name, with the understanding that he would drill for oil, he to pay the lessors therefor, as rental,' a percentage of the production. Evans himself was apparently without sufficient funds with which to promote the venture alone and he thereupon sought the aid of Yfermich and Jackson, who were Avilling to provide the necessary funds for drilling operations, resulting in the agreement of September 7, 1922, whereby they were to furnish $35,000 and receive a stated percentage of the net proceeds from the operation of the well when completed. Wermich and Jackson, being unable or unwilling to carry the entire financial burden or risk, enlisted the aid of others in providing the sum agreed upon, and for the purpose of setting forth the proportionate interests of those who were to advance the funds, the declaration of trust of September 28, 1922, was entered into. The sole purpose of this trust, therefore, was to provide the funds for drilling one well, and in this particular the instant case is identical with Extension Oil Co., supra.

Of course, all of the parties engaged in this venture were primarily interested in the prospective profits to be derived from the sale of oil and gas, and in that particular all may be said to have had a common interest. But it seems clear to us that the parties in interest, in so far as their endeavors weré concerned, were divided into two well defined classes, each functioning independently of the other: (1) those concerned with the drilling and operation of the well and the sale of the production therefrom, and (2) those whose prime function was to finance the venture, receiving as their compensation profits derived from the sale of the products.

As we have already stated, the trustees were never required to receive any oil, the income of the trust being derived solely from oil sold by those in charge ox drilling- and operating the well. The record shows that the trustees had nothing whatsoever to do with the operation of the well and, furthermore, that they were never even consulted with respect thereto, if or, indeed,, were they ever consulted respecting the sale of the oil or gas therefrom. In fact, the testimony shows that TVermich knew nothing about the contracts entered into for the sale of oil or gas until 30 or 60 days afterward, and it was only through casual inquiry that he learned then.

The trust maintained no office, owned no furniture, and it has never operated any kind of business other than as described. Its only employee during 1923 was a bookkeeper, whose duties were to receive the checks from Evans and disburse specified sums to those beneficially interested and record them in the accounts kept for the purpose. The trustees served without compensation and it appears from the record that their primary function as such was to sign and countersign checks issued to beneficiaries.-

In one of the most recent cases promulgated, Lloyd M. Willis, su'pra, the purposes of the trust were extremely broad and diversified. There, the Board found that the trustees carried on “ an elaborate business,” which clearly distinguishes the instant case therefrom without necessity for further consideration.

We are of the opinion, therefore, that the trust here was not of the form and mode of a corporation and that it was not organized to nor did it in fact engage in the conduct of a business, but merely collected the income accruing under the declaration of trust and distributed it to those beneficially interested, .and that it is not an. “ association ” and should not be taxed as a corporation under section 230 of the Revenue Act of 1921.

Since the remaining specifications of error are predicated upon our holding the petitioner to be an association, we need not consider them.,

Judgment 'will he entered under Rule BO


text:
    David A. Reed and Robert T. Rossell, Executors of the Last Will and Testament of James H. Reed, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47344.
    Promulgated September 25, 1931.

      Maynard Teall, Esq., for the petitioners.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Van Fossan:

The first allegation of error challenges the action of the respondent in including in-the gross estate of James PI. Reed, deceased, the proceeds of six life insurance policies in excess, of $40,000, receivable by beneficiaries other than the executors of the estate.

The Revenue Act of 1926 provides:

Sec. 802. The value of tbe gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

The petitioners maintain that as to the first group of policies the power of revocation was not lodged in the decedent at his death and hence the beneficial interest in the proceeds thereof had vested 'fully in the beneficiaries.

The language of the insurance contract establishing Kate J. Reed as the primary beneficiary is as follows: “ New-York Life Insurance Company * * * promises to pay * * * to Kate J., wife of the Insured * * * with * * * right of revocation.” The insured had the option of reserving or relinquishing "his right of revocation. At the time the policies were issued the decedent chose to retain it. However, in the later clause entitled “ change of beneficiary ” the insured was given the right to designate a new beneficiary with or without reserving the right of revocation.

The respondent contends that the phrase “.with * * * right of revocation ” appearing after the designation of the beneficiary, is general in character and continued in effect during the life of the policy. Petitioner contends that when this provision is read in connection with other provisions of the policy the insured at the time of his death had no right of revocation and that, accordingly, the right to the proceeds of the policies had vested.

The respondent further asserts that the decedent’s failure to reserve his right of revocation under the “ change of beneficiary ” provision was not equivalent to a relinquishment of that right, but was merely a silence without significance.

With neither of respondent’s propositions can we agree. The language of the paragraph styled “ change of beneficiary ’’ must be closely scrutinized. The gist of its provisions is that “ when right of revocation has been reserved (as here) * ⅜ * the Insured * ⅜ * may * * * designate a new beneficiary with or without reserving right of revocation * * The right to change a

beneficiary must be expressly reserved. Cooley, Briefs on Law of Insurance, Yol. IV, p. 3755. In the absence of an express reservation the rights of the named beneficiary are protected and his consent to a change must be secured. Joyce, The Law of Insurance (2d ed.), sec. 730; Smith v. Metropolitan Insurance Co., 34 Pa. Sup. 72; Schaefer’s Estate, 194 Pa. 420; Entwistle v. Travelers' Insurance Co., 202 Pa. 141. Here, we have two pertinent provisions relating to revocation. The first grants the right. The second indicates how it may be perpetuated. When decedent elected to exercise the right first granted he brought into action the provision of the later paragraph. Under this paragraph affirmative reservation of the right to make a further change is necessary.

In Brown v. Powell, 130 Miss. 496; 94 So. 457 (1923), the Supreme Court of Mississippi had before it the exact question presented in the instant case. The insurance policy there under consideration contained precisely the same two provisions and in the identical language found in the policies here in controversy. It was there held:

Where the name of the beneficiary in a life insurance policy is followed by the words “ with right of revocation,” and the policy provides that, “ When the right of revocation has been reserved * * * the insured * * * may * * * designate a new beneficiary, with or without reserving right of revocation, by filing written notice thereof at the home office of the company accompanied by the policy for suitable indorsement thereon,” the insured, when designating a new beneficiary, must state in the notice thereof filed with the insurance company that he reserves the right of revocation if he desires to again exercise such a right.

Thus when decedent exercised the right of revocation granted by the policy and designated a new beneficiary without expressly reserving the right to make a further change, his right of revocation was gone and revocation could then be made only with consent of the new beneficiary.

Looking at the converse of this reasoning, if the right of revocation granted in the first quoted portion of the contract was a continuing right and authorized innumerable changes of beneficiary, then the provision in the later paragraph styled “ change of beneficiary ” (i. e., with or without reserving right of revocation) is not merely meaningless, but actually in conflict with the first provision. In construing a contract effect should be given to all its provisions if such be possible, and, where two constructions are possible, the one which gives effect to all is preferable to one that gives effect but to part and nullifies in part.

The construction we have adopted gives effect to both provisions of the contract.

Under the rule laid down in Chase National Bank v. United States, 278 U. S. 827; Saltonstall v. Saltonstall, 276 U. S. 260; and Reinecke v. Northern Trust Co., 278 U. S. 339, a transfer made subject to a power of revocation in the transferor, terminable at his death, is not complete until his death. If an insurance policy reserves to the insured alone the power to change the beneficiary, no absolute rights vest in the beneficiary and the transfer is incomplete until the death of the insured.

On the other hand, if the power of revocation be not reserved, or, as in the instant case, has been originally reserved, then exercised and exhausted and lost because of failure to make specific further reservation, the transfer of the rights under the policy has occurred prior to the death of the decedent and at his death the proceeds of the policy form no part of his taxable estate.

In the case before us, as to the first group of policies no power of revocation remained in the insured after the designation of the second beneficiaries. The transfer of the beneficial interest in the proceeds of the policies, therefore, occurred on April 18, 1910. The transfer having been effectively made and the rights of the beneficiaries having vested long prior to decedent’s death, the proceeds of the policies were improperly included as part of the taxable estate of decedent. See Helena Liebes, Executrix, 20 B. T. A. 731; Philip W. Blood, Executor, 22 B. T. A. 1000.

Though the Supreme Court had under consideration a different statute, the reasoning employed in Reinecke v. Northern Trust Co., supra, as to the “ five trusts ” lends strong support to the decision here reached as to the first group of policies. The court there said:

Since the power to revofce or alter was dependent on the consent of the one entitled to the beneficial, and consequently adverse, interest, the trust, for all practical purposes, had passed as completely from any control by decedent which might inure to his benefit as if the gift had been absolute.

In the second group of policies the converse situation is presented. In Policy No. 4119975 of the New York Life Insurance Company the beneficiary clause reserved the right of revocation to the insured. The “ change of beneficiary ” clause, uniform in all the New York Life Insurance Company policies, specifically granted to him the right to name a new beneficiary when the right of revocation had been reserved and certain collateral conditions had been met. During his lifetime and while the policy was in force, the decedent designated his wife, Kate J. Seed, as his primary beneficiary and made no change in that designation. In the Equitable Life Assurance Society policies the provisions governing the rights of revocation and change of beneficiary were even broader. The beneficiary clause named as beneficiary Kate J. Seed, wife of the assured, “ subject to the right of the assured to change the beneficiary ” and the clause entitled “ privilege of changing beneficiary ” granted the assured the right to change the beneficiary at any time during the continuance of the poiicy.

In the second grouj), therefore, the insured, up to' the time of his death, possessed the right of revocation and the right to substitute a now beneficiary in the place of the one named. Such rights gave him the control over the benefits flowing from the contracts of insurance and the power to direct their future enjoyment until his death. Thus the facts of the second group of policies bring them within the rule laid clown in Chase National Bank v. United States, supra:

Termination of the power of control at the time of death inures to the benefit of him who owns the property subject to the power, and thus brings about, at death, the completion of that shifting of the economic benefits of property which is the real subject of the tax.

The proceeds of the second group in excess of $40,000 are taxable. See Louis M. Weiller, 18 B. T. A. 1121; Edwin S. Rauh, Executor, 19 B. T. A. 998; Helena Licbes, Executrix, supra; Philip W. Blood, Executor, supra.

The petitioners contend that an act imposing a tax on the proceeds of an insurance policy taken out prior to 1918 is unconstitutional. We find no authority for this view. The petitioners cite Lewellyn v. Frick, 268 U. S. 238; Tyler v. United States, 281 U. S. 497; and Coolidge v. Long, 282 U. S. 582, as supporting their contention. The situation presented in the Frick case was extensively considered in Bessie M. Ballinger, Executrix, 23 B. T. A. 1311.

The second issue is whether or not the payments made by the petitioners to cancel unpaid balances on certain pledges of the decedent to the University of Pittsburgh and the Pittsburgh Medical Center are properly deductible as claims from the decedent’s gross estate under the provisions of section 303 (a) (1) of the Revenue Act of 1926.

Tlie situation on this point is similar to that in Jeptha H. Wade, Jr., et al., 21 B. T. A. 339, and on the authority of that decision we hold that the sum of $7,875 paid to discharge such obligations is deductible from the decedent’s gross estate. •

The respondent contends that the consideration for the claims against the estate must have been received by the decedent. We have disposed of this question in Jeptha H. Wade, Jr., et al., supra, where we held that such a requirement is not prerequisite to the allowance of the deduction.

Judgment will he entered wider Rule 50.


text:
    Melville Hanscom et al., Executors of the Estate of Edward E. Hanscom, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44992.
    Promulgated September 25, 1931.

      Chester A. Bennett, Esq., and Elwood Seal, Esq., for the petitioners.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Van Fossan:

The first allegation of error is the failure of the respondent to allow as a credit the sum of $659.16 paid as an inheritance tax to the State of Pennsylvania. Section 301 of the Revenue Act of 1926 provides, in part, as follows:

(a) In lieu of the tax imposed by Title III of the Revenue Act of 1924, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 303) is hereby imposed upon the transfer of the net estate of every decedent dying after the enactment of this act, whether a resident or nonresident of the United States:
* * * * * * *
(b) The tax imposed by this section shall be credited with the amount of any estate, inheritance, legacy or succession taxes actually paid to any State or Territory or the District of Columbia, in respect of any property included in tlie gross estate. Tlie credit allowed by tliis subdivision shall not exceed 80 per centum of the tax imposed by this section, and shall include only such taxes as were actually paid and credit therefor claimed within three years after the filing of the return required by section 304.

A payment of $5,539.57 made by the petitioners on January 20, 1927, as an inheritance tax to the State of Pennsylvania was duly credited by the respondent, but an additional payment of $659.16, made on October 28,1927, after the return was filed, was not allowed. The petitioners paid the inheritance tax of $659.16 imposed by the State of Pennsylvania upon the transfer of the estate of Edward E. Hanscom, included in his gross estate for Federal estate-tax purposes. The petition filed by the petitioners on June 26, 1929, constitutes a claim for such payment as required by section 301(b). The total sum of $6,198.73 does not exceed 80 per centum of the tax legally due under that section. Therefore, the amount of the tax so paid, or $659.16, should be allowed as a credit.

The second issue involves the valuation of the stock of the Eliot Realty Company as of August 7,1926. The capital stock of the Eliot Realty Company was closely held by members of the decedent’s family and no sales thereof wrere ever made to the public. Under such circumstances the value of the stock is determined on the basis of the assets underlying the capital stock, and the earnings of the corporation. Estate of Jacob Fish, 1 B. T. A. 882; George F. Milton, Jr., Exccutor, 17 B. T. A. 380. There were no earnings in 1925 and 1926 and no dividends had been declared during the corporation’s existence. Hence, the value of the real estate and other assets owned by the corporation on August 7, 1926, is determinative of the value of the stock.

The sole witness as to the value of the real estate was Edward Hanscom, Jr., treasurer of the corporation and son of the decedent. He was unable to qualify as an expert in real estate value in Ocean City, W. J., and Philadelphia, Pa. He testified merely that the book values of the properties were substantially correct. The experience of this witness was insufficient to give his opinion any substantial weight. The record does not disclose any persuasive evidence that the fair market value of the real estate holdings of the Eliot Realty Company was other than that fixed by the respondent. Therefore, the valuation of the 2,297 shares of the capital stock of the Eliot Realty Company at $229,700 as determined by the respondent is approved.

Reviewed by the Board.

Judgment will be entered under Rule 50.


text:
    E. M. Rosser, Executor, Estate of Margaret Edwards Cobleigh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40765.
    Promulgated September 25, 1931.

      Robert T. McCrachen, Esq., and John B. Peery, Esq., for the petitioner.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Van Fossan:

The principal issue in this proceeding is whether or not at the time of her death Margaret Edwards Cobleigh had such an interest in the residue of the estate of her father, Daniel Edwards, deceased, that the value thereof should be included in the gross estate for the purposes of the estate tax.

The applicable statutory provisions are contained in section 302 of the Eevenue Act of 1924 and read as follows:

The value of the gross estate of the decedent shall he 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 which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate; * * *

Under the quoted statutory provisions the real question at issue is whether or not the decedent had an interest in the corpus of her father’s estate which, after her death, was subject to the payment of the charges against her estate and the cost of its administration and was subject to distribution as a part of her estate.

It appears from the notice of deficiency attached to the petition herein that, exclusive of the value of any share of her father’s estate, the decedent’s gross estate amounted to more than $1,500,000. She died testate and by her last will and testament, a copy of which was attached to the stipulation of facts filed in the evidence in this proceeding, she bequeathed and devised the principal portion of the residue of her estate in trust, one-half of the net income of the estate being payable to her daughter during her life and the other half of the net income, together with the corpus of the trust, being ultimately distributable to her grandchildren. In our opinion, however, the principal issue in this proceeding is to be determined by a construction of the provisions of the will of decedent’s father.

The respondent contends that, under the provisions of her father’s will,-the decedent in this proceeding “acquired a fee simple absolute estate in-a one-third interest ” in her father’s estate. The petitioner, on the other hand, argues that the decedent’s interest in her father’s estate was conditional, the condition being her survival of the discontinuance of her father’s business, and that, since she did not so survive, no part of the corpus of her father’s estate ever became a part of her own estate.

The will of Daniel Edwards, deceased, appears to have disposed of both personal and real property. The evidence does not disclose how much of his estate consisted of realty, but it appears that a very large portion of it was personal property. Before his death he had carried on a large mercantile business and he had also invested to a very considerable extent in securities. When the surviving executrix made her final accounting, apparently all of the realty had been .converted into money, pursuant to authority conferred on his executrices by Daniel Edwards, but when such conversion" occurred, whether .before or after death of the decedent in this proceeding, is not disclosed.

The will of the decedent’s father was carefully drawn and evidences a definite, considered plan for the disposal of his property. It is apparent from the portions of the will quoted in the findings of fact that it was the testator’s intent that, so long as his executrices elected under the provisions of his will to continue any business in which he might have been engaged at the time of his death, they should have absolute and complete control of the principal of his estate. His wife predeceased him, but, although the will was drawn prior to her death, after her death he made no alteration in the provisions concerning the continuance of his business. After the death of the testator’s wife the discontinuance of his business by his executrices became the fact determining the time for the distribution of the principal of his residuary estate.

By the sixth article of his will Daniel Edwards vested his residuary estate in his executrices, giving, devising and bequeathing to them such residuary estate in trust for the purposes and uses stated in the article. By this article the testator created an active trust and conferred upon his executrices as trustees broad powers with respect to the management thereof. That trust was to continue until such time as the executrices, under the authority conferred by the will, saw fit to discontinue and wind up the business which had been conducted before his death by the testator.

This vesting of the estate in the executrices in trust is in our opinion of primary importance with respect to the determination of the principal issue in this proceeding. For the provisions of the will creating the trust contain the only explicit and direct terms vesting the residuary estate in any person or persons. There is no specific or direct gift of any part of the principal of the estate to the decedent in this proceeding or to any of the beneficiaries named in the will. The gift to the beneficiaries is only implied and the implication is contained in the word “ divide ” used in the following provisions of the will:

Either at the death of my said wife, Margaret Edwards, or else at the time when under the provisions of this will, it shall he deemed best to discontinue and wind up my entire business interests (should my business be carried on, under the provisions of this will, after the death of my said wife, Margaret) I direct the whole of the rest, residue and remainder of my estate to be divided equally among my said three daughters, Mary E. Newell, Anna -A. Jones and Margaret E. Cobleigli, their heirs, executors, administrators and assigns, share and share alike.

There being in the will no explicit words giving the corpus of the estate to the decedent and the other beneficiaries and the gift being merely implied by the use of the word “ divide,” it results that the gift of the residue of the estate is annexed to and dependent upon the division provided for in the will. The gift could not, therefore, take effect in any way until the division was made. Therefore, since by direction of the will the principal of the residuary estate was not to be divided until after the discontinuance of the testator’s business, no interest in the residuary estate could vest in the decedent and other beneficiaries until the testator’s business had been discontinued. In other words, under the provisions of the will not only were the possession and enjoyment by the beneficiaries of the residuary estate postponed until the discontinuance of the testator’s business, but the vesting in the decedent and other beneficiaries of any interest in such residuary estate was also postponed until such time. It necessarily follows that the words “ their heirs, executors, edministrators and assigns ” contained in the quoted paragraph directing division of the principal of the residuary estate are to be construed as merely defining the character and quality of the estate in personal and real property which the testator’s daughters would take when and if the business carried on by the testator at the date of his death should be discontinued.

In re Kountz's Estate, 213 Pa. 390; 62 Atl. 1103, involved the question of whether or not the trust created by the will of the testatrix violated the rule against perpetuities. By her will the testatrix had bequeathed and devised her residuary estate to a trustee in trust for certain purposes and uses, conferring broad powers on the trustee and creating an active trust. There was no direct or explicit gift of the residuary estate to her grandchildren, among whom the testatrix intended that such estate should be divided ultimately. The will provided only with respect to the gift to her grandchildren that at a certain future time after the death of the last daughter of the testatrix the principal of the estate should be divided among her grandchildren. Referring to the provision for such division among the grandchildren, the Supreme Court of Pennsylvania said:

Even here there is no direct and explicit gift of the principal; it is only implied from the direction to divide. Chief Justice Gibson said, in Moore v. Smith, 9 Watts, 403: “ Where a gift is only implied from a direction to pay, it is necessarily inseparable from the direction, and must partake of its quality; insomuch that if the one is future and contingent, so must the other be.” And in Smith on Executory Interests, section 314, it is said: “ Where there is no gift but in a direction to pay or transfer or divide among several persons at a future period, though the future period is annexed to the payment, possession, or enjoyment, yet it is also annexed to the devise or bequest itself. For, in this case, the direction to pay or transfer- or divide, constitutes the devise or bequest itself; and therefore the vesting in interest is postponed, and not merely the vesting in possession or enjoyment.

We are of the opinion that the principles stated in the foregoing quotation from In re Kountz's Estate, supra, are applicable to the principal issue in this proceeding.

The facts show that the decedent, Margaret Edwards Cobleigh, died before her father’s business was discontinued by his executors. We, therefore, hold that at her death no interest in the residue of his estate was vested in her. It follows that, pursuant to the applicable statutory provisions, no part of the value of her father’s residuary estate should be included in the decedent’s gross estate for tax purposes.

As to the second issue, the petitioner contends that the assessment and collection of any taxes imposed by the provisions of the statute on the decedent’s estate are barred by the provisions of section 310 (a) of the Revenue Act of 1926 which, it is claimed, is applicable because of the provisions of sections 318 (a) of the Revenue Act of 1926. Section 310 (a) of the Revenue Act of 1926 provides that the amount of the estate taxes shall be assessed within three years after the return was filed. The decedent died in 1924 subsequent to the enactment of the Revenue Act of 1924. The respondent seems to contend that section 310 (a) of the Revenue Act of 1924 is applicable and that, therefore, the amount of the taxes imposed on decedent’s estate by the statute might be assessed within four years after the return was filed.

We deem it unnecessary to determine whether the provisions of the Revenue Act of 1924 or those of the Revenue Act of 1926 are applicable, for the reason that in our opinion requisite action was taken within the time limited by either statute. The return was filed August 7, 1925, and notice of deficiency was mailed August 7, 1928. August 7, 1928, was within four years after August 7, 1925, and, in accordance with our views expressed in Willingham Loan & Trust Co., 15 B.T.A. 931, was within three years after August 7, 1925. Our decision in Willingham Loan & Trust Co. was reversed by the United States Circuit Court of Appeals for the Fifth Circuit. See Willingham Loan & Trust Co. v. Commissioner, 36 Fed. (2d) 49. But the decision of the Circuit Court of Appeals was in turn reversed by the United States Supreme Court in Burnet v. Willingham Loan & Trust Co., 282 U. S. 437.

We are of the opinion that the assessment and collection of taxes imposed by the provisions of the statute on decedent’s estate are not barred by any provisions of the statute of limitations.

Reviewed by the Board.

Judgment will he entered under Rule 50.


author: Seawell:

text:
    American Conservation Service Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 25784.
    Promulgated September 28, 1931.

      William J. Matthews, Esg., for the petitioner.

      W. R. Lansford, Esg., for the respondent.
   OPINION.

Seawell:

The taxable year involved in the instant case is 1922 and the applicable law is found in the Revenue Act of 1921, section 212 (b), which reads as follows:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the ease may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *

Paragraph 3 of article 23 of Regulations 62, promulgated under the authority of the Secretary of the Treasury, provides:

A taxpayer who changes the method of accounting employed in keeping his books for the taxable year 1921 or thereafter should, before computing his income upon such new basis for purposes of taxation, secure the consent of the Commissioner. Application for permission to change the basis of the return shall be made at least 30 days, before the close of the period to be covered by the return and shall be accompanied by a statement specifying the classes of items differently treated under the two systems and specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change.

This Board held in Clendening Co., 1 B. T. A. 622, that a taxpayer may not change the basis of reporting income without complying with the regulations prescribed by the Commissioner pursuant to statutory authority.

Petitioner’s 1921 tax return was made on the cash receipts and disbursements basis, but petitioner insists it was so made by inadvertence and that it should have been made on the accrual basis and that the item $19,342.95 was accrued in 1921, and should have been included in the return for that year and, not being so reported, the statute of limitations operated as an effective bar to any tax thereon, the deficiency notice being mailed February 25, 1927. In our opinion, however, the statute of limitations is not involved, because the Commissioner is not attempting to assert any tax for the year 1921, but for the year 1922, and as to that year it is shown the deficiency notice was mailed in due time.

The question for our determination is simply whether in the circumstances of this case the item $19,342.95 should be included in the gross income of the petitioner for the year 1922 and as such subject to tax as held by the Commissioner. The petitioner admits no tax has been paid on same for either year and argues that none should be paid thereon for the year 1922, in which petitioner’s return was made on the accrual basis, for the reason that the item was accrued in 1921, that its books have always been kept on the accrual basis, and that the item, therefore, has no place in the 1922 return of petitioner. Accepting the premise as stated, the conclusion would naturally follow, but, in our opinion, the evidence, as indicated in our findings of fact, does not justify such premise.

In a statement by the president of petitioner, contained in a letter in evidence and duly sworn to, he stated that the income the petitioner had for 1918,1919 and 1920 “ was always on a strictly cash basis and recorded and reported that way.” The petitioner admits that its 1921 tax return is made on the cash receipts and disbursements basis, but contends it should have been on the accrual basis and then included the item $19,342.95, its books having been kept on the accrual basis as the witness, Hirsch, who made the 1922 return for petitioner on the accrual basis, testified, he never having seen the 1921 return which had been made on the cash receipts and disbursements basis.

The evidence shows the item $19,342.95 was paid to, or received by, petitioner in 1922. The Commissioner found the petitioner had kept its books and made its returns in years prior to 1922 on the cash receipts and disbursements basis and, in our opinion, the evidence sustains such finding — certainly it is insufficient to overcome such finding, and as there was never any consent shown to have been given by the Commissioner for the petitioner to change its method of accounting and making its tax returns, the Commissioner’s determination is approved.

Judgment will be entered for the respondent.


text:
    Street and Finney, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 17663.
    Promulgated September 28, 1931.

      Newton K. Fox, Esq., and Adrian C. Humphreys, Esq., for the petitioner.

      Eugene Meaeham, Esq., and G. E. Lowery, Esq., for the respondent.
   OPINION.

Seawell:

The issues raised by the pleadings are whether or not the respondent erred in failing and refusing to allow as deductions from gross income for the years 1920 and 1921 alleged bad debt items in the amounts of $3,519.25 and $571.16, respectively, and whether the petitioner is entitled to classification as a personal service corporation in said years. At the hearing, the respondent conceded error in refusing to allow the aforesaid bad debt item.

In reference to the claim for personal service classification, the applicable law for the years 1920 and 1921 is found in section 200 of the Revenue Acts of 1918 and 1921, respectively. In order to qualify as a personal service corporation, the section requires such corporation to meet these tests: (1) The income of the corporation must be ascribed primarily to the activities of the principal owners or stockholders; (2) such principal owners or stockholders must themselves be regularly engaged in the active conduct of the affairs of the corporation; (3) capital, whether invested or borrowed, must not be a material income-producing factor; and (4) gains, profits or income derived from trading as a principal, or gains, profits, commissions or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, inclusive, must not amount to or exceed 50 per centum of the gross income. A failure to comply with any one of these requirements is fatal to a claim for personal service corporation classification. Mitchell Advertising Agency, Inc., 10 B. T. A. 1311, and Mac Martin Advertising Agency, Inc., 11 B. T. A. 162.

The evidence is clear that the petitioner did not derive gains, profits or income from trading as a principal or derive such, or commissions or other income, from a Government contract or contracts made during the statutory period above mentioned.

The respondent at the hearing conceded that capital was not a material income-producing factor. It only remains, therefore, for this Board to consider and determine, in the circumstances of the instant case, whether the income of the petitioner is to be ascribed primarily to the activities of the principal owners or stockholders and whether such principal owners or stockholders were themselves, during the taxable years in question, regularly engaged in the active conduct of the affairs of the corporation.

The evidence shows that Finney and his wife were, during both years in question, the principal stockholders, Frank Finney being the president and his wife the treasurer of the petitioner. Both are shown to have been active in the conduct of the business of the corporation and, in view of what the evidence shows they did, were, in our opinion, and must nesessarily have been, in the sense of the statute, regularly engaged in the conduct of the affairs of the corporation. All that was done in the conduct and operation of the business was under the direction and supervision of Frank Finney, the president, who closed all contracts — a most important function.

The petitioner’s manner of conducting its business was not materially different from numerous other advertising agencies which we have held entitled to personal service classification.

We are of the opinion, therefore, that petitioner is entitled to such classification, the evidence showing that petitioner’s income during 1920 and 1921 is to be ascribed primarily to the activities of Fin-ney and his wife, the principal stockholders, who were themselves during such years regularly engaged in the active conduct of the affairs of the corporation.

Our determination herein is in accordance with and controlled by our decisions in Mitchell Advertising Agency, Inc., supra; Mac Martin Advertising Agency, Inc., supra; H. K. McCann Co., 14 B. T. A. 234, 251; Snitzler-Warner Co., 16 B. T. A. 342; Federal Advertising Agency, Inc., 19 B. T. A. 1126.

Judgment will he entered wnder Rule 50.


author: MuRdock:

text:
    Acme Products Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31868.
    Promulgated September 28, 1931.

      Robert B. Todd, Esq., and Jolm J. Finnorn, Esq., for the petitioner.

      J ames L. Badcstrom, Esq., for the respondent.
   OPINION.

MuRdock:

The items in controversy were deducted as organization expenses and disallowed as such. It is now claimed that they are deductible on an entirely different basis as expenditures made in an unsuccessful effort to develop a secret formula and a patentable process. Such expenditures, if made as contended, would be of a capital nature and would not be deductible as ordinary and necessary expenses. While additional work was being done in an effort to succeed and while hope for ultimate success was not unreasonable, there was no occasion to deduct any part of the expenditures as a loss. Some of the expenditures would have entered into the cost of the process if any had been discovered. Here the effort was a complete failure and the expenditures represented a loss to the petitioners in so far as they can be properly allocated to the experimental work on these processes. Ernest E. Lloyd, 8 B. T. A. 1029; cf. Goodell-Pratt Co., 3 B. T. A. 30.

The cost of materials and the salaries of the research man and his assistant are clearly a part of such loss. Logan and the other regular employees had other regular duties, were not employed for the purpose of carrying on these experiments, spent only part of their time on the work, and did this only as a makeshift. Officers’ salaries and wages are specifically deductible as expense where they are paid or incurred in carrying on a business. Tire total amount claimed includes some such items that are not part of the loss. We can not accurately determine how much of the time of these officers and employees was spent in the work or what would have been reasonable compensation for the performance of the services they rendered in the experimental work. Less expensive labor would have sufficed and the difference in compensation is not properly a part of the loss.

In determining the amount of the loss we have allowed only a small part of these latter items.

The evidence of when the loss was sustained is not too convincing or complete, but such as it is, it indicates that 1926 is the proper year for the deduction.

Judgment will be entered wider Rule 50.