author: Smith :

text:
    Sterling Newell and W. E. Clark, Executors Under the Will of Charles C. Ingalls, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57835.
    Promulgated March 3, 1932.

      Sterling Newell, Esq., W. E. Clark, Esq., and Paul L. Holden, Esq., for the petitioners.

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

Smith :

The decedent’s holdings in the preferred and common stock of the Ingalls Stone Company, constituting 85.27 per cent and 87.96 per cent, respectively, of the total, were returned for estate-tax purposes at $75 per share for the preferred and $154.10 per share for the common. The respondent has determined deficiencies by valuing the preferred stock at $100 per share and the common stock at $250 per share. The sole question for our determination is the fair market value of the holdings of the decedent in the Ingalls Stone Company at the date of his death, October 24, 1928.

To sustain their .contentions the petitioners called as one of their witnesses J. Frank Walls, of Bedford, Indiana, who was one of the appraisers appointed to make an appraisal of the personal estate of the decedent by the Probate Court of Lawrence County, Indiana. The other appraiser was Ambrose K. Sears, a county assessor and State inheritance-tax appraiser for Lawrence County. Walls testified that he was thoroughly familiar with the Indiana limestone business and with the value of the shares of stock of Indiana limestone companies and of other local securities. He further testified that there had been no sales of the shares of stock of the Ingalls Stone Company; that the stock was closely held; that he was furnished with a copy of an adjusted balance sheet of the Ingalls Stone Company as of October 81, 1928, which balance sheet showed an excess of assets over liabilities of $1,052,078.46, which represented the book value of the preferred and common stock. Knowing the properties of the company as he did, and knowing that certain of the assets were carried at amounts which he knew were in excess of their real values, he and Sears carefully went through the balance sheet and marked down the value of certain of them. The amount of such mark-down was $212,319.69. This amount was then deducted from $1,052,078.46, referred to above, which left a balance of $839,-758.77 as the equity of the common and preferred stockholders in the assets of the company. From the last named amount there was then deducted $268,400 as the equity of the preferred stockholders, which left a balance of $571,358.77 as the equity of the common shareholders. This last named amount was then divided by 3,707 shares of common stock outstanding, which gave a value for the common shares of $154.13. Although the equity attributable to the preferred stock was in the computation shown as $100, the preferred stock was returned for inheritance-tax purposes at a value of $75 per share and the common at $154.10 per share. These are the same values shown on the Federal estate-tax return.

Another witness for the petitioners was C. H. Burke, who was the secretary of the Maynard H. Murch Company, of Cleveland, which, in 1924, had underwritten an issue of bonds of the Ingalls Stone Company of $300,000. Burke testified that in his opinion and in the opinion of his firm the Indiana limestone industry was a hazardous one. There were many competitors. Before his firm would underwrite the issue of bonds it required that the Ingalls Stone Company take out a life insurance policy on the life of Charles C. Ingalls in the amount of $300,000.' The firm considered Ingalls to be a very exceptional man in the stone industry — a man who would make a business succeed where others would fail. They placed much reliance upon the management and were desirous of securing themselves and their clients who might be purchasers of the bonds. against the untimely death of Ingalls. He testified that Ingalls had lived up to their expectations and had succeeded in making the company a success; that shortly prior to the death of the decedent the Indiana Limestone Company had been formed, which had taken in some 24 independents which had operated with indifferent success; that in 1928 this combine dominated the field, and that the price structure was dictated by this concern. He further testified, as a banker thoroughly familiar with the industry and the situation -which existed with respect to it in 1928, that he considered a fair method of valuing the total shares of stock of the Ingalls Stone Company in 1928 would have been to capitalize the earnings of the company for a five-year period ending in 1928 upon a six-year basis. He testified “ My idea of the value of that business was $662,059.62 as of October 24,1928, without taking into consideration the elimination of Charles C. Ingalls, who was the dominating factor in making the company a success.” This amount is much less than the value returned for decedent’s holdings in the estate-tax return. He further testified that he was not interested in allocating this value between the common and preferred shares; that inasmuch as Ingalls owned more than 85 per cent of each class of stock his holdings would carry the control of the company.

A third witness was W. E. Clark, one of the executors of the estate. He testified as to the remarkable ability of Charles C. Ingalls and as to the conditions which obtained in the Indiana limestone industry in 1928. In his opinion the preferred and common stock of the Ingalls Stone Company could not have been sold in 1928 for as much as it has been returned for estate-tax purposes. He thought that the values returned for both classes of stock were high and that no market could have been found for them in 1928 at those prices.

The taxing statute requires the inclusion in the gross estate of the “ value at the time of * * * death ” of property of the decedent. Section 302, Revenue Act of 1926. In article 13, Regulations 70 (1929 Edition), it is stated:

The value of all property Includable in the gross estate is the fair market value thereof at the time of decedent’s death. The fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. * * *

The question of the valuation of property in such a case as the one before us here involves the exercise of sound judgment upon the entire facts of record. In James Couzens, 11 B. T. A. 1040, 1160-1169, we exhaustively discussed principles of valuation. A review of those principles in this proceeding would not be profitable. The problem in this case is much the same as was before the court in Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893, wherein the court stated:

* * * but of all things value is the most uncertain. Opinions about it are prophecies, whose truth cannot ordinarily be verified save where the property is in fungibles, and there is a concourse of buyers and sellers. As to property like that at bar the best opinion is little more than a guess. These factories were in the country, situated on streams, dependent in part upon them for power. They had their history, their goodwill, their own individuality; it was a most difficult matter even with disinterested evidence to arrive at their equivalent in money. * * *

We do not know upon what basis the respondent has made his determinations of value. From the stipulated facts it is reasonable to infer that they are predicated in large part upon the balance sheet and earnings over a period of years. It must be admitted that the earnings of the company were large. It is also true that one of the witnesses testified that owing to valuable contracts on the company’s books at the date of the decedent’s death the earnings for 1929 were in excess of those for 1928. We are of the opinion, however, that the balance sheet is not a reliable index of value and that earnings are only one factor to be considered in valuing the decedent’s holdings.

From the evidence of record we can not determine the correctness of the adjusted balance sheet as of October 31, 1928, furnished the witness, Walls. The equity of the common and preferred stockholders in the balance sheet contained in the stipulation of facts as of November 30, 1928, is $1,312,362.93, as contrasted with the adjusted balance sheet furnished Walls of $1,052,078.46. The asset items in that balance sheet which Walls testified were in excess of true values are substantially the same amounts as he stated were included in the adjusted balance sheet furnished him. The markdown in those assets was warranted by the information in the possession of Walls. We are therefore of the opinion that in the valuation of the decedent’s holdings WaUs and his associate, Sears, were justified in reducing the equity of the common and preferred stockholders in the amount of $212,319.69. This leaves an equity for the common and preferred shareholders at November 30, 1928, of $1,100,043.24. We are of the opinion that the equity of the common and preferred shareholders at the date of the death of the decedent was approximately the same amount.

From a consideration of the entire record, we are of the opinion that the preferred stock had a market value not in excess of $75 per share at the date of the death of the decedent. There were outstanding at that time 2,684 shares of preferred stock, which, multiplied by $75 for each share, gives a total of $201,800 as the value of such stock, and this amount deducted from the $1,100,043.24, referred to above, gives a total of $898,743.24 as the equity of the common stockholders, and this divided by 3,707, the number of shares outstanding at the date of the death of the decedent, gives a value of $242.44 per share. We therefore conclude from the evidence that the fair market value of the preferred shares of the Ingalls Stone Company at the date of the death of the decedent was $75 per share, and of the common shares was $242.44 per share.

Although the' amounts thus found are considerably in excess of those estimated by the witness, Burke, the Board is of the opinion that the earnings for the company for the six-year period ended in 1928 warrants such a valuation. The average earnings per common share during such period, after the allowance of dividends upon the average number of preferred shares outstanding during the period, equal $35.54 per share for the common stock, and it is furthermore to be noted that the company had valuable contracts on its books at the date of the death of the decedent, and the testimony shows that the profits for the year 1929 were in excess of those for 1928.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Mary M. Buck, John A. Buck, Jr., and Walter E. Buck, Executors, Estate of John A. Buck, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 32584, 44153, 44684.
    Promulgated March 4, 1932.

      Norman A. Eisner, Esq., and Walter J. Rollings, G. P. A., for the petitioners.

      R. A. Gox, Esq., for the respondent.
   OPINION.

Smith:

These are proceedings for the redetermination of deficiencies as follows:

The allegations of error stated in the petition in Docket No. 32584 are as follows:

1. The inclusion in the gross estate of John A. Buck of the community interest of his wife, Mary M. Buck.

2. The inclusion in the gross estate, at face value, of a worthless note receivable of Ronald C. Kennedy in the principal amount of $1,000, plus accrued interest to .date of death of $528.89, a total of $1,528.89.

3. The inclusion in the gross estate, at face value, of a promissory note of J. C. Freese in the principal amount of $2,000, the collection of which was barred by the statute of limitations.

4. The increase made in error by the respondent in the value of the following parcels of real estate for Federal estate-tax purposes:

Parcel No. 3 — Market & Taylor St. Property
Parcel No. 4 — Delger Bldg. 6th & Market Sts.
Parcel No. 9 — Golden Gate & Larkin Property (all in San Francisco)

5. The increase made in error by the respondent in the value of 269 shares of stock of the Langendorf Baking Company for Federal estate-tax purposes.

6. The failure to include among the liabilities of the estate the decedent’s proportionate stockholder’s liability in the amount of $8,105.14 arising from endorsement of acceptance of the Koster Company by officials of the California Barrel Company, of which the decedent was a stockholder.

7. The failure to include among the liabilities of the estate the claim of the Matson Navigation Company against the estate in the amount of $13,684.98.

8. The failure to include among the liabilities of the estate the amount of $95,000 loaned to decedent by his wife (Mary M. Buck), from her separate property, on April 1, 1922, and not repaid to her prior to his death on April 6,1923.

9. The failure to include among the deductions allowed the estate a reasonable allowance for support of dependents actually paid pursuant to an order of the Superior Court for the City and County of San Francisco.

The above assignments of error are exclusive of certain assignments of error settled by stipulation of the parties at the hearing of these proceedings.

10. The allegation of error stated in Docket No. 44153 is, “ The addition to petitioner’s taxable income for the year 1924 of $60,-000.00 alleged to be deducted in error as income paid to Mary M. Buck, a beneficiary,” and that in Docket No. 44684 is, “ The addition to petitioner’s taxable income for the year 1925 of $7,500.00 alleged to be deducted in error as income paid to Mary M. Buck, a beneficiary.”

These proceedings were heard together, at which time the respondent moved to increase the deficiency in income tax determined against the estate for 1925 in Docket No. 44684 by the amount of tax payable upon the profit realized by the estate upon the sale in that year of shares of stock of the Langendorf Baking Company, provided the Board should find that the value of that stock at the date of the death of the decedent was less than the amount for which such stock was sold in 1925.

The petitioners are the executors of the estate of John A. Buck, who died testate a resident of. San Francisco, California, on April 6, 1923. For convenience of treatment, the facts and conclusion of the Board pertaining to each allegation of error will be considered in order.

1. The first allegation of error is that the respondent has erroneously included in the gross estate of the decedent the value of the community interest of Mary M. Buck, the widow of the decedent. In the estate-tax return filed, such value was included in the gross estate. The will of the decedent executed November 22, 1922, states in part as follows:

I estimate that, at the time of my marriage to my wife, Mary M. Buck, my fortune was of the value of approximately Three Hundred Thousand Dollars; and that all of the rest of my property is the community property of myself and my said wife. I hereby recognize her right to one-half of the community property, and I give her, in addition thereto, one-half of my separate property, so that she shall receive altogether, on the distribution of my estate, one-half of all my property, whether separate or community. * * *

This point is decided in favor of the respondent. United States v. Robbins, 269 U. S. 315; United States v. Talcott, 29 Fed. (2d) 897; United States v. Henshaw, 31 Fed. (2d) 946; Lula Vance Baumgartner, 21 B. T. A. 623.

2. On September 16, 1915, decedent received an unsecured note from Ronald C. Kennedy in the principal sum of $1,000, due one year after date with interest at the rate of seven per cent per annum. At the date of the death of John A. Buck (April 6, 1923) nothing had been paid on account of the principal of the note and there was accrued interest in the amount of $528.89. The note was returned in the estate-tax return at a value of $500. The respondent valued it at $1,528.89, which included the entire principal and interest to April 6, 1923. The full amount of the note with interest was paid in 1928, there having been some prior payments of interest.

The petitioners contend that the note was outlawed at the date of the death of the decedent and had no value. There is no proof, however, that the note had no value at the date of death of the decedent, and, even if outlawed at that date, there is no evidence that the maker of the note would have pleaded the statute of limitations as a bar if a suit had been brought against him for the collection thereof. The action of the respondent in including the note in the gross estate at a value of $1,528.89 is sustained.

3. The estate-tax return filed by the petitioners contained the following item: “Note, J. C. Freese, dated November 5, 1915, in the principal sum of $2,000, with interest at 6%, due six months from date. Interest paid to April 1, 1923. Barred by Statute.” The value was given as “ Nil.” This note was included in the gross estate at face value by the respondent in the determination of the deficiency. On November 6, 1923, an interest payment was made of all accrued interest to that date and, on November 4, 1925, an interest payment of $240 was made. The principal of the note has never been collected.

The petitioners contend that this note was outlawed at the date of the death of the decedent and was worthless on that date. There is no proof, however, that the note was worthless. The estate-tax return shows that interest was paid to April 1, 1923, and that three 3’ears’ interest was subsequently paid upon the note. The petitioners contend that the payment of interest on the note did not prevent the running of the bar of the statute of limitations, which is four years from the due date of the note. (Section 337 of the Code of Civil Procedure of the State of California.) In their brief, the petitioners claim that under the laws of the State of California “ partial payments do not toll the statute of limitation.” In support of this proposition, section 360 of the Code of Civil Procedure is relied upon, which provides:

No acknowledgement or promise is sufficient evidence of a new or continuing contract, by which to take the case out of the operation of this title, unless the same is contained in some writing, signed by the party to be charged thereby.

In Minifie v. Rowley, 202 Pac. 673, it was stated:

The effect of this provision is not to require that the new or continuing contract must consist of a written acknowledgment or promise. There may be an acknowledgment by conduct, as well as by words. In the case of a part payment, for instance, of either principal or interest the conduct itself has always been deemed, unless accompanied by qualifications, an unequivocal acknowledgment of a subsisting contract or liability from which a new contract to pay the debt must be inferred. Barron v. Kennedy, 17 Cal. 574, 577. Section 360 of the Code of Civil Procedure makes no attempt to regulate the character of the acknowledgment itself; its sole purpose is to alter the form of the evidence by preventing parol proof of the acknowledgment or promise whether the latter be in the form of words or acts. * * *

The decision in Altube v. Aguirre, 212 Pac. 217, is to the same effect. The law in California as established by these decisions and others cited therein is that the payment of interest on promissory notes is such an act or promise as will extend the statute of limitations, but that where such payment is disputed, parol evidence as to such payment will not be received, but only a written acknowledgment. In these proceedings the petitioners admit that payments of interest were received. Because of the failure on the part of petitioners to prove that the note was worth less than $2,000 at the date of the death of the decedent, the respondent’s action in including the note in the gross estate at a value of $2,000 is sustained.

4. In the estate-tax return the following three real estate properties in San Francisco were listed among the assets of the estate. The Commissioner determined a value for them higher than that shown in the return.

The net rentals received on these properties for 1922 were $22,077.57, $24,157.94, and $18,042.57, respectively. The values shown in the estate-tax return were those determined by three appraisers for the estate — Dennis M. Coghlan, R. F. Mogan, and W. D. Sheldon, and are the values upon which the State inheritance tax was paid. Coghlan is a well qualified expert on real estate values in San Francisco and has been appointed by the court in hundreds of cases for the purpose of determining values. Mogan occupied the position of inheritance-tax appraiser for the State of California. Sheldon was deceased at the time of hearing. In the determination of the net rentals no amount was allowed for depreciation of physical properties. The value for the Market and Taylor Streets property was based upon a capitalization of the net rentals at approximately 7.51 per cent; that of the Delger Building at Sixth and Market Streets upon a capitalization of net rentals, plus an estimated amount for vacancies of approximately 7 per cent (the net rentals of the Delger Building show a yield of 4.84 per cent on a value of $500,000 for the entire property). The value of the Golden Gate and Larkin Streets property was found by capitalizing the net rentals for 1922 at approximately 7.5 per cent. The properties at Market and Taylor Streets, and at Sixth and Market Streets (Delger Building) were in the heart of the business section and were valuable properties. The buildings upon them were inadequate. There were no sales of comparable properties at or near the basic date with which we are concerned.

At the hearing of these proceedings the respondent adduced no testimony in support of the values determined by him. He sought, however, to disprove the determinations of Coghlan upon the basis that the net rentals for 1922 should be capitalized upon a basis of 5y2 or 6 per cent. Coghlan, although admitting that the first two parcels of property named were valuable pieces of property, was of the opinion that his bases of valuation were correct and that the fair market values of the interests of the estate in those properties were not in excess of the amounts fixed by the appraisers.

We are of the opinion that the evidence of record establishes the correctness of the determinations of value made by the appraisers for State tax purposes, which are the same amounts as reported in the estate-tax return. Our predicate for this conclusion is in part that in the determination of the net rentals no depreciation upon the buildings on the properties is provided for. It is furthermore to be noted that in the valuation of the “ Delger Building ” property, $10,000 was added to the actual rentals for the purpose of arriving at a fair rental. The rentals actually received were only 4.84 per cent upon the valuation for property shown in the estate-tax return. The determination of the respondent upon this point is reversed.

5. The decedent was the owner at the date of death of 269 shares of the capital stock of the Langendorf Baking Company. The value placed thereon by the petitioners in the estate-tax return was $80 per share, or $21,520 for the 269 shares as at April 6, 1928, the date of decedent’s death. The respondent determined a value of $105 per share, or a total value of $28,245 for the 269 shares.

The Langendorf Baking Company had outstanding on March 31, 1923, 2,632 shares of stock of a par value of $100 per share. On that date it had an earned surplus of $42,926.32. The stock was closely held. There were but 15 or 16 stockholders. There had been no transactions in the stock at or near the date of death of the decedent. It was without an established market. Between February, 1919, and April, 1923, no dividends whatsoever were paid on the stock. In July, 1920, there had been an assessment upon the stock of $6 per share, and in May, 1921, an assessment of $10 per share. The book value of the stock as at March 31, 1923, was $139.70 per share, but in reaching such a book value there was included among the assets $75,000 for good will. In April, 1923, after an appraisal by the American Appraisal Company, the assets of the company were written up $97,000, representing the increased value of the physical properties in that amount. On May 15, 1923, one month and nine days after the decedent’s death, a stock dividend of 20 per cent was declared, as a result of which the estate received 54 additional shares of stock. The earnings for 1922 were good and for 1923 were approximately $160,000. Cash dividends per share were paid as follows:

July 14, 1923_ $3
Nov. 2, 1923_ 2
Dee. 26, 1923_ 2
Apr. 2, 1924_1_ $2
July 2, 1924_ 2
Oct. 2, 1924_ 2

Upon a careful consideration of all of the evidence, the fair value of the stock on April 6, 1923, is determined to be $80 per share, the amount shown in the estate-tax return.

At the hearing in these proceedings, counsel for the respondent moved to increase the deficiency in the income, tax of the estate for 1925 by the difference between $21,520, the value of the shares at the date of the death of the decedent (if that value should be sustained by the Board) and the price at which sold by the estate in 1925, namely, $33,915, or $12,395. This contention is considered below.

6. The estate-tax return filed by the petitioners listed in schedule “ B ” — “ Stocks and Bonds,” 95 shares of the capital stock of the California Barrel Company — value on date of death “ Nil.” In schedule “ I ” — “ Debts of Decedent ” — the following item was listed as a liability: “Wells Fargo Bank and Union Trust Company— Acceptances for California Barrel Co. $8,105.14.” The Wells Fargo Bank and Union Trust Company filed a claim against the estate in the amount of $8,105.14, based upon the alleged liability of the estate as a stockholder in the California Barrel Company, which in turn was liable as a stockholder of the Koster Company, which was alleged to be indebted to the Wells Fargo Bank and Union Trust Company.

This claim was not allowed by the probate court; and suit was commenced against the estate by the bank in March, 1927. In 1928, while this suit was still pending, Frederick J. Koster (who owned 874 shares and whose family owned more than 4,000 shares of the California Barrel Company stock) agreed to assume the liability of the estate as a stockholder in that company in exchange for the 95 shares of stock held by the estate, which were returned in the estate-tax return as having no value. This transfer was approved by the probate court.

The petitioners contend that the estate, on April 6, 1923, had a liability to the Wells Fargo Bank and Union Trust Company of the $8,105.14 and that the mere .fact that in subsequent years this claim was liquidated by the petitioners turning over to one Koster shares of stock which had been returned in the estate-tax return as having no value does not prevent the estate from deducting from the gross estate the claim in question.

Article 39 of Regulations 63 (1922 Edition) provides as follows:

Claims against the estate. — The amounts that may be deducted under this heading are such only as represent perspnal obligations of the decedent existing at the time of his death, whether then matured or not. Only such claims as are enforceable against the estate may be deducted.

The evidence in this case does not show that the bank had an enforceable claim against the estate. At any rate it was never enforced. If it had been the estate would have been subrogated to the rights of the California Barrel Company in respect of the payment made, which right might have been equal to the amount of the claim. The action of the Commissioner in disallowing the deduction of the claim is sustained.

7. By an amendment to the petition, the petitioners claim the right to deduct from the gross estate $13,684.83, the amount of a claim filed against the estate by the Matson Navigation Company, which was allowed by the probate court but which had not been paid at the time of the hearing in these proceedings.

Section 1497 of the Code of Civil Procedure of California provides :

Every claim allowed by the executor or administrator, and approved by a judge of the Superior Court, or a copy thereof, as hereinafter provided, must, within thirty days thereafter, be filed in the court, and be ranked among the acknowledged debts of the estate, to be paid in due course of administration

The claim of the Matson Navigation Company represents the decedent’s liability as a stockholder of the Matson By-Products Company for his proportionate part of an indebtedness of that company to the Matson Navigation Company. Under section 3 of article 12 of the California constitution “ each stockholder of a corporation * * * shall be individually and personally liable for such proportion of all its debt and liabilities contracted or incurred, during the time he was a stockholder.” The debt giving rise to the claim in question was incurred during the time the decedent held stock in the debtor corporation, and within three years of the time the Mat-son Navigation Company’s claim was allowed by the probate court. The claim was not barred by the three-year statute of limitations (section 359 of the California Code of Civil Procedure) and is a subsisting claim against the estate. See Gardiner v. Royer (Cal.), 139 Pac. 75; McCann Co. v. Denny (Cal.), 270 Pac. 190; Wass v. Keene (Cal.), 286 Pac. 1041. Subsequent agreements between the debtor and creditor corporations did not affect the decedent’s and/or his estate’s liability, nor stay the running of the statute of limitations. Cf. Bank of San Luis Obispo v. Pacific Coast Steamship Co., 103 Cal. 594; 37 Pac. 499. The petitioners’ contention that the amount of this claim should be allowed as a deduction from the gross estate is sustained.

8. In the spring of 1922, the decedent had a bill to pay in the amount of $325,000. The decedent not having the full amount of cash with which to pay the debt, contemplated the selling of certain securities to raise the cash. Mary M. Buck, the decedent’s widow, remonstrated against the sale of the securities, since she had funds in the bank for the payment of a part of the debt. She turned over to her husband $95,000 to enable him to make the payment. This amount was never repaid to her. She presented no claim against the estate for the $95,000 in question and the probate proceedings were completed without reference to any such claim.

The circumstances under which the payment was made by Mary M. Buck were stated by her to have been as follows:

Mr. Buck had a large amount to pay, a large bill to pay and he was short of money, and I had this money in the bank and said to him, why, why not take this money, I will lend it to you. He hesitated, he thought he could sell some securities, but he said, “All right, I will take that money,” and that is how it came that I loaned him the money.

Upon cross-examination she stated that the bill was in the amount of $325,000 and that:

* * * He was lacking that amount of money, and 1 said I would give it to him. He would not hear of it at first, but I said, “ Oh, yes, do not sell any of the securities. It is there, you can have it.”

Although from the record it is evident that Mary M. Buck turned over from her separate estate $95,000 to her husband on April 1, 1922, the evidence does not warrant the. conclusion that the money was loaned to the decedent. His will executed on November 22,1922, states that all of his property, with the exception of $300,000 which constituted his fortune at the date of marriage, constituted community property.

A somewhat similar situation was involved in Blair v. Stewart, 19 Fed. (2d) 257. In that case the court stated if there was any agreement which would serve to bind the decedent’s separate estate the fact—

* * * ought to be proved by clear and convincing evidence where as here the proof of it depends, not upon the interpretation of a written instrument, but upon the oral testimony of the grantee, as to what was agreed to by the grantor whose lips have been sealed by death.

Mary M. Buck testified that her separate estate consisted of gifts of property to her from her husband and income therefrom. Whether the payment of the $95,000 to her husband represented a gift or a loan to him is uncertain. In any event it is to be noted that the widow took under the will and not under the statute. It is possible that the provision which the decedent made for Mary M. Buck in his will was intended to and did compensate her for the $95,000 in question.

The taxing statute permits the deduction from the gross estate of “ claims against the estate * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered.” (Section 403 (a) (1) of the Bevenue Act of 1921.) The evidence does not show that the widow had an enforceable claim against the estate for the $95,000 in question. The action of the respondent in disallowing the deduction is sustained.

9. Under date of April 26, 1923, Mary M. Buck filed a petition in the Superior Court of the State of California, in and for the City and County of San Francisco, for an order granting family allowance. In such petition she alleged that John A. Buck died testate on the sixth day of April, 1923, and that he left an estate “ which is far in excess of ” $10,000. She further alleged:

That the sum of seventy-five hundred dollars ($7,500) per month is a reasonable and necessary allowance for the maintenance and support of your petitioner, and your petitioner therefore desires to have this court make an allowance to her of the sum of seventy-five hundred dollars ($7,500) per month, as and for her use, maintenance and support, the same to take effect from the date of the death of said John A. Buck, deceased, and to continue until the return to this eourt of the inventory and appraisement in the estáte of said deceased'.

On April 26, 1923, the court issued an order to the effect that $7,500 per month—

* * * Is a reasonable and necessaiy sum for the use, maintenance and support of said Mary M. Buck, the widow of said John A. Buck, deceased, and that she be and she is hereby allowed out of the estate of said deceased as and for her use, maintenance and support, the sum of Seven Thousand Five Hundred Dollars ($7,500) per month; * * *

Pursuant to the above entitled order, twelve monthly payments of $7,500 were made to the widow.

On July 11, 1924, the inventory of the estate having then been filed, Mary M. Buck filed with the above-mentioned court a petition for family allowance in the amount of $3,750 per month for her maintenance and support, alleging that such amount was a reasonable allowance for such purposes. On July 23, 1924, the court issued an order pursuant to which there was paid to her for a period of 10 months the amount of $3,750 per month. The total amount paid by the estate for family allowance pursuant to court orders, during the period of administration (22 months), and claimed as a deduction from the gross estate, was $127,500. The respondent has allowed a deduction for family allowance at the rate of $2,500 per month for a period of 21 months — total $52,500.

The statute permits the deduction from the gross estate of “ such amounts reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction ” (section 403 (a) (1), Bevenue Act of 1921). The Commissioner’s regulations provide, with reference to this item, as follows:

Abt. 43. Support of dependents. — The support during the settlement oí the estate of dependents of the decedent should be deducted, but pursuant to the following rules:
(1) In order to be deductible, the allowance must be authorized by the laws of the jurisdiction in which the estate is being administered, and not in excess of what is reasonably required.
(2) The allowance for which deduction may be made is limited to support during the settlement of the estate. Any allowance for a more extended period is not deductible.
(3) There must be an actual disbursement from the estate to the dependents, but after payment has been made the right of deduction is not affected by the fact that the dependents do not expend the entire amount for their support during the settlement of the estate.

There is no dispute as to the payment by the estate of the amount claimed as a deduction for the support of dependents, such amount having been authorized by proper court orders. The respondent has detennined that $2,500 per month is a reasonable allowance for the support of the decedent’s widow.

The decedent’s gross estate was in excess of $2,000,000. During the period of administration the widow occupied the summer and winter homes that she and decedent had lived in prior to his death. The winter home was a 12-room house on Gough Street, in San Francisco. The summer home was on a 9-acre estate at San Rafael, in Marin County; the house there had 15 rooms. Throughout the year three gardeners and a coachman were employed at the summer home. The widow regularly employed two or three house servants and a chauffeur, who were with her at either home. The monthly pay roll for such services was approximately $900. On account of illness following decedent’s death, the widow had extra expenses. She testified that she had not spent the full amount of the monthly allowance of $7,500 per month for her support and, although $7,500 was reasonably required for her support in the standard of living to which she had been accustomed during the first 12 months following her husband’s death, $3,750 per month was sufficient for that purpose thereafter, and in 1924 the court reduced the allowance to that amount. The widow kept no books of account showing the actual cost of her support. From the record we can not determine that $7,500 per month was reasonably required for the widow’s support during the 12 months immediately following the decedent’s death; neither do we think the respondent’s allowance of $2,500 per month is sufficient, nor is it supported by the evidence. The fact that the widow requested a reduction of the allowance for her support, and the approval of such reduced allowance by the court, is some indication that $3,750 per month was the amount reasonably required for her support. In the circumstances, we hold that the deduction for support of dependents during the period of administration should be based upon a monthly allowance of $3,750. The.allowance having been made for a period of 22 months, and not 21 months as respondent has erroneously determined, the amount deductible from the gross estate is $82,500. Cf. Estate of W. A. Blair, 4 B. T. A. 959; Mary A. Powers, Executrix, 6 B. T. A. 633; Fred Wolferman, Executor, 10 B. T. A. 285; Allie E. Nicholson, Executrix, 21 B. T. A. 795.

10. The only question raised by the petitions filed in Docket Nos. 44153 and 44684 is the right of the petitioners to deduct from the gross income of the estate amounts paid to the widow for her maintenance and support during the period of administration. Pursuant to the orders of the Superior Court of the State of California, in and for the City and County of San Francisco, the executors paid “ out of the estate ” certain amounts for the support of the decedent’s widow in the calendar years 1924 and 1925. In the income-tax returns filed for the estate for those years there were deducted from the gross incomes $60,000 and $7,500, respectively, representing the payments of the allowances. The respondent properly disallowed the deduction of these amounts. Section 403 (a) (1) of the Revenue Act of 1921 provides for such deductions from the gross estate, and having determined a reasonable allowance for the support of dependents during the period of administration, the total amount of which has been allowed as a deduction from the gross estate, the same allowances are not deductible from the gross income of the estate. See Charles Lesley Ames, Executor, 14 B. T. A. 1067; affd., 49 Fed. (2d) 853. See also Buck v. McLaughlin, 48 Fed. (2d) 135.

As indicated above, respondent at the hearing of these proceedings moved to increase the deficiency in Docket No. 44684 by the amount of the profit, namely, $12,395, realized by the estate in 1925 upon the sale of its holdings in the Langendorf Baking Company. The evidence shows that this stock was reported in the estate-tax return as having a value of $21,520 and that that stock, including certain shares received during the period of administration as a stock dividend, was sold by the estate in 1925 for $33,915. Clearly, the difference between these two amounts of $12,395 represents taxable income of the estate. The motion of the respondent to increase the deficiency for 1925 is allowed.

Judgments will be entered under Rule 50.


author: TRammell :

text:
    Max B. Shubin and Sara C. Shubin, on Behalf of Reliable Coal Company, a Dissolved Corporation, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39773.
    Promulgated March 4, 1932.

      Theodore B. Benson, Esq., for the petitioners.

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

TRammell :

The petitioners contend that the sale by the Reliable Coal Company of its property and business under the circumstances set out in our findings of fact was a sale on the installment plan within the meaning of the Act. The respondent contends that it was a completed transaction and not a sale on the installment plan.

Section 212 (d) of the Revenue Act of 1926 provides as follows:

Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

In the instant case the Reliable Coal Company sold its property and business for $95,000. In payment therefor the corporation received back a purchase-money first mortgage for $50,000 on the ground, buildings and improvements. In addition it received $15,000 in cash representing money furnished by the purchaser, and $30,000 in cash representing the proceeds from a second mortgage placed on the property by the purchaser with a building and loan association and as collateral for the payment of which the corporation gave its bond for a like amount.

The petitioners contend that since the Reliable Coal Company was liable on its bond to the building and loan association for the payment of the $30,000 loaned to the purchaser and paid by him to the corporation the amount is to be considered as in the nature of a loan to the Coal Company by the building and loan association on the credit of the Coal Company and consequently was not part of the “ initial payments ” within the meaning of the Act. While a copy of the bond given by the Reliable Coal Company to the building and loan association was not put in evidence, the Coal Company apparent^ had no liability thereunder except in event the maker of the second mortgage or the purchaser of the property in this case failed to make payment. The transaction, therefore, was not unlike that where a seller receives in payment for property the promissory notes of the purchaser and thereafter endorses the notes and sells them. In the latter type of cases we have consistently held that the entire amount of the proceeds from the notes was to be included in determining taxable income. Grace T. Mytinger, 4 B. T. A 896; Packard Cleveland Motor Co., 14 B. T. A. 118; E. E. Chapman, 19 B. T. A. 878. The expression “ initial payments V is defined in the above quoted section of the statute as payments in cash or property other than evidences of indebtedness of the purchaser. The $30,000 paid to the taxpayer in cash, derived from the second mortgage to the building and loan association was clearly something other than evidence of indebtedness of the purchaser. This mortgage was not received by the taxpayer, but by the building and loan association. The taxpayer received the cash. Accordingly we are of the opinion that the $30,000 received by it as the proceeds from the second mortgage given by the purchaser of the property to the building and loan association, is to be considered as part of the “initial payments” received during the year of sale.

Since the $30,000 is to be considered as part of the “ initial payments,” such payments received by the Coal Company during the taxable period amount to $45,000, or considerably in excess of one-fourth of the selling price of $95,000. The sale therefore was not one on the installment plan within the meaning of the Act. Grace T. Mytinger, supra; Packard Cleveland Motor Co., supra; E. E. Chapman, supra. The respondent’s action in treating the sale as a completed transaction is therefore sustained.

The petitioners contend that the respondent erred in determining that the purchase-money first mortgage of $50,000 received back by the Coal Company had a fair market value equal to its face value and allege in the petition that the fair market value of the mortgage was not in excess of 80 per cent of its face value at the time of its receipt on May 4, 1927. In support of the contention the petitioners submitted evidence relating to the value of the property covered by the mortgage and to attempts made by Max B. Shubin to dispose of the mortgage and to obtain loans thereon. Shubin testified to a fair market value of the property in May, 1927, of $30,000. Another witness named Goodrich who was a real estate agent in Philadelphia from 1923 to 1927, testified to the same value. Goodrich also testified that in 1927 a short time before the property was sold he obtained an offer to purchase it at $30,000 but when he submitted the offer to Max B. Shubin the latter rejected it, stating that the property was worth $60,000, the price desired for it. The petitioners make no attempt to reconcile Shubin’s testimony as to a value of only $30,000 with the statement as to value he made to Goodrich in rejecting an offer of that amount. If, as Shubin testified, the property was worth only $30,000, it is difficult to see why he rejected the offer to purchase it at that amount. His action speaks louder than his words.

In testifying as to his method of valuing property, Goodrich stated: “ I don’t go into obtaining the value of property so much by making an examination * * * if I had a property offered to me I would usually submit it to one or two customers, and I would take it for granted that these people looking for properties knew their own business and knew what it would be worth to them.” The opinion testimony of a witness who arrives at values in this manner might or might not correctly reflect the fair market value of the property about which he testifies, but an opinion which has no sounder basis than this is not entitled to very great weight, especially where the owner refused to sell on the basis of value stated by the witness on the ground that the property was worth twice that amount.

Shubin stated that during 1927 or subsequently — just when is not shown — he attempted to sell the mortgage to every mortgage broker he knew at a discount of 20 per cent, but was unable to sell it. The record does not disclose whether his attempts were made in 1927 or subsequently. It very well may have been in 1930 before any such attempt was made, for all the record discloses. It is further open to the objection that the record is silent as to whether any of the mortgage brokers to whom the mortgage was offered were dealers in mortgages on the class of property covered by this mortgage. The record does not disclose to what extent the witness had acquaintance among brokers. He may not have known the brokers who were in the market for such securities. Shubin also testified to attempts made in 1927 and 1928 to borrow money and use the mortgage as collateral, and that the greatest amount offered to him was $20,000. The fact that $20,000 was the largest amount Shubin could have borrowed on the mortgage as collateral is not indicative of what the fair market value of the mortgage was. It may have been that the particular banks to which he applied for a loan did not make loans in larger amounts. The respondent has determined that the fair market value of the mortgage was equal to its face value of $50,000. From a consideration of the entire record we are unable to hold that the evidence is sufficient to overcome the prima facie correctness of that determination.

Judgment will be entered for the respondent.


text:
    R. C. Kuldell, Administrator with the Will Annexed of the Estate of Howard R. Hughes, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31831, 40357.
    Promulgated March 7, 1932.

      A. G'alder Maolcay, Esq., for the petitioner.

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

Smith:

Among the assets of the decedent’s estate were 1,500 shares of stock of the Hughes Tool Company, which the facts show would ultimately be distributed to the residuary legatees, since the estate otherwise seems to have been sufficient for the payment of decedent’s debts, expenses of administration, etc. One-half of the residuary estate was left to the decedent’s son and the other half to decedent’s father, mother, and brother in equal shares. On or about May 28, 1924, the father, mother, and brother sold their interests in the decedent’s estate (with an exception not material here) to the Hughes Tool Company. Thereafter, the Hughes Tool Company declared dividends of $243,500 and $500,000 in 1924 and 1925, respectively. The stock owned by the decedent was one-half of the capital stock of the Hughes Tool Company and one-half of the amount of the respective dividends was credited to the petitioner as administrator upon the books of the Hughes Tool Company. The amounts credited represent dividends attributable to 750 shares of stock, which the petitioner contends did not constitute income to the estate by reason of the above mentioned assignments to the Hughes Tool Company. The respondent has treated these amounts as income of the estate.

Subject to the payment of his debts, all of the decedent’s estate vested immediately in the devisees or legatees, “ but upon the issuance of letters testamentary or of administration upon ” such estate, the executor or administrator had “ the right to the possession of the estate as it existed at the death of the testator,” and the petitioner, as administrator, had possession of and held the decedent’s estate “ in trust to be disposed of in accordance with the law.” Article 3314, Vernon’s Annotated Texas Statutes, vol. 9; Matthews v. Darnell, 27 Tex. Civ. App. 181; 65 S. W. 890; Melton v. Beasley, 56 Tex. Civ. App. 537; 121 S. W. 574; Munger v. Munger (Tex.), 298 S. W. 470. While heirs and legatees may sell and convey their interest in a decedent’s estate (Miers & Rose v. Trevino (Tex.), 213 S. W. 715), the purchaser takes subject to valid claims against the estate (Roberts v. Carlisle (Tex.), 4 S. W. (2d) 144), and gets nothing more than the residuary legatees would have received after administration (Runkle v. Smith, 106 Atl. 474; 90 N. J. Eq. 478). In Brewster v. Gage, 280 U. S. 327, 334, the Supreme Court said:

Upon the death of the owner, title to his real estate passes to his heirs or devisees. A different rule applies to personal property. Title to it does not vest at once in heirs or legatees. United States v. Jones, 236 U. S. 106, 112, 35 S. Ct. 261, 59 L. Ed. 488, Ann. Cas. 1916A, 316. But immediately upon the death of the owner there vests in each of them the right to his distributive share of so much as shall remain after proper administration and the right to have it delivered upon entry of the decree of distribution. Sanders v. Soutter, 136 N. Y. 97, 32 N. E. 638; Vail v. Vail, 49 Conn. 52; Cook v. McDowell, 52 N. J. Eq. 351, 30 A. 24. Upon acceptance of the trust there vests in the administrators or executors, as of the date of the death, title to all personal property belonging to the estate; it is taken, not for themselves, but in the right of others for the proper administration of the estate and for distribution of the residue. The decree of distribution confers no new right; it merely identifies the property remaining, evidences right of possession in the heirs or legatees, and requires the administrators or executors to deliver it to them. The legal title so given relates back to the date of the death. Foster v. Fifield, 20 Pick. (Mass. 67, 70; Wager v. Wager, 89 N. Y. 161, 166; Thompson v. Thomas, 30 Miss. 152, 158.

So far as tbe record discloses, there has been no distribution of the decedent’s estate and the stock upon which dividends were declared and credited to the estate was in possession of the petitioner as administrator. Regardless of the solvency of the estate, the interest of the residuary legatees was subject to petitioner’s possession for the purposes of administration, and their title thereto was not perfect until distribution. Cf. Henry v. United States, 251 U. S. 393. Prior to that time, the residuary legatees did not have title to this stock and they could not maintain a stockholders’ suit; Whitaker v. Whitaker Iron Co. (W. Va.), 238 Fed. 980; affd., 249 Fed. 531; certiorari denied, 248 U. S. 564. Cf. Pierce Co. v. Fiske, 237 Mass. 39; 129 N. E. 609.

The assignments, which the petitioner contends effectively transferred 750 shares of the stock of the Hughes Tool Company to that company, while conveying the interests of the assignors in the residuary estate, merely gave to the assignee the right to receive that which they would otherwise have received upon the distribution of the estate. In the meantime, the petitioner was accountable to neither assignors nor assignee for income (including the dividends in question) upon the corpus of the estate, even though all or a portion of such income eventually went into the residuary estate. See In re Brooklyn Trust Co., 166 N. Y. S. 513; 179 App. Div. 262. They had no present interest in the income of the estate during the period of administration and such income was taxable to the petitioner. Since the income in question “ would eventually go to taxable persons,” the instant proceedings are distinguishable from Lederer v. Stockton, 260 U. S. 3, and Bowers v. Slocum, 20 Fed. (2d) 350, wherein it was held that the income there sought to be taxed would go to residuary legatees that were tax-exempt.

The crediting of the full amount of the dividends on the decedent’s stock in the taxable years to the petitioner and the apparent solvency of the Hughes Tool Company, when considered in the light of the above authorities, leads us to the conclusion that petitioner could have demanded and received payment of the amounts in question at any time and that the dividends were “constructively received ” in the taxable years under consideration. Cf. Commissioner of Internal Revenue v. Bingham, 35 Fed. (2d) 503; certiorari denied, 281 U. S. 729. While it is true that bookkeeping entries do not make income of that which is not in fact income, the converse is also true, and the debit entries upon the books of the Hughes Tool Company in a subsequent year did not change the income status of the amounts credited to the petitioner in the taxable years before us. The respondent’s determination on this point is sustained.

Certain facts were stipulated regarding a second point in issue. The respondent on brief states that the “question relating to the disallowance by the Commissioner of a claimed deduction in 1924, aggregating $22,000 for fees paid by the petitioner to attorneys and accountants has been settled by a stipulation filed with the Board on December 28, 1931.” The Board can not determine from the stipulation what the agreement between counsel is.

Judgment will be entered under Rude SO,


author: Seawell :

text:
    Title Insurance and Trust Company, Executor, Estate of Otto F. Brant, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 35010, 49624.
    Promulgated March 7, 1932.

      George G. Witter, Esq., George M. Thompson, G. P. A., and M. F. Mitchell, Esq., for the petitioner.

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

Seawell :

In the determination of the issue herein, it is necessary for us to consider and construe the order of the Superior Court of California granting family allowance to the widow of Otto F. Brant, in connection with the law of California authorizing such allowance, and the provisions of the Revenue Acts of 1921 and 1924 applicable thereto.

Chapter Y of Title XI of the Code of Civil Procedure, California, 1925, contains provision for the support of the family of a decedent. By section 1464 of said code it is provided:

Widoio and minor children may remain in decedent’s house, etc. When a person dies leaving a widow or minor children, the widow or children, until letters are granted and the inventory is returned, are entitled to remain in possession of the homestead, of all the wearing-apparel of the family, and of all the household furniture of the decedent, and are also entitled to a reasonable provision for their support, to be allowed by the superior court, or a judge thereof. [Amendment approved 1880; Code Arndts. 1880, p. 87.]

Section 1465 of said code provides:

Upon the return of the inventory, or at any subsequent time during the administration, the court may on petition therefor, set apart for the use of the surviving husband or wife, or, in case of his or her death, to the minor children of the decedent, all the property exempt from execution, including the homestead selected, designated, and recorded; * * *

Sections 1466 and 1467 of said code provide:

§ 1466. Court may make extra allowance. If the property set apart is insufficient for the support of the widow and children, or either, the court or a judge thereof must take such reasonable allowance out of the estate as shall be necessary for the maintenance of the family, according to their circumstances, during the progress of the settlement of the estate, which, in case of an insolvent estate, must not be longer than one year after granting letters testamentary or of administration. [Amendment approved 1907; Stats. 1907, p. 933.]
§ 1467. Payment of allowance. Any allowance made by the court or judge, in accordance with the provisions of this article, must be paid in preference to all other charges, except funeral charges and expenses of administration; and any such allowance, whenever made, may, in the discretion of the court or judge, take effect from the death of the decedent.

Section 1516 of said code provides that all of the property of the decedent shall be chargeable with the payment of the debts of the deceased, the expenses of administration, and the allowance to the family, except as otherwise provided in said code and in the Civil Code, and that there shall be no priority as between personal and real property for the above purposes.

Section 1359 of the Civil Code of California, 1925, provides that before any debts are paid the expenses of the administration and the allowance to the family must be paid or provided for.

In section 1646 of the Code of Civil Procedure of California it is provided that the executor or administrator, as soon as he has sufficient funds in his hands, must pay the funeral expenses and the expenses of the last sickness, and the allowance made to the family of the decedent.

There is no mention made in the statutes of income of the estate of the decedent.

The granting of family allowance is not dependent on the existence of income of the estate, but the statute (§ 1466), in certain instances and for a limited period, authorizes the proper court or a judge thereof to make such reasonable allowance “ out of the estate ” as shall be necessary for the maintenance of the family, according to their circumstances, during the progress of the settlement of the estate, although the estate may be insolvent.

The right of the widow to a family allowance is purely statutory. In re Welch's Estate, 106 Cal. 427; 39 Pac. 805; In re McSwain's Estate, 176 Cal. 280; 168 Pac. 117; Hills v. Superior Court in and for Los Angeles County, 207 Cal. 666; 279 Pac. 805.

The widow’s allowance is in the nature of a part of the cost of administration. 24 C. J. 230, 231 and note 98 on page 231, citing Deeble v. Alerton, 58 Col. 166; 143 Pac. 1096; Wilson v. Wilson, 55 Col. 70; 132 Pac. 67. It is not a claim or demand which must be presented in due form of law to the executor or administrator of the estate, but is an expense of administration. In re Cutting, 174 Cal. 104; 161 Pac. 1137.

In determining the value of the net estate subject to estate tax, section 403 of the Revenue Act of 1921 and the corresponding section 303 of the Revenue Act of 1924, allow as a deduction from the corpus of the estate administration expenses, claims against the estate and such amounts reasonably required and expended for the support during the settlement of the estate of those dependent upon the decedent as are allowed by the laws of the jurisdiction under which the estate is being administered.

In Fred Wolferman, Executor, 10 B. T. A. 285, the Commissioner in determining the net estate subject to estate tax refused to allow as a deduction $10,000 ordered paid by a Kansas probate court for the support of the widow during the period of administration. This Board held said amount was a proper deduction.

In Charles Lesley Ames, Executor, 14 B. T. A. 1067; affd., 49 Fed. (2d) 853, in which it was contended by petitioner that the amounts which the probate court of Minnesota ordered paid to the widow for the maintenance of herself and children during the period of administration should be deducted from the gross income of the estate, we held that such payments were not so deductible, but were distributions from the funds or corpus of the estate. See also Estate of W. S. Tyler, 9 B. T. A. 255.

In the case of Buck v. McLaughlin (C. C. A., 9th Cir.), 48 Fed. (2d) 135, the court had before it for determination the question whether “ family allowance ” to decedent’s widow is taxable income within the purview of the Sixteenth Amendment and section 213 (a) of the Eevenue Act of 1921. The court decided that such allowance was not “ taxable income ” in the hands of the widow.

The question in that case was not the same as in the instant case, but the court’s conclusion that the widow’s allowance is not taxable income is more consistent with the theory that it is derived from the corpus of the estate than that it proceeds from the income of the estate.

The petitioner contends that the deductions claimed are allowable under the plain wording of the statute, referring to and quoting section 219 (a) and (c) of the Eevenue Act of 1921 and apparently relying specially on the phraseology in (c) to the effect that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary.

In the instant case, however, in our opinion, the widow’s allowance claimed as deductible from income of the estate was not, in the light of California law and decisions and the Eevenue Act of 1921, income properly paid. The petition did not pray that it be so paid nor did the probate court so order, but construed the request for an allowance “ out of the estate,” which the applicable statute intended.

The petitioner also insists its contention is sustained by I. T. 2581, C. B. X-1, p. 175, construing article 863 of Eegulations 74. In that ruling it is stated that under the Michigan law it was the practice for the probate judge to issue an order for the payment of the widow’s allowance with no provisions as to whether it was to be paid out of income or out of principal, but that it was the practice of the auditor general’s department and of the probate judges to consider the widow’s allowance as being paid out of income to the extent there was income out of which to pay it. Office Decision 829 (C. B. 4, 224) is also cited and relied on by the petitioner.

The facts and circumstances existing and the law considered and ruled on in I. T. 2561 and O. D. 829, supra, are not identical with those in the instant case, and if they were so considered by us, would not be controlling herein. There is no evidence adduced showing that the practice of the probate courts of California in the matter of granting and ordering paid family allowance to the widow of a decedent is the same as prevails in the Michigan probate courts, as indicated in I. T. 2561, supra.

In view of the California law, the decisions of its courts construing the same, and the prior decisions of this Board, we are of the opinion that the widow’s allowance is properly a charge against the corpus of the estate and not legally deductible from income of the estate.

Judgment will be entered under Rule 50.


author: Trammell:

text:
    Lu Frisk Thomas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55331.
    Promulgated March 7, 1932.

      Maurice W. Stoffer, Esq., for the petitioner.

      James K. Polk, Jr., Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

Trammell:

The question presented for our decision is whether the petitioner may, in computing her tax liability, elect to treat the gains arising from the sale of part of the stocks here involved as “ capital net gain ” and the gain from the remainder as “ ordinary net income.”

The pertinent provisions of the Eevenue Act of 1928 are as follows:

Sec. 101. Capital net gains and losses.
(a) Taw m case of capital net gain. — In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12(4 per centum of the capital net gain.
* * * * * * *
(c) Definitions. — For the purposes of this title—
(1) “ Capital gain ” means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
(2) “ Capital loss ” means deductible loss resulting from the sale or exchange of capital assets.
(3) “ Capital deductions ” means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year.
(4) “ Ordinary deductions ” means the deductions allowed by section 23 other than capital losses and capital deductions.
(5) “ Capital net gain ” means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains.
(6) “ Capital net loss ” means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain.
(7) “ Ordinary net income ” means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions.
(8) “Capital assets” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business

There is no controversy by the parties as to the entire group of stocks being “ capital assets ” or the profits from the sale thereof being “ capital net gain ” within the provisions of the Act, nor is there any controversy with respect to the respondent’s action in treating the so-called interest as a part of “ capital net gain.” The controversy is only as to whether the petitioner may elect to have the profits from the sale of the common stock of the Eoyal Milling Company and the so-called interest allocable thereto taxed as “ ordinary net income ” and the profits from the sale of the other stocks taxed as “ capital net gain.” The petitioner contends that she is entitled to do as she did in filing her return, treat the profit from the sale of part of the stock as “ ordinary net income,” and the remainder as “ capital net gain.” The respondent denies that the petitioner has such right.

A similar question was presented in De Lancey Nicoll, 16 B. T. A. 868; affd., 41 Fed. (2d) 1008, and there decided adversely to the petitioner. In that case the petitioner, during the taxable year, sold two blocks of securities which he had held for more than two years. Upon the sale of one he realized a profit of $30,825 and upon the sale of the other he sustained a loss of $53,366.40, the net result of the two transactions being a loss of $22,541.40. The petitioner returned the profit of $30,825 as a capital net gain, but deducted the loss of $53,366.40 in determining ordinary net income. The respondent allowed the deduction of the loss of $53,366.40 as taken by the petitioner, but held that the gain of $30,825 should be included in computing ordinary net income and not treated as capital net gain for the purposes of the tax. In sustaining the action of the respondent in refusing to permit the petitioner to segregate the transactions for the purpose of determining his tax liability, we said:

Obviously, this definition of “ capital net gain ” must comprehend the net result of all transactions during any taxable year, involving the sale or exchange of capital assets, provided such result represents a net gain to the taxpayer. [Italics supplied.]

What we said in the Nicoll case is equally applicable in the instant case. The statute specifically provides that “ capital net gain ” means the excess of the total amount of capital gain over the sum of the capital deductions and capital losses plus the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains. The words “ total amount ” in the statute contemplate the whole or entire amount of capital gain and not a portion thereof. Anything less than the whole amount does not come within the purview of the statute. The petitioner, therefore, is not entitled to treat the profits from the sale of part of the group of stocks as “ capital net gain ” and the profit from the remainder as “ ordinary net income.” The action of the respondent is accordingly sustained.

The petitioner urges in her brief that section 101 is a relief section and that a liberal construction thereof should be made in her favor and against the Government. We do not think the rule contended for by the petitioner is applicable here. There is no doubt or ambiguity in the provisions of section 101 in so far as they require that the “ total amount of capital gain ” realized by the petitioner be taken into consideration in determining the amount of “ capital net gain.” To grant the petitioner’s contentions would result in a violation of the express provisions of the statute.

Judgment will be entered for the respondent.


author: GoodRich :

text:
    Berenice Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 24667, 36637.
    Promulgated March 8, 1932.

      Lawrence A. Baher, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

GoodRich :

Petitioner claims a value of her patent rights as of the date of acquisition by her of $700,000, and contends that she is entitled to recover that value by means of deductions on account of depreciation thereof over the lives of the patents. Respondent advances several contentions in opposition. He urges, first, that petitioner acquired these patent applications not by gift, but for a consideration, in which case the basis for depreciation is the original cost thereof, which is not disclosed by this record. Next, he contends that, regardless of the basis, petitioner is not entitled to depreciation, because during the years here involved she was not the owner of the patents, since they had been transferred to trustees and no allowance on account of the exhaustion of trust property may be made to a beneficiary of a trust. Finally, he disputes the value of the patent applications as claimed by petitioner, contending that it was not in excess of about $25,000.

Respondent’s contention, that petitioner’s acquisition of these patent applications was not by gift, is bottomed solely upon the following testimony by Brown:.

At the time I was working out the development of this shoe proposition I had given up a very lucrative engagement in the line which I had been working, and there came a time when it was necessary for me to have more funds to operate with or give up the idea, and go back into my old business. Mrs. Brown and her mother had resources, and they agreed to contribute the funds necessary to carry on everything to have me proceed with the shoe proposition rather than go back into the old business. Their belief and enthusiasm was such that they were willing to take the chance, and on the strength of that I agreed to assign the patents when issued to Mrs. Brown.

As we consider this case we become convinced that in agreeing to transfer to petitioner his patent applications, Brown was motivated not by the money advanced by Mrs. Brown and her mother, but by the fact that they had given their support to an endeavor which had, for him, become of great interest and were willing to assist him in every possible way, even to drawing upon their own financial resources, to bring his labors to a successful culmination. Brown had abandoned a lucrative connection in the advertising business to enter a field to which his interest led him. Through his observations, his studies and experiments he had become convinced that ordinary footwear was largely responsible for most of the foot trouble from which so many people sutler and that, in turn, such trouble was responsible for much ill health and misery. He had experimented considerably with devices designed to cure individual cases of foot malformation and defects and came to believe that the majority of such cases could have been avoided had the sufferers worn shoes so scientifically modeled as to permit the foot to perform its natural functions, free from the restrictions and damages caused by ordinary footwear. The development of his ideas, therefore, became for him more than a commercial proposition. He made it his life’s work and he believed that to accomplish it would be to confer a benefit upon mankind. There is no doubt but that to have the members of his family believe in his ideas and their ultimate development, and to wish him to continue in his endeavors, meant much to him. Judging him as he appeared before us, we are convinced that he is a person who would respond generously to the loyalty offered him by these members of his family and that reaction, we believe, motivated him in making the assignments. The amounts advanced by petitioner and her mother are not disclosed. We infer from the record that they were small; that they met only the living expenses of the family and some traveling expenses for Brown while engaged in his demonstrations and in making his contacts with the manufacturers who later entered into contracts with him and petitioner. Brown testified that the advances in nowise represented a selling price of the patents; that he would not have assigned to any outsider upon these terms; and that “ love and affection ” as recited in the assignment, was an important item in connection therewith. We conclude that the assignments made by Brown to petitioner were gifts.

In support of his contention that, regardless of the manner in which acquired, petitioner may not have a deduction on account of depreciation because she was not the owner of the patents during the years here involved, but was only the beneficiary of a trust, respondent cites the cases of Baltzell v. Mitchell, 3 Fed. (2d) 428; Detroit Trust Co. et al., 16 B. T. A. 207; and Richard Sharpe et al., 17 B. T. A. 135. The BaTtzeTl case arose under the Bevenue Act of 1918 and deals with income of a trust described by section 219 (a) (4) as follows in part:

(4) Income which is to be distributed to the beneficiaries periodically whether or not at regular intervals * * The Detroit Trust Company case arose under a similar provision of the 1921 Act and was controlled by the Baltzell decision, as was the Sharpe case, arising under a similar provision of the 1924 Act These decisions, and the many other decided cases bearing on the same issue, manifest the rule that a beneficiary of a trust is not entitled to deduct from his distributable share of the trust income an allowance for the exhaustion of the trust property. But this issue does not arise in the case at bar. Here, there are no distributions from the trust, periodic or otherwise, for the trust has no income. It was created by petitioner for purposes of management and protection of her patents. Under it, the trustees may grant licenses of the patents, or sell or dispose of them only upon petitioner’s assent and direction. She retained the power to terminate the trust; she remained the veritable owner of the patents. True, the agreement provided that upon termination of the trust petitioner should convey to the Selby Shoe Company a one-half interest in the patents so far as they relate to the women’s and misses’ shoe business and, in case of sale of the patents, should make a settlement with the licensees, but the rights of these parties are vague, indefinite and dependent upon future agreements. There is nothing to indicate that the trust will be terminated within the lives of the patents and we regard these possible interests as too contingent to effect such a substantial derogation of petitioner’s ownership as to bar her from a deduction representing the exhaustion of the patents and allowed her under section 214 (a) (8) of the Revenue Acts of 1921 and 1924. Again, we point out that all royalties arising under the licenses granted under these patents are paid directly to petitioner, not to the trust. It is manifest that this fact makes here inapplicable the statutory provisions treated in the cases cited. Cf. Julia N. DeForest, 4 B. T. A. 1059.

We have held that the patent applications were acquired by petitioner by gift, prior to December 31, 1920. Therefore, under section 204 (a) (4) of the Revenue Act of 1924, the basis for depreciation thereof is their fair market value as of date of acquisition. Harry W. Bockhoff, 3 B. T. A. 560. Applications for letters patent are property subject to valuation which may be recovered by depreciation allowances over the life of the patents. Individual Towel & Cabinet Service Co., 5 B. T. A. 158; Hershey Manufacturing Co., 14 B. T. A. 867; Stephens-Adamson Manufacturing Co., 16 B. T. A. 41; Empire Machine Co., 16 B. T. A. 1099; John Douglas Co., 23 B. T. A. 1307.

Our determination of the total value of these patent applications when acquired by petitioner we have set out in our findings of fact. In determining this value we have relied largely upon the testimony of two witnesses of outstanding qualifications. Both had long been connected and were in positions of responsibility with long established and leading shoe manufacturers, one a maker of women’s and misses’ shoes; the other a maker of men’s and boys’ shoes. That these witnesses were familiar with the shoe business in all its phases and were competent to judge of the importance in the trade of Brown’s developments and the future commercial possibilities of those ideas can not be questioned. At the time Brown presented his proposition to their concerns and both decided to take it up, each of these witnesses made estimates as to what future business his concern could develop with the Arch Preserver shoe. Upon these estimates we rely, for they were made by persons who were in a position to gauge the future as well as that could be done with respect to this proposition and their accuracy has been borne out well by subsequent production, except during a war period which they could not .have foreseen. ' Since the estimates of future production had been made, and the royalty fixed prior to the assignment of the applications to petitioner, we base our determination of value upon those factors. Based upon that valuation, an annual deduction should be allowed petitioner during the lives of these patents.

Judgment will be entered undev Bule 50,