author: Mellott :

text:
    Harry Feldman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77274.
    Promulgated April 30, 1936.

      Floyd F. Toomey, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Mellott :

The statute (section 601, Revenue Act of 1928, amending section 907 (a), Revenue Act of 1926), imposes upon the respondent the burden of proving fraud. We hold that he sustained such burden of proof and established, not merely by a preponderance of the evidence, but by clear and convincing proof, that the petitioner was guilty of fraud. It follows that the assessment of the tax is not barred by the statute of limitations (section 278, Revenue Act of 1924; section 276 (a), Revenue Act of 1934) and the deficiency should be approved. We shall now briefly set out some of the reasons for our holding.

The evidence clearly indicates that the petitioner received substantial sums of money which were not reported by him as taxable income. These included at least the following amounts:

Net gain on the sale of corporate stock_$56, 500. 00
Salary from Euclid CofCee Co_ 2,250. 00
Interest from Morgan Bronze Co_ 1, 660. 00
Net gain on sale of real estate_ 6,000. 00
Salary from Max Glick Co- 334.18

It is true, as pointed out by petitioner upon brief, that the case had its inception in a bitter personal feud between Max Glick and Harry Feldman. We would be reluctant to find petitioner guilty of fraud if the proof rested entirely upon the testimony of Max Glick; but such is not the case, for we have the testimony of several disinterested witnesses which established a substantial portion of the salient facts. As a matter of fact many of them were established by petitioner. He testified that Max Glick paid him $64,000 for his shares of stock in the Max Glick Co. and introduced in evidence documents clearly indicating the receipt of such sum. He testified that “the total business [was] worth on March 1, 1913, $40,000 to $50,000.” Upon this basis his one-third interest was worth from $13,333 to $16,666, so it is clear that he made a substantial profit when he disposed of it in the taxable year for $64,000; but he reported no profit.

The basis for determining gain or loss upon the sale of the stock in question was its March 1,1913, value. (Sec. 204 (b), Revenue Act of 1924.) Petitioner was taxable upon the excess of the amount realized over the basis. (Sec. 202 (a), Revenue Act of 1924.) We have found such basis to be $7,500. The preponderance of the evidence, including the balance sheets of the company, amply supports our finding. We are satisfied that petitioner should have reported a profit of at least $56,500 from the sale of his interest in the corporation.

As to the profit derived from the sale of the real estate and buildings for $17,500, petitioner specifically alleges in his petition that he sold said real estate for said sum and avers “such sum resulted in profit to the petitioner, but the amount of such profit did not exceed the loss incurred by him in the sale of his interest in the Max Giick Company.” He did not attempt to establish, either upon his return of income or by evidence before us, that the sale of his interest in the Max Giick Co. resulted in a loss to him. It might well be that his interest in the company had at one time been greater than the amount for which it was sold in 1924; but this would not entitle him to take a deduction for such loss in the year 1924, for gain or loss upon this transaction, like gain or loss upon the sale of the stock, must be measured by the March 1, 1913, value.

Whether or not the respondent has sustained the burden of proving fraud is to be determined from the entire record and not merely from the affirmative evidence presented by him. (L. Schepp, 25 B. T. A. 419.) It is, however, as pointed out by counsel for the petitioner in his brief, necessary that such proof be made not merely by a preponderance of the evidence, but by evidence which is clear and convincing (Drawoh, Inc., 28 B. T. A. 666; In re Locust Building Co., 299 Fed. 756; George L. Rickard, 15 B. T. A. 316). But we believe that the proof before us is sufficient to comply with this requirement.

All the revenue acts have required taxpayers to submit under oath “true and accurate” returns, “setting forth specifically the gross amount of income from all separate sources.” The returns thus made constitute the basis upon which the Government relies for the collection of its revenues. It has a right to rely upon such returns being correctly made, and a wilful omission o.f income, or a deliberate and intentional failure to report substantial amounts actually received, if not actually constituting a fraud upon it, is at least substantial evidence tending to establish fraud. (Cf. Joseph Carroro, 29 B. T. A. 646; D. C. Clarke, 22 B. T. A. 314; Tanner Oil Co., 20 B. T. A. 794; M. Rea Gano, 19 B. T. A. 518; Charles F. Long, 12 B. T. A. 488.) The evidence in this case convinces us that the petitioner wilfully and intentionally omitted from his return of income the substantial amounts set out above.

There was some testimony indicating that petitioner solicited and obtained the assistance of “an expert” in income tax matters, who prepared his return after being .furnished with the details of the various transactions going to make up his income. Petitioner does not contend that he can escape the consequences of making a false return by reason of his reliance upon the “expert.” The return as made was his return and he must suffer the consequences! if it is false. D. C. Clarke, supra; Grover C. Blumer, 23 B. T. A. 1045; B. P. Wickham, 22 B. T. A. 1393; aff'd., 65 Fed. (2d) 527; Charles E. Mitchell, 32 B. T. A. 1093.

Petitioner contends that we committed error in receiving in evidence over his objection, a document identified as a copy of petitioner’s retained copy of his 1924 return. We have carefully reviewed the circumstances surrounding the receipt of the evidence and are satisfied that our ruling was correct. The original return, filed with the collector, had been destroyed prior to the hearing before us, conformable to the acts of Congress (25 Stat. 672, as amended by 28 Stat. 933) after the Joint Committee of the Seventy-first Congress had authorized the destruction of all forms 1040 (individual income tax returns) for 1924 and 1925. When the revenue agent requested petitioner, during the course of the investigation which ultimately resulted in the determination of the deficiency, to submit to him his retained copy, petitioner did so and the agent made the copy. We are satisfied that it was an exact copy, and that the intermediate copy was a duplicate of the original. It is significant that the tax shown by the copy to be due, was the identical amount paid by the petitioner to the collector — $63.44. It is also significant that petitioner, although called as a witness in his own behalf, did not deny that the copy produced was a correct copy. On the contrary he admitted under cross-examination that after the revenue agent had completed his report, and after he had discussed it with his legal adviser and also with one of the “experts” in income tax matters upon whom he relied, he signed an agreement admitting that the deficiency was correct. We give no credence to his testimony to the effect that the revenue agent “forced” him to sign such agreement. It was signed in the presence of his nephew, who was also his legal adviser, and in. the presence of Miss Lloyd, assistant to the “expert” who prepared his return.

While we hold that the document was the best evidence obtainable and was properly received for the purpose of showing the income reported by the petitioner, it was merely cumulative and our conclusion would probably be the same without it. The petitioner does not deny that he paid a tax of only $63.44. He tacitly or expressly admits that he received a substantial portion of the income which the respondent, after a thorough investigation, determined that he did receive. The testimony of the disinterested witnesses, together vidth petitioner’s failure to deny the correctness of the proffered copy — the evasiveness of petitioner under cross-examination — his frequent answer to questions in the language typical of witnesses reluctant to make a frank disclosure of all pertinent facts such as “I don’t remember” or “I don’t recollect” — all convince us that petitioner made an incorrect return of income with intent to evade tax. “Silence is often evidence of the most persuasive character. Runkle v. Burnham, 153 U. S. 216, 225; Kirby v. Tallmadge, 160 U. S. 279, 383.” (Bilokumsky v. Todd, 263 U. S. 149, 154.)

Anent petitioner’s contention that the rule enunciated in Consolidated Coke Co., 25 B. T. A. 345 (aff'd., 70 Fed. (2d) 446), to the effect that a party to litigation who deliberately destroys evidence can not introduce a copy made by himself, we hold that the rule is not applicable here. The original return was destroyed by the Government as a matter of routine, for the purpose of minimizing its space requirements. Such destruction took place several years prior to the determination of the deficiency and at a time when litigation was neither pending nor contemplated. Under the circumstances, no reason for the application of the rule exists.

It would serve no useful purpose to extend this discussion. Suffice it to say that we are of the opinion, and hold, that the deficiency in tax determined by the respondent, is correct. We have found that the deficiency is due to fraud and the fraud penalty must be added.

Reviewed by the Board.

Judgment will be entered for the respondent.

       SEC. 204. * * *
      (bl The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1918, shall be (A) the cost of such property (or, in the case of such property as is described in paragraph (1), (4), or (o), of subdivision (a), the basis as therein provided), or (B) the fair market value of such property as of March 1, 1918, whichever is greater. In determining the fair market value of stock in a corporation as of March 1, 1918, due regard shall be given to tbe fair market value of the assets of the corporation as of that date.

       Sec. 202. (a) Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom oyer the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Harold G. Ferguson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70463.
    Promulgated April 30, 1936.

      Robert M. L. Baker, Esq., for the petitioner.

      Arthur L. Murray, Esq., for the respondent.
   OPINION.

Van Fossan:

This proceeding involves deficiencies in income taxes of $16.40 for 1929 and $1,097.52 for 1930, pins a 25 percent penalty of $274.38 for delinquency of the taxpayer in filing his 1930 return. The petition sets forth five allegations of error, two of which respondent admits in his answer. By an amendment to his answer, respondent asks the Board to increase the amounts of the above deficiencies because of salaries, fees, commissions, and other compensation received by petitioner in 1929 and 1930, which had been considered community property in determining the deficiencies, but all of which was income of petitioner under a certain property settlement agreement entered into by petitioner and his wife on March 1, 1929.

The parties submitted the proceeding upon the pleadings, a stipulation of facts, and certain documentary evidence that was offered and received as a part of the stipulation. The stipulation relates only to the two issues remaining for determination, as all other issues have been expressly conceded. The controverted issues are:

(1) Whether petitioner realized taxable gain under section 44 (d) of the Revenue Act of 1928 upon the assignment by petitioner to Trust No. 5583 of his interest in and to 430 Units of Beneficial Interest in Trust No. 65, Pacific National Bank of Los Angeles, trustee, in accordance with the property settlement agreement between petitioner and his wife.

(2) Whether, under respondent’s affirmative defense, the salaries, fees, commissions and other compensation for personal services received by petitioner after the property settlement agreement between petitioner and his wife are taxable in their entirety to petitioner.

The stipulated facts are substantially as follows.

On May 5, 1915, petitioner was intermarried with Dolores Anne Ferguson. On August 1, 1928, they separated. On March 4, 1929, an interlocutory decree of divorce was granted petitioner by the Superior Court of the State of California. Petitioner was granted a final decree of divorce on March 13,1930.

Growing out of said divorce action which was then pending, petitioner and his wife, on March 1, 1929, entered into a property settlement agreement. This agreement stated that it was the desire of husband and wife to make an adjustment and agreement as to their property rights, and an agreement as to the obligation on the part of the husband to support his wife. A trust was created for the wife whereby certain property was transferred to the trustee by the husband, which transfer and declaration of trust the wife accepted in full satisfaction of any and all of her right, title, interest, and estate in the community property or the husband’s separate property. The wife accepted the trust provisions as full satisfaction of any obligation of maintenance and support by the husband and agreed to support, maintain, and educate their adopted daughter during her' minority. It was agreed by both husband and wife that any and all property thereafter acquired by either would be his or her separate property, and each relinquished any and all rights to inherit or succeed as heir to any estate of the other.

Pursuant to a provision of said agreement and on April 24, 1929, petitioner assigned in writing to the Citizens National Trust & Savings Bank of Los Angeles, California, as trustee under a declaration of trust, No. 5583, all of his right, title, and interest in and to 430 units of beneficial interest in Trust No. 65, Pacific National Bank of Los Angeles, trustee. The duplicate of the assignment, together with the assignee’s acceptance, was filed with the Pacific National Bank of Los Angeles, as trustee of Trust No. 65, and thereafter said assignee was recognized by Trust No. 65 as the owner of said 430 units of beneficial interest therein. Trust No. 5583 was revocable by petitioner only with the consent of Dolores Anne Ferguson, and the entire net income of said trust estate was payable to Dolores Anne Ferguson.

Trust No. 65, Pacific National Bank of Los Angeles, trustee, was created on April 10,1928. The corpus of said Trust No. 65 was some 4,000 acres of land, together with improvements thereon, situate in S,anta Barbara County, California, known as “Conception Ranch.” On June 28, 1928, the ranch was sold by the Pacific National Bank of Los Angeles, as trustee of said Trust No. 65, at a gross profit of $199,869.89. The contract sales price was $386,666.66 of which the sum of $86,666.66 was paid to said trustee hi cash and the balance of the contract price was payable in installments of $100,000 each, due respectively on November 1, 1929, November 1, 1930, and November 1, 1931, deferred payments bearing interest at the rate of 1 percent per annum. The trustee, in filing its fiduciary returns for the years 1928, 1929, and 1930, reported the profit on said sale on the installment plan basis. The percentage of profit returnable upon the collection of the balance of the contract price was 51.6904 percent.

The trustor of said Trust No. 65 issued a total of 1,495 units of beneficial interest in said trust. The units of beneficial interest were transferable and it was petitioner’s interest in 430 units of beneficial interest in said trust which was assigned to Trust No. 5583 in accordance with the property settlement agreement between petitioner and his wife. The said 430 units were purchased by petitioner during the year 1928 at a cost of $43,000, or at the rate of $100 per unit. The respondent has determined that said assignment by petitioner falls within the scope of section 44 (d) of the Revenue Act of 1928, and has accordingly included as taxable income of petitioner for the year 1929 the sum of $35,913.14 computed under that section.

The petitioner received as salaries, fees, commissions, and other compensation for personal services during the year 1929 the sum of $28,200, or $2,350 a month, and during the year 1930 the sum of $23,600, or $1,966.66 a month.

Separate income tax returns were filed by the petitioner and his said wife, Dolores Anne Ferguson, for the year 1929.

For the calendar year 1930, on March 14, 1931, petitioner filed a “Tentative Return” and requested an extension of time to June 15, 1931, for filing a “Completed Return.” One-fourth of the estimated tax liability, to wit, $150, was paid by petitioner at the time of filing said tentative return. An extension of time for filing said completed return was granted petitioner as requested. The completed return was not filed by the petitioner on or before the due date as extended, and in accordance with section 3176 of the Revised Statutes a deputy collector on October 18, 1932, filed a completed 1930 return for. petitioner.

The first issue arises as a result of petitioner’s transfer of 430 units of beneficial interest in Trust No. 65. Petitioner acquired the units in 1928 at a cost of $43,000, transferring the units in 1929 in compliance with the terms of a property settlement with his wife. Respondent has applied section 44 (d) of the Revenue Act of 1928 to this transfer and computed a gain of $35,973.74. The pleadings and' the stipulation limit the issue to whether petitioner realized any taxable gain under section 44 (d) by his transfer.

In applying section 44 (d) the legislative intent and purpose must be borne in mind. Prior to its enactment holders of installment obligations had been able to escape tax on income by disposing of the installment obligations in a nontaxable transaction, Wallace Huntington, 15 B. T. A. 851; M. A. Milan, 16 B. T. A. 1112; Charles F. Meagher, 20 B. T. A. 68. Section 44 (d) was designed to stop this loophole by determining gain or loss upon disposition of installment obligations. The constitutionality of the section and its application have been upheld in numerous decisions of the courts and this Board, Nuckolls v. United States, 76 Fed. (2d) 357; Provident Trust Co. of Philadelphia v. Commissioner, 76 Fed. (2d) 810, affirming 29 B. T. A. 374; Lawler v. Commissioner, 78 Fed. (2d) 567, affirming 29 B. T. A. 227.

The petitioner contends that section 44 (d) is inapplicable because the “installment obligations” dealt with in this section refer to the evidence of indebtedness acquired by the vendor from the vendee, whereas the petitioner transferred units of beneficial interest which represented his investment in Trust No. 65. Petitioner contends that Trust No. 65 is the vendor of the property and holds the installment obligations in its own right. We do not understand that respondent disagrees with petitioner on the position that Trust No. 65 occupies in this transaction.

Respondent’s contention is that petitioner, as a cestui, que trust, assigned his right, title, and interest in the corpus of Trust No. 65; that this corpus consisted solely of installment obligations; that petitioner, by his assignment, disposed of installment obligations within the meaning of the statute, because petitioner’s units of beneficial interest were evidence of and represented his direct ownership in the installment obligations held by Trust No. 65, under the doctrine of Brown v. Fletcher, 235 U. S. 589.

We are of the opinion that it can not be said that the disposition of these 430 units of beneficial interest was the equivalent of the transfer of 430/1495 of the installment obligations held by the trustee. It is important to observe that what petitioner assigned was participating certificates. A very different situation would obtain were the trustee of Trust No. 65 the assignor of the installment obligations received by it. In no real sense was there in this case a satisfaction of installment obligations at other than their face value, or a distribution, transmission, sale, or other disposition of installment obligations as a result of petitioner’s action. The trustee of Trust No. 65 and the corpus thereof, held for collection, were not affected by the assignment, but only the beneficiaries of the trust. Whereas, petitioner had been entitled to the net proceeds and was the owner of the units before the assignment, thereafter the Citizens National Trust & Savings Bank of Los Angeles, petitioner’s assignee, was entitled to the proceeds, and was the recognized owner of the 430 units. By accepting the assignment, the Citizens National Trust & Savings Bank subjected itself to the terms and conditions contained in the trust indenture creating Trust No. 65, but this change in the ownership of the units did not disturb the trust corpus of Trust No. 65 or the installment obligations due to it. It merely substituted one beneficiary for another. The Pacific National Bank, as trustee of Trust No. 65, was bound by the trust indenture to perform its duties thereunder, and where, as here, beneficial interests could be bought and sold on much the same basis as shares of stock in á corporation, the shifting of beneficial interest from one party to another was of no concern to the trustee, so long as the conditions under which transfers were permitted had been complied with by the parties.

Here the conditions were complied with, the transfer was recognized, and the Pacific National Bank, as trustee, was obligated to pay the net proceeds of each installment payment over to Citizens National Trust & Savings Bank instead of to petitioner. It might be interesting to inquire what position respondent would take in the event the Citizens National Trust & Savings Bank should transfer these units. If such a transfer were made, would respondent again apply section 44 (d) ? If his theory is sound, respondent could say that each successive transfer was a disposition of installment obligations. There appears to be no reason why his theory should not be as applicable to successive transfers of the certificates of participation as it is to the first transfer. This latter situation reveals the weakness of the theory and points to the fact that the installment obligations themselves, and not some undivided interest in the net proceeds thereof, are what Congress had in mind in enacting section 44 (d). Furthermore, it appears that our holding herein is in accord with respondent’s own ruling appearing in I. T. 2547, C. B. IX-2, p. 121.

The decision upon which respondent relies to support his contention, Brown v. Fletcher, supra, is not in point. That case involved a question of the jurisdiction of a Federal District Court. The Supreme Court held that in an action to recover property, or an interest in property, by the assignee of a beneficiary under a testa-mentarjr trust, the Federal District Court had jurisdiction, where the requisite value and diversity of citizenship existed. In its opinion the Court stated that the instrument used to evidence the beneficiary’s alienation was not a chose in action payable to the assignee, but an evidence of the assignee’s right, title, and estate in and to the property. Respondent has seized upon this language to justify his contention and has ignored the language in the opinion preceding the above statement that the rights of the beneficiary depended upon the terms of the will creating the trust and the duty which the law imposed upon the trustee because of his fiduciary capacity. The rights of the beneficiaries in this proceeding likewise depend upon the trust indenture and the duty imposed by law upon the trustee. Petitioner acted fully within his rights in making the assignment and the trustee was bound by the terms of the trust indenture to recognize the transfer when it complied with the conditions imposed. No question is raised as to petitioner’s compliance, nor could one be in view of the record.

We do not pass upon the question of whether petitioner realized a gain upon the disposition of his $48,000 investment in satisfaction of the obligation to support his wife and adopted minor daughter, since the issue has been expressly limited by the pleadings and stipulation to whether gain was realized xmder section 44 (d), supra.

The second issue is whether salaries, fees, commissions, and other compensation received by petitioner in 1929 and 1930, the amounts of which were stipulated, were separate income to petitioner or community income, in view of the property settlement of March 1, 1929. This issue is controlled by our decision in Muriel Oakes Ames, 30 B. T. A. 516, where we held the separation agreement operative. Since the parties here have stipulated petitioner’s monthly income for 1929 and 1930, there is no failure of proof with respect to the earnings that are separate and the earnings that are community income. See also Chester Addison Jones, 31 B. T. A. 55, petition for review denied, Commissioner v. Jones, 82 Fed. (2d) 329.

The deficiency notice asserts a negligence penalty for 1930 in the amount of $274.38. No issue was raised by the pleadings with respect thereto, but were the issue presented the stipulated facts would justify respondent’s imposition of the penalty. The penalty will be added to the deficiency recomputed under Rule 50.

Decision toill be entered under Rule 50.

       SEC. 44. INSTALLMENT BASIS.
      * * ⅜ * * * *
      (d) Gain or loss upon disposition of installment obligations.- — -If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange — the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.


author: Van Fossan :

text:
    Lehigh Valley Trust Company, Executor, Estate of Eliza G. Newhard, Deceased, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent. Milton T. George, Administrator, Estate of Daniel George, Deceased, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent. Milton T. George, Administrator, Estate of Ellemina Diehl, Deceased, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent. Milton T. George, Administrator, Estate of Jemima Klotz, Deceased, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent. Irvin Achey, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75510-75513, 75532.
    Promulgated May 5, 1936.

      Lawrence TJ. Rupp, Esq., and Fred B. Cernerd, Esq., for the petitioners.

      Dean P. KvmbaTl, Esq., and H. B, Linton, Esq., for the respondent.
   OPINION.

Van Fossan :

These proceedings were brought to contest respondent’s action in proposing to assess against the several petitioners as transferees of the estate of Jonas George, deceased, the following amounts:

Lehigh. Valley Trust Co., executor of estate of Eliza G. Newhard, deceased_$7,859.15
Milton T. George, administrator, estate of Daniel George, deceased_10,163. 27
Milton T. George, administrator, estate of Bllemina Diehl, deceased— 10,163. 27
Milton T. George, administrator, estate of Jemima Klotz, deceased_10,163.27
Irvin Achey_ 7, 859.15

Respondent’s action is based on the determination by him of a deficiency of $10,163.27 in income tax, penalty, and interest for the year-1928, due from the estate of Jonas George, deceased.

Two primary questions are presented:

(1) Whether the estate of Jonas George realized taxable gain from the sale in 1928 by the administrator of certain real estate.
(2) Whether petitioners are liable as transferees or distributees for such tax.

Respondent also contends that Milton T. George is personally liable for the tax under section 3467, Revised Statutes.

Certain facts were stipulated substantially as follows:

Jonas George died testate on March 7, 1912. His son, Alfred J. George, and John J. Weiler were named executors of his estate, but letters testamentary were granted to Alfred J. George and Ellen S. George, widow of Jonas George, both of whom served as such until their respective deaths. Alfred J. George died in 192S and Ellen S. George died on October 4, 1927. Letters of administration c. t. a. d. b. n. were then granted to Milton T. George, who duly qualified as administrator of the estate, and converted all of its assets into cash except property known as 131 and 133 South Eighth Street in Allentown, Pennsylvania. Milton T. George is the petitioner in Docket Ros. 75511, 75512, and 75513 in his capacity as administrator of the estates of Daniel George, Ellemina Diehl, and Jemima Klotz, respectively.

The material portions of the will of Jonas George are as follows:

Fourth : All my real estate that I may die seized of is Not to be sold but to remain intact during the lifetime of my wife and my son Alfred J. and my hereinafter named Executors to pay all taxes and insurance and keep said real estate in good condition and repair. ⅜ ⅜ ⅜
* * ⅜ * * * ⅜
Sixth : The balance of my income from whatever source, I give and bequeath unto my son Alfred J. George for and during the term of his natural life.
In the event of his death, without leaving issue, then I give and bequeath unto my wife Ellen, the entire income of my estate from whatever source, after the payment of all expenses, taxes, insurance and repairs, during her lifetime.
In the event of the death of my said -wife Ellen, before my said son Alfred J., then the entire income less expenses, taxes, insurances and repairs unto my son Alfred J. during his lifetime.
Seventh : After the death of both my wife Ellen and my said son Alfred J. then I direct all my real estate to be sold at private or public sale for the highest price that can be gotten for the same and a good and sufficient deed or deeds to be executed and delivered to the purchaser or purchasers thereof and out of the proceeds I direct a monument costing not less than Five Thousand Dollars ($5000.) to be erected on my burial lot in Union Cemetery, Allentown, Pa. and the balance I give and bequeath unto my brothers and sisters or their legal representatives share and share alike, deducting however from the balance before distribution is made, the sum of Two Hundred ($200.) Dollars, which I give and bequeath unto the Union Cemetery Association, the interest of which is to bo used in keeping my burial lot, graves, tombstones and monument in good condition and repair.

During 1928 Milton T. George, as administrator of the estate of Jonas George, sold and converted into cash the real estate known as No. 716 Hamilton Street, Allentown, Pennsylvania. He received therefor $140,000. Its March 1, 1918, value was $50,000 and the improvements placed thereon from March 1, 1913, to the date of sale aggregated $835.38. The depreciation on the property for the same period was $5,933.33. Out of the proceeds of such sale the administrator paid $5,000 for a monument and $200 to the Union Cemetery Association for perpetual care, pursuant to the direction of the will.

On October 21, 1928, Milton T. George, as administrator of the Jonas George estate, made a partial distribution of the estate to representatives of some of the petitioners and to others. On April 29, 1929, he made a final distribution of the estate. Through both distributions the petitioners or their representatives received the following amounts:

Estate of Daniel George-$16, 718.30
Estate of Ellemina Diehl- 15, 718. 30
Estate of Jemima Klotz_ 15, 718. 30
Estate of Eliza G. Newhard- 7, 859.15
Irvin Achey_ 7, 850.15

On April 28, 1929, Milton T. George, as administrator of the estates of Daniel George, Ellemina Diehl and Jemima Klotz, after deducting the expenses of the administration, distributed to the various heirs their respective shares of such estates. In September 1929, under the terms of the will of Eliza G. Newhard, the Lehigh Valley Trust Co., executor of her estate, distributed to St. Paul’s Evangelical Lutheran Church the sum of $6,400.67 out of the sum received from Milton T. George, administrator.

The difference between the amounts received by the various administrators from the estate of Jonas George and the amounts paid out by them was consumed in expenses of administration.

The distributions above referred to made by Milton T. George, as administrator of the estate of Jonas George, rendered said estate insolvent and without sufficient funds or assets with which to pay the tax here claimed by the Commissioner from said estate. There remained, however, the real property at Nos. 131 and 133 South Eighth Street, Allentown, Pennsylvania, which was sold by the collector of internal revenue on June 20, 1933, for the sum of $4,000. That amount was applied against the Federal income tax liability of the estate alleged by the Commissioner to have arisen as a result of the sale of the Hamilton Street property heretofore mentioned. There also remained money in the bank in the sum of $510.82, which was seized by the collector of internal revenue and applied against the alleged tax liability of the estate. After making allowance for said payments there remains an alleged liability of the estate of Jonas George, deceased, for income taxes for the year 1928 in the amount of $10,163.27.

In August 1929, the collector of internal revenue for the first district of Pennsylvania assessed against the estate of Jonas George income taxes for the year 1928 in the amount of $14,674.09. This total was composed of the following items:

Tax_$11,329.07
25 percent penalty_ 2, 832. 27
Interest to July 31, 1929_ 512. 75
Total_ 14, 674. 09

The distribution heretofore referred to, made by Milton T. George, as administrator of the estates of Jemima Klotz, Daniel George, and Ellemina Diehl and by the Lehigh Valley Trust Co., as executor of the estate of Eliza G. Newhard, left the said estates insolvent and without any assets.

Neither the estate of Jonas George, deceased, nor Milton T. George, as administrator thereof, filed a Federal income tax return for the calendar year ended December 31, 1928.

On July 31, 1929, Milton T. George, as administrator of the estate of Jonas George, was advised of the Commissioner’s claim of an income tax liability of $14,674.09 for the year 1928 against the said estate. Thereafter, but on or prior to September 13, 1929, the administrator was advised with respect to the assessment of the said tax by the collector.

By letter dated September 13,1929, the administrator of the estate of Jonas George took exception to the tax liability thus determined. Thereupon the collector considered the said protest or exceptions and requested the Commissioner of Internal Revenue to forward any papers in the case in order that the case might be reconsidered. Claim for abatement was filed by the administrator of the estate of Jonas George and this was finally rejected in September of 1931. Thereafter the question of the liability of the administrator of the estate of Jonas George was the subject of further consideration by the Commissioner’s office at the request of the attorney for the estate of Jonas George. This consideration extended up to the time of the mailing of the deficiency notices.

From the time the transferee liabilities were proposed by the Commissioner up to- the dates of the notices of deficiency the said liabilities have been the subject of consideration by the Commissioner’s office at the request of the petitioners.

After the rejection of the abatement claim, the collector took steps toward collection. The administrator therefore filed a protest claiming that the estate was not liable for any tax and submitted evidence in support of his contention. In order to consider the said protest and grant a hearing in the matter, the Commissioner suggested that the collector withhold collection of the tax, and he did so.

The following additional facts were adduced by testimony presented at the hearing:

On June 10,1928, Milton T. George, as administrator of the Jonas George estate, filed a partial account in the Orphan’s Court of Lehigh County, Pennsylvania, showing the receipt of $140,000 and a balance of $118,330.40 to be distributed under the will of Jonas George. The report was referred to an auditor for audit and distribution. On April 1, 1929, the auditor filed his report which was confirmed nisi on the same day by the presiding judge of that court. The report became absolute 30 days thereafter as the adjudication of the said court, no objections having been filed thereto. The auditor made his distribution on the basis that the legacies given to the testator’s brothers and sisters, and their representatives, vested at the date of his death. On September 9, 1933, after all monies had been distributed, the first notice of the alleged transferee liability and the proposed assessment therefor wTas sent by the respondent. In October 1933, the protest against such assessment was filed and no determination of liability was made until February 7, 1934.

Daniel George died on April 24, 1915. Ellemina Diehl, the sister of Jonas George, died prior to the date of his death. Eliza G. Newhard, daughter of Eli George, brother of Jonas George, died in 1923. Eli George died May 24, 1904. Elizabeth Achey, sister of Jonas George, died in 1879, leaving surviving her son, Irvin Achey, and her daughter, Rose Groh, her only children, who were living at the time of Jonas George’s death.

The property known as ISTos. 131 and 133 South Eighth Street, Allentown, Pennsylvania, was appraised by the State of Pennsylvania for inheritance tax purposes at $21,000 in 1927. It had a fair market value of $21,000 in 1927, 1928, and 1929.

From the above facts it appears that during the taxable year, and pursuant to instructions contained in the will, the administrator sold certain real estate, making a profit on the sale. Section 161 (a) of the Revenue Act of 1928 provides for the taxation of income of an estate or trust. Paragraph (3) thereunder specifically provides for taxation of income received during the period of administration or settlement of an estate, and subsection (b) of section 161 provides that the tax due shall be paid by the fiduciary except as provided in sections 166 and 167 (not here applicable). The question is, Was this income received by the estate? In construing a comparable section of the 1924 Act the Supreme Court, in Helvering v. Butterworth, 290 U. S. 365, stated that “the evident general purpose of the statute was to tax in some way the whole income of all trust estates. If nothing was payable to the beneficiaries the income without deduction was assessable to the fiduciary.” Here the administrator received the property as corpus of the estate and upon sale a profit was realized. This gain must be taxable to the estate unless the statute authorizes its deduction in computing the net income of the estate. See section 162, Revenue Act of 1928; Anna M. Chambers et al., Trustees, 33 B. T. A. 1125. Petitioner points to no applicable statutory provision providing for such deduction or making the income taxable to the beneficiaries, and under the facts none appears to be applicable.

Petitioners urge that, under the law of Pennsylvania, the estate of the beneficiaries was a vested estate and therefore, they argue, income from the conversion of such property must be taxable to the beneficiaries. We do not conceive this to be a case to be governed by the niceties of the Pennsylvania law. But conceding the law of Pennsylvania to be as stated, the conclusion contended for does not follow. The situation presented in the instant case obviously was the subject of consideration in G. C. M. 12771, wherein the effect of Pennsylvania law was fully considered and it was held that the gain from the sale of realty was taxable to the estate. We agree with the reasoning of this ruling and make the same holding. The estate was properly held liable for the tax.

The question next for consideration is whether or not the petitioners are liable for the payment of the tax as transferees of the assets of the estate of Jonas George. The statutory definition of transferees comprehends all the petitioners, individually in the case of Irvin Acliey and representatively in the cases of the other petitioners.

Milton T. George, as administrator of the estates of Daniel George, Ellemina Diehl, and Jemima Klotz, and the Lehigh Yalley Trust Co. as executor of the estate of Eliza G. Newhard, were the proper representatives to whom the assets of the estate of Jonas George were distributed and, hence, were the “distributees” specifically included in the definition.

Under the decisions of the Board and the courts the distribution of assets does not of itself mean the incurring of transferee liability. It is only when such distribution makes the taxpayer insolvent or leaves him with insufficient assets to pay the tax due that the liability comes into existence. Helen Dean Wright, 28 B. T. A. 543, and cases there cited. Here the parties have stipulated that the distributions by the administrator rendered the estate of Jonas George insolvent and without funds or assets with which to pay the tax. We must assume that the stipulation was carefully drawn and couched in language chosen with full realization of the meaning of the words used. Thus we have no alternative to holding that petitioners are liable as transferees.

The argument advanced by petitioners, that the proof shows that respondent might have realized the taxes in full had he moved promptly in forcing sale of the Allentown property, loses its apparent force when we note the plain language of the stipulation to the effect that the long-continued and repeated consideration of the case in the Commissioner’s office was at the request of the petitioners. So far as the record reveals, the respondent acted with expedition once the consideration occasioned by petitioners’ requests was concluded. Moreover, the record does not reveal when the Government seized the property in question.

The above holding makes unnecessary a consideration of respondent’s alternative suggestion that Milton T. George should be held personally liable for the taxes under section 3467, Revised Statutes.

Decision fixing the amou/nt of each petitioner’s liability- as a transferee will Toe entered, under Bule 50.

       Revenue Act of 1928.—
      SBC. 311. TRANSFERRED ASSETS.
      (a) Method of collection. — The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax impQSC.il by this title (including the provisions in the case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :
      (1) Transferees. — The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title.
      (2) Fiduciaries. — ’The liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of the taxpayer.
      Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.
      * * * * * * *
      (f) Definition of “transferee”. — As used in this section the term “transferee” includes heir, legatee, devisee, and distributee.


author: Black: Murdock,

text:
    Uzal H. McCarter (Deceased), Fidelity Union Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69193.
    Promulgated May 5, 1936.

      John A. Goodin, <7. P. A., for the petitioner.

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

(On Rehearing.)

Black:

On October 29, 1935, the Board promulgated its report in this proceeding and on November 11, 1935, petitioner filed a motion for reconsideration, which has been followed by an amended motion for reconsideration filed December 20, 1935. No decision under Rule 50 has been entered pursuant to our report promulgated October 29, 1935.

The principal ground urged by petitioner in support of its motions for reconsideration is that the stipulated facts set out in our report, 33 B. T. A. 304, show that on each occasion when petitioner’s decedent made the two sales of stock in question, viz.: 2,000 shares September 4, 1929, and 10,000 shares April 28, 1930, he gave his broker specific instructions as to which stock to sell out of shares then held by the broker, and that, while the facts show that these instructions were violated in part and certain shares were delivered by the brokers which were different from those which decedent had ordered sold, nevertheless under the holding of the Supreme Court in Helvering v. Rankin, 295 U. S. 123, the gain on the sales of stock in question should have been computed by using as a basis the cost of the stock which petitioner instructed his brokers to sell rather than using as a basis the cost of the shares represented by the certificates which were actually delivered, to the extent they did not represent the stock ordered sold. In further support of its motions for reconsideration, petitioner cites Miller v. Commissioner, 80 Fed. (2d) 219.

The gist of our report promulgated October 29, 1935, was that Helvering v. Rankin, supra, applied to transactions where the seller was dealing on margins and where identification by certificates was impossible and that the rule laid down by the Supreme Court in that case would not apply, where, as in the instant case, the stipulation showed what certificates were actually delivered in completing the sale.

In Miller v. Commissioner, supra, the Second Circuit held that Helvering v. Rankin, supra, was not to be limited to transactions on margin, but applied to the sale of shares which had been purchased outright. On this point the court said:

To be sure, the court there was dealing with the sale of corporate shares made through a broker which had been held in a marginal account with other lots of the same kind bought at different times and at different prices. But we cannot see why it should make a difference whether a broker has stock belonging to a customer in a safekeeping account or holds it as security for his advances. In each case the title is in the customer and if the broker has advanced money to purchase the stock he holds it only by way of pledge.

In the Miller case from which the above quotation of opinion is taken, among the stocks which the taxpayer directed his broker to sell were 200 shares of Otis Elevator stock which the taxpayer had purchased December 28, 1926. As to this 200 shares, the court said:

The order for the sale of this stock was fulfilled by the delivery of certificates Nos. 2694 and 2695 for 200 shares purchased on April 17, 1924, instead of by the delivery of certificates Nos. 8149 and 8152 issued for the stock purchased December 28, 1926, which was ordered sold. The Commissioner argued that these certificates issued for the stock purchased on December 28, 1926, alone represented that stock and neither the designation by the taxpayer of the shares he proposed to sell, nor the “First-in, First out” rule could affect the case. But the decisions of the Supreme Court in Helvering v. Rankin, 295 U. S. 123, supra; Gormon v. Littlefield, 229 U. S. 19; Richardson v. Shaw, 209 U. S. 365 and Duel v. Hollins, 241 U. S. 523, 527, indicate that a designation made at the time of sale, sufficiently identifies the stock.

The similarity of the facts of the instant case to those of the Miller case with reference to the 200 shares of Otis Elevator stock which the taxpayer had purchased December 28, 1926, is illustrated by a comparison of the instant case with the facts which we have quoted just above from the court’s opinion. The stipulation in the instant case was quoted in full in our former report, to which reference is hereby made. The following quotation from the stipulation will suffice for present purposes:

It is stipulated and agreed that during the years 1929 and 1930 and for several years prior thereto one, John F. Sheehan, was associated with the decedent, Uzal H. McCarter, as a private secretary; that if the said John F. Sheehan were called and gave testimony as a witness in this case he would testify that Mr. McCarter gave instructions to sell on September 4, 19-29 the 2,000 shares of Public Service Corporation common stock which he had purchased August 12, 1929; that said John F. Sheehan verbally, by telephone, instructed the brokers Johnson & Wood to sell such 2,000 shares that were acquired by Mr. McCarter August 12, 1929.
It is further stipulated and agreed that the delivery clerk in the said brokerage firm of Johnson & Wood, in making delivery of certificates in connection with the sale of the 2,000 shares in question made the following delivery: 1,000 shares were delivered from certificates representing a part of the original 3,000 shares in the account as of July 29, 1929, which carried a basis to Mr. McCarter 29.05½ and 1,000 shares from certificate representing the shares purchased August 12, 1929.
⅜ ‡ ⅜ ⅜ ⅜ ⅜ ⅜
It is further stipulated and agreed that if called as a witness in this case the said John F. Sheehan would testify that the taxpayer Mr. McCarter gave instructions for the sale on April 28, 1930 of the 10,000 shares of Public Service Corporation common stock which had been purchased by him on October 2 and October 28,1929; and that he the said John F. Sheehan verbally, by telephone, transmitted instructions to the brokerage firm of Johnson & Wood to sell the said 10,000 shares of Public Service Corporation common stock which had been acquired by Mr. McCarter through said firm on October 2 and October 28, 1929.
⅜ * ⅜ * ¾; * *
It is further stipulated and agreed that the delivery clerk of Johnson & Wood in making delivery of certificates for the said sale of 10,000 shares of Public Service Corporation common stock delivered the following certificates:
400 shares out of the August 12, 1929 purchase,
8, 800 shares out of the 10,000 bloc bought, in October 1929,
800 shares from other certificates not identifiable.
⅜ ⅜ * ⅝ ⅜ ⅞: *
It is further stipulated and agreed that the certificate representing the 3,000 shares of Public Service Corporation common stock acquired in 1926, the 2,000 shares acquired August 12, 1929, and the 10,000 shares acquired October, 1929, were carried in the name of Johnson & Wood or some name other than Uzal H, McCarter.

The court in the Miller case, after discussing the Supreme Court’s decision in Helvering v. Rankin, and other Supreme Court decisions, concluded its opinion with the following holdings:

It follows from the foregoing,
(1) That where there is no designation by the taxpayer at the time of making the sale, the certificate should be treated as the proper means for identification;
(2) That a designation by instructions to the broker of the shares to be sold is controlling though the certificate delivered does not correspond with the instructions;
(3) That the “First-in, first-out” rule applies only where there is neither identification by a certificate, nor by designation of the taxpayer.

We interpret paragraph. (2) of the foregoing quotation from the court’s opinion to refer to cases where certificates are to be delivered by the broker from lots held by him and not to certificates to be delivered by the customer to the broker.

It is clear that, if the Second Circuit correctly states the law in paragraph (2) of the quotation, then we should grant petitioner’s motion and reconsider our opinion promulgated October 29,1985, and reach a different conclusion from that which we there reached and should sustain petitioner rather than approve the determination of respondent. After a restudy of the issue we are constrained to adopt the court’s holding in the Miller case and follow it. Accordingly, we grant petitioner’s motion for reconsideration and modify our opinion promulgated October 29, 1935, by sustaining petitioner on issue (2) therein dealt with. Cf. Robert E. Ford, 33 B. T. A. 1229 and James W. Arrott, Jr., 34 B. T. A. 133.

We think it is well to point out, however, that the court in the Miller case did not question the correctness of those Board and court cases where it has been held that mere intention to sell shares different from those actually delivered does not control. On that point the court said:

It is unnecessary for us to express any opinion as to the rule in such circumstances. We only hold that where there is a designation such as was found sufficient in Helvering v. Rankin, 295 U. S. 123, supra, it can make no difference whether the stock is held on margin or not.

It should also be pointed out, we think, that the Supreme Court in Helvering v. Rankin, supra, held that the facts as found by the Board of Tax Appeals did not show that the decedent Turner had instructed his brokers to hold the 1,200 shares of United Gas Improvement stock first purchased and to sell the shares later purchased. The Supreme Court held that the court below was in error in giving that sort of construction to our findings of fact.

After the decision of the Supreme Court the case was remanded to the Board by the Third Circuit for further hearing and findings with respect to what, if any, shares were designated to the broker as those to be sold or those to be held. • On rehearing (James L. Rankin, Executor, 33 B. T. A. 761), we found that in 1928 the decedent was carrying in a margin account with his broker 2,500 shares of a public utility stock, some of which he had owned for more than two years. He gave orders to his broker to sell 1,300 shares without designating the securities to be sold as those purchased on a particular date or particular price. Upon these facts wo held that the Commissioner correctly applied the “first in, first out” rule and that the securities sold must be deemed to be those first purchased.

We mention these facts connected with our ultimate holding in the Rankin case made subsequent to the Supreme Court’s decision because we want to make it clear that in granting petitioner’s motion for reconsideration in the instant case we are doing so because the evidence shows that petitioner did designate to his brokers the particular stock which he desired sold, and that designation should be given effect.

At the same time we do not want to be understood as questioning the correctness of those Board and court decisions which hold that mere intention of a taxpayer to sell certain stocks purchased at a given date and a given price, not accompanied by definite instructions to that effect, is not sufficient to malm inapplicable the “first in, first out” rule. Cf. George Vawter, 31 B. T. A. 884; aff'd., 83 Fed. (2d) 11.

Beviewed by the Board.

Decision will be entered under Rule 50.

Murdock,

dissenting: I think that where the shares sold can be identified by a certificate they should take the basis applicable to the shares represented by that particular certificate. I do not agree with the prevailing opinion in so far as it holds, following the decision of the Second Circuit Court of Appeals in Miller v. Commissioner, 80 Fed. (2d) 219, that identification by designation to one’s broker of a particular lot of stock to be sold is controlling even though it appears that the broker actually delivered stock certificates which are identified as those received in the purchase of some other lot. McCarter designated to his broker the shares to be sold. According to the stipulation the broker might have delivered proper certificates to carry out, at least in part, the instructions of his principal. But, instead, he actually delivered certificates which can be identified with some lot other than that which McCarter intended to sell. McCarter ratified his agent’s action by allowing it to stand. His gain or loss must be measured by the basis applicable to the property which he actually sold, rather than by applying the basis of the stock which he merely intended to sell. McGinley Corporation v. Commissioner, 82 Fed. (2d) 56, affirming 31 B. T. A. 266. The first in, first out rule is in no way involved whenever the shares sold can be identified in some way.

The Supreme Court, in Helvering v. Rankin, 295 U. S. 124, said:

The fallacy ⅜ * * lies in the assumption that shares of stock can be identified only through stock certificates. It is true that certificates provide the ordinary means of identification. But it is not true that they are the only possible means.

That was a case in which identification by certificates was impossible. The Court held that shares,sold might be sufficiently identified by designation to the broker to make inapplicable the “first in, first out” rule. I do not infer from what the Supreme Court said in that case that identification by designation is to take precedence over identification by certificates. Indeed, I think the opposite inference could be more reasonably drawn. With all due respect to the Second Circuit Court of Appeals, I do not agree with its decision in the Miller case. Furthermore, the three rules laid down by the Circuit Court in that case, apparently as all-inclusive rules, conflict within themselves. Suppose a taxpayer who had purchased several equal lots of one kind of stock at different times and at different prices had received for the lot first purchased certificate A, for the next lot purchased certificate B, and so 'forth; he instructs his broker to sell the second lot of stock which he purchased; and the broker delivers certificate C instead of certificate B. Rule 2 of the Miller case would require that the basis applicable to the second lot of stock purchased be used. The next year the taxpayer directs his broker to sell a like number of shares but does not designate the lot. The broker this time delivers certificate B. Rule 1 of the Miller case would apply and, again, the basis to be used would be the cost of the second lot purchased. Obviously the same basis could not be used twice. No such difficulty as this will arise if the Commissioner is permitted to use the rules which he has always used, except as now modified by the RcmJcin decision; that is, where there is no designation and no other means of identification, he applies the first in, first out rule; in cases where there is identification by certificates, he uses that means of identification; and, finally, in cases where there is identification by designation of shares otherwise not identifiable, then that method of identification must be used.

McMahon, Seawell, Leech, and TurneR agree with this dissent.