author: Adams:

text:
    Whitney Realty Company, Ltd., Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48192, 51719-51724, 57757-57759.
    Promulgated November 28, 1933.

      Ferris I). Stone, Esq., Cleveland Tlwrber, Esq., and E. S. Reid, ■Jr., Esq., for the petitioners.

      Mason B. Leming, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Katherine D. Douglas; Adelaide McCreery Remick, Jerome II. Remick, Jr., and union Guardian Trust Company, a Michigan Corporation. Executors under the Last Will and Testament of Jerome H. Remick, Deceased; David C. Whitney; David M. Whitney; Tracy W. McGregor; John .1. Iloff; Susan M. Whitney; Grace Whitney I£off; Katherine McGregor.

   OPINION.

Adams:

The principal question raised by these proceedings is whether the conveyance of the assets of the Continental Lumber Co. to Nathan T. Yiger, as trustee, was a transfer of its assets, in complete liquidation of the lumber company, to its stockholders, so that the stockholders sustained a loss based on the difference between the fair market value of the property received and their capital investment. If the law question is decided in favor of the petitioners, a question of fact is presented as to the amount of loss sustained. We have included in our findings the facts relating to the amount of loss sustained, if any, for the reason that these facts provide an historical background for the issue of law.

The petitioners contend that there was a complete liquidation of the Continental Lumber Co. which resulted in a loss to the former stockholders; that the transfer to Yiger, coupled with his declaration of trust, was a distribution in kind to the stockholders, Yiger holding title as their nominee; that the procedure followed was a practical short cut to the same net result, viz., title in the trustee and beneficial ownership in the stockholders, which saved time and money and avoided thé legal complications that would follow a direct-distribution to the stockholders and a conveyance from each of them to the trustee. The petitioners rely particularly upon the decision of the Board in Central Natl. Bank, Trustee, 25 B.T.A. 1123, as supporting their position.

The respondent contends that the transfer of the corporate assets to Viger, as trustee, falls squarely within the provisions of article 548 of Regulations 69 (Revenue Act of 1926); that legislative approval has been given to the administrative interpretation of article 548 by the repeated reenactment in the same terms of the gross income provisions of the statute; that in any event petitioners have failed to prove' any loss because their interest in the assets before and after the transfer was the same; and that Viger is a trustee in liquidation and the transfer to him did not constitute a distribution in kind; citing Fred. A. Hellebush et al., Trustees, 24 B.T.A. 660.

The applicable section of the Revenue Act of 1926 is set out in the margin.

Since the petitioners claim that the exchange of their shares of stock for trust certificates constituted a complete liquidation of the corporation, we have omitted that portion of the section relating to distributions in partial liquidation.

In the last analysis this issue turns upon the question of whether a distribution to the stockholders in complete liquidation results from exchanging corporate shares of stock for liquidating trust certificates. In such a case, have the stockholders realized all that they may hope to receive from their investment in the corporation, so that they can definitely and finally determine the loss sustained by each in 1927?

In Fleckner v. United States Bank, 8 Wheat. 338, a resolution was passed which required the president and cashier of the bank “ to take measures to liquidate the balance due to the original plaintiffs and other banks.” In the opinion the Supreme Court said:

Some criticism has been employed on the meaning of the word “ liquidate ”, in the resolution above stated. It is said, to mean, not a payment, but an ascertainment of the debts of the bank. We think otherwise. Its ordinary sense, as given by lexicographers, is to clear away, to lessen debts. And in common parlance, especially among merchants, to liquidate a balance, means, to pay it; and this, we are satisfied was the sense in which the words were used in this resolution; and, consequently, that the appropriation of this note to the payment of the debt was within the scope of the authority given to the president and cashier.

In Richmond v. Irons, 121 U.S. 27, the Supreme Court stated that “ the power of the president or other officer of the bank to bind it by transactions after it was put into liquidation is that which results by implication from the duty to wind up and close its affairs. That duty consists in the collection and reduction to money of the assets of the bank, and the payment of creditors equally and ratably so far as the assets p't'ove sufficient.” (Italics supplied.)

Similarly, the state courts have held that liquidation is the winding up of a firm’s or company’s affairs by getting in its assets, settling with its debtors and creditors, and appropriating the amount of profit or loss; Rohr v. Stanton Trust & Savings Bank, 245 Pac. 947; 76 Mont. 248; Gibson v. American Ry. Express Co., 193 N.W. 274; 192 Iowa, 1126; Lafayette Trust Co. v. Beggs, 107 N.E. 644; 213 N.Y. 280.

Can it be said that the exchange of corporate certificates of stock for trust certificates of interest lessened or cleared away the debts of the corporation? Did the trust certificates give the stockholder anything materially different from what he already had, i.e., a right to share ratably in the assets after the payment of the corporate debts ?

Here, there was no collection and reduction of assets into money, no settling with creditors and debtors, no appropriation of the amount of profit or loss, no distribution of assets to the stockholders, and no payment of a liquidating dividend. There was only a transfer of corporate assets to a trustee who was authorized to collect .and reduce the assets to money, settle with creditors and debtors, and then distribute whatever balance remained to the former stockholders as their pro rata part of the corporate assets. This was not a distribution to the stockholders in complete liquidation of the corporation. Cf. Wells Fargo Bank & Union Trust Co. v. Blair, 26 Fed. (2d) 532. It merely transferred that duty to a trustee who acted for the corporation in discharging the statutory duty imposed upon the board of directors. (Cahill’s Comp. Laws of Michigan, 1922 supp., sec. 9053 (15) to 9053 (39), inclusive). Until that duty is performed the corporation has not been completely liquidated. Cf. Mrs. Grant Smith, 26 B.T.A. 1178. From a taxing standpoint, the stockholder realizes his gain or sustains his loss when the final liquidation payment or dividend is received. It is at this time that a closed transaction results, from which he can determine the gain realized or the loss sustained. Russel Wheel & Foundry Co., 3 B.T.A. 1168.

The petitioners cite Central Natl. Bank, Trustee, supra,, as controlling our decision on this issue. In that case the transfer was made by the corporation to the stockholders by virtue of a liquidating dividend distributing the assets in kind. Prior to physical distribution the stockholders, as owners of undivided interests in the corporate assets, assigned their interests and requested the corporation to convey the assets, undivided, to a trustee who would act for the stockholders, individually and collectively. Apparently there were no commercial debts. We think that case is clearly distinguishable from the one before us upon the facts.

The respondent relies upon our decision in Fred A. Hellebush et al., Trustees, supra; affd., Hellebush v. Commissioner, 65 Fed. (2d) 902. In that case a sale of the corporation’s assets was negotiated, after which the stockholders authorized the transfer of all the assets to Hellebush and others, as trustees, and the dissolution and liquidation of the corporation. The transfer was made by the officers of the corporation and, therefore, the trustees consummated the sale of the assets, paid the liabilities, distributed the proceeds to the stockholders, and the corporation was dissolved.

In holding the transactions resulted in a taxable gain to the corporation, the Board said:

The action taken at the stockholders’ meeting, April 20, 1927, appointing Hellebush and Lippelman as trustees and conveying to them the corporate property, was a corporate action, and being the act of the corporation, the trustees would necessarily be responsible to and acting for the creator of the trust, even though the stockholders were beneficially interested in the property. The trust was closed when the property was sold, the debts owing the corpoi’ation were collected, the debts of the corporation paid, and the money distributed to the stockholders. It was then that the stockholders came into possession of the proceeds of the property. It is true, of course, that if a corporation really makes a distribution of its property in kind to its stockholders, no gain or loss therefrom results to the corporation. If, thereafter, the stockholders sell the property which they have received as a distribution in kind, any gain or.loss resulting from such sale would be taxable to them and not to the corporation. But that, in our judgment, is not the situation which we have before us in this proceeding. [Italics supplied.]

Situations similar to the one arising in the Hellebush case, supra, have been considered by the Board and the courts in Liberty Service Corp., 28 B.T.A. 1066; Nace Realty Co., 28 B.T.A. 467; Northwest Utilities Securities Corp., 27 B.T.A. 524; S. A. MacQueen Co., 26 B.T.A. 1337; Boggs-Burnam & Co., 26 B.T.A. 988; Nibley-Mimnaugh Lumber Co., 26 B.T.A. 978; James Duggan, 18 B.T.A. 608; Taylor Oil & Gas Co., 15 B.T.A. 609; affd., Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108; certiorari denied, 283 U.S. 862; and Burnet v. Lexington Ice & Coal Co., 62 Fed. (2d) 906. In all of these cases the corporation has been held liable and its attempt to avoid liability by transfer of corporate assets to trustees or agents, who completed the sale, was ineffectual. In most of these cases the contention advanced by the taxpayers was to the same effect as that advanced by these petitioners, namely, that a distribution in kind was made by the corporation and the trustees acted for the former stockholders in making the sale. The principal difference lies in the fact that here the corporation is still in the process of liquidation while in the cited cases a contemplated sale was consummated.

In these proceedings the trustee was, in our opinion, acting for the corporation, despite the express disavowal contained in the trust instrument. The trust is not closed until the property is sold, the debts owed to the corporation collected, the debts owed by the corporation paid, and the money distributed among the stockholders. When these events occur a taxable transaction results, from which gain or loss is to be determined. However, testimony at the hearing was positive to the effect that the trustee was still engaged in collecting the debts due the corporation, indicating that liquidation had not yet been completed.

It is our judgment that petitioners have not as yet realized anything from their investment in the Continental Lumber Co. or its predecessors. The transaction resulted in a mere change in the evidence of their ownership. Their rights in the assets held by the trustee were identically the same rights in those assets that were evidenced by shares of stock of the corporation, and neither gain nor loss will result until there has been a final disposition of the liquidation certificates. Reese Blizzard, 16 B.T.A. 242.

Reviewed by the Board.

Decision will Toe entered for the respondent.

       Art. 548. Gross income of corporation in liquidation. — When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes. (See section 282 and articles 1293 and 1294.) Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets in kind upon dissolution, however, they may have appreciated or depreciated in value since their acquisition. (See further articles 622 and 1545.)

       Sec. 201. (c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. » * *


source: Caselaw Access Project

author: Goodeich :

license: Public Domain

text:
    Rand Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. R. Rand, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62226, 63111.
    Promulgated November 28, 1933.

      Leland W. Scott, Esq., for the petitioner.

      T. M. Mather, Esq., and J. A. Lyons, Esq., for the respondent.
   opinion.

Goodeich :

Again we are called upon to determine whether transactions disposing of depreciated securities constituted valid and bona fide sales so that the losses registered may serve to reduce income and thus avoid tax. The primary facts are not in dispute; it is only the ultimate finding respecting the character of the transactions which is in controversy. Upon motion, the proceedings were consolidated for hearing.

In December 1929 the Hand Co., a closely held “ family ” corporation, having its principal office in Minneapolis, Minnesota, where it was engaged in buying, selling, and holding securities and other properties, owned 1,000 shares of stock of Harrison’s Orange Huts, Inc., acquired at a cost of $29,020. R. R. Rand, Jr., a resident of Hennepin County, Minnesota, and president of the Rand Co., then owned 3,450 shares of the same stock, acquired at a cost of $85,722.19. At that time the Orange Huts concern was in financial difficulty, as petitioners learned upon investigation. An involuntary petition in bankruptcy was filed by its creditors during the month; it appeared that its liabilities were substantially in excess of its assets; and its stock, listed on the Chicago curb, had much declined in price. Although 4,325 shares were traded on the Chicago curb in the last half of December at prices ranging from 25 cents a share, low, to $1.75 a share, high, petitioners’ brokers informed them that their holdings could not be marketed there and, near the end of the month, petitioners unsuccessfully sought to sell the stock in the Twin City markets. On the last day of the month both petitioners ostensibly sold their Orange Huts shares to A. S. Trux, who was employed upon salary by the Rand Co. as secretary-treasurer. The certificates representing the shares were assigned to Trux, reissued in his name and delivered into his possession. The transactions were recorded in the accounts of both petitioners. For its lot of 1,000 shares, the Rand Co. received $5, and claimed a loss of $29,015. For his 3,450 shares, Rand received $10, and claimed a loss of $85,712.19. Respondent has disallowed the losses and that action gives rise to the deficiencies in income tax for 1929 — $17,929.45 against Rand, and $3,191.65 against his company.

Thereafter, the Orange Hut business improved. The bankruptcy proceedings were terminated, a reorganization of the company was planned, and its stock became active on the market and advanced in price until at some time in May 1930 it reached about $6 a share. Petitioners then reacquired the stock from Trux at the same price he had paid.

We sustain respondent’s determinations, for we are of the opinion that these transfers were not arm’s-length transactions — valid sales, whereby the sellers parted with all rights in the stock and the buyer acquired legal and equitable ownership therein — but effected merely an arrangement for the accommodation of petitioners. In the first place, we are not convinced that the stock could not have been disposed of upon the open market at prices substantially in excess of the nominal sum at which Trux took it oyer. Eand testified that his brokers were unable to sell the stock owned by petitioners, yet the market record shows that during the last two weeks of December nearly that many shares changed hands and the proof does not satisfy us that petitioners’ stock, or a part of it, could not have been sold also. Both Eand and Trux testified that there was no arrangement or understanding respecting a reacquisition of the shares by pétitioners. That may be true as to any expressed agreement, and perhaps Eand’s further testimony indicates that the sellers thought they were definitely parting with their property. But the record indicates to us that Trux did not regard himself as complete and unrestricted owner of the property — certainly not in the event the stock recovered in value. For instance, after Eand testified that the reason for selling the stock was that “ we wanted to take a loss on the stock * * * and accordingly the sale was made to Mr. Trux,” Trux testified concerning his reason for buying:

Q. Did yon buy the stock as an investment?
A. No, sir.
Q. What was your reason for buying it?
A. Just buying it because it was a matter of having him get his loss back; he couldn’t sell it any place else, so I accommodated the gentleman.

And concerning the reacquisition of the stock by petitioners, Trux testified as follows:

Q. How did you happen to sell to Mr. Rand this * * * stock * * * for $10.00 when it had a market value on that date of $6.00 a share?
A. Well, I didn’t think I was entitled to make a profit out of something that I thought was worthless when I bought it.
Q. Who set the price on this stock when Mr. Rand came to you to repurchase it? * * * Did he ask you what you would take for it?
A. I don’t know as he did. I think I volunteered to give it back to him for just what I paid for it. ⅜ * * I think I went to his office and told him that this stock had proven to be of value and I thought he ought to have it back. * * * I am positive I volunteered to give it to him, and the price was just what I paid for it.

In other words, Trux, as an employee, was willing to spend $15 of his own money in an accommodation purchase so that his employer might register a useful loss, but when the stock he purported to purchase advanced in price, he felt that it and the gain belonged to his employer, not to himself. Perhaps such an attitude was commendably loyal, but it forestalled Trux from taking full and complete ownership of the shares and prevented these transactions from being complete and effective sales, as that term is known in the law. Harold B. Clark, 2 B.T.A. 555; Stewart & Co., 2 B.T.A. 737; Harold F. Seymour, 27 B.T.A. 403; cf. Oscar F. C. Kunau et al., Trustees, 27 B.T.A. 509; Andrew J. Peters, 28 B.T.A. 976.

Judgment will he entered for the respondent.


author: Muedock:

text:
    Charles G. Miller and Harold B. Miller, as Executors of the Estate of Charles A. Miller, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58712.
    Promulgated November 29, 1933.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Muedock:

The Commissioner determined a deficiency in estate tax on the estate of Charles A. Miller in the amount of $165,258.47. The parties have filed a stipulation of facts, under which but one question is submitted to the Board for decision. That question is whether or not the decedent, together with his wife and six children, held certain shares in a British corporation jointly, with the right of survivorship. The respondent supports his determination solely on the ground that the property was held by the decedent and the others as joint tenants within the meaning of section 302 (e) of the Revenue Act of 1926. If it was so held, then both agree that its value would be properly included in the gross estate, because the decedent furnished all of the consideration when the stock was originally acquired. If it was not so held, the respondent concedes that only one eighth of the value should be included in the gross estate, as the petitioner contends.

The decedent died on May 2, 1927, a resident of Rye, Westchester County, New York. He was survived by his widow, May Bourne Miller, and their six children, Charles Gilbert Miller, Harold Bourne Miller, Clara Miller Prankard, Kate Carlyle Vail, Madeleine Miller Flammer, and May Miller Goss, all residents of the State of New York at all times material hereto. The decedent, prior to 1923, had purchased with his own funds 2,880 preference shares and 57,010 ordinary shares of Babcock & Wilcox, Ltd., a British corporation. His ordinary shares were increased to 114,020 by a stock dividend on May 17, 1923. He was then the sole owner and registered holder of these shares. On June 18, 1928, the decedent instructed the corporation to transfer all of his shares to himself, his wife, and their six children. He executed a written instrument in New York and forwarded it to England. Despite the words of the instrument, the only consideration was love and affection. The instrument was in the following form:

I, Ohables A. Miller, Rye, New York, U.S.A., in consideration of the sum of Ten shillings paid by Charles A. Miller, Clara M. Prankard, Charles G. Miller, Kate C. Yail, Harold B. Miller, Madeleine M. Flammer, May B. Miller and May M. Goss, hereinafter called the said Transferees:
Do hereby bargain, sell, assign and transfer to the said Transferees, on list attached, Twenty-eight hundred eighty (2880) Preference shares, Fifty-seven thousand & ten (57010) Ordinary shares, Fifty-seven thousand & ten (57010) Ordinary shares as at back of and in the undertaking called the Babcock and Wilcox Limited, .
To Hold unto the said Transferees, their Executors, Administrators, and Assigns, subject to the several conditions on which I held the same immediately before the execution hereof; and we the said Transferees, do hereby agree to accept and take the said shares subject to the conditions aforesaid.
As Witness our Hands and Seals this eighteenth day of June, in the year of our Lord One thousand nine hundred and twenty-three.
Signed, sealed, and delivered,
by the above named
[Here follow, in the order given, the signatures and seals of Charles A. Miller, M. B. Miller, Charles G. Miller, Harold B. Miller, Clara M. Prankard, Kate C. Vail, Madeleine M. Flammer, May M. Goss.]

Thereafter the corporation issued new certificates for ail of the stock. Each named the eight persons as registered owners of the stock. The certificates were kept in New York. In accordance with written instructions from the eight persons, dividends on 57,010 ordinary shares were paid to the decedent and dividends on 57,010 ordinary shares were paid to May Bourne Miller, respectively, for account of the eight persons. There was no further change in the situation until the decedent died.

The respondent argues that the law of England, the domicile of the corporation, is controlling on the question of whether the shares were owned in joint tenancy or in common; while the petitioner contends that the law of New York, the place where the contract was executed and the parties were domiciled, governs in the absence of a prohibition by the law or public policy of the place where the corporation has its domicile. The respondent contends that under the law of England an assignment to several persons results in their holding the property as joint tenants unless there is in the instrument an indication that the property is to be held in common. Joint ownership with the right of survivorship is not favored by the courts, either in England or in New York, although joint ownership is permitted if the intent is clear. The words “jointly” or “joint tenancy ” need not be used to show the intent. New York has provided by statute:

When estate in common; when in joint tenancy. Every estate granted or devised to two or more persons in their own right shall be a tenancy in common, unless expressly declared to be in joint tenancy; * * * [Laws 1909, ch. 52, sec. 66.]

This section applies to personal property. McKinney’s Consolidated Laws of New York Annotated (1917), bk. 49, p. 96, and cases there cited. An intention to create joint ownership must be declared in the instrument and, unless the words used are inconsistent with the creation of tenancy in common, an instrument will be held in New York to create common rather than joint ownership. Section 363 (c) of Wharton on Conflict of Laws, 3d ed., 1905, vol. 1, deals with “Assignment of Shares of Corporate Stock.” The author there says:

The assignability o£ such shares is doubtless to be determined by the law of the domicil of the corporation, though the assignability of a special or qualified interest therein, as distinguished from the assignability of the shares themselves, is to be determined by the law of the place where such interest was created. Assuming the assignability of the shares, the validity and effect of the assignment as between the parties is to be determined by the law of the place where the assignment is made; but the steps requisite to perfect the assignment as against the corporation or the creditors of the assignor are to be determined by the law of the domicil of the corporation; * * *

Other authorities seem to agree that the rule above stated is a correct one. See Netherwood v. Raymer, 253 Fed. 515. We are not concerned here with any form of transfer of corporate shares made obligatory by the law of England or the bylaws of the corporation. The question is whether, as between the parties themselves, there was created one kind of ownership or another. We see no reason why that question should not be determined by the law under which the parties contracted. Cf. Netherwood v. Raymer, supra. That law was the law of New York.

The assignment here in question does not indicate in any way that the shares were to be held jointly rather than in common. It provides that they are to be held “ subject to the several conditions on which I held the same immediately before the execution hereof ” and the transferees agreed to take the shares subject to those conditions. We do not know what conditions are referred to but there is no reason to believe that those conditions would have any bearing upon the question of joint or common ownership. The respondent relies somewhat upon a letter from Charles G. Miller, one of the sons, to the secretary of Babcock & Wilcox, Ltd. The letter was dated June 30, 1923. It was in part as follows:

On bebalf of my father, Mr. O. A. Miller, I am enclosing transfer form covering stock recently issued to Mm in form of stock dividend. He wishes that stock to be transferred so that all eight names will appear as joint holders just as was requested for his previous holdings.

The “transfer form” referred to was not the assignment here in question. The respondent contends that the use of the word “ joint ” in the son’s letter of June 30 indicates an intention on the part of the father to create joint ownership by his assignment of June 18. We are not impressed by this argument. The word was used by one other than the grantor. It appears, not in the assignment, but in a letter of a later date and may have carried no such significance, even in the mind of the writer of the letter, as the respondent would attribute to its use. The respondent also points to certain provisions of the articles of association of Babcock & Wilcox, Ltd., relating to “ joint-holders of a share ”. These provisions do not affect our question of how the shares here involved were owned as between the eight persons. The provisions are not inconsistent with ownership of the shares in common. The respondent also points to the fact that after the death of the decedent, his name was simply crossed off the certificates and that his wife’s name was crossed off when she died. We do not see as much significance in this as does the respondent. The petitioner has made out its case. The instrument itself is not sufficient to create joint ownership of the shares and the surrounding circumstances mentioned in the stipulation do not show an intention on the part of the decedent to create joint ownership.

Decision will he entered under Rule 50.


author: Smith:

text:
    Ennalls Waggaman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Floyd P. Waggaman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61244, 61246.
    Promulgated November 29, 1933.

      Meredith M. Davibin, Esq., and August H. Moran, Esq., for the petitioners.

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

Smith:

Petitioners plead limitation and allege that the respondent erred in including in their respective incomes the canceled notes, claiming that the notes were never intended to be paid, that they were erroneously transferred to the corporation, and that they were canceled to correct the error, or as a forgiveness of the debt.

Relative to the plea of limitation, it is sufficient to say that the petitioners’ counsel introduced in evidence the income tax returns for both petitioners for the taxable year. Both returns are stamped as being filed March 12, 1929, and on both appears in long hand “ waiver 12/31/31,” and attached to each, return by metallic fastener is a Form 872, dated February 16, 1931, “ Consent Fixing Period of Limitation upon Assessment of Income and Profits Tax,” by which limitation was extended to December 31, 1931. These written consents were in each case signed by the petitioner and the respondent, and came from proper governmental custody, and were introduced in evidence by petitioners’ counsel, as part of the returns, without one word of objection.

It is too late to question the genuineness of the waivers by petitioners on brief, when their counsel was responsible for their being in the record. We accept them as part of the record. The deficiency notices were mailed November 13, 1931, which was in time, and the plea of limitation is not good. The burden of proof to establish the plea of limitation is on the petitioners. Lester L. Robison, 22 B.T.A. 395.

Relative to the canceled notes, it does not appear that the trustee, Brawner, had any right to make advancements from the corpus to the petitioners, or either of them or to anticipate their income. Had this right existed the trustee would doubtless merely have required receipts for his protection. When this is considered in connection with the fact that the notes were listed in the written offer of sale as part of the assets of the Waggaman estate, were appraised by the board of directors of the corporation as part of the estate, and were conveyed to and accepted in part payment of stock in the corporation, part of which was subsequently distributed to petitioners, we can not hold that the notes were transferred to the corporation by mistake. It is significant also that the written proposition was approved in writing by petitioners, and that the notes were renewed and notes given for interest during the four years they were among the assets of the corporation.

It remains to consider whether the cancellation of the notes should be considered a gift, or a dividend.

Section 115 (a) of the Revenue Act of 1928 provides in substance that any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28,1913, shall be considered a dividend ; while section 22 provides that the value of gifts shall be exempt from taxation.

In Lincoln Natl. Bank, Executor, 23 B.T.A. 1304; affd., in 63 Fed. (2d) 131, we had before us a transaction involving this same estate and corporation. The Waggaman estate was a stockholder in the Emerson Drug Co., which stock was transferred to the corporation. Thereafter a stock dividend was declared by the Drug Co., which stock was distributed by Waggaman & Brawner, Inc., among its stockholders by resolution of the directors, calling it a gift. The Commissioner held that the distribution was a dividend, which was approved by the Board as follows:

We are unable to find that the transfer in question was a gift, and are of opinion that the respondent should be sustained. This was a distribution made by the corporation to its shareholders, and there is no evidence that it was not out of earnings or profits accumulated subsequent to February 28, 1913, as postulated by the respondent. Thus it is squarely within the statutory definition of a dividend in section 201 (a), Revenue Act of 1926. The language of the corporate resolution is not entirely determinative of the nature of the distribution, nor is the fact that the distribution was to only some of the shareholders and not strictly in proportion to holdings. Hadley v. Commissioner, 36 Fed. (2d) 543, affirming 6 B.T.A. 1031. The other shareholders have not complained and must therefore, in this proceeding, be deemed to have ratified.

In the case of Hugh H. Miller, 25 B.T.A. 418, we held that the cancellation by a corporation, with the consent of its shareholders, of a debt from its president, who was its largest shareholder, created by withdrawals over a period of years, the corporation at the time of cancelation having substantial surplus and the debtor being solvent, was not a tax-free gift, but was taxable as a dividend.

The case of F. W. Fitch, 27 B.T.A. 615, is similar to that above cited, and we there held that where a corporation canceled an indebtedness of its president and principal stockholder it was a dividend and not a tax-free gift. See also Ida L. Dowling, 13 B.T.A. 787; Henry D. Muller, 16 B.T.A. 1015; Virginia H. Holden, 9 B.T.A. 220; and Moses Cohen, 28 B.T.A. 190.

The corporation in the instant cases had surplus and undivided profits far in excess of the canceled notes. It is clear that the notes were considered assets of both the estate and the corporation and were used for the purpose of making the stock of the latter fully paid and nonassessable. We hold that the cancellation of the notes must be considered a dividend.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Stbenhagen:

text:
    American Title Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61461.
    Promulgated November 29, 1933.

      Mwrdy H. tSpahr, Jr:, Esq., for the petitioner.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Stbenhagen:

Soon after its organization in 1929 petitioner assumed all the title insurance liabilities of the American Bank & Trust Co. by the issuance of a formal policy of insurance, for which it was paid a fee of $25,000. It included the full amount of this fee, together with $445.90, representing 10 percent of other premiums on policies written in 1929, in a reserve, the whole amount of which, it contends, should be excluded or deducted from its gross income.

1. In guaranteeing land titles for a consideration, petitioner was engaged in an insurance business within the meaning of the revenue acts, Home Title Ins. Co. v. United States, 285 U.S. 191; affirming 50 Fed. (2d) 107, and as this business constituted its principal activity, it is taxable as an insurance company. Bowers v. Lawyers Mortgage Co., 285 U.S. 182. Sections 201-8 of the Act of 1928, which segregate such companies from the general scheme of taxation, provide special methods for computing the taxable net income of (1) life insurance companies, (2) insurance companies other than life or mutual, and (3) mutual insurance companies other than life. Since petitioner is neither a life nor a mutual company, its net income is to be computed in accordance with section 204, applicable to other companies. By subsection 204 (b) (2) net income is defined as gross income less the deductions allowed by subsection (c) ; gross income comprises inter alia underwriting income, which, by .sec. 204 (b) (4), “ * * * means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.”

Respondent determined and contends that the premiums paid petitioner for title insurance policies are earned when paid, and cites I. T. 1981, III-1 G.B. 311, and G.C.M. 2332 VI-2 C.B. 262, to this effect as reflecting the departmental attitude. Where a policy is unlimited as to time, he argues, there can not be that segregation between an earned and unearned premium which insurance on life and risks for a time certain affords, and hence no part of the premium can be regarded as unearned. There is something to be said for this, since there is no factual basis to guide the allocation of the premium between earned and unearned. But, in our opinion, it is more important that in the very nature of title insurance such an allocation can have no place. Unlike other insurance, such as life, fire, etc., which protect the insured against future events, title insurance merely guarantees against a future disclosure of unfavorable circumstances existing at the time of the deed. Theoretically (and presumably in the large majority of cases) the insurance liability once assumed continues indefinitely, and the premium is therefore earned immediately upon the assumption of the liability. Petitioner’s premiums, therefore, are to be regarded as earned in 1929, and constitute a part of its underwriting income in that year.

This conclusion is not affected by the fact that the first policy was issued in the acquisition of a predecessor company’s business, Hoosier Casualty Co. v. Commissioner, 32 Fed. (2d) 940; affirming 6 B.T.A. 1343; certiorari denied, 280 U.S. 581. Nor is it material that this treatment of title insurance premiums is not reflected, in the underwriting exhibit of the annual statement of the National Convention of Insurance Commissioners, incorporated by reference in section 204 (b) (1) of the act, for that statement was adopted as a guide and not as a limitation on the application of the statute. United States v. Home Title Ins. Co., supra; Massachusetts Protective Assn., Inc., 18 B.T.A. 810.

2. In claiming that the reserve is deductible from gross income, petitioner has not invoked section 204 (c), specifying the deductions allowable to insurance companies of its type, and we find no provision of that section which authorizes the deduction of a reserve. The rule that only those deductions specified by statute are to be allowed, Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, has been repeatedly applied against the attempted deduction of voluntary reserves, Readers' Publ. Corp. v. United States, 40 Fed. (2d) 145; 69 Ct. Cls. 681; Spring Canyon Coal Co. v. Commissioner, 43 Fed. (2d) 78; Mt. Plymouth Corp., 25 B.T.A. 1201; O. J. Morrison Department Store Co., 23 B.T.A. 895; William J. Ostheimer, 1 B.T.A. 18, and in the case of insurance companies the reason for its application is particularly cogent because only specified items of their gross income fall within the purview of the taxing act. Western Casualty Co., 20 B.T.A. 738.

Petitioner cites Act No. 362, Laws of Pennsylvania, 1929, which requires title insurance companies to accumulate a reserve until $250,000 has been reached by the setting aside of 10 percent of the premiums on policies issued, or, with the consent of the secretary, a greater amount. It argues that its reserve was thus one “ required by law,” and seeks to justify the inclusion of the full $25,000 of the first premium plus 10 percent of the later ones by virtue of this act, although it has not shown that the secretary consented to the greater amount. Respondent contends that even if petitioner were permitted to deduct the reserves required by law, such as are allowed life insurance companies, its reserve was not among those contemplated by statute. He argues that not every reserve so required is deductible, but only those which aid “in determining what part of the gross income ought to be treated as net income for purposes of taxation,” United States v. Boston Ins. Co., 269 U.S. 197; see also McCoach v. Ins. Co. of North America, 244 U.S. 585. But since, in respect of title insurance companies, there is no provision of the statute which permits the deduction of reserves required by law, it is not necessary to determine to what extent the petitioner’s reserve was voluntary and to what extent it was required, because in no event is it deductible.

3. Although we have held above that the entire amount of $25,445.09 received by the petitioner as premiums in 1929 and omitted from its return should have been included in the petitioner’s gross income, the respondent in determining the deficiency included only $22,500 of this amount. He now claims an increase in the deficiency because he should have treated the entire amount of $25,445.09 as gross income without deduction. In accordance with the foregoing opinion, this claim for an increase in the deficiency is well founded and must be allowed.

Reviewed by the Board.

Judgment will be entered under Bule 60.


author: SteRNhagen :

text:
    Edison Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52662.
    Promulgated December 5, 1933.

      J. Marvin Haynes, Esq., G. J. McGuire, Esq., and James 0. Wynn, Esq., for the petitioner.

      M. B. Leming, Esq., and John B. Gas7cins,Esq., for the respondent.
   OPINION.

SteRNhagen :

1. In our opinion, the distributions of May 12, 1925, and May 27, 1925, made by Stevens & Wood, Inc., of Delaware, were dividends and not distributions in liquidation, both in fact and in the contemplation of the statute. At the time they were declared by the corporation, no dissolution of the corporation or winding up of the business had been decided upon or definitely planned. The mere fact that liquidation had been suggested as one method of resolving the dispute between shareholder interests does not stamp the distribution as one in liquidation. We have found no case to support such a view. The decisions in Gossett v. Commissioner, 59 Fed. (2d) 365, and Tootle v. Commissioner, 58 Fed. (2d) 576, relied upon by respondent, disclosed clear evidence that the distributions were made as part of a plan theretofore clearly manifested to wind up and dissolve. Here no such plan took shape until after these distributions of surplus. After the determination to liquidate and dissolve, the distributions of October 1925 and May 1926 were clearly in liquidation; but these are not contested by the petitioner. We think that neither the statement of Clowes nor the ambiguous punctuation in the minutes relating to the Touche, ISTiven audit points to liquidation.; and if they did, they would be of too little weight to control the determination of the character of the distribution.

2. (a) The petitioner contends that what it received in 1926 because of its ownership of Republic shares was the result of a transaction in a statutory reorganization, and that the recognition of gain is forbidden by section 203 (b) (2), Revenue Act of 1926. The major premise of its argument is that the entire sequence of events constitutes a reorganization, and that its tax ⅛ determinable by a comparison of its position at the end with its position at the beginning. In its return and in this proceeding, it has not adhered consistently to this broad concept; but this is not important if the proposition itself is sound.

In our opinion, there is no warrant in the statute for such a wide and formless concept of reorganization. Cf. Robert D. Green, 24 B.T.A. 719. In considering the several subdivisions of section 203, from (a) to (g), which lay down the rules for the recognition of gain or loss and its extent, the first inquiry is not whether there has been an intent, purpose, or plan to reorganize, but whether there has been a “reorganization” as defined in subdivision (h). It is only after the situation is found to be a reorganization within subdivision (h), that the preceding subdivisions, withholding the recognition of gain or loss in reorganization transactions, require examination. When this is understood, it becomes plain that the words “plan of reorganization ” found in some of the subdivisions preceding (h) are not the dominating words which give character to the situation itself, but are words of limitation upon the recognition of gain or loss. Where the expression “ plan of reorganization ” appears, its effect is not to broaden the definition of (h), but to confine the nonrecognition of gain or loss to such transactions as are pursuant to the plan as well as part of the consummated statutory reorganization itself, and, in a proper case, by a party to the reorganization. Thus the scheme of the statute preserves the full effect of all its terms and phrases, while otherwise the integrity of the definition in (h) would be lost.

The definition in (h), broad as it is (cf. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599), is by its terms clearly restricted to actual events and occurrences, and does not embrace mere intents, plans or executory agreements. It is the merger or consolidation, the acquisition, the transfer, and not the plan or agreement, with which the definition deals. This definition, so confined, is hard enough at best to apply, as the numerous decisions and extensive literature on the subject will testify; but the difficulties would be multiplied and unduly try the powers of administration if, by interpretation, the scope of the definition were so broadened as to embrace a mere plan. This involves no question of liberal or strict construction, since every interpretation which is liberal to him who realizes gain is harsh to one who realizes loss. At what stage would a plan come within the statute ? If there should be several plans of, say, conflicting interests, which would the statute recognize ? In the present case, the original Stevens plan was to be available “ to a limited number of stockholders.” - Although the new corporation was formed in 1925 as a step in the Stevens plan, and In 1925 received a comparatively small part of the Republic shares from Bonbright, the Stevens plan was frustrated, and a substantially different plan was formulated in 1926. Clearly, there was no reorganization in 1925, notwithstanding the existence of a “ plan ” and its partial realization.

The petitioner contends that the mutual transactions set forth in the Bonbright letter of January 29, 1926, and carried out on February 1, 1926, constituted an exchange in reorganization within subdivision (b) (2). This can not be sustained. At that time there was no reorganization. If it be said that there was a plan, and that the transaction was in pursuance thereof, still there was no statutory reorganization and hence no statutory party to a reorganization the stock or securities of which were transferred or received. The petitioner does not specify which of the parts of the disjunctive definition of (h) is applicable, and we are unable to bring it within (A), (B), (C), or (D). The transaction was between two large shareholders and was, as the Bonbright letter called it, a purchase and sale by each of some of the shares which each owned, with the necessary transfer of cash. The fact that it was preliminary to their mutual promises, looking to a further promotion of a plan to have the Republic shares controlled through the Penn-Ohio corporation, does not give it the character of a reorganization. It was a separate and complete transaction, E. F. Simms, 28 B.T.A. 988. .

But if it were a reorganization within subdivision (h) ,- and could be regarded as an exchange, the transaction of February 1, 1926, set forth in the Bonbright letter, would not be covered by subdivision (b) (2) and thus free from present tax, but would' be within subdivision (d) (1) in case of gain or subdivision (f) in case of loss, for money was received as well as securities. That need not, however, be determined, since the transaction was not an exchange, but a group of sales and purchases, each for a fixed price. Cf. Sarther Grocery Co., 22 B.T.A. 1273. This is what the contracting parties intended, as manifested by their express language, and it is the way they both accounted for the transaction on their books. There is no evidence to the contrary. While- the effect may have been similar to that of an outright exchange, the liability is fixed by the legal character of what was done and not by its practical effect, United States v. Phellis, 257 U.S. 156; E. F. Simms, supra. The nature of the transaction as a sale is not affected by a fixed obligation to use the proceeds in an agreed way, Sarther Grocery Co. v. Commissioner, 63 Fed. (2d) 68; Clemmons v. Commissioner, 54 Fed. (2d) 209; Lonsdale v. Commissioner, 32 Fed. (2d) 537; Detroit Egg Biscuit & Specialty Co., 9 B.T.A. 1365, or, a fortiori, by the conditional or tentative obligation which petitioner assumed in respect of the joint account and the underwriting of the Penn-Ohio proposed new common.

It is held, therefore, that the petitioner’s income for 1926 includes the gain derived from the sale to Bonbright of 5,753 shares of Republic common and 3,840½ shares of Republic preferred.

(b) This must likewise be true as to the transaction in February consisting of the disposition by petitioner of the 5,753 shares of Republic common and the acquisition of 11,506 shares of Penn-Ohio common. It is difficult from the facts available in this record to determine just what happened and when. The Commissioner determined that this was an exchange by the petitioner, and this determination is presumptively correct and must be adopted as the fact unless the evidence is otherwise. We can not say that the evidence overwhelms the presumption, although it leaves the details of this transaction in confusion. It is, however, clear that this transaction must have occurred prior to the plan suggested by the president of the Penn-Ohio corporation on February 4 for securing control of the Republic preferred, without which there could be no voting control. Apparently, as a step in the “ endeavors ” undertaken in the Bon-bright letter, the shares of Republic common which were in the joint account were delivered to Penn-Ohio for double the number of Penn-Ohio common plus bonds at the rate of $25 per share. The Penn-Ohio corporation did this apparently upon the same authority as that upon- which in October 1925 it issued its 65,256 shares “ and other consideration ” for 32,628 shares of Republic common. Thus it stands with no greater significance as a part of a statutory reorganization than did the earlier issue, and not pursuant to an authoritative plan of reorganization but to the same undefinitive plan of two minority, although substantial, shareholders. Unless, therefore, chis transaction is to have its statutory character held in suspense until some future events occur to determine whether any statutory reorganization is in process, and then is to be retrospectively recognized as part of such reorganization, there is still no such reorganization, no merger or consolidation, and no acquisition by Penn-Ohio of a majority of the outstanding 113,964 shares of voting stock of Republic.

As above indicated, the statute does not, as a general proposition, require that whenever a reorganization is found to have at some time occurred, all transactions in the shares before and after shall be embraced within the reorganization, so that losses and gains may not be recognized. Such a rule would be impracticable and should not be adopted unless fairly required by the statute. A loose construction of the reorganization provisions would promote confusion rather than certainty, and if uniformly applied, as any rule should be, it would work as harshly in one case as it would liberally in another. The provisions are available to all according to their terms, and if one fails to bring himself within them his tax must be determined by the general method, Sarther Grocery Co., supra.

The February transaction, which the respondent has called an exchange, is a fully taxable transaction. Within the limits of the deficiency already determined, since no increase was claimed or pleaded, the determination is sustained.

(c) When the exchange of March 80 occurred, the petitioner giving 6,152½ shares of Republic preferred and $42.13 for 6,153 shares of Penn-Ohio preferred and $212,278.50, this was but a step in the acquisition by Penn-Ohio of voting control of Republic, and this was an exchange by petitioner in pursuance of the very plan for such acquisition and consequent reorganization. While it was not the culminating acquisition which determined the control, it was indubitably a part of the reorganization which at that time was definitively planned and had been approved by the Penn-Ohio shareholders on February 27. Given a clear and authoritative plan by one corporation to acquire stock control of another in an arrangement which partakes of the nature of a merger or consolidation, it is not essential that the acquisition be in a single transaction. While preliminary or casual acquisitions of less than a majority are not within the reorganization, those which are directly related to the process of deliberately acquiring control must be held to be so.

In our opinion, therefore, this transaction would, were it not for the $212,278.50 received in money, have been within section 203 (b) (2), and there was, in accordance with section 203 (d) (1). recognizable gain limited by the $212,278.50.

Reviewed by the Board.

Judgment will be entered under Bule B0.


author: Smith :

text:
    E. H. Hallett, Martin A. Brown, Eugene M. Dow, and Nell T. Moulton, Executors of the Estate of Herbert B. Moulton, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60044.
    Promulgated December 5, 1933.

      George W. Pilee, Esq., for tbe petitioners.

      Prew Savoy, Esq., for tbe respondent.
   OPINION.

Smith :

This proceeding involves a deficiency in estate tax of the estate of Herbert B. Moulton in the amount of $9,303.06. The only question for our determination is what amount of the residue of tbe decedent’s estate is deductible from the gross estate as a bequest to charity.

The decedent died a resident of Lisbon, Grafton County, New Hampshire, December 25, 1928, leaving a last will and testament by which he disposed of his entire estate, valued by the respondent at $961,422.55. After making numerous specific bequests to individuals and to charity the decedent bequeathed the residue of his estate to trustees as follows:

16. All the rest, residue and remainder of my estate, of whatever kind and wherever situated, I give, devise, and bequeath to Martin A. Brown of Wilmington, Vermont, Ernest H. Hallett of Lisbon, New Hampshire, Eugene M. Dow of Lisbon, New Hampshire, and Edward K. Woodworth of Concord, New Hampshire, and their successors in trust, In Trust Nevertheless and subject to the charges imposed by the foregoing provisions, for the following purposes:
A. To build and equip (exclusive of books) on some suitable lot in the town of Lisbon, at a cost of not less than thirty-five thousand dollars ($35,000), a public library to be known as Herbert B. Moulton Memorial Library, and upon the completion of said library to transfer the same by suitable instrument of transfer to the town of Lisbon, to be managed by a board of five trustees to be elected by said town in the following manner:
At the first annual meeting of the voters of said town at which legal action may be taken in the premises there shall be elected one trustee to serve for the term of three years, two trustees to serve for the term of two years, and two trustees to serve for the term of one year, and thereafterwards there shall be elected annually two trustees or one trustee, as the occasion may require, to serve for the term of three years. Vacancies arising otherwise than by expiration of the term of office shall be filled for the unexpired portion of the term by the remaining members of the board. Such trustees may be men or women. If, however, a public library shall have been provided in said town during my life I direct that this bequest shall be void. In the event that I shall have begun but not completed such library my trustees shall complete the same.
B. To set aside the sum of twenty-five thousand dollars ($25,000) to be known as the Lyman Public School Fund, the income to be paid over annually for the support of schools in the town of Lyman, New Hampshire; but this provision shall not have the effect of relieving said town or any school district therein from raising and appropriating for the support of schools the amount required by law; it being the purpose of this provision to provide funds in addition to the amount which would be otherwise available.
O. To hold and manage the residue of my estate and to expend the income thereof remaining after the payment of all charges thereon created by this will and all other legitimate charges against my said estate, in their discretion, in such sums, at such times, and in such manner as may seem to them advisable, for philanthropic, educational or other charitable purposes, except as herein next provided, for the benefit of the town of Lisbon and its inhabitants.
My trustees shall make payments for the relief and support of any brother or sister of my wife or myself or their children by blood but not by adoption, or grandchildren by blood but not by adoption, who, through misfortune, may be in need of such relief and support.
I especially desire that the public schools in Lisbon shall be thoroughly efficient. Because the lapse of time brings changes in methods and conditions impossible to foresee, because it is not possible accurately to forecast the amount of income which my trustees will have at their disposal, and because needs more pressing than those of the public schools may arise, I do not attempt to specify what portion of the income of my estate shall be devoted to the public schools or any other particular object except as herein specified. I direct, however, that unless some unexpected and unusual conditions seem to warrant, no sums shall be devoted to the support and maintenance of the public schools for the purpose of relieving, or if the effect would be to relieve, the town or any school district therein from raising and appropriating such sums as are now raised and appropriated for the support of schools, or amounts proportionate to the sums now so raised and appropriated based upon valuation.
While my trustees are expressly directed to devote the income of my estate to philanthropic, educational and other charitable purposes for the benefit of the town of Lisbon and its inhabitants, they are, nevertheless, authorized to permit the annual income or any port ion thereof to accumulate for a reasonable time for the erection of buildings, the establishment of parks or playgrounds, or to assist any such building or establishment, provided always that the objects shall be within the limits of a valid charitable trust. In the administration of the trust hereby created it is my purpose that my trustees and their successors shall exercise a wide discretion, and while it is my fundamental purpose to benefit the town of Lisbon and its inhabitants my trustees shall not be required to expend the whole of the income in said town provided that income expended elsewhere shall, in their judgment, be calculated to benefit the town or its inhabitants, — for example, and for example only, assistance may be rendered deserving young men and women of the town in pursuing their education elsewhere.

By clause 14 of the will the decedent bequeathed an aggregate of $2,000 to three churches in Lisbon.

In the estate tax return filed by the executors a deduction was taken for charitable bequests in the amount of $485,664.44 including the $2,000 bequeathed to the churches provided for in clause 14, the $25,000 gift to the public schools of Lisbon provided for in clause 16 B, and $457,664.44, representing the value of the gift of the residue of the estate, to. the town of Lisbon and its inhabitants.

Upon audit of the estate tax return the respondent tentatively valued the residue of the estate for charitable purposes at $27,000, which amount he increased by $28,963.63 in his final determination. In making his final determination the respondent computed the amount deductible as a bequest to the town of Lisbon by taking the present value of the residue of the estate postponed until the end of the year of the death of the survivor of 31 persons aged, respectively, 6, 9, 11, 12, 14, 14, 15, 15, 16, 16, 19, 19, 19, 22, 27, 28, 34, 37, 40, 41, 42, 42, 50, 50, 52, 53, 55, 57, 66, 70 and 70, entitled to the benefits of clause 16 O of the will. In his brief the respondent states:

The principle is a very simple one. The present value of $1.00, payable thirty years hence, is by no means $1.00. The present value thereof is the sum which with interest in thirty shears will equal $1.00. Consequently, the value of a remainder interest for charitable purposes, payable thirty years hence, which is deductible from the gross estate, is not the value of the property today. The present value is the sum which with interest will equal the amount of the remainder in thirty years. If there is an intervening life estate, the length of that life must be determined by the mortality tables, and the present value of the remainder at the end of that life is the amount deductible from the gross estate as a gift for charitable purposes. That is the principle involved herein and applied by the Commissioner.

The principle anounced may be sound enough when applied to suitable facts, but in our opinion it leads to error here because of the respondent’s assumption that each of the 31 persons who were entitled upon certain contingencies to receive benefits from the residue of the estate took a life estate in such residue.

Clause 16 of the will, when read in full, does not show any such purpose on the part of the testator. In subdivision G of clause 16 the trustees are directed to expend in their discretion all of the income of the residue of the estate remaining after the payment of all charges “ for the benefit of the town of Lisbon and its inhabitants ”, with the exception that payments should be made for the relief and support ” of any of a certain class .or classes of relatives “ who, through misfortune, may be in need of such relief and support ”. Under this provision of the will the relatives did not take life estates in the residue of the decedent’s estate. They took no vested interests of any description. Their interests were contingent upon their becoming in need of relief and support through misfortune. It is not reasonable to assume, as apparently the respondent did, that misfortune was to befall all of the 31 relatives and that their combined needs for relief and support would absorb all or a substantial part of the income of the residuary estate, leaving nothing for the town of Lisbon and its inhabitants. If this had been the expectation of the testator he probably would have left the residue of the estate to his relatives for life with the remainder over to charity. There is no indication that such a construction was ever given to the will. We do not think that the will could have been lawfully construed in this manner. While admittedly some portion of the income of the estate might be expended for the benefit of the relatives mentioned, we do not believe that this consideration should be permitted to destroy the public character of the immediate gift to charity as avowed by the testator.

The only case cited by the respondent in his brief is Henry R. Ickelheimer et al., Executors, 14 B.T.A. 1317, which he claims to have followed literally in determining the deficiency herein. In that case the will of the decedent provided that the income from certain property and specific amounts of money should be paid to the widow of the decedent for life and that at her death such property and specific amounts of money should be paid over to charitable corporations. The respondent determined the amount deductible as a bequest to charity by valuing the remainder interest by reference to mortality tables at the time of decedent’s death. In our opinion we said:

* * * The corporations did not receive the absolute ownership of the property in question, but were entitled to the corpus only after the expiration of the life estate of the widow. In such a case it is proper to value the remainder by reducing the amount to be received by an amount representing the delayed receipt of the bequest by the charities. See Dugan v. Miles, 292 Fed. 131; United States v. Farr’s Executor, 196 Fed. 996; and Simpson v. United States, 252 U.S. 547.
Whether the remainder going to the charities is to be valued by reducing the present value to future value, which we regard as preferable to the method used by the respondent, it is certain that the deduction for bequests to charities must be less than the amount of the money at the date of the decedent’s death. * * *

The obvious distinction between that case and the instant case is that there the widow took a vested life estate in the property passing to charities, while here, as we have pointed out above, there is no vested intervening estate. There was nothing of value to deduct from the residue of the estate in computing the value of charitable bequests, unless a value was to be ascribed to the contingent benefits to which each of the 31 relatives might become entitled, based on the probability of such beneficiary, through misfortune, becoming in need of support. This, however, was not done by the respondent and probably could not be done with any reasonable accuracy.

In Humes v. United States, 276 U.S. 487, the Supreme Court had before it almost the direct converse of the question here presented; that is, a deduction was sought of an amount representing the estimated value of contingent bequests to charity. The Court denied the deduction, holding that Congress did not intend to authorize a deduction for a contingency which could not be accurately determined. See also St. Louis Union Trust Co. v. Burnet, 59 Fed. (2d) 922, as to the nondeductibility of contingent charitable bequests.

Ithaca Trust Co. v. United States, 279 U.S. 151, is more directly in point. There, the testator bequeathed his residuary estate to his widow for life, authorizing the withdrawal of the principal of any sum necessary to maintain her “ in as much comfort as she now enjoys ”, with the remainder to charities. The court held that the provision for the maintenance of the widow did not render the gift to charity so uncertain as to prevent its deduction in computing the net taxable estate for estate tax purposes. We think that that might be said with even more certainty when the contingency involves only the income and not the principal of the trust property, as in the instant case.

Charitable bequests are favorites of the law, St. Louis Union Trust Co. v. Burnet, supra, and are expressly encouraged by the statute, Edwards v. Slocum, 264 U.S. 61.

We are of the opinion that the value of the residue of the decedent’s estate at the time of the decedent’s death, without any diminution on account of the contingent interests of the relatives referred to in the will, is deductible as a charitable bequest in computing the net taxable estate.

Judgment will ~be entered under Rule 50.


author: Goodeioh :

text:
    Joseph F. Hindes, Trustee for Anna E. Pope, Trustee for John W. Emerson, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61230, 61251-61253, 61282-61285, 61308-61311.
    Promulgated December 6, 1933. .

      Vernon GooJc, Esq., for the petitioner-.

      William E. Davis, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Joseph P. Hindes, Trustee Lillie E. White Trust; Joseph F. Hindes, Trustee Maggie M. Holding Trust; Joseph P. Hindes, Trustee Annie L. Murray, Pannie L. Murray and Sudie W. Murray Trust; Joseph P. Hindes, Trustee Plorence Parley Preston Trust; Joseph P. Hindes, Trustee Anna E. Pope Trust; Joseph P. Hindes, Trustee Laura Duke Trust; Joseph P. Hindes, Trustee Daisy McVickar Trust; Joseph P. Hindes, Trustee Eleanor Preston Parley Trust; Joseph P. Hindes, Trustee Blanche Duke Trust; Joseph P. Hiades, Trustee Lola Duke Johnson Trust; Joseph P. Hindes et al., Executors, Estate of Isaac E. Emerson.

   OPINION.

Goodeioh :

Respondent has determined deficiencies in income tax against petitioner as a trustee and as executor under the will of Isaac E. Emerson as follows:

All of the deficiencies arise upon respondent’s determination that the return to Emerson of certain common stock, which he had previously transferred to the trustee, followed by the transfer by Emerson to the trustee of certain preferred stock, constituted a taxable exchange. Since a transaction identical except as to the number of shares occurred in each case, the determination of its character will serve to dispose of all the cases, which were consolidated. The facts were agreed to and we adopt the stipulation of counsel as our findings. For an understanding of the issue, a shorter statement will suffice.

Isaac E. Emerson, late of Baltimore, president and principal stockholder of the Emerson Drug Co., was a man of wealth and long enjoyed a large income. For many years prior to his death he had contributed more or less regularly to the support of a number of his relatives. Came a time when he decided to make definite provisions for such allowances and to that end, during the period 1919 to 1921, he created 14 irrevocable trusts, each for the benefit of certain of his relatives. As trust property, he transferred to the trustee shares of common stock of the Emerson Drug Co. in such amounts for each trust as he deemed desirable and suitable. Of one trust, Anna E. Pope was trustee; of all the others the trustee was his close associate, Hindes, the petitioner. Generally the declarations provided for the periodical distribution of the trust income to the designated beneficiaries for life, and upon their deaths, to their children for a period of 10 years, at the end of which the corpus was to be distributed to those children or their issue; if there were no such issue, the corpus was to revert to the grantor or his estate. The terms of some of the indentures differed somewhat from that general outline, but not in a manner here material. It is conceded that the creation of these trusts was entirely gratuitous on Emerson’s part; that, without any bargaining with the beneficiaries, and without discharging any legally recognizable obligation to them, he made these gifts.

Thereafter, Emerson became dissatisfied with what he had done, chiefly perhaps because he found he had given away so much common stock that he no longer held a two-thirds majority in the Emerson Drug Co., but also because the cash and stock dividends upon the common stock had resulted in a greater income to some of the beneficiaries than he had intended; moreover, he was convinced that preferred stock was more suitable as corpus of the trusts than common. In 1921 he undertook to rearrange the entire matter of allowances to his relatives and, as a beginning, wrote to each of the life-tenant beneficiaries this letter:

I have recently been going over certain of my business affairs and think it advisable to make some changes in the allowances which I have heretofore been giving you and others of my relatives. As this matter is covered by a trust agreement under which Mr. Joseph IT. Hindes is trustee, it is necessary that you should sign the enclosed authorization addressed to him. Please attend to this as promptly as possible and I will let you know just what allowance I shall make you in the future under the new trusteeship.

The authorization mentioned is as follows:

Xou are trustee under a declaration of trust heretofore made by Captain Isaac E. Emerson in my favor. The making of this trust was entirely voluntary on Captain Emerson’s part and was intended to be an allowance from him to me toward my support. He has recently written me to the effect that he wishes to make some changes in the schedule of allowances which he has made from time to time for various relatives, and I am writing this line to say that I am entirely satisfied that he and you as trustees should make any change whatsoever that he may see 'fit in regard to the trust in my favor.

In the cases here before us, all the life-tenant beneficiaries (but not the remaindermen, for they were not so requested) executed and delivered that authorization, whereupon Hindes and Mrs. Pope, in December 1927, assigned and delivered to Emerson the common stock which they held as trustees under the several declarations of trust.

At, or about, that same time Emerson executed a second set of trust indentures, each naming Hindes as trustee and assigning shares of preferred stock of the Emerson Drug Co, as corpus of the trusts. In 1928 Emerson transferred additional preferred stock, increasing the corpus of one or more of the trusts. In five of the new trusts there were substantial changes, both as to beneficiaries and terms, from the old trusts which they supplanted; in two of the new trusts the life beneficiaries were the same but different remindermen were designated; while in seven of the new trusts the beneficial interests and terms were essentially the same as in the corresponding old trusts. In connection with the creation of the new trusts there was no agreement between Emerson, Hindes, or any of the beneficiaries other than evidenced by the letters above set out, and the determination of the amount of the corpus and the terms of the trusts were made by Emerson alone, without consultation with the trustee or the beneficiaries. By one of the new trusts both the value of the corpus and the annual income to the beneficiary were reduced; by the others the value of each corpus was substantially increased, although the income therefrom remained about the same as before.

Respondent has determined that the surrender by the trustee to Emerson of the common stock held as the corpus of each of the old trusts, and the transfer to the trustee by Emerson of preferred stock as the corpus for each of the new trusts, constituted an exchange of stocks, and was taxable, since section 203 (b) (1), Revenue Act of 1926, and section 112 (b) (1), Revenue Act of 1928, exclude an exchange of stocks from the classification of nontaxable transactions. .He has paired each old trust with its corresponding new trust and, treating each pair as a taxing unit, has determined as a taxable profit the amount by which the value of the preferred stock exceeds the cost of the common stock held as corpus by the old trust. As to Emerson, he has determined as taxable profit the amount by which the value of the common stock, when returned to him by the trustee, exceeds the cost of the preferred stock transferred to the trustees for benefit of the second trusts. The values and costs of the respective stocks and the number of shares transferred are not in dispute; in short, it is conceded that respondent’s computations respecting the amounts he treats as taxable profit are correct. The sole question for our determination is whether respondent erred, as petitioner contends he did, in treating these transactions as taxable exchanges.

We conclude that he did, for we see here not a taxable exchange of stocks, but, first, a gift by Emerson to his relatives; next, at his request, a voluntary relinquishment of it by the relatives, amounting to a gift back; and, finally, a second gift by Emerson. Such was the result accomplished, and the intervention of the trustees in the transfers to meet legal requirements does not here affect the character of the transactions. That the life, beneficiaries might voluntarily and gratuitously relinquish their rights and make a gift back is not disputed. The point is suggested, but not pressed, that perhaps the life beneficiaries could not relinquish for the remaindermen and that the latter might follow the trust property or maintain an action for damages against the trustees. Those contingencies we need not consider for, as respondent points out on brief, such matters are collateral and immaterial to the issue before us, and we may regard the transactions as valid, since, so far as our record shows, the parties at interest so accept them. See Francis M. Camp, 21 B.T.A. 962; Alfred T. Wagner, 17 B.T.A. 1030; Lewis E. Smoot, 25 B.T.A. 1038.

Respondent finds in the letter sent by Emerson to the life beneficiaries a promise of future allowances sufficient to serve as a consideration for a taxable exchange of stocks. We do not. The letter makes neither promise nor definite undertaking; at most it only infers a continuance of an allowance subject to such change as Emerson desired to make. Even so, the phrase “ changes in the allowances ” might mean — and the facts concerning the new trusts show that it did mean — that Emerson might give more, less, or nothing, according to his own whim or judgment. Apparently— and this is the test of the nature of the relinquishment — that was satisfactory to the trust beneficiaries. They felt that Emerson, having made them gifts, had the right to retract, and they were content to await his voluntary bounty which previously had not failed them — a resignation that Emerson giveth and Emerson taketh away. Nor do we, as respondent urges, regard Emerson’s desire to repossess the common stock as the controlling factor in determining the nature of the transactions. While he wanted the common stock, he also thought preferred stock, because of its greater security, was better for trust property, and his principal motive was to make “ changes in the allowances which I have heretofore been giving * * * my relatives.”

What is the distinction between a gift, and an exchange of stock, taxable under the statute? For the purposes of this case we need only point out a transaction which discloses the difference more clearly and forcefully than we could in discussion. Upon brief both parties tell us that a beneficiary of one of the first trusts (Mrs. Keith) did not accede to Emerson’s request to authorize the trustee to permit a change in the trust. After bargaining, a contract was entered into whereby she agreed to the exchange of 1,000 shares of common stock held by the trustee for her benefit for 12,000 shares of preferred stock and $5,000 in cash. Clearly, that transaction was a taxable exchange; respondent so determined and petitioner concedes it. The case of the Keith trust is not now before us, but the transaction is involved in the estate case, Docket No. 61311, wherein the tax to be imposed upon the profit arising from that exchange may be determined upon settlement.

Respecting the transactions involved in the cases now before us, we conclude that respondent erred in treating as taxable exchanges of stock the surrender of common stock to Emerson by the trustees of the old trusts and the transfer of preferred stock by Emerson to the trustee of the new trusts.

Eeviewed by the Board.

Judgment will be entered for 'petitioners m all cases except Docket No. 61311, wherein judgment will be entered v/nder Rule 50.


author:
Smith :
      Seawell,

text:
    J. Gilmore Fletcher, Executor of the Estate of Joseph Riter, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51679.
    Promulgated December 6, 1933.

      George B. Berger, Esg., for the petitioner.

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

Smith :

The first question presented by this proceeding is whether the property included in the testamentary trust over which the decedent, Joseph Eiter, exercised the power of appointment is includable in the gross estate. The applicable provision of the statute relating thereto is section 302 of the Revenue Act of 1926, which, so far as material, reads as follows:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth; and
(h) Except as otherwise specifically provided therein subdivisions (b), (e), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estate, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.
* * * # ⅜ ⅜ *

The petitioner contends that the power of appointment in this case is a “ special or limited power ” and not a “ general power ” and therefore that the Commissioner erred in including in the gross estate the value of the appointive property-. It is the respondent’s contention that the value of the appointive estate passed under a general power of appointment within the contemplation of the statute and therefore that its value was properly included in the gross estate.

A power of appointment is general when it is exercisable in favor of any person the donee may select, and special or limited when it is exercisable only in favor of persons or a class of persons designated in the instrument creating the power. Fidelity-Philadelphia Trust Co. v. McCaughn, 34 Fed. (2d) 600; certiorari denied, 280 U. S. 602; Farmers Loan & Trust Co. v. Bowers, 29 Fed. (2d) 14.

Under the will of his father, the decedent had a power to appoint the trust estate left by his father “ for such person or persons as my said son Joseph, by his last will and testament, may direct, limit and appoint.” It is to be noted that there is no provision that the decedent, Joseph Riter, could appoint the estate to a corporation. But the phrase “ person or persons ” is usually held to include corporations unless there is a provision in the power that appointment may not be made to a corporation. It was held in Farmers' Loan & Trust Co. v. Shaw, 56 Misc. Rep. 201; 107 N.Y.S. 337, that an appointment may be made to a corporation under a power to appoint in any person. This decision was affirmed, Farmers’ Loan & Trust Co. v. Shaw, 111 N.Y.S. 1118; 127 App. Div. 656.

The petitioner makes the contention that inasmuch as under the will of Thomas B. Riter the decedent could not have exercised a power of appointment except by will, that the power was “ special ” and not “ general.” We are of the opinion that the point is not well taken. As was stated by the court in Whitlock-Roso v. McCaughn, 21 Fed. (2d) 164:

* * * The power wbicb the Congress had in mind, and which it called “ general ”, was a power which could be exercised by either will or deed, and did not have to include both. A decedent could select either method, by will or deed, by which a power could be exercised by a donee. Either method, if the donee of the power is not restricted as to appointees, complied with the statute, and the power is general.

The petitioner further argues that inasmuch as the decedent, Joseph Riter, could not have exercised the power if he had left issue surviving, the power is limited and not general.

The petitioner’s contention upon this point is not well founded. There was a contingency to the exercise of the power. The power could not have been exercised by the decedent except upon the condition that he died without issue surviving. But a contingency or condition of this character does not change a general power into a special power. Conditional powers or powers upon condition similar to that in this proceeding have been before the Pennsylvania courts on a number of occasions and the courts have consistently held that the condition did not change a general power into a special power. In re Forney's Estate, 280 Pa. 459; 124 Atl. 424, dealt with a testamentary power similar to the one in the present instance. There, as to a share of his estate, the donor of the power created a testamentary trust with a life estate to his daughter:

* * * and after the death of the daughter he bequeathed the same to her child or children, but, should she die without leaving child or children, then said share to be paid to such person or persons as the daughter so dying should * * * by any last will and testament, or instrument in the nature thereof, direct, limit, and appoint * * *

Having so died, the daughter exercised the power in favor of her sister, but since in so doing she made the property a part of her own estate for all purposes, it was held that her exercise of the power was subject to inheritance tax. The later case of In re Twitchell's Estate, 284 Pa. 135; 130 Atl. 324, characterizes the power involved in In re Forney's Estate, supra, as a “ general power.”

In Cowman v. Classen, 156 Md. 428; 144 Atl. 367, the donor of the power gave his wife a life estate, a succeeding life estate to his daughter, and a remainder to the daughter’s issue, “ but should she however die without issue living at the time of her death then and in that event one-half part thereof, my trust estate, * * * I give, devise and bequeath to such person or persons or body corporate * * * as she may by her last will and testament designate or appoint.” The daughter died without issue, and by her will made disposition of the property over which she had power of appointment. The court held this was a general power of appointment. The court stated:

* * * it was a general power, presently given to a designated person, and the contingency upon which it was to arise could not be finally ascertained until the donee’s death, and, necessarily, the will by which the power was to be exercised had to be executed during the lifetime of the donee, and so before the contingency upon which the power depended could be made certain.
* * ⅜ * * * *
It seems settled law that, where the authority to execute a power is dependent upon a contingent event, it may be exercised before the happening of the contingency, and the execution will be valid when the contingent event subsequently occurs; and this is unquestionably true from the necessity of the case, when the happening of the event cannot be ascertained until the moment of the donee's death, as when the event is the dying of the donee without issue living at his death. * * * [Citing numerous cases.]

In support of his contention that the power exercised by the decedent was a special power and not a general power, the petitioner urges upon the Board the decision of the District Court for the Eastern District of Pennsylvania in Fidelity Trust Co. v. McCaughn, 1 Fed. (2d) 987. There the donee of the power was given power to appoint by her will to whomsoever she chose over the time she “ remains unmarried.” The donee remained unmarried and by her will exercised the power. The court held that the power exercised was a special power and not a general power inasmuch as the power of disposition denied to the donee control over what should become of the property during her lifetime; that since the duration of time or possession of the power was limited it could not be held to be a general power. This decision appears to the Board to be out of line with the great weight of legal authority. In any event, the Board is of the opinion that a condition which may exist with respect to the exercise of a power of appointment has no bearing upon the question of whether it is a general power of appointment or a special power of appointment. The contentions of the respondent upon this point are sustained.

The second question for our consideration is whether the amount of the estate tax should be credited with the amount of the collateral inheritance tax paid to the Commonwealth of Pennsylvania. The respondent contends that it should not be by virtue of section 301 (b) of the Revenue Act of 1926, as amended by section 802 of the Revenue Act of 1932. Section 301 (b) of the Revenue Act of 1926 provides:

Tbe tax imposed by this section shall be credited with the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or Territory or the District of Columbia, in respect of any property included in the gross estate. The credit allowed by this subdivision shall not exceed 80 per centum of the tax imposed by this section, and shall include only such taxes as were actually paid and credit therefor claimed within three years after the filing of the return required by section 304.

Section 802 of the Revenue Act of 1932 provides, so far as material, as follows:

(a) Section 301 (b) of the Revenue Act of 1926 is amended to read as follows:
“(e) The tax imposed by subdivision (a) of this section shall be credited with the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or Territory or the District of Columbia, in respect of any property included in the gross estate (not including any such taxes paid with respect to the estate of a person other than the decedent). The credit allowed by this subdivision shall not exceed SO per centum of the tax imposed by subdivision (a) (after deducting from such tax the credits provided by subdivision (b)), and shall include-only such taxes as were actually paid and credit therefor claimed within four years after the filing of the return required by section 304, * * *”

The reason for amending section 301 (b) of the Revenue Act of 1926 by incorporating therein the parenthetical clause “ not including any such taxes paid with respect to the estate of a person other than the decedent ” is stated in the Ways and Means Committee Report on the Revenue Bill of 1932 (Rept. No. 708, 72d Cong., 1st sess., p. 46), as follows:

Subsection (a) of this section amends subdivision (b) of section 301 of the Revenue Act of 1926. The changes are:
(1) A clarifying provision to remove any basis of a claim for credit for State death taxes paid with respect to another person’s estate, where the property is included in the decedent’s estate.

Upon this point the petitioner submits, that at the time of the death of Thomas B. Riter there was no inheritance tax imposed by the laws of the Commonwealth of Pennsylvania on assets or property passing from any person dying seized or possessed thereof to or for the use of a father, mother, husband, wife, children, and lineal descendants born in lawful wedlock, children of a former husband or wife, or a widow of the son of the person dying seized or possessed thereof where such persons were or are commonly known and designated as direct heirs in the laws and decisions of the Commonwealth of Pennsylvania; but that there was at the time of the death of Thomas B. Riter an inheritance tax, known as a collateral inheritance tax, imposed on assets or property passing from any person dying seized or possessed thereof to any person or persons or to bodies corporate or politic, other than persons designated as direct heirs, and that such person or persons or bodies corporate or politic, other than direct heirs, were and are commonly known or designated by the laws and decisions of the courts of Pennsylvania as collaterals or collateral heirs; further, that under the laws of the Commonwealth of Pennsylvania and the State of Florida the will of Joseph Eiter speaks as of the date of his death and that under these laws the will did not become operative or effective until the date of his death, and that under these laws no part of the property of the testamentary trust created by the will of Thomas B. Eiter passed under the power of appointment exercised by Joseph Eiter until May 16, 1928, the date of the death of Joseph Eiter. These propositions of law are ifot denied by the respondent and the Board finds them to be sound.

The question remains, however, as to whether the collateral inheritance taxes paid to the Commonwealth of Pennsylvania on December 27,1928, in the amount of $79,094.38, were taxes paid with respect to the estate of a person other than the decedent.

The collateral inheritance tax law of the Commonwealth of Pennsylvania as it existed at the date of the death of Thomas B. Eiter in 1907, had, with slight modifications, long been in effect. There have been many decisions of the' courts • of Pennsylvania bearing upon the nature of the tax. The fundamental thought in enacting the Collateral Inheritance Tax Act of 1887, which with slight modification was in effect in 1907, was to levy a toll against the passing of property of citizens going by reason of death to collaterals in whatever light the taking might be viewed. Shugars v. Chamberlain Amusement Enterprises, 130 Atl. 426, 427. In that case it was stated that “ the tax springs into life on the death of property owners; eo instanti it becomes seated on their estates.” The court further stated, referring to Coxe's Estate, 193 Pa. 100; 44 Atl. 256:

* * * We held that under the will these persons could only be determined after the termination of the life estate through the death of the widow. The tax under the act did not become due and payable until the specified contingency happened; at that time the value of the property as it then existed was to be used as the basis of assessment on which the tax must be declared. * * *

From the above decisions of the Supreme Court of Pennsylvania it is apparent that the collateral inheritance tax paid on December 27, 1928, to the Commonwealth of Pennsylvania was an excise tax, which attached to the trust estate created by the will of Thomas B. Eiter in respect of that estate passing to collaterals. The appointee of property under a general power of appointment receives that propei'ty from the donor under Pennsylvania law. In re Hagen’s Estate, 285 Pa. 326; 132 Atl. 175; In re McCord’s Estate, 276 Pa. 459; 120 Atl. 413; In re Forney’s Estate, supra; In re Kates’ Estate, 282 Pa. 417; 128 Atl. 97; In re Twitchell’s Estate, supra,; In re Valentine’s Estate, 297 Pa. 99; 146 Atl. 453. It is true that the tax attached to that estate by reason of the fact that it passed to collater-als by virtue of the exercise of the power of appointment by Joseph Riter. But the tax attached not by virtue of his exercise of appointment, but by the fact that the property passed to collaterals. If the property had passed to collaterals by reason of the nonexercise of the power of appointment by Joseph Riter, the tax would nevertheless have attached. With these facts in mind we think that it is clear that the collateral inheritance tax paid to the Commonwealth of Pennsylvania was not paid with respect to the estate of Joseph Riter.

The petitioner argues that this interpretation of the statute defeats the intention of Congress with respect to crediting the amount of the Federal estate tax with the amount of the inheritance tax paid to a state. But this is not necessarily so. By section S03 (b) (2) of the Revenue Acts of 1924 and 1928, the Congress has permitted the deduction from the gross estate of—

An amount equal to the value of any property (A) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, or (B) transferred to the decedent by gift within five years prior to his death, where such property can be identified as having been received by the decedent from such donor by gift or from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. * * *

This provision was designed to exempt from the incidence of the estate tax property included in the gross estate which had been subject to estate tax within a period of live years. Clearly, if Thomas B. Riter’s estate had been subjected to the payment of an inheritance tax to the Commonwealth of Pennsylvania upon his death in 1907, it could not be argued that the Federal estate tax payable upon the death of Joseph Riter is entitled to be credited with the amount of the tax paid on the estate of Thomas B. Riter of many years before.

It is not the province of this Board to speculate as to what the intention of Congress was with respect to the allowance of a credit against the Federal estate tax of the amount of inheritance tax paid to a state. Where the language of the statute is unambiguous, resort may not be had to principles of interpretation applying to ambiguous language. The only question which we have to decide is whether the collateral inheritance tax paid to the Commonwealth of Pennsylvania on December 27, 1928, was paid with respect to the estate of the decedent. We are of opinion that it ivas not. The action of the resjiondent in refusing to credit the amount of the Federal estate tax with the collateral inheritance tax paid is sustained.

Reviewed by the Board.

Judgment will he entered under Bule 50..

Seawell,

dissenting: The estate of Joseph Biter, by reason of the exercise by him of a power under Thomas Biter’s will, paid to the State of Pennsylvania the succession tax in controversy and should, in my opinion, be credited with the proper amount thereof in computing the estate tax of Joseph Biter.