author: Smith: Trammell,

text:
    Frank M. McNab, Petitioner, v. Commissioner of Internal Revenue, Respondent. William H. Schmidt, Petitioner, v. Commissioner of Internal Revenue, Respondent. Rosemarie Macbeth, Petitioner, v. Commissioner of Internal Revenue, Respondent. Carrie S. Protheroe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58083, 58084, 60502, 66957.
    Promulgated October 11, 1935.

      Melvin D. Wilson, Esq., and Joseph D. Peeler, Esq., for the petitioners, Frank McNab, William H. Schmidt, and Rosemarie Macbeth.

      Thomas B. Dempsey, Esq., for the petitioner, Carrie S. Protheroe.

      Ralph E. Smith, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, involve deficiencies in income tax for the year 1927 as follows:

In Docket No. 66957 the deficiency constitutes petitioner’s liability as transferee of the assets of the estate of Thomas J. Protheroe. Los Angeles, California, under section 280 of the Revenue Act of 1926.

The sole question involved in all of these proceedings is whether the bonds of the Southern California Gas Corporation (hereinafter called Gas Corporation) received by petitioners (in Docket No. 66957 received by the petitioner’s transferor) in exchange for shares of common stock of the Southern California Gas Co. (hereinafter called Gas Co.) are to be treated as received in a tax-realizing reorganization, or as received in a nontax-realizing reorganization.

The facts are contained in a signed stipulation of the parties, which may be briefly summarized as follows:

Petitioners are all individuals residing in Southern California. All of them held shares of common stock of the Gas Co. which they exchanged on November 17, 1927, for cash and bonds of the Gas Corporation, under conditions hereinafter set out.

In 1927 there were two existing corporations, the Gas Co. and the Midway Gas Co. (hereinafter called Midway), which were incorporated under the laws of the State of California on October 5, 1910, and November 11, 1911, respectively. The former was principally engaged in distributing natural and artificial gas to retail and industrial consumers and the latter in purchasing natural gas in the oil fields, transporting it to cities and selling it to distributing companies.

Under date of October 17, 1927, an agreement was entered into between some of the larger stockholders of the Gas Co. and Midway, and a syndicate of bankers composed of the Chase Securities Corporation, Stone & Webster, Inc., Hunter, Dulin & Co., and Pynchon & Co., which provided, among other things, that (1) the Gas Co. should acquire the properties and business of Midway for capital stock and bonds of the former, and (2) that a new corporation should be organized which should acquire all, or practically all, of the common stock of the Gas Co. and all of the capital stock of Midway for cash and bonds of the new company.

On October 4, 1927, Midway adopted resolutions authorizing the sale of its properties and business to the Gas Co. These resolutions provided that it was the plan of the board of directors that:

* * * saicl common capital stock and said bonds of the Southern California Gas Company to be received from Midway Gas Company assets shall be distributed to the stockholders of this corporation when, as and if received by this corporation and as soon as such distribution may lawfully be made.

On October 17, 1927, the Gas Co. had issued and outstanding 240,000 shares of common stock of the par value of $25 a share, and 182,226 shares of preferred stock of a par value of $25 a share. Both classes of stock had equal share voting rights. On said date Midway had issued and outstanding 23,264 shares of capital stock of a par value of $100 a share, all fully voting common stock.

On October 31,1927, the Gas Co. acquired all of the properties and business of Midway as of August 31, 1927, in consideration of a new issue of 80,000 shares of its capital stock of a par value of $25 a share, and $2,942,000 face value of a new issue of bonds of said Gas Co., due in 1957, and the assumption of Midway’s liabilities. Immediately after this transaction and throughout the remainder of 1927 the Gas Co. had outstanding 320,000 shares of common capital stock and 182,226 shares of voting preferred stock.

In accordance with the terms of the agreement of October 17,1927, a new corporation, the Gas Corporation, was organized under the laws of the State of Delaware on November 12, 1927. This corporation had an authorized capital stock of $16,500,000, consisting of $7,500,000 preferred and $9,000,000 common stock, all of which was issued and outstanding on November 17, 1927. On the last named date it acquired under the provisions of contracts of October 17 and November 17, 1927, and certain deposit agreements referred to in the contracts, 23,121 shares out of a total of 23,261 shares of the capital stock of the Midway Gas Co., and 239,608 out of a total of 320,000 shares of the outstanding common stock of the Gas Co. for cash and bonds of the Gas Corporation.

On November 17, 1927, the Gas Corporation issued for the shares of stock of Midway and the Gas Co. bonds having a par value of $24,942,000. Virtually all of the remaining $58,000 face value of the bonds of that issue were subsequently issued in the acquisition of the remaining common shares of stock of the two companies. The shares of stock of the Gas Co. and Midway acquired by the Gas Corporation as herein set forth were deposited with a trustee as collateral for the bonds issued as partial consideration therefor. On November 17, 1927, the board of directors of Midway declared a dividend of $2,942,000 and paid the same in temporary certificates of the first mortgage and refunding gold bonds, 5 percent, “ due 1937 (sic) ” of the Gas Co.

These bonds were sold on November 17, 1927, at 95, and the proceeds therefrom were used by the Gas Corporation in the acquisition of the shares of stock of Midway and the Gas Co., as aforesaid.

On December 10, 1927, Midway distributed the 80,000 shares of common stock of the Gas Co. to its stockholders. The Gas Corporation received 79,508 of the 80,000 shares of the common stock of the Gas Co. Midway did no business thereafter, but retained its charter until March 31, 1934, for the purpose of settling its income taxes for prior years.

After the acquisition of the 319,116 shares of the common stock of the Gas. Co. by the Gas Corporation as aforesaid, the Gas Co. continued and (still continues) its corporate existence. Its operations were enlarged, as it then had the gas-gathering and transporting assets formerly owned by Midway. There were some changes in its directory management.

Pursuant to the agreement of October 17, 1927, as modified by an agreement dated November 17, 1927, petitioner Rosemarie Macbeth received for her 3,996 shares of common stock of the Gas Co. $234,-195.57 cash and bonds of the Gas Corporation of the par value of $308,393.30 and of the fair market value of $286,017.70. The $234.-195.57 was the amount of cash payable to petitioner Rosemarie Macbeth after deducting $1,875 per share brokerage commissions and her share of other expenses of carrying out the transaction. She reported in her 1927 return a profit of $234,195.57, being the amount of the cash received. She did not in 1927 sell or otherwise dispose of any of the bonds of the Gas Corporation received for her stock. The respondent adjusted her income for 1927 by increasing the same in the amount of $286,017.70 representing the fair market value of the bonds received.

On November 17, 1927, petitioner William H. Schmidt was the owner of 80 shares of the common stock of the Gas Co. which had cost him $500. He received for the 80 shares of common stock of the Gas Co. $6,336.65 in cash and bonds of the Gas Corporation of the par value of $4,500 and of the fair market value of $4,140. The transfer of the stock for cash and bonds was effected under the terms of a deposit agreement dated June 24, 1927. This petitioner reported in his 1927 return a profit of $6,336.65, being the amount of the cash received. He did not in 1927 sell or otherwise dispose of any of the bonds of the Gas Corporation received for his stock. The respondent adjusted this petitioner’s income for 1927 by increasing the same in the amount of $4,140 representing the fair market value of the bonds received.

On November 17, 1927, petitioner Frank M. McNab was the owner of 176 shares of the common stock of the Gas Co. which had cost him $2,100. He received for his 176 shares of the common stock of the Gas Co. $13,384.74 in cash and bonds of the Gas Corporation of the par value of $10,500 and of the fair market value of $9,660. The transfer was effected under the terms of a deposit agreement dated June 24, 1927. This petitioner reported in his 1927 return a profit of $11,221, by deducting $2,163.74 against the cash received. He did not in 1927 sell or otherwise dispose of any of the bonds of the Gas Corporation received for his stock. The respondent adjusted this petitioner’s income for 1927 by increasing the same in the amount of $9,723.74, by including $9,660 as representing the fair market value of the bonds and by reducing the cost $63.74.

Petitioner Carrie S. Protheroe is the transferee of Thomas J. Protheroe, deceased, whose estate owned 192 shares of the common stock of the Gas Co. which had a basis of $4,413. The estate received for this stock $14,900 in cash, less $340.57 deducted as its share of the expense of the transaction, and bonds of the Gas Corporation having a par value of $11,500 and a fair market value of $10,580. The transfer was effected under the terms of a deposit agreement' dated June 24, 1927. This petitioner’s transferor did not in 1927 sell or otherwise dispose of the bonds of the Gas Corporation received for his stock.

It is the contention of the petitioners in these proceedings that the exchange by the stockholders of the Gas Co. of a majority of the voting capital stock of that company for cash and bonds of the Gas Corporation, a Delaware corporation, organized for that purpose, was a merger or consolidation, or something in the nature thereof, and, as such, constituted a reorganization within the meaning of section 203(h) (1) of the Revenue Act of 1926, and that as a result of such reorganization the value of the bonds received in connection with the transaction was not subject to tax in accordance with section 203(d) (1) of the same taxing act.

The pertinent provisions of the statute are as follows:

Seo. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
s¡: * * * * * *
(d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
* >¡4 * # # * H*
(h) (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation or substantially all the properties of another corporation). * * *
(2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

As stated by the Supreme Court in Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, with reference to the term “ reorganization ” as contained in section 203 (h) (1) (A), above quoted:

The words within the parenthesis may not be disregarded. They expand the meaning of “ merger ” or “ consolidation ” so as to include some things ■which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness can not be designated as either merger or consolidation. * * *

No contention is made by the petitioners that the transaction by which the Gas Corporation acquired in excess of 60 percent of the voting capital stock of the Gas Co. was a strict merger or consolidation. But it is contended that within the expanded meaning of the phrase “ merger or consolidation ” as contained within the parenthetical clause of section 208 (h) (1) (A) of the Revenue Act of 1926 there was a merger or consolidation of these companies. It is pointed out that the Gas Corporation acquired a majority of the voting stock (both common and preferred stock being voting stock) of another corporation, namely, the Gas Co.

As observed by the Supreme Court in Gregory v. Helvering, 293 U. S. 465, the term “ reorganization ” contained in section 112 (i) of the Revenue Act of 1928 refers to the reorganization “ of corporate business.” A transaction of the nature of that contained in these proceedings can not be said to partake of the nature of a merger or consolidation unless there is a continuity of interest on the part of the old corporation or of its stockholders in the new corporation. Cortland Specialty Co. v. Commissioner (C. C. A., 2d Cir.), 60 Fed. (2d) 937; Gregory v. Helvering, supra; Mead Coed Co. v. Commissioner (C. C. A., 4th Cir.), 72 Fed. (2d) 22. Where the continuity of interest is claimed to rest in the stockholders of the old company, in order that the claim may be valid it must appear that the proprietary interest of the old stockholders survives in the new corporation. Where the interest of the stockholders of the old corporation in the new is represented by short term notes there is no reorganization of the corporation within the contemplation of the statute. Pinellas Ice & Cold Storage Co. v. Commissioner, supra. Where the interest of the old stockholders is represented only by bonds of the new corporation, the requirement for a continuity of interest is not fulfilled. As was stated by the Circuit Court of Appeals for the Second Circuit in Worcester Salt Co. v. Commissioner, 75 Fed. (2d) 251, “ bonds are merely an evidence of indebtedness ”, and the receipt of bonds by an old corporation gave the old corporation no interest in the new corporation. Where there is no continuity of proprietorship interest, the reorganization provisions of the Revenue Act of 1928, which defer tax upon income actually received are not applicable.

In the proceedings at bar the petitioners received nothing but cash and bonds of the Gas Corporation in exchange for their shares of stock of the Gas Co. They had no continuing interest in the new corporation. They are therefore liable to income tax upon the profits realized from the exchange which are determined by deducting from the cash plus the fair market value of the bonds received the cost to the petitioners of their shares of stock in the Gas Co. Cf. Hay Foundry & Iron Works, 33 B. T. A. 144. The stipulated facts show the basis for the computation of such profits.

The appeal of J. S. Rippel & Co., 30 B. T. A. 1146, involved another stockholder of the Southern California Gas Co., who received in exchange for his shares of stock cash and bonds of the Southern California Gas Corporation. We held that there was no reorganization of the Southern California Gas Co. because it had not been dissolved, and in support of our opinion cited John J.. Watts, 28 B. T. A. 1056. The petitioners point out that the decision of the Board in the case of John J. Watts, supra, was reversed by the Circuit Court of Appeals for the Second Circuit, 75 Fed. (2d) 981. Hence, they argue that the fact that the Gas Co. was not dissolved is immaterial. Granted that this was so, we are nevertheless of the opinion, for reasons set forth above, that the contentions of the petitioners herein are not meritorious.

Reviewed by the Board.

Judgment will he entered under Bule 50.

Artjndell dissents.

Trammell,

dissenting: I now think that the Bippel case was in error and should not be followed.


source: Caselaw Access Project

author: Murdock: Smith, Seawell,

license: Public Domain

text:
    Albert K. Smiley, Petitioner, v. Commissioner of Internal Revenue, Respondent. Francis G. Smiley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74424, 74425.
    Promulgated October 15, 1935.

      Charles de la Vergne, Esq., for the petitioners.

      8. B. Anderson, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined deficiencies in income tax for the year 1930 as follows: Albert K. Smiley (Docket No. 74424), $489.94; and Francis G. Smiley (Docket No. 74425), $493.02. The Commissioner increased the income of each as reported by $3,250. This amount represents one half of $6,500 which was payable under the will of Daniel Smiley (father of the petitioners) to Effie F. Smiley (mother of the petitioners) and Ellen E. Sanborn (an aunt of the petitioners). This action of the Commissioner is assigned as error. The cases were consolidated and the facts in each have been stipulated.

Daniel Smiley died testate on February 14, 1930. His will provided for the payment of $6,000 annually to his wife, Effie F. Smiley, and $1,500 annually to her sister, Ellen E. Sanborn. The will provided, further, that these legacies should be a charge upon his “ Lake Mohonk property.” That property included a hotel and was left to the petitioners in equal shares as a part of their father’s residuary estate. The petitioners formed a partnership known as Smiley Brothers, which operated the Lake Mohonk property from February 15 until December 31,1930. The partnership paid $6,500 during that period to Effie F. Smiley and Ellen E. Sanborn pursuant to the terms of the will of Daniel Smiley. This amount was deducted in computing the net income of the partnership distributable to the partners. The Commissioner held that the $6,500 should not be deducted in computing the net income of the partnership distributable to the partners. He stated in the notice of deficiency that he was acting upon authority of Burnet v. Whitehouse, 283 U. S. 148, but that case is not in point. The Commissioner filed no brief.

A partner is taxable with his distributive share of the net income of the partnership. Section 182 (a) of the Revenue Act of 1928. These petitioners were equal partners and the only question in issue is the amount of their distributive shares of the net income of the partnership known as Smiley Brothers. This partnership was not purchasing the Lake Mohonk property and was not making any capital investment in the property, nor was it releasing that property from charges against the property fixed by the will of Daniel Smiley. (Cf. Corbett Investment Co. v. Helvering, 75 Fed. (2d) 525). It was merely operating the property for what profit it could make and call its own over and in excess of the expenses and charges which it had to pay in connection with the operation. One of the fixed annual charges which it had to pay for the privilege of operating the property was the amount here in question. That charge was made by the decedent and had to be discharged from the hotel revenues. The amount in controversy must be deducted before the net income of the partnership can be determined. The partnership was entitled to keep only such profits as remained from the operation of the hotel after the payment of this amount. Not all of the gross income from the hotel property belonged to the partnership. The petitioners, independently of the partnership, were not entitled to retain all of the revenues from the operation of the hotel, since the testator had given them the property subject to rights therein which he had given to others. The partnership was not entitled to the $6,500, but had to pay it out to those entitled to it. Obviously it formed no part of the partners’ distributive share of the net income of the partnership. Neither did it form a part of the petitioners’ income on any theory. This is in accordance with the following decisions of this Board: Walter T. Gudeon, 32 B. T. A. 100; Julian L. Hamerslag, 15 B. T. A. 96 (as to a monthly payment of $50); James M. Hutchinson, 11 B. T. A. 789; Jamas Brown, 10 B. T. A. 1036.

Reviewed by the Board.

Decision will be entered under Buie 60.

Smith,

dissenting: The annuities payable to Effie E. Smiley and Ellen E. Sanborn are made a charge upon the “ Lake Mohonk property.” The petitioners are devisees of the property subject to the annual charges.

If petitioners had operated the Lake Mohonk property as executors of the will of their father they would not have been entitled to deduct the amounts paid to the annuitants in 1930, for the annuities were payable at all events. Burnet v. Whitehouse, 283 U. S. 148; Helvering v. Pardee, 290 U. S. 365. The annuities were received by the annuitants as legacies. They did not constitute taxable income to them. The devisees and legatees of the residuary estate were not entitled to the deduction of the annuities. Helvering v. Pardee, supra.

In the majority opinion it is held that the taxable profits from the operation of the hotel in 1930 are after the deduction of the annuities paid. I do not think that this is so. Cf. Corbett Investment Co. v. Helvering, 75 Fed. (2d) 525. The petitioners had to pay the annuities. But they were not deductible expenses to them. They constituted capital charges.

Seawell,

dissenting: Petitioners received the Lake Mohonk property own onere. There was no compulsion that they should use it or otherwise cause it to produce income. Their tenure depended upon the payment of the legacies to the mother and aunt, as the property was the pledge to assure the payment whether or not it produced income. If the prevailing opinion is correct, it would seem that the income of the property, if any, is exempt to the extent of $7,500 a year so long as both Mrs. Smiley and Mrs. Sanborn live. I do not think this is according to the law of the case.

Smith and ARNOLD agree with the above dissent.


author: McMahon:

text:
    Citizens Water Works, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61147, 68579, 73546.
    Promulgated October 15, 1935.

      Harry O. Stuttle, Esq., and G. H. Moore, Esq., for the petitioner.

      G. A. Bay, Esq., for the respondent.
   opinion.

McMahon:

These are proceedings, duly consolidated for hearing and opinion, for the redetermination of deficiencies in income tax for the calendar years 1929, 1930, and 1931 in the respective amounts of $1,721.60, $1,714.95, and $1,394.90.

It is alleged that the respondent erred in “ deducting dividends ” in the years 1929,1930, and 1931 in the respective amounts of $17,340, $16,770, and $16,620, and that he erred in failing to hold petitioner exempt from taxation under the provisions of section 103 (14) of the Revenue Act of 1928. These allegations were denied by respondent. The petitioner also maintains that it is exempt from Federal taxation, irrespective of the express statutory exemption, as an instrumentality performing an essential governmental function.

The material facts are not disputed.

The city of Litchfield, Illinois, is a municipal corporation operating under the laws of Illinois. Its population, according to the 1930 census, was about 6,612.

For a time immediately prior to 1925 the city of Litchfield operated its own water system. The water furnished from a reservoir south of the city was muddy and had a bad odor. The residents could not drink this water. Furthermore, this reservoir proved to be inadequate. It frequently went dry. The reservoir was relatively shallow, resulting in a luxuriant aquatic growth which imparted to the water a hitter taste. The water was practically unfit for domestic use and most industrial uses. Water was also obtained from a creek, which was somewhat better, although it was also of a poor quality due to the sluggishness of the stream. Due to aquatic organisms it also had a disagreeable odor and taste. The creek was also quite muddy. The water system then in use was used more generally for flushing water closets and sprinkling lawns. The citizens depended upon wells for most of their domestic water supply including drinking water. Analyses showed that both the well water and th.e water from the water system were unfit for human consumption because of pollution. During the time these sources of water supply were in use there were frequent outbreaks of typhoid fever and dysentery contracted at least in part from polluted drinking water. Most of the sewage was not carried away by water or otherwise. This water supply was inadequate for fire protection and sanitary purposes. Furthermore, the water system equipment then in use did not furnish sufficient pressure.

Due to the above described conditions the city of Litchfield determined upon the construction of a new water system, and employed an engineering firm to make an investigation looking to the construction of such system. The new water system recommended by the engineers contemplated expenditures in excess of the amount for which the city of Litchfield was permitted to become indebted under legal limitations restricting its indebtedness to an aggregate not exceeding 5 percent on the value of the taxable property therein.

Local people were willing to help to finance a water system if they could be satisfied that they would be repaid sometime. Accordingly, the petitioner was organized on February 16, 1924, under an act of the .General Assembly of the State of Illinois entitled “An Act in relation to corporations for pecuniary profit ” approved June 28, 1919. The articles of incorporation of the petitioner provide for a life of 50 years and for an authorized capital stock of 2,990 shares of preferred stock and 10 shares of common stock, all of a par value of $100 per share. They also provide that the management of the corporation shall be vested in seven directors. The preferred stock of the petitioner was subscribed for by about 250 persons, practically all of whom were citizens of Litchfield. The $1,000 par value of common stock was subscribed for by 10 of its citizens. They have received no dividends. The holders of the preferred stock have been receiving dividends ever since organization. During the period of construction, when the petitioner derived no revenues, the city paid the holders of preferred stock the amount of their dividends and the petitioner never repaid the city. During the years in controversy herein the petitioner paid dividends of 6 percent to the holders of the preferred stock.

On March 20, 1924, the city of Litchfield entered into a contract with the petitioner, but it was not until over a year thereafter that the new water system was completed.

The contract was carried out by the parties. Under the contract certain considerations moved from the city to the petitioner. As one of the considerations, the petitioner agreed to furnish and did furnish water, in the years in question, to the city for fire and other public purposes, without any further charge. The city allowed petitioner to use its existing supply main and distributing system in the city, and kept the same in repair. The city owns the transmission lines within the city limits, while petitioner owns those outside of the city limits. The city paid for its hydrants. After the new water system was installed a great many more connections with the water system were made. The city, at its own expense, put in more water mains for fire protection and to supply the demand for service, spending about $100,000 therefor, and paid for them by special assessments. The total amount of bonds issued by the city of Litchfield for water purposes between July 1922 and April 1, 1931, was $149,400.

After the new water system was completed the water delivered to the consumers was clear, colorless and substantially free from disagreeable taste and odor, and was of a good sanitary quality. Due to the adequate supply of water, sewage disposal of the city was much improved. Since the completion of the new waterworks in 1925 there has been improvement in the sanitary conditions of the city and a marked reduction in the number of cases of typhoid fever and of intestinal infection.

The petitioner paid its secretary a salary, but none of its other officers received salaries. Its directors met once a month. They were guided by ordinances and resolutions of the city council.

The petitioner’s gross income was derived from charges made for water furnished to private individuals, collected by the city and turned over to it, with the exception of 5 percent net thereof, which was retained by the city.

The petitioner paid a Federal income tax for the years 1925, 1926, 1927, and 1928. The income tax returns of the petitioner for the years 1929, 1930, and 1931, the years in question here, show, among other things, the following:

Year

Gross income

Deductions

Interest

Depreciation

5% to city

Total

Net income

Credit

Tax due

1929.. $27,932.91 $17,340 56.987.14 $1,397.23 $25,724.37 $2,208.54 $3,000 None

1930.. 25,558.19 16,770 6.987.14 1,277.80 25,034. 94 523.25 3,000 None

1931.. 21,611.27 16,620 6,987.14 23,607.14 1,995.87 None

In the above returns the items termed “ interest ” represent the 6 percent dividends paid upon the petitioner’s preferred stock.

Attached to each of the returns for 1929 and 1930 is a statement in which petitioner claims that.it is exempt from Federal taxation.

The respondent in the notice of deficiency for the year 1929, among other adjustments, disallowed the deduction of dividends claimed in the amount of $17,840, and increased the net income of the petitioner to $18,650.88.

The respondent, in the notice of deficiency for the year 1930, among other adjustments, disallowed the deduction of dividends claimed in the amount of $16,770, and increased the net income of the petitioner to $18,291.21.

The respondent, in the notice of deficiency for the year 1931, disallowed the deductions of dividends claimed in the amount of $16,620 and determined a net income of $14,624.13.

The respondent allowed the deductions claimed by the petitioner representing depreciation and those representing the 5 percent of net revenues derived from the water system and retained by the city of Litchfield.

The articles of incorporation of the petitioner and the contract between the petitioner and the city of Litchfield dated March 20, 1924, which were introduced in evidence as Exhibits 1 and 15, respectively, are incorporated in our findings by reference.

Upon the foregoing facts, the first issue raised by the pleadings is whether respondent erred in failing to allow the deduction of dividends paid to its preferred stockholders. The petitioner has not pressed this issue, since no mention is made of it in its brief and no mention was made of it in the opening statement of petitioner’s counsel at the hearing. In any event, there is no provision in the statute for allowing the petitioner to deduct dividends. No adjustment of respondent’s determination in this respect will be made.

The other issue raised by the pleadings is whether the petitioner is exempt from taxation for the years 1929, 1930, and 1931 under the provisions o.f section 103 (14) of the Revenue Act of 1928.

The evidence discloses that the petitioner was not organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by the Revenue Act of 1928. Its charter shows that it was organized to provide and furnish a supply of water to the city of Litchfield, to sell and distribute water in that city to the inhabitants thereof, and to .such other persons, firms, and corporations as might desire to purchase water, to construct, maintain, and operate a system of water supply and waterworks, pumping stations, filtration plants, and other appurtenances, to acquire, construct, and maintain a reservoir for the storage of water, and to do any and every thing necessary to the attainment of these objects. Furthermore, the proof shows that during the years in controversy the petitioner actually did other things besides simply holding title to property. The petitioner did not collect income from property and turn the entire amount thereof, less expenses, to the city of Litchfield or any other tax exempt organization. The city itself, under the contract, collected the water rents and paid over 95 percent of the net receipts to the petitioner, retaining 5 percent for itself.

We hold that the petitioner does not come within the provisions of section 103 (14) of the Revenue Act of 1928. See Stanford University Bookstore, 29 B. T. A. 1280 and Sun-Herald Corporation v. Duggan, 73 Fed. (2d) 298, in which latter case it is stated: “ To obtain an exemption, the taxpayer claiming it must come precisely within the terms of the statute * *

It may not be amiss to point out that under section 116 (d) of the Revenue Act of 1928 income accruing to any political subdivision of a state which is derived from any public utility or the exercise of any essential governmental function is exempt from taxation. As we construe section 116, it has reference to income directly accruing to a political subdivision of a state, and is to be invoked by the political subdivision itself. The city of Litchfield is not a party to this proceeding. However, it may be pointed out that the 5 percent of the net income derived from the operations of the waterworks which accrued to the city of Litchfield by virtue of the contract has not been taxed to this petitioner for the years in question. The petitioner claimed this 5 percent as a deduction and it was allowed by the respondent.

In Citizens’ Water Co., 32 B. T. A. 750, upon facts somewhat similar to those contained in the instant proceeding and more favorable to the taxpayer than the facts involved in the instant proceeding, we held that the net income of a private corporation operating waterworks under contract with a city is not exempt from tax under section 116 (d) of the Revenue Act of 1928. There the city owned a part of the corporation’s stock and bonds and, as is true in the instant proceeding, had the right under contract to acquire ownership of the waterworks upon certain conditions. We there stated in part:

* * * This paragraph [the first paragraph of section 116 (d)] was intended to exempt the city from taxation upon income which it actually receives from any public utility or from the exercise of an essential governmental function. Cf. Philadelphia Rapid Transit Co., 8 Fed. Supp. 152. * * * It is true, as petitioner points out, that the city under the terms of the ordinance could take full possession and ownership of the water works by giving petitioner one year’s notice and paying par and accrued dividends on all outstanding stock, and thus get the benefit of accretions in the “ water fund ” arising out of the tax of 5 mills and unused earnings. But the city did not exercise this right during the taxable years here under consideration and we are not, therefore, impressed with petitioner’s argument that its net income accrued to and became the property of the city of Burlington. The petitioner is a private corporation and the city is one of its stockholders. It is too well settled to require citation that a corporation is a taxable entity separate and distinct from its stockholders and that the income of a corporation is not the income of its stockholders. The first paragraph of section 116 (d), supra, exempts from taxation income which is received by a state or political subdivision thereof from any public utility. In our opinion, it grants no exemption to a public utility corporation even though a substantial portion of its unused earnings may at some future time accrue to the benefit of a political subdivision of a state.

Under the principles of the above cited authority we hold that the petitioner is not exempt from taxation under section 116 (d) of the Revenue Act of 1928. The latter portion of section 116 (d), which we have not quoted in the margin, has no application to the instant proceeding, since it applies only to contracts entered into by political subdivisions of a state prior to September 8, 1916, whereas the contract in question herein was not entered into until 1924.

The petitioner also maintains that it, as an instrumentality of the city of Litchfield engaged in an essential governmental function, is exempt from Federal taxation, independently of the statutory exemption. We find it unnecessary to determine whether the petitioner was, during the years in question, an instrumentality o.f the city of Litchfield or the State of Illinois, since, even if it were, it is not exempt. Only those instrumentalities of a state which are of a governmental nature, as distinguished from a proprietary or quasi-private nature, are exempt from Federal taxation. Fox Film, Corporation v. Doyal, 286 U. S. 123, and T. P. Wittschen, 25 B. T. A. 46; and it has been held that the building and operation of a waterworks or water supply system by a city or district constitutes the exercise of a proprietary, rather than a governmental, function. Denman v. Commissioner, 73 Fed. (2d) 193, affirming C. S. Denman, 27 B. T. A. 256; and T. P. Wittschen, supra. Cf. Flint v. Stone Tracy Co., 220 U. S. 107, wherein the Supreme Court stated in part: “ It is no part of the essential governmental functions of a State to provide means of transportation, supply artificial light, water and the like.”

Furthermore, even if it were assumed, for the purposes of discussion only, that petitioner was in the years in controversy an instrumentality o,f the State of Illinois, engaged in an essential governmental function, there is another reason why it should be held not exempt. It was incumbent upon the petitioner, in order to obtain exemption, to establish facts showing that the taxation of it imposed a substantial direct burden upon the exercise of an essential governmental function. Burnet v. Jergins Trust, 288 U. S. 508; Fox Film Corporation v. Doyal, supra; Willcuts v. Bunn, 282 U. S. 216; Wanless Iron Co., 29 B. T. A. 834; affd. Wanless Iron Co. v. United States, 75 Fed. (2d) 779; certiorari denied, 295 U. S. 765; and T. P. Wittschen, supra.

In Wanless Iron Co., supra, we stated in part:

* * * The agency or instrumentality of the State is not immune from Federal taxation unless it is shown affirmatively hy the party having the burden of proof (in these proceedings the petitioner) that the tax will impose a substantial, direct burden upon the state. If the influence of the tax is remote there is no immunity. This principle of immunity from Federal taxation of the instrumentalities of the state “ has its inherent limitations.” Fox Film Corp. v. Doyal, 286 U. S. 123; Willcuts v. Bunn, 282 U. S. 216. * * *

Petitioner has not here met its burden in this respect. It is true that the water rates would have to be in such amount as to cover all taxes, but there is nothing to show that the rates which it would be necessary to establish to cover the taxes in question would be exorbitant or prohibitive or that as a result thereof the citizens of Litchfield would refuse to subscribe to the service and thereby deprive the city of Litchfield of an adequate water system for health, fire protection, or other purposes. We fail to see, and petitioner has not shown us, that the imposition of the taxes in controversy upon it placed a direct or substantial burden upon the city of Litchfield so as to exempt it from Federal income taxation by virtue of the contract.

We hold that the respondent did not err in holding that petitioner is subject to Federal income taxation for the years 1929, 1930, and 1931.

Decision will he entered for the respondent.

       Net loss.

       SEC. 103. EXEMPTIONS PROM TAX ON CORPORATIONS.
      The following: organizations shall be exempt from taxation under this title—
      # i¡: * * J* * *
      (14) Corporations organized for the exclusive purpose of holding title to property collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title.

       SEC. 116. EXCLUSIONS FROM GROSS INCOME.
      In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this title:
      * * * * * it! *
      (d) Income of States, municipalities, etc. — Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof.


author: Matthews:

text:
    Edwin L. Bowen, Petitioner, v. Commissioner of Internal Revenue, Respondent. Donald N. Waterbury, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charlotte M. Waterbury, Petitioner, v. Commissioner of Internal Revenue, Respondent. Whitford N. Waterbury, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eugene W. Waterbury, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62985, 73380-73383.
    Promulgated October 17, 1935.

      John W. Fisher, Esq., and Geo. F. Herr, Esq., lor the petitioners. B. W. Wilson, Esq., for the respondent.
   OPINION.

Matthews:

We are of the opinion that the trust instruments which we have described in our findings were valid and effective to pass title to the shares of stock constituting the corpus of each trust and that the gains realized on the sale of these shares of stock in August 1929 were properly reported by the City Bank Farmers Trust Co. as trustee. These shares of stock were transferred and delivered to the trustee at the time the trusts were accepted, and this was done prior tó the execution on August 13,1929, of the agreement' to sell the entire capital stock of the Waterbury Chemical Co. Clearly, the stock did not belong to the petitioners, the grantors of the trusts, after the trusts were accepted. All of the trusts were irrevocable except upon written notice delivered to the trustee during the preceding taxable year, and they have been continued in force and effect ever since they were established. In accordance with the provisions of the trust instruments under which the petitioners, as grantors, reserved the option to direct the trustee to sell any of the trust property, the trustee was directed to sell and did sell all of the stock of the Waterbury Chemical Co. which it held in trust and retained the proceeds thereof for the uses of the trusts. It follows that the respondent erred in adding to the taxable income reported by the petitioners for 1929 the gains which were realized by the trustee from the sale of these shares of stock.

We have considered the respondent’s alternative argument that section 167 of the Revenue Act of 1928 is here applicable and have concluded that the terms of the trusts involved herein are not such as to bring the income therefrom within the provisions of section 167. See, in this connection, our discussion of the application of this section of the statute in the case of Preston R. Bassett, 33 B. T. A. 182, where the issue thus raised by the respondent was decided adversely to his contention. On the authority of that decision, and for the reasons set out in our opinion therein, we hold that section 167 is not controlling in the instant proceedings.

Inasmuch as petitioner Edwin L. Bowen transferred in trust all of the stock of the Waterbury Chemical Co. which he owned on August 1, 1929, no other issue is presented in Docket No. 62985 and we hold that there is no deficiency in that proceeding.

In determining the tax liability of the other petitioners, who owned shares of stock of the Waterbury Chemical Co. which were not included in the trusts which they established, it will be necessary to decide the fair market value of the stock on the basic dates for the purpose of determining the amount of the gain on the sale thereof by the petitioners.

Petitioner Eugene W. Waterbury acquired his stock prior to March 1, 1913. The stock inherited by Donald N. Waterbury, Charlotte M. Waterbury, and Whitford N. Waterbury was distributed to them on December 9, 1915. The notice of deficiency addressed to Eugene W. Waterbury indicates that he reported capital gain in the amount of $91,872. We do not know what basis was used by him in computing this gain. On August 12, 1929, Eugene W. Waterbury established five trusts and conveyed to the trustee thereunder 32 shares of the par value of $100 each and 412 shares of the par value of $25 each, retaining for himself 83 shares of the par value of $100 each and 124 shares of the par value of $25 each. The other three petitioners computed their profits by using as the basis for determining gain a value on December 9, 1915, of $332.41 per share for the shares of stock having a par value of $100 each.

In computing the deficiencies involved herein the respondent used a value of $150 per share on both the basic dates. In the brief filed on behalf of the respondent it is stated that a value in excess of $250 is not supported by the evidence.

There were no sales of the stock at or about the basic dates. The stock was closely held and was not traded in on any exchange. The only witness to testify with respect to the value of the stock was one Pfeiffer, who was vice president and treasurer of William R. Warner & Co., which purchased all of the stock of the Waterbury Chemical Co. under the terms of the contract dated August 13, 1929. He testified that he had been connected with William R. Warner & Co. since 1908 and during the period of his association with that company he had been called upon to place a value on the business securities of approximately 25 pharmaceutical companies, laboratories, and similar concerns, which had been purchased by his firm. After having examined the profit and loss statements of the Waterbury Chemical Co. and its balance sheets for the fiscal years ended July 31, 1908, to July 31,1911, inclusive, which were introduced in evidence, the witness testified that, in his opinion, the fair market value of the entire capital stock of the Waterbury Chemical Co. was $450,000 as of March 1,1913, and was $405,000 on December 9,1915. In reaching this conclusion the witness took into consideration, among other factors, the length of time the business had been in existence, how well it was established, the territories covered, the tangible assets of the business, the amount of the sales, the amount of the management expenses, and the fact that the business consisted primarily of one item.

We have carefully examined all the evidence with respect to the value of the stock and have determined that the shares of stock having a par value of $100 each had a March 1,1913, value of $350 per share and a value of $315 on December 9, 1915; one fourth of these amounts represents the fair market value of the shares having a par value of $25 each.

Judgment of no deficiency will he entered in Docket No. 62985. Judgment will he entered under Rule 50 in Docket Nos. 73380, 73381, 73382, and 73383.


author: Seawell:

text:
    Agnes Davis Exton, Grace Davis Barnes, William Henry Davis, and A. Clifford Shinkle and Marie Therese Hinkle, Executors under the will of Kate Davis Hinkle, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77483.
    Promulgated October 17, 1935.

      ■Jerome F. Barnard, Esq., Robert A. Taft, Esq., and John E. More, Esq., for the petitioners.

      Lewis B. Pendleton Esq., for the respondent.
   opinion.

Seawell:

This case involves a deficiency in Federal estate tax proposed against the estate of Therese Davis McCagg, who died' a resident of Washington, D. C., February 3, 1932. The deficiency asserted is $1,269.53, and of that amount the sum of $1,166.06 is in dispute, the error assigned being the action of the respondent in including as a part of the gross estate of the decedent, with values as of the date of her death, a one-sixth interest in certain real estate, in the city of Cincinnati, Ohio, comprising property held at the death of the decedent by the Central Trust & Safe Deposit Co. of Cincinnati, Ohio, as trustee, under a declaration of trust executed by it under date of July 12, 1913, the valuation of the one-sixth interest included as aforesaid being put at $47,556.67 by the respondent, which sum, together with one sixth of the accrued rentals on the property to date of the death of the decedent, amounting to $137.50, makes the sum of $47,694.17 which is alleged to have been erroneously included in the gross estate of the decedent as determined by the respondent.

This proceeding came before the Board on the petition of Arthur B. Wells, executor under the will of Therese Davis McCagg. Since the filing of the petition on September 27, 1934, the executor has died and upon representation that no fiduciary has been or will be appointed, the administration of the estate having been closed, upon motion duly made, the parties now appearing as petitioners, constituting all the residuary beneficiaries under clause 39 of the will of Therese Davis McCagg, deceased, were substituted in place and stead of Arthur B. Wells, executor.

After making numerous special bequests to her sisters, a brother, and others, the decedent bequeathed and devised to her sisters and brother as shown in clause 89 of her will.

Clause 39 referred to is as follows:

All the rest, residue and remainder of my estate, whether real, personal or mixed, of whatsoever kind and wheresoever situate, I give, devise and bequeath to my sisters, Katherine Davis Hinkle, Agnes Davis Exton and Grace Davis Barnes, and my brother, William Henry Davis; or in case of the death of any one or more of them, before my death, to such of them as shall survive me, to them, their heirs and assigns forever.

Kate Davis Hinkle (same as Katherine Davis Hinkle) died testate, and on August 29, 1932, A. Clifford Shinkle and Marie Therese Hinkle were appointed and qualified as executors under her will and are now so acting.

It is stipulated that each of the petitioners received assets from the estate of Therese Davis McCagg, deceased, of a value in excess of the deficiency involved, and that the respondent makes no contention that the transfer pursuant to which the said declaration of trust was executed was made in contemplation of death.”

On July 12, 1913, there was executed by the Central Trust & Safe Deposit Co. as trustee a “ Declaration of Trust ”, portions of which deemed material to the issues herein are as follows:

Know all men by these presents, that, whereas, Holden Davis, Kate D. Hinkle, Therese D. McCagg, Agnes D. Eckstein, Grace D. Barnes and William Henry Davis, hereinafter called the beneficiaries, by.deeds of even date herewith, have conveyed to The Central Trust & Safe Deposit Company, a corporation organized under the Laws of the State of Ohio, doing business in the City of Cincinnati in said State, its successors and assigns, all those several tracts of land situated in said City of Cincinnati, described briefly as follows:
****** *
Now the said The Central Trust & Safe Deposit Company, hereinafter referred to as said Trustee, hereby acknowledges and declares that said conveyances were made to, and all and singular the property aforesaid is to be held by it and its successors, upon the following trusts, and with the following powers:
(1) During the existence of said Trust said Trustee shall collect and receive the rents, issues and profits arising from said premises, and after deducting therefrom taxes, cost of insurance and repairs, and all other necessary and proper charges and expenses, including commissions paid to real estate agents in cases of sale or lease made by said Trustee, and the compensation of said Trustee, which shall not exceed 3% per centum of the gross income received by it, shall pay over annually the residue of said income in monthly installments as nearly equal as may be, on the tenth day of each month to the beneficiaries, one sixth (%) to each, or to such persons as they may respectively designate by written order given to said Trustee as each installment becomes due, without power of anticipation; and in case of the death of any of the beneficiaries before the termination of the trust his or her share of said net income shall be similarly paid without power of anticipation as he or she may by will direct, or on failure of such direction, or in so far as the same may not extend, to his or her heirs at law.
* * * * * * *
(7) The net proceeds of every sale shall be distributed to the beneficiaries in equal parts, one sixth to each beneficiary, as soon as practicable after the receipt of the same; and in case of the death of any beneficiary before any such distribution, his or her distributive share shall be paid as he or she may by will direct, or on failure of such discretion or in so far as the same may not extend, to his or her heirs at law. On every such distribution the Trustees may retain 1% per centum of the sum to be distributed as its commission and in compensation of its services.
*******
(10) Upon the sale of all the property aforesaid, and distribution of the proceeds thereon, or on the death of the survivor of said beneficiaries, whichever said events shall first occur, said trust shall expire by limitations. And said trust may be terminated in whole or in part, or altered or amended at any time by writing signed by all persons then entitled to receive distributive shares of sales, and delivered to said trustee, it being understood that distributees under disability or minority or otherwise may act in such matter by their guardians; any distributee may act by an attorney in fact appointed as required for the conveyance of real estate; and the trustee may resign said trust upon making of any alteration or amendment other than a total or partial revocation, or upon sixty (60) days notice in writing to all of those then entitled to distributive shares of sales. Upon the termination of said trust before distribution of all the assets thereof, such distribution shall at once be made to the persons and in the proportions above provided with reference to distribution of proceeds of sales.

The deed, which those designated as “ beneficiaries ” in the “ declaration of trust ” made to the Central Trust & Safe Deposit Co., is not in evidence.

The Federal revenue statutes involved in the consideration and discussion of the issues in the instant case are section 302 of the Revenue Act of 1926 and its subsections (a), (c), (d), (f),and (h)— subsection (c) as amended by the joint resolution of the House and Senate of March 3, 1931, and as further amended by section 803 (a) of the Revenue Act of 1932, and subsection (f) as amended by section 803 (b) of the Revenue Act of 1932. Only such portions of the statutes as are thought pertinent-are here quoted:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
* * * * * * *
(e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period, not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter," amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
* ÜÍ * * * * *
(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, or (3) by deed under which he lias retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (A) the possession or enjoyment of, or the right to the income from, the property, or (B) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth; * * *
****** *
(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, 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.

It is not contended that the “ transfer pursuant to which the said declaration of trust was executed, was made in contemplation of death ”, nor has evidence to establish such as a fact been adduced. The respondent, however, does contend that the property held in trust by the Central Trust & Safe Deposit Co. to the extent of one sixth of its value at the date of the death of Therese Davis McCagg must be included in her gross estate in order to afford a proper basis for measuring the value of the economic benefits in property transferred upon her death by reason thereof.

The record shows the instrument creating the trust was executed July 12, 1913, prior to the enactment of the original Federal Estate Tax Act of September 8, 1916, and years before the amendments to the 1926 Revenue Act to which reference has been made above. It also shows Therese Davis McCagg died in 1932 prior to the effective date of the 1932 amendments mentioned.

It is argued in behalf of the petitioners that the brother and sisters of Therese Davis McCagg, deceased (sometimes referred-to herein as the decedent), acquired and held on July 12, 1913, as remaindermen, vested interests in the property held in trust by virtue of a transfer inter vivos begun and completed prior to the enactment of the original Federal Estate Tax Act of 1916 and that there was upon the death of Therese Davis McCagg no transfer of property from her to them upon which an estate tax might be asserted or imposed. •

If there was in fact such an absolute and completed transfer of vested rights and interests in 1913 to the decedent’s brother and sisters as counsel for petitioners assert and there was on the death of the decedent no passing or transfer of other or additional rights or interests to them by reason of her death and will, of course there would be no estate tax liability under any of the Federal estate tax statutes, no matter on what date the decedent died. Schwab v. Doyle, 258 U. S. 529; Nichols v. Coolidge, 274 U. S. 531.

This contention of the petitioners is very similar to that of the plaintiffs in Saltonstall v. Saltonstall, 276 U. S. 260 (Massachusetts statutes taxing inheritances being involved) in which case the Court said:

* * * It is said that they [plaintiffs] had vested interests or remainders subject only to being divested by the exercise of the reserved power; which never happened; that as their remainders vested before the enactment of the 'taxing statutes these cannot constitutionally be applied to them under the rule laid down by this court in Nichols v. Coolidge, 274 U. S. 531, 41 S. Ct. 710, 71 L. Ed. 1184.

Thereafter the Court said:

So long as the privilege of succession has not been fully exercised it may be reached by the tax. * * * And in determining whether it has been so exercised technical distinctions between vested remainders and other interests are of little avail, for the shifting of the economic benefits and burdens 'of property, which is the subject of a succession tax, may even in the case of a vested remainder be restricted: or suspended by other legal devices. ■ A power of appointment reserved by the donor leaves the transfer, as to him, incomplete and subject to tax. Bullen v. Wisconsin, 240 U. S. 625, 36 S. Ct. 473, 60 L. Ed. 830. The beneficiary’s acquisition of the property is equally incomplete whether the power be reserved to the donor or another. And so the property passing to the beneficiaries here was acquired only because of default in the exercise of the power during the donor’s life and thus was on his death subject to the state’s power to tax as an inheritance. ■

While what the Court said was in considering and discussing a different tax and law, the reasoning employed and the principles enunciated and applied to the facts in that case seem to us applicable in the instant case.

In 1913 there was certainly no absolute and completed transfer with respect to the vested equitable interest of Therese Davis McCagg in the trust property to her brother and sisters. She had at that time and thereafter exactly the same character and extent of interest in the property held in trust that they had, and the trust instrument by virtue of which she held such interest provided that the trustee might sell and convey the property in fee simple, with the approval of a majority of aforesaid children that might be then living, and provided that the net proceeds of every sale should be distributed to the beneficiaries in equal parts and that, in case of the death of any beneficiary before any such distribution, “ his or her distributive share shall be paid as he or she may by will direct, or on failure of such discretion or in so far as the same may not extend, to his or her heirs at law.”

It was further provided in the trust instrument that it might “ be terminated in whole or in part, or altered or amended at any time by writing signed by all persons then entitled to receive distributive shares of sales, and delivered to said trustee ” and “ Upon the termination of said trust before distribution of all the assets thereof, such distribution shall at once be made to the persons and in the proportions above provided with reference to distribution of proceeds of sales.” In view of the provisions just quoted and also others embodied in the trust instrument, in our opinion, and we so hold, there was in 1913 no completed transfer of interests to the brother and sisters of the decedent as insisted in behalf of petitioners, nor in any sense that would make the transfer or passing of the equitable rights and interests of the decedent in the trust property to her brother and sisters upon her death not subject to the Federal estate tax.

The entire equitable interest of the decedent in the property held in trust was retained by her until her death and the property and enjoyment thereof then passed from her to others at her death and by reason of her death and will.

All of the beneficiaries (the children of William Henry Davis, the elder) had equal rights and interests in the property held in the trust, which might be terminated by the decedent in conjunction with the others. In fact, the trust arrangement appears to have been in the nature of what might be termed a family trust, one in which brothers and sisters equally interested in certain property inherited from their father which they concluded could best be managed if the legal title and control of the property, its rental, lease, or sale were in one instead of in six individuals, hit upon the plan of each conveying his or her interest in the property to a corporation, the Central Trust & Safe Deposit Co., which would and did on the same day execute for their benefit a trust instrument embodying provisions relative to the property they conveyed which they evidently authorized or approved. Instead of each of the six children conveying his or her interest in the property in question to the corporation as trustee or in trust and therein and thereby creating a trust in his or her favor, all conveyed their interests in the property to the corporation, which on the same day executed the declaration of trust described, retaining in itself the legal title.

We think the facts and circumstances disclosed by the record warrant the conclusion that the provisions in the trust instrument for the benefit of the “ beneficiaries ” designated therein were put in by their direction and that when they conveyed their property to the corporation it was with the understanding and agreement that the corporation would immediately — as it did — execute the declaration of trust or trust instrument containing the provisions for the benefit of the “ beneficiaries.”

The purpose and effect of their action were the same as if they had themselves directly created the trusts instead of deeding their property to the corporation and having it create the trusts desired and directed by them. They owned the property and caused the trusts to be executed, permitting the legal title- to remain in the trustee.

The terms and conditions in the trust instrument in the instant case are quite different from those of the trust in the case of Williams v. United States, 41 Fed. (2d) 895, relied on by petitioners in support of their contention that, as subsections (c) and (d) of section 302, supra, each contains the language: “ To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise,” and the trust in the instant case was established, not by the decedent, but by the corporation, there is no liability to estate tax under those subsections. ■

In view of the facts and circumstances shown by the record, we hold the case of Williams v. United States, supra, and the principles therein enunciated, are not applicable and controlling in the instant case.

Another insistence in behalf of petitioners is that, as the trust instrument was executed in Ohio, the property was situated there and the trustee was located there, the trust is subject to and governed by the laws of the State of Ohio, in the light of which, the power of appointment reserved in the trust to the decedent to appoint by will was never, in fact, exercised by her, and hence her interest in the trust is not affected thereby and forms no part of her estate, having passed in default of appointment and not under the power of appointment (see section 302 (f), supra), and in support of such contention petitioners cite a number of cases, apparently relying chiefly on Kiplinger v. Armstrong, 34 Ohio App. 348; 171 N. E. 245, which cites other cases to which counsel also refer.

In the above case, which is the only one we deem it necessary to refer on this point, the court said in part:

From our examination of the books, we believe it may be accurately stated that an intention to execute a testamentary power is shown when specific reference is made in the will to such power; when the will disposes of the subject-matter of the power; or when the provisions of the will will not have any operation except as an execution of the power.
The modern tendency seems to be to relax the rule requiring the intention to execute the power to be clearly established, and to hold that if, from the. tenor and effect of the will, construed in the light of the circumstances surrounding the testator at the time of the execution of the power, it can be fairly determined from all the competent evidence available that it was the intention of the testator to execute the power, such intention will be given effect. But where the testator has other property, so that the provisions in the will would be effectual without the exercise of the power, and there is no reference in the will either to the power or to the subject-matter of the power, it is generally held that it has not been shown that there was an intention to execute the power.

In the light of that decision and the facts and .circumstances of the instant case, we are of the opinion and hold that the decedent intended in and by her will to exercise the power of appointment which in the declaration of trust was reserved to or retained by her and did so exercise it in clause 39 of her will, in which she bequeathed and devised to her sisters and brother (naming them) all the rest, residue and remainder ” of her estate “ of whatsoever kind and wheresoever situate.”

The rights and. interests owned and enjoyed by the decedent in the instant case and the power of appointment which she exercised by will are similar to those owned and exercised by Henry C. Whit-lock, as disclosed by the opinion of the court in Whitlock-Rose v. McCaughn, 21 Fed. (2d) 164. In that case the court stated that the Federal estate tax had been paid on the property over which Whitlock had the power of appointment and had devised “ his residuary estate, which included the estate held in trust for him under the last will and testament of his father [Friend Whitlock], over which he had the power of appointment, to his niece, ‘ Eliza Whit-lock-Kose, her heirs and assigns forever, in fee simple ’ ”, and that the suit was brought by his executrix to recover the tax. After so stating and quoting the provisions of section 402 (e) of the Revenue Act of 1918 — the statute then applicable and corresponding to section 302 (f) of the Revenue Act of 1926 — the court, in part, said:

The question for determination is whether or not the property on which the tax was assessed and collected passed from Henry to Elise Whitlock-Rose under a “ general power of appointment.” * * *
This use of the term, ‘‘general power of appointment,” is in harmony with general usage. A power is regarded as “general” when it is not restricted by the donor to particular objects or beneficiaries, though the method of exer-clsing it may be restricted and limited to a testamentary paper. Tucker v. Alexander (C. C. A.) 15 F. (2d) 356; Hume v. Randall, 141 N. Y. 499, 503; 36 N. E. 402; Greenway v. White, 196 Ky. 745, 246 S. W. 137, 32 A. L. R. 1385. “A general power of appointment by will enables the donee, to devise the property of [to] any person who may have the capacity to take.” Underhill on the Law of Wills.
Property subject to a power of appointment under a will is a general power, and is equivalent to a fee. Lane v. Lane, 4 Pennewill (Del.) 368, 55 A. 184, 64 L. R. A. 849, 103 Am. St. Rep. 122; Bingham’s Appeal, 64 Pa. 345; Pennsylvania Co., etc., v. Lederer (D. C.) 292 E. 629; Bullen v. State of Wisconsin, 240 U. S. 625, 36 S. Ct. 473, 60 L. Ed. 830. * * *
The power created by the will of Friend Whitlock permitted Henry O. Whit-lock to appoint “ by any last will and testament ” any person whomsoever he wished, and it was therefore a general power, and was subject to the tax.
■The decree of the district court is affirmed.

In United States v. Field, 255 U. S. 257, the Court passed on the question whether the Revenue Act of September 8, 1916, as amended by the Act of March 3, 1917, imposed an estate tax on a certain interest that passed under testamentary execution of a general power of appointment created prior, but executed subsequent, to its passage. In its opinion, holding that such interest was not subject to the tax, the Court said:

It would have been easy for Congress to express a purpose to tax property passing under a general power of appointment exercised by a decedent had such a purpose existed; and none was expressed in the act under consideration. In that of February 24, 1919, which took its place, the section providing how the value of the gross estate of the decedent slum be determined contains a clause precisely to the point (section 402 [e], 40 Stat. 1097) :
“ 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,” etc.
Its insertion indicates that Congress at least was doubtful whether the previous Act included property passing by appointment. * * *

The section of the 1926 Revenue Act corresponding to the section above quoted is section 302 (f), which contains the same language the Court said was “ precisely to the point ”, indicating such change in the law as would authorize the imposition of an estate tax on an interest that passed under testamentary execution of a general power of appointment, such as, in our opinion, occurred in the instant case.

Section 302 (a) of the Revenue Act of 1926, unlike the corresponding sections of the earlier acts, does not limit the interest of a decedent for estate tax purposes to one which is “ subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate” (see Crooks v. Harrelson, 282 U. S. 55), but specifically includes the value of any interest, of the decedent “ at the time of his death ” in all property, real or personal, tangible or intangible, wherever situated.”

Irrespective of whether the interests of the sisters and brother of the decedent were vested or contingent prior to the decedent’s death, the decedent’s interest at the time of her death is, in our opinion, nevertheless taxable under the provisions of section 302 (c), supra, on account of the power possessed by her to dispose of the income and principal by her will and the shifting of the economic benefits of the property upon her death, whether or not she exercised her power of appointment by will. The phrase in section 302 (c), supra, “ to take effect in possession or enjoyment at or after his death ” includes the interests in a trust passing from the control of the donor or settlor at his death. Reinecke v. Northern Trust Co., 278 U. S. 339; Chase National Bank v. United States, 278 U. S. 327; Kate Allerton Johnstone, Executrix, 29 B. T. A. 957; affd., 76 Fed. (2d) 55.

The provisions of subdivision (d) of section 302 of the Revenue Act of 1924, reenacted in the 1926 Act, were inserted to prevent avoidance of Federal estate tax through the creation of trusts which might be altered, amended, or revoked “ by the decedent alone or in conjunction with any person.”

Referring to the provisions of that section, the Supreme Court in Burnet v. Wells, 289 U. S. 670, said:

* * * Through the devices thus neutralized, as well as through many others, there runs a common thread of purpose. The solidarity of the family is to make it possible for the taxpayer to surrender title to another and to keep dominion, for himself, or, if not technical dominion, at least the substance of enjoyment. * * *

In this connection also see Porter v. Commissioner, 288 U. S. 436.

The propositions relied on by petitioners and the numerous decisions cited and discussed in the briefs of their counsel to sustain them have been carefully considered, though we have not herein undertaken to discuss the same in detail, for the reason that the authorities we have quoted or cited as applicable to the facts and circumstances of the instant case convince us, and we so hold, that the respondent did not commit error in including as a part of Therese Davis McCagg’s gross estate the sum of $47,694.17 representing one sixth of the value of certain property held by the Central Trust & Safe Deposit Co. under the trust agreement dated July 12, 1913, at the date of decedent’s death.

Since each of the petitioners received assets from the estate of Therese Davis McCagg, deceased, in excess of the deficiency involved, each is liable for the amount of the deficiency. One payment, however, will discharge the whole deficiency. Phillips v. Commissioner, 283 U. S. 589; Kathleen O'Brien, 20 B. T. A. 167; W. O. Menger, 17 B. T. A. 998.

Decision will be entered for the respondent.


author: Smith:

text:
    Farmers Union Cooperative Company, Guide Rock, Nebraska, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64668.
    Promulgated October 17, 1935.

      A. 'O. R. Swensen, Esq., and Artlmr S. French, <7. P. A., for the petitioner.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Smith:

This case involves a deficiency in income tax of $1,065.93 for the calendar year 1928 and a penalty of $266.48 for failure to file a return, making a total of $1,332.41 in controversy.

The petitioner claims exemption from income tax on the ground that it is a corporation or association organized and operated on a cooperative basis for the purpose of marketing products of members and producers and purchasing supplies and equipment and turning back the profits or savings to the producers and purchasers after the payment of necessary expenses. The respondent has denied the claim of exemption and imposed a penalty of $266.48 on account of failure of petitioner to file a return. . The petitioner alleges that the re-! spondent’s action was erroneous.

The petitioner corporation was organized under the laws of the State of Nebraska on May 27, 1915. Article III of its articles of incorporation provides:

The general nature of the business to be transacted by said Corporation shall be buying, storing and selling of grain, hay, seeds and all products of the farm; milling, making, buying, storing, handling and selling mill products, by-products and supplies of all kinds intended for food for animals and persons; breeding, buying, rearing, keeping and marketing or slaughtering for curing and food purposes of all kinds of live stock, its products or by-products, or any process necessarily connected therewith; purchasing, storing, handling and sale of all kinds of coals, lumber and building materials, the alteration, refinement or manufacture of any such material intended for buildings or improvements, buying, storing, handling and selling of all kinds of general merchandise, dry goods, groceries, notions, materials and supplies of all kinds for the household and family use, buying, storing, handling, manufacturing and selling of all kinds of implements, tools and machinery for use on the farm, garden, mill, elevator, or for any purpose connected with the business of this Corporation or its members or patrons; buying, leasing, using and selling of real or personal property for any purpose whatsoever aiding or furthering the purposes and business of this Corporation; and doing or transacting any business, activity, process or parts ojE processes, using legal methods and resorting to provisions of the laws or the protection of the courts in furtherance of the legitimate aims of this corporation in transacting such business as outlined above, or it may elect to engage in, in accordance with the laws and statutes of the State of Nebraska, as now in force or shall be hereinafter enacted relating thereto.

On May 15, 1915, the petitioner made a formal declaration, filed with the Secretary of State of the State of Nebraska May 20, 1915, that it was a cooperative corporation and claimed the benefits of the Nebraska laws governing cooperatives.

The amount of the capital stock of the corporation as originally formed was $20,000. The highest amount of indebtedness to which the corporation could subject itself was not to exceed two thirds of the paid-up capital stock. By amendments to its articles of incorporation and to its bylaws prior to 1928 the petitioner’s authorized capital stock was increased.

The bylaws of the corporation which were in effect during the year 1928 provided for the payment of an annual dividend of 8 percent on the par value of all the paid-in capital stock of the corporation. Section 5 of article IV of the bylaws provided: “All remaining net profits shall be prorated to stockholders in proportion to the amount of business they have done with the corporation during business year.”

The petitioner had capital stock of $19,810 outstanding in 1928. The par value of its capital stock was $10 per share. It had approximately 220 stockholders in 1928. The maximum amount of shares any one stockholder can own is limited to 100 shares or $1,000 par value of stock. At least two stockholders owned as much as $1,000 worth of stock in 1928. A stockholder had only one vote. Membership in the corporation was open to any producer who was willing and offered to pay for a share of stock and pay his dues in the Farmers Union in the State of Nebraska. It was and is the desire of the petitioner to increase the membership in the association, since this would result in an. increase in its business. No dividends were paid on the capital stock during 1928. A dividend of 4 percent was paid in the year 1934.

In 1928 the business of the petitioner consisted of running a grain elevator, a feed store, and a general merchandise store. It also shipped livestock and handled machinery repairs through the Farmers Exchange of Omaha. The general merchandise store was operated in competition with two other stores in Guide Bock, Nebraska. The prices charged for merchandise were about the same as those charged by the other two stores mentioned. The store was open to the general public and any one could go there and buy any article of merchandise that the petitioner had to sell. The grain elevator was operated in competition with another elevator in Guide Rock, privately owned.

In buying grain the petitioner operated as follows: When a farmer brought in a load of wheat to its elevator he inquired as to the price he would be paid therefor. The petitioner’s representative then advised him what price the petitioner would give for the wheat. The price was determined by the market price for the grain on the Kansas City, Kansas, or Omaha, Nebraska, grain markets. When the purchase was made the producer was either credited with a stated amount on the books of the petitioner or a check in his favor for the value of the wheat was drawn at that time or at some later date.

The policy of the petitioner was to operate on as close a margin as possible, both with respect to marketing grain and selling merchandise. No distinction was made in this respect between business done with stockholders and with nonstockholders. The petitioner had a net profit of $11,882.76 in 1928. It did not make as much profit in the years immediately preceding 1928 as it did in that year, although 1918 was a big year. The profits of the petitioner from the time it was organized up to and including 1928 were not paid back either to the stockholders or the nonstockholders, but were kept in the business, although in 1918 some shares were issued against the profits made in that year. The earnings were also used to liquidate the indebtedness of the corporation. No. patronage or other dividends except as above indicated were ever paid to stockholders or nonstockholders from the time the corporation was organized up to and including 1928. The only way that patrons of the corporation could participate in the profits of the business was by purchasing shares of stock in the corporation, after which they could participate only in such profits as accrued subsequent to the date they became shareholders. The petitioner has never set up on its books any credits or accounts payable in favor of nonstockholders representing the profits made on business done with them.' No segregation is made on the petitioner’s books as between stockholder and nonstockholder business and there is no way of determining from the records of the corporation the business done with nonstockhold-ers for the year 1928 and also no way of making available to the nonstockholders any profits made on their business in 1928.

In 1928 the petitioner did more business with stockholders than it did with nonstockholders. About 30 percent o,f the elevator department business and 40 percent of the general merchandise store business was done with nonstockholders. But less than 15 percent of its total business was done with persons who were neither stockholders nor producers.

Section. 103 of the Revenue Act of 1928 provides in part as follows:

The following organizations shall be exempt from taxation under this title — ■
* # * * * * *
(12) Farmers’, fruit growers’, or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per centum per annum, whichever is greater, on the value of the consideration for which, the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association; nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and may purchase supplies arid equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases.

It is elementary that if the petitioner may successfully claim that it is exempt from income tax under the above quoted provision of law it must be because it fills all of the requirements of the statute for exemption from tax. Register v. Commissioner, 69 Fed. (2d) 607, citing Producers' Creamery Co. v. United States, 55 Fed. (2d) 104; Bank of Commerce v. State of Tennessee, 161 U. S. 134; Heiner v. Colonial Trust Co., 275 U. S. 232. Exemptions from taxation are not favored and in construing statutes granting such exemptions nothing is to be taken by inference or implication. Riverdale Co-operative Creamery Association v. Commissioner, 48 Fed. (2d) 711.

The respondent contends that the petitioner is not exempt from income tax as a farmers’ cooperative association for the following reasons:

1. It is neither organized nor operated for the purpose of marketing the products of members or other producers and turning back to them the proceeds of sales less necessary marketing expenses.
2. It is neither organized nor operated for the purpose of purchasing supplies and equipment for the use of members or other persons and turning over such supplies and equipment to them at actual cost plus necessary expenses.

In so far as the marketing end of the petitioner’s business is concerned, this case appears to be on all fours with the case of Pro ducers' Creamery Co. v. United States, supra. In that case the corporation marketed milk for both stockholders and nonstock-holders. As in the instant case, 30 percent of its business was done with nonstockholders. In denying exemption from income tax under the provisions of the Revenue Act of 1926, which in all material respects are the same as the provisions of the Revenue Act of 1928, the court said:

* * * We think it equally clear that it was not exempt under the 1926 act. This act does expressly extend the exemption to corporations having a capital stock, paying dividends on the stock, and accumulating a reserve, and does specifically provide that such an association may market the products of nonmembers to the extent of 50 per cent, of its business. It, however, just as the 1924 statute does, bases the tax exemption upon the fact that the association is organized to, and in operation does, turn back to those for whom it markets their produce the proceeds of the sales, less operating costs. Here the undisputed proof shows that appellant makes at least 30 per cent, of its profit from nonmembers to whom it turns nothing back.

The undisputed proof in this case shows that at least 30 percent of the profit realized by the petitioner from the operation of its elevator department was from nonstockholders to whom it did not and could not turn back anything other than the original price paid them for their grain, which was the market price. See also South Carolina Produce Association v. Commissioner, 50 Fed. (2d) 142; Riverdale Co-operative Creamery Association v. Commissioner, supra; Fruit Growers' Supply Co. v. Commissioner, 56 Fed. (2d) 90, all of which hold that in order for a cooperative company to be exempt from income tax it must, under the statute, turn back to the producers, whether they be stockholders or nonstockholders, the proceeds of sales less necessary marketing expenses.

While a marketing association is permitted to handle nonmember business, the plain intent of the statute is that if it deals with nonmembers it must deal with them upon the same basis that it deals with members. See Central Co-operative Oil Association, 32 B. T. A. 359.

The evidence in this proceeding is to the effect that all the profits of operation accrued to the stockholders either in the form of dividends paid to them at the rate of 8 percent per annum upon their shares of stock, or in patronage dividends which are distributed only to the stockholders in proportion to the amount of business transacted with each. Petitioner clearly does not fill the requirement of the statute that to be exempt the petitioner must turn back to its members or other producers the proceeds of sales, less the necessary marketing expenses, over certain amounts which may be retained as a necessary reserve. The petitioner’s case is not strengthened by the fact that up to the end of the year 1928 it had not paid any patronage dividends with the exception of certain patronage dividends in the form of shares of stock upon the business of 1918. The simple fact is that the petitioner was not in 1928 organized to come within the exempting provisions of the statute.

It is furthermore to be noted that the petitioner operated a general merchandise store upon the same method that it operated its elevator department. The profits accruing to the petitioner from that business accrued only to the stockholders.

Since the petitioner filed no return for 1928 it is liable to the 25 percent addition to the tax provided for by section 291 of the Revenue Act of 1928.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    H. C. Priester, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55195.
    Promulgated October 17, 1935.

      Herbert E. Sitz, Esq., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Smith:

If the shares of Deere & Co. purchased by petitioner in 1927 and sold in 1928 constituted the separate property of the petitioner’s children it follows that the profit realized from the sales constituted taxable income of the children. The petitioner asserts that the issue in this proceeding is primarily a question of the ownership of Deere & Co. stock. This is obviously correct. The respondent contends that the petitioner and not the children was the owner of the stock. He contends that there was no valid gift of Central States Power & Light Corporation stock or the proceeds of the sale thereof by the petitioner to his children. He reaches this conclusion by claiming the petitioner had the power to recant or retract the gift at any time and that in fact he did recant it.

In Haynes v. Gwin, 137 Ark. 387; 209 S. W. 67, 68, the court stated:

* * * Where a gift is made to an infant, even by the father himself, and the father takes possession of the property, he holds as naiural guardian, and the possession is the infant’s. * * *

In Beaumont v. Beaumont, 152 Fed. 55, 58, it is said:

* * * Wliat shall constitute the essential delivery, possession or control, must depend always on the circumstances of each case and the environment of the parties. * * *

This is particularly.true in the case of minors who, because of tender years,, may be incapable of managing the property. In such a case the parent making, the gift may receive delivery and exercise control .for the minors as their natural guardian. See Emil Frank, 27 B. T. A. 1158. In that case the respondent determined that certain brokerage accounts which the taxpayer established in 1925.in the names of his three minor daughters, who were 8, 14, and 16 years of age in that year, were in effect trading accounts of the taxpayer and not of his daughters. The taxpayer managed the brokerage accounts but always treated the securities therein as the separate property of his daughters. We held that the income derived from the brokerage accounts owned and operated by the taxpayer in the names of his minor daughters was in fact income of the daughters and was not taxable to the taxpayer. In our opinion we stated:

The petitioner here was the natural and legal guardian of his minor daughters and his possession and control of the subject matter of the gifts constituted possession and control by the daughters. The gifts will not be defeated because of such fact, if there was a bona fide intention to give. On this point the law presumes that the transfer of property or money to a minor child by the parents is a gift. * * *

We think there can be no question but that the evidence in this proceeding indicates an intention on the part of the petitioner to make a gift to each of his minor children of 150 shares of Central States Power & Light Corporation common stock. To effect the gift the petitioner had the ¡shares of stock made out in the name of each of his minor children. In order to make sale of those shares it was necessary for him to obtain the permission of the court having jurisdiction therein to order the sale of the shares. In the light of these circumstances we can not doubt that the proceeds of the sale of the stock constituted the property o,f the minor children. All that was done by the petitioner with respect to the proceeds was consistent with the theory that the proceeds from the sale of the stock belonged to the minor children and nothing that was done is consistent with a view that the petitioner used those proceeds in the purchase of Deere & Co. stock for his own benefit.

The evidence further shows that the brokerage concern through which the petitioner dealt objected to opening an account with the petitioner as guardian for his minor children. The petitioner thereupon made purchases of Deere & Co. stock for his children through his own brokerage account. The profits from the sale of those shares were all credited to the accounts of the minor children and were not taken by the petitioner as profits belonging to himself.

The question before us is whether the profits from the sale of the Deere & Co. stock were profits of the minor children or profits of the petitioner. Petitioner accounted for the profits as guardian and trustee for his children. We are of the opinion that the purchase and sale of the Deere & Co. shares through the brokerage account and on margin carried in the name of the petitioner is no bar to the claim of the petitioner made herein. All of the purchases and sales of this stock were for the guardianship accounts, and all purchases and sales were earmarked as being for the account of the children.

The action of the respondent in taxing the profits from the sale of Deere & Co. stoek to the petitioner is reversed.

Reviewed by the Board.

Judgment will be entered vmder Rule 50.