author: Murdock:

text:
    Estate of Mary R. Donald, Deceased, Scott Scammell, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 97787, 99798, 103373.
    Promulgated March 25, 1941.

      Scott Scammell, Esq., and John Hall Forbes, Esq., for tlie petitioner.

      Sidney U. Hihen, Esq., and William G. Euymarm, Esq., for tlie respondent.
   OPINION.

Murdock:

Scott Scammell has attempted to differentiate between the services rendered by him to the estate as executor and those which were separate from and in addition to services rendered in discharge of his duties as executor. He regards the latter as services performed in managing the estate, for which he was paid the annual fee of $6,000. He claims that these extra-executorial services were rendered in connection with the conduct of a business by the estate and payment for those services represented ordinary and necessary expenses of the operation of that business. Although the Commissioner does not regard the $6,000 as an excessive amount for the services rendered, nevertheless, he has disallowed the annual deductions and defends his action upon the ground that the payments were not ordinary and necessary expenses paid in the operation of any business within the meaning of section 23 (a) of the Revenue Acts of 1934 and 1936.

The petitioner, to overcome this determination, would have to show not only that the estate was engaged in the operation of some business during the taxable years, but also that all or some ascertainable part of the $6,000 was paid as an ordinary and necessary expense of that business. The only authority which Scammell has for continuing the estate is the tacit consent of his wife and her sister, the surviving residuary legatees. While this circumstance may be more or less immaterial, it does not reduce the difficulties of his attempt to divide his services into the two classifications. Although Scammell has attempted to describe his extra-executorial duties in some detail, his differentiation is not entirely satisfactory. It seems clear that some of the services for which he says the fee of $6,000 was paid were in fact services which an executor would be expected to perform in the ordinary discharge of his duties. Thus, at the very beginning, it is apparent that not all of the $6,000 fee can be attributed to extra-executorial services.

Merely keeping records, collecting interest and dividends, and keeping funds invested through managerial attention does not constitute the operation of a trade or business within the meaning of section 23 (a), no matter how large the estate or how continuous or extended the work required may be. Higgins v. Commissioner, 312 U. S. 212; White Trust v. Commissioner, 119 Fed. (2d) 619; City Bank Farmers Trust Co. v. Commissioner, 112 Fed. (2d) 457; Miller v. Commissioner, 102 Fed. (2d) 476; Kane v. Commissioner, 100 Fed. (2d) 382; and Bedell v. Commissioner, 30 Fed. (2d) 622. This rule is applied in the foregoing cases not only to individuals but also to fiduciaries, and it applies here. Approximately 90 percent of the assets of this petitioner-were represented by marketable stocks and bonds. The petitioner, in so far as it was engaged in keeping account of those funds, collecting interest and dividends therefrom, and investing the funds, was not engaged in the operation of any business within the meaning of section 23 (a). Consequently, in so far as the annual fee of $6,000 was paid for those services, it was not deductible. Furthermoi’e, it appears from this record that a very large part of the fee was paid for those services or would have to be allocated thereto.

The petitioner argues that it took an active part in the management and operation of several corporations in which it had large investments and those activities constituted the carrying on of a business, citing Washburn v. Conmmissioner, 51 Fed. (2d) 949; Foss v. Commissioner, 75 Fed. (2d) 326. The court held that Washburn, who had an office with a complete organization and gave personal attention to and participated in the management of various companies not merely for the. purpose of conserving his investments but of carrying on the companies successfully and making them profitable, was thus engaged in business. The court in the Foss case said that Washburn’s activities, closely resembled those of Foss and held, following the Washburn case, that Foss, who was a majority owner of stock of the American Blower Co. and participated in the management, was thereby engaged in business. Some courts have taken the view that the Washburn case has been overruled by subsequent decisions of the Supreme Court. See McGinn v. Commissioner, 76 Fed. (2d) 680; duPont v. Deputy, 22 Fed. Supp. 589; White Trust v. Commissioner, supra. If the Washburn case was overruled, no doubt, the Foss case was also overruled. Since the Supreme Court has decided Deputy v. duPont, 308 U. S. 488, and Riggins v. Commissioner, supra, there would seem to be even greater reason to think that the Washburn and Foss decisions do not correctly state the law. However, there may be some doubt about this and, consequently, we shall consider the extent, if any, to which the facts in this case parallel the facts in those cases.

The petitioner may rely upon its activities in connection with the following assets: Evans mortgage, Belle Mead Sweets note and stock, Hamilton Investment Co. common stock, Merchants Refrigerating Corporation common and preferred, Richey, Browne & Donald, Inc., mortgage and preferred stock, S. L. Allen & Co. stock, and Chateau D’Armes Realty Corporation stock. The evidence indicates that the_ activities of the petitioner in connection with most of these investments were merely for the purpose of conserving them, rather than for the propose of using the corporations as an outlet for investing its funds by carrying on a successful and profitable business through those corporations. The petitioner, apparently, was only trying to save a few burnt chestnuts in most of these instances. None of the corporations, with the exception of the Chateau D’Armes Realty Corporation, could be regarded as the alter ego of the petitioner. Thus, most of these activities would not meet the test of the Washburn case.

There was no corporation connected with the Evans mortgage, and Scammell’s activities in connection with that mortgage were those of an executor trying to collect on a debt due the decedent’s estate. The determination of the Commissioner, as well as the testimony of Scam-mell and the records of the estate, would indicate that the entire investment of the petitioner in Belle Mead Sweets was lost prior to the beginning of the taxable years. Furthermore, the company was £n bankruptcy in 1935 and may have been in bankruptcy even before 1935. Scammell’s activities in connection with the business of that company did not represent the carrying on of a business by this petitioner. Scammell successfully opposed the liquidation of the Hamilton Investment Co. in 1935, and he was active in eliminating some internal friction in the Merchants Refrigerating Corporation, but those efforts would not bring this case within the Washburn and Foss cases.

The petitioner had a mortgage of $10,000 on property of Richey,. Browne & Donald, Inc., and held 85 percent of the preferred stock of that corporation. Scammell was a director and took part in the conduct of the business. The petitioner owned some of the preferred stock of S. L. Allen & Co. and it had some hold on the voting control stock. Scammell consulted with his brother, who was president of the corporation, and discussed with him various problems relating to the operation of the business in an effort to increase its profits so that it might pay the past dividends on its cumulative preferred stock. The petitioner was not using either of these corporations to carry on any business for profit, but interested itself in their affairs only for the purpose of preserving its investment in them.

This leaves for consideration the activities of the petitioner in the affairs of the Chateau D’Armes Realty Corporation. The Chateau DArmes Realty Corporation stock was valued for estate tax purposes, at $498 and has since been carried at that same value. It was organized to hold a second mortgage on an apartment building. The second mortgage had been received by the decedent as part payment for a farm. The record does not show just how the stock of the Fort Washington Avenue Realty Corporation was held. Assuming that the activities of the petitioner in connection with Chateau DArmes Realty Corporation bring it within the Washburn case, what part, if any, of the $6,000 compensation paid to Scammell during each of the taxable years could be allocated to his services in connection with the activities of this corporation ? The entire investment of the petitioner in the stock of this company was valued at only $498 at the time the decedent died and during the taxable years. The record does not justify the allocation of more than an insignificant portion of the $6,000 fee to these activities. Thus, under no circumstances could the determination of the Commissioner in disallowing the annual deduction of $6,000, be disturbed.

The amounts paid to the certified public accountants and the amount paid for a copy of the record of a proceeding before the Board were incidental to the ordinary administration of the estate. George W. Oldham et al., Executors, 86 B. T. A. 523. They have not been shown to be ordinary and necessary expenses of any business carried on by the petitioner.

Decision will be entered um,der Rule 50,.


source: Caselaw Access Project

author: Aiuindell :

license: Public Domain

text:
    Jewel Mining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99266.
    Promulgated March 25, 1941.

      W. E. Baird, O. P. A., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

Aiuindell :

The substantial question at issue is the limits to be assigned to the words “the property” as used in section 114 (b) (4) of the Revenue Act of 1934 as partially defined in article 23 (m)-l (j) of Regulations 86. Dependent on this question is the method by which allowable depletion is to be computed. Petitioner argues, first, that the leasehold acquired on July 1, 1930, is “the property” contemplated by the statute, regardless of the later sublease of a portion of it, and that it is correct in lumping together the gross income from its own operations and the royalties received from the sublessee to obtain the base to which the 5 percent depletion allowance is to be applied and hr combining the net income from both sources in computing the 50 percent limitation imposed by the statute. Respondent argues, to the contrary, that a division of the original property was accomplished by the sublease and that he has properly separated gross and net income from each property in applying both the 5 percent allowance and the 50 percent limitation.

The petitioner argues, alternatively, that, even though the income here be held to arise from two separate properties, it must be sustained in its method of computing depletion under article 23 (m)-l (j), which allows the treatment of two properties in the same tract of land as a single interest if this practice be followed consistently.

The issue framed by the first contentions has been before us on other occasions, although not in the precise form presented here. In the instance of a single tract of land operated by the taxpayer as a ranch, and granted leases to different operating oil companies under separate leases, we held that the taxpayer had as many separate properties for purposes of computing depletion as he had given leases. J. T. Sneed, Jr., 40 B. T. A. 1136 (on appeal, C. C. A., 5th Cir.). In so holding we followed the prior decision in Allie M. Turbeville, 31 B. T. A. 283; affirmed on this point, 84 Fed. (2d) 307, where the taxpayer sought to treat production from several parcels of land, owned by her and leased to operating oil companies, as arising from a single property in order to claim depletion on certain bonuses. There too the separateness of properties covered by different leases in computing depletion was affirmed.

The related situation of an oil company which carried on operations on several pieces of land, some of which it owned and others of which it leased, and claimed depletion on its combined income from these separate properties, was before us in Vinton Petroleum Co. of Texas, 28

B. T. A. 549; affd., 71 Fed. (2d) 420. Separate computation of depletion allowable as to each property was there required. The fact was in that case that the taxpayer had consistently treated the several properties as “separate and independent of each other in accounting for its operations on each property.”

In face of these holdings the petitioner relies principally on Mascot Oil Co., 29 B. T. A. 652, wherein we held that the sublease by the taxpayer to another of the oil rights below feet in a parcel of land on which the taxpayer had leased all mineral rights did not create a separate property for computing depletion.

The cases considered do not point clearly to the conclusion requested by either party. Moreover, it appears unnecessary to decide the question thus framed, in view of the alternative argument advanced by the petitioner. If it be assumed that the mineral interest covered by the sublease is a separate property from that in the acreage retained and operated by the petitioner, claim is nevertheless made to treat these properties as one under article 23 (m)-l set out above in the margin. The requirements of the regulations here seem to be fully satisfied: The mineral interests operated by the sublessee and the petitioner are “included in a single tract or parcel of land”; and the petitioner has shown consistent practice in treating these interests as one. The respondent, indeed, does not on brief oppose this alternative contention of the petitioner, and we perceive no reason why the present situation does not fall clearly within the provisions of the regulations. The fact of petitioner’s consistent treatment of its two interests in the property as a single property distinguishes this case from Vinton Petroleum Co., supra. Moreover, the respondent’s regulations, No. 69, applicable in that case did not contain any provision permitting the treatment of different interests as a single property.

In J. T. Sneed, Jr., supra, certain limitations in applying article 23 (m)-l (j) were implied from article 23 (m)-l (b) and thought necessary to the consistent application of these two subsections of the regulations. Thus, it was held that combination of the income from separate properties was not permissible where they were not operated by the taxpayer “as a common enterprise”, and the taxpayer, who was engaged in the business of ranching and leased mineral rights in his ranch merely as an incident to that enterprise, was not permitted to lump together income from oil leases covering separate portions of the ranch. The substance of this requirement is that there must be some practical reason for the treatment of the two properties as one and that such a course of action arise not alone from the mere fact of common ownership. In the instant case, the petitioner was engaged in mining operations similar to those of its sublessee, the mining of the sablease was an integral part of its own business enterprise. There was thus good cause to treat the proceeds from both, sources as arising from its own business operations and in these circumstances the petitioner must be sustained in its claim of right to lump together with its mining revenues the income produced from the sublease.

Our decision must accordingly be, as indicated above, for the petitioner.

Decision will be entered wider Rule 50.

       SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      *******
      (b) Basis foe Depletion.—
      *******
      (4) Percentage depletion foe coal and metal mines and sulphur. — The allowance for depletion under section 23 (m) shall be, in the case of coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property. A taxpayer making his first return under this title in respect of a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion; and the depletion allowance in respect of such property for such year shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for such year shall be computed without reference to percentage depletion. The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer, or of any other person if the basis of the property (for determining gain) in his hands is, under section 118, determined by reference to the basis in the hands of such taxpayer, either directly or through one or more substituted bases, as defined in that section.
      Ano?. 23(m) — 1. * * *
      *******
      (j) “The property,” as used in section 114 (b) (2), (3), and (4) and articles 23 (m) — 1 to 23 (m) — 19, inclusive, means the interest owned by the taxpayer, freehold or leasehold, in any mineral property. The taxpayer’s interest in each separate mineral property is a separate “property”; but, where two or more mineral properties are included in a single tract or parcel of land, the taxpayer’s interest in such mineral properties may be considered to be a single “property,” provided such treatment is consistently followed.


author: Sternhagen :

text:
    Nevada-Massachusetts Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101240.
    Promulgated March 25, 1941.

      Loms Janin, Esq., for tbe petitioner.

      Harry R. Horrow, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioner claims and respondent denies in each year a credit under Revenue Act of 1936, section 26 (c) (2) ,

To get as directly as possible at the determinative factors, several propositions may be assumed arguendo, without deciding them: That the contract term “net proceeds from operation and other moneys available” is within the statutory term earnings and profits; that the interest accrued for which new notes were given is the sort of debt intended by the statute; that the original indebtedness of Tungsten, to cover which petitioner’s notes were issued, was, although the creditors were shareholders, incurred under circumstances which bring it within the intendment of the statute.

The credit provided by section 26 (c) (2) is carefully set forth in the statute and is to be administered literally, Belle-Vue Manufacturing Co., 43 B. T. A. 12; Moloney Electric Co., 42 B. T. A. 78 (on review C. C. A., 8th Cir.); Hub Clothing House, Ltd., 39 B. T. A. 900; cf. Strong Manufacturing Co., 41 B. T. A. 1273 (on review C. C. A., 6th Cir.). Here there was a written contract accepted (which arguendo we treat as executed) prior to May 1, 1936, expressly dealing with the disposition of earnings and profits. It dates back to the beginning of the petitioner’s existence in 1925. Since that time there have been circumstances from which it may be clearly inferred that it has not been treated by its parties as imposing the strict restraints upon petitioner as to the disposition of its earnings and profits as its language would indicate. The creditors were all shareholders and Segerstrom, one of the principal creditors, was petitioner’s active president. There is no showing as to the net proceeds or other available moneys from year to year from 1925 to 1936, nor is it shown what in practice that term “net proceeds” has been interpreted to mean. Taking it, as we have, to mean earnings and profits, it would appear that there had been earnings and profits in the past and that they were used otherwise than to pay the notes as the petitioner urges that the contract requires. For example, in 1928 the mill was reconstructed; in 1933 the Humboldt tract was acquired after $75,000 royalties had been paid; in 1934 $15,000 was paid for the remaining shares of three corporations; in 1936 $15,000 was spent to replace a pipe line. All this túne there was no payment of the notes but a periodical renewal of them and an extension of the time for interest. Such a practical administration of a contract and the acquiescence therein of the obligees precludes a recognition of the contract as a stricture upon the corporation’s use of its funds in any one year. Apparently the contract was not recognized by the parties as a binding requirement of payment from earnings and profits in any earlier year, and there is no more reason to regard it as requiring payment in the years in question. In fact, the notes were paid in 1936 and 1937.

Another weakness in petitioner’s position is that the 1924 contract provides that the notes shall first be paid not only out of the net proceeds of the operation of the mining property of the Tungsten Co., but also out of any other moneys available. The meaning of this was in practice left entirely to Segerstrom, the president and a noteholder. The petitioner is shown to have other activities and sources of earnings and profits besides the Tungsten mining properties, and upon its own conception of the statute it can not say that the earnings and profits other than the net proceeds of the Tungsten mines were required to be used for the payment of the notes unless in the opinion of Segerstrom they were “available.” If Segerstrom, even though in unquestioned good faith, regarded the other moneys as not available, they were not subject to any contract obligation and hence not within section 26 (c) (2). Only the net proceeds from the operation of the Tungsten mines .would then be left as subject to the restriction, and there is no telling from the evidence what the amount of such net proceeds was.

It can not be held that petitioner was in 1936 or 1937 under any contractual requirement to pay within those years out of the earnings and profits of those years the amounts of the notes. The determination is therefore sustained.

Decision will be entered for the respondent.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      *******
      (c) Contracts Restricting Payment of Dividends.— *******
      (2) Disposition of profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30,1936.


author: HaRRon:

text:
    Estate of John E. Cain, Sr., Emma Weitmuller Cain, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101330.
    Promulgated March 26, 1941.

      James W. Allen, O. P. A., for the petitioner.

      Frank M. Thompson, Jr., Esq., for the respondent.
   OPINION.

HaRRon:

The main question is whether all or any part of the proceeds of the insurance policy in the face amount of $50,000 which was issued by the Sun Life Assurance Co. upon the life of decedent should be included in the gross estate under section 302 (g) of the Bevenue Act of 1926, as amended by section 404 of the Bevenue Act of 1934.

The provisions of section 302 (g) as so amended are as follows:

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

On the estate tax return petitioner did not include any part of the proceeds of the policy in question in the gross estate and took the statutory exemption of $40,000 with respect to other policies of life insurance. In the statement attached to the deficiency notice respondent determined that the entire proceeds of the policy in question should be included in the gross estate, and based his determination on section 302 (a) as well as on section 802 (g). In his brief respondent apparently seeks to support his determination solely under section 302 (g).

Section 302 (g) appears broad enough on its face to include in the gross estate the amounts receivable by a beneficiary other than the estate under any policy taken out by decedent upon his own life. See Broderick v. Keefe, 112 Fed. (2d) 293; Chase National Bank v. United States, 116 Fed. (2d) 625; 52 Harvard Law Review, 1031, 1047. However, the scope of section 302 (g) has been limited by judicial decisions and by regulations to amounts receivable by a beneficiary other than the estate under a policy in which decedent retained a “legal interest” or a “legal incident of ownership” at the time of his death. See Chase National Bank v. United States, supra. In Chase National Bank v. United States, 278 U. S. 327, the Supreme Court held that section 402 (f) of the Revenue Act of 1921, which was substantially the same as section 302 (g) of the Revenue Act of 1926, constitutionally applied to amounts receivable by a beneficiary other than the estate under a policy in which at the time of his death decedent retained the right to change the beneficiary and stated that the “power in the decedent to surrender and cancel the policies, to pledge them as security for loans and the power to dispose of them and their proceeds for his own benefit during his life * * * is by no means the least substantial of the legal incidents of ownership, and its termination at his death so as to free the beneficiaries of the policy from the possibility of its exercise would seem to be no less a transfer within the reach of the taxing power than a transfer effected in other ways through death.” Article 27 of Regulations 80 (1934 Ed.), which was in effect when decedent revoked the rights reserved by him in paragraph xn, under “Privileges and Conditions”, of the policy in question and also when he died, provided that the amounts receivable under a policy of insurance by a beneficiary other than the estate, less the $40,000 exemption, must be included in the gross estate if decedent retained any of the legal incidents of ownership in the policy. See also Art. 27, Regulations 70 (1929 Ed.), and Regulations 80 (1937 Ed.). Article 25 of Regulations 80 (1934 Ed.) stated that “legal incidents of ownership” included the right to the economic benefits of the policy, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, and also contained the following statement: “The decedent possesses a legal incident of ownership if the rights of the beneficiaries to receive the proceeds are conditioned upon the beneficiaries surwiving the decedent.”

Petitioner contends that none of the proceeds of the policy in question are includable in the gross estate. She argues that at the time of his death decedent retained none of the legal incidents of ownership in the policy in question and had only a so-called possibility, of reverter or reversionary interest in the policy, and relies on Emily King Parker et al., Trustees, 30 B. T. A. 342; affd., 84 Fed. (2d) 838; Estate of John T. H. Mitchell, 37 B. T. A. 1; Thomas C. Boswell et al., Executors, 37 B. T. A. 970; and Estate of William G. Thompson, 41 B. T. A. 901.

The Board has held that section 302 (g) does not apply to amounts receivable by a beneficiary other than the estate under a policy in which at the time of his death decedent had only a so-called possibility of reverter or reversionary interest and did not retain the right to change the beneficiary or to borrow on the policy or to surrender the policy for its cash value. Emily King Parker et al., Trustees, supra; Guaranty Trust Co. of New York et al., Executors, 33 B. T. A. 1225; Estate of John T. H. Mitchell, supra; Thomas C. Boswell et al., Executors, supra; and see Estate of William G. Thompson, supra. All of the above Board cases, with the exception of Estate of William G. Thompon, supra, were promulgated prior to Helvering v. Hallock, 309 U. S. 106, and were decided upon principles enunciated in Helvering v. St. Louis Union Trust Co., 296 U. S. 39; Becker v. St. Louis Union Trust Co., 296 U. S. 48, and in that part of the opinion in Bingham v. United States, 296 U. S. 211, which was grounded upon the St. Louis Union Trust Co. cases. Although Estate of William G. Thompson, supra, was promulgated subsequent to Helvering v. Hallock, supra, that Board case may be distinguished on the ground that there the policies of insurance were taken out by decedent on his own life prior to the enactment of the insurance provisions of the estate tax act. See 52 Harvard Law Review, 1037, 1038-1046.

In Helvering v. Hallock, supra, the St. Louis Union Trust Co. cases were overruled. In the HaTloch case the Supreme Court held that an inter vimos transfer by a decedent to a trust under which a remainder interest was Subject to defeat by the reversion of the corpus to him “upon a contingency terminable at his death” was an incomplete transfer intended to take effect in possession or enjoyment at or after death and that the value of the remainder interest was includable in the gross estate under section 302 (c) of the Revenue Act of 1926 as amended. With respect to its decision in Klein v. United States, 283 U. S. 231 the Court stated as follows:

The inescapable rationale of this decision, rendered by a unanimous Court, was that the statute taxes not merely those interests which are deemed to pass at death according to refined technicalities of the law of property. It also taxes inter vivos transfers that are too-much akin to testamentary dispositions not to be subjected to the same excise. By bringing into the gross estate at his death that which the settlor gave contingently upon it, this Court fastened on the vital factor.

Although the Klein and HaTloch cases deal with section 302 (c), “by parity of reasoning they throw light upon the proper construction of section 302 (g)”, Broderick v. Keefe, supra. In fact, the principles of the Klein and HaTloch cases appear to be equally as “decisive” of the present case as the principles of the St. Louis Union Trust Co. cases were “decisive” of Bingham v. United States, supra. Subsequent to the HaTloch case, both the Court of Claims and the Circuit Court of Appeals for the Second Circuit have held that section 302 (g) applies to amounts receivable by a beneficiary other than the estate under a policy in which at the time of his death decedent had only a so-called possibility of reverter or reversionary interest. Bailey v. United States, 31 Fed. Supp. 178; and Chase National Bank v. United States, supra; cf. Broderick v. Keefe, supra.

In our opinion, the Board cases referred to above, as well as Bingham v. United States, supra, in so far as they hold that section 302 (g) does not apply to amounts receivable by a beneficiary other than the estate under a policy in which at the time of his death decedent had only a so-called possibility of reverter or reversionary interest, must fall with the St. Louis Union Trust Co. cases.

At the time of his death decedent had a so-called possibility of reverter or reversionary interest in the policy in question. Under the policy his wife was to receive the income from the proceeds for her life and upon her death the proceeds were to be distributed in equal shares to each of their surviving children and to the surviving children of each of their deceased children. In the event that decedent outlived his wife and their children and grandchildren, the proceeds were to be paid to his estate; and in the event that his wife outlived him and their children and grandchildren, the balance of the proceeds remaining at her death was to be paid to his estate. At the time of his death decedent was 71 years of age, and he was survived by his wife and also by 4 children and 9 grandchildren, whose ages ranged from 6 years to 42 years. It is evident that immediately prior to the time of his death the possibility of defeating the combined interests under the policy of his wife and their children and grandchildren was very remote; and that the possibility of defeating the separate interest under the policy of any single beneficiary was much less remote. However, the degree of remoteness of the possibility of defeating all or any one of the interests under the policy is not determinative here. The Hallock case made no distinction between a present and a remote possibility of defeat. Cf. Doris Bond Sherman, 41 B. T. A. 898. And under the closely related gift tax statute transfers subject to the possibility of defeat have been held to be incomplete without regard to the degree of remoteness of the possibility. See Doris Bond Sherman, supra; Marrs McLean, 41 B. T. A. 1266; Margaret White Marshall, 43 B. T. A, 99. The “vital factor” is that each and every interest under the policy was given upon a contingency terminable only at decedent’s death. See Helr ■vering v. Halloclc, supra. Thus the “transfer” of the interests under the policy was not complete for estate tax purposes until decedent’s death and was “too much akin to testamentary dispositions not to be subjected to the same excise.” See Helvering v. Hallock, supra. Therefore, it is held that section 302 (g) applies to the policy in question. Bailey v. United States, supra; Chase National Bank v. United States, supra; and see Klein v. United States, supra; Helvering v. Hallock, supra; Broderick v. Keefe, supra.

Petitioner contends that, even if section 302 (g) is applicable to the policy in question, only such portion of the proceeds of the policy as is allocable to the premiums paid by decedent is includible in the gross estate. She relies on Lang v. Commissioner, 304 U. S. 264; and DeLappe v. Commissioner, 113 Fed. (2d) 48.

The courts have held that a policy of insurance in which a beneficiary other than the estate is named is “taken out” by a decedent on his own life within the meaning of section 302 (g) to the extent that the premiums have been paid directly or indirectly by decedent, and that only such portion of the proceeds as is allocable to the premiums so paid by the decedent is includable in the gross estate. Walker v. United States, 83 Fed. (2d) 103; Helvering v. Reybine, 83 Fed. (2d) 215; Old Colony Trust Co., Executor, 39 B. T. A. 871; see Lang v. Commissioner, supra; DeLappe v. Commissioner, supra; Nelson v. Commissioner, 101 Fed. (2d) 568; cf. Bailey v. United States, supra. In Lang v. Commissioner, supra, the Supreme Court made the following significant statement: “In the absence of a clear declaration it cannot be assumed that Congress intended insurance bought and paid for with the funds of another than the insured and not payable to the latter’s estate, should be reckoned as a part of such estate for purposes of taxation.” And in DeLappe v. Commissioner, supra, the Circuit Court of Appeals for the Fifth Circuit stated in part as follows: “In computing estate taxes on the proceeds of life insurance the question to be decided is whether the decedent paid all or only part of the premiums.”

Prior to the promulgation of Regulations 80 (1934 Ed.) the regulations consistently and continuously recognized that whether or not a policy of insurance in which a beneficiary other than the estate was named was “taken out” by decedent on his own life within the meaning of the statute depended in large part upon the source of premium payments. See Lang v. Commissioner, supra; Walker v. United States, supra. Article 25 of Regulations 70 (1929 Ed.) provided in part as follows: “Where a portion of the premiums were paid by the beneficiary and the remaining portion by the decedent the insurance will be deemed to have been taken out by the latter in the proportion that the premiums paid by him bear to the total of premiums paid”; and article 28 of Regulations 70 (1929 Ed.) provided in part that, where the proceeds of a policy were payable to a beneficiary other than the estate and only a portion of the premiums had been paid by the decedent, then the amount to be returned was that proportion of the insurance receivable which the premiums paid by the decedent bore to the total premiums paid. In Lcmg v. Commissioner, supra, the Supreme Court held that the definition of the words “taken out” as used in the statute which was given in articles 25 and 28 of Regulations 70 “must be treated as approved by Congress.” Articles 25 and 27 of Regulations 80 (1934 and 1937 editions) as originally promulgated, apparently required that the entire amounts receivable under a policy of insurance by a beneficiary other than the estate, less the $40,000 exemption, be included in the gross estate, regardless of source of premium payments, if at the time of his death decedent retained any of the “legal incidents of ownership” in the policy. See Walker v. United States, supra. However, some recognition of the importance of the source of premium payments was given in article 25 of the 1934 edition by the provision that insurance “is considered to be taken out by the decedent in all cases, whether or not he makes the application, if he pays the premiums either directly or indirectly”, and in article 25 of the 1937 edition by the provision that in the case of a decedent dying before the date on which the 1934 edition of Regulations 80 was promulgated the definition of “taken out” set forth in article 25 of Regulations 70 (1929 Ed.) was to continue to apply. Articles 25 and 27 of Regulations 80 (1937 Ed.) have been amended recently by T. D. 5032, promulgated January 10, 1941, to provide once more that whether or not a policy in which a beneficiary other than the estate is named is “taken out” by decedent on his own life within the meaning of the statute depends in large part upon the source of premium payments. Article 25 as so amended provides in part as follows: “Where a portion of the premiums or other consideration was actually paid by another and the remaining portion by the decedent, either directly or indirectly, such insurance is considered to have been taken out by the latter in the proportion that the payments therefor made by him bear to the total amount paid for the insurance”; and article 27 as so amended provides in substance that the proceeds of a policy receivable by a beneficiary other than the estate, less the $40,000 exemption, are to be included in the gross estate only to “the extent to which such insurance was taken out by the decedent upon his own life (see article 25).”

In the light of the judicial and administrative construction of section 302 (g) outlined above, we are unable to agree with the Court of Claims that it is of “no controlling importance” whether or not the premiums on a policy in which a beneficiary other than the estate is named are paid by the decedent or another. See Bailey v. United States, supra.

Decedent paid premiums on the policy in question amounting to $4,557.50, and his wife paid premiums on the policy amounting to $27,708.37. She paid such premiums out of her own funds. It is true that her separate estate consisted of property which decedent had given to her at various times during their marriage. However, in our opinion, this fact alone does not justify the attributing to decedent of the premium payments made by his wife. Cf. Nelson v. Commissioner, supra. Therefore, it is held that only 4,557.50/32,265.87 of the proceeds of the policy in question is includable in the gross estate. Walker v. United States, supra; Helvering v. Reybine, supra; Old Colony Trust Co., Executor, supra; see Lang v. Commissioner, supra; DeLappe v. Commissioner, supra.

In her petition, petitioner claims a deduction of $1,100 as counsel fees and expenses incurred in connection with the present proceeding. The deduction in question has not been allowed by respondent. The parties stipulated that petitioner has agreed to pay and will pay her counsel $1,100 “in full for his fee and expenses in connection with the prosecution of this appeal.”

Section 303 (a) (1) (B) of the Revenue Act of 1926 as amended provides for the deduction from the value of the gross estate of such amounts for “administration expenses * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered.” “There can be no question that such a proceeding as this is an incident to the administration of the estate” and that counsel fees and expenses incurred therein are “administration expenses” within the meaning of the statute. John A. Loetscher et al., Executors, 14 B. T. A. 228; reversed on another issue, 46 Fed. (2d) 835. The statute does not require that “the court having jurisdiction shall first make the allowance.” John A. Loetscher et al., Executors, sufra. In Tennessee the executors are allowed their reasonable expenses of administration, including counsel fees and expenses. See Code of Tennessee, sec. 8250; Cannon v. Apperson, 82 Tenn. 553; Johnson v. Patterson, 81 Tenn. 626. The counsel fees and expenses in question have been agreed upon and appear reasonable. Cf. Estate of Jacob Voelbel, 7 B. T. A. 276. “This proceeding was prosecuted in good faith and apparently with reasonable cause and there is no reason to doubt” that the executor is entitled in her accounting to the allowance of the counsel fees and expenses in question. Cf. John A. Loetscher et al., Executors, supra. The statute does not require that the counsel fees and expenses in question actually be paid; it is sufficient that the amount of the counsel fees and expenses have been agreed upon and will be paid. ’William Rhine-lander Stewart, Jr., et al., Executors, 31 B. T. A. 201. Therefore, it is held that the $1,100 claimed as a deduction for counsel fees and expenses incurred in conection with the present proceeding should be allowed. Margaret Day et al., Executors, 34 B. T. A. 11; William Rhinelander Stewart, Jr., et al., Executors, supra; Estate of Jacob Voelbel, supra; John A. Loetscher et al., Executors, supra; and see Regulations 80, art. 34.

On the estate tax return petitioner reported the value of 52 shares of Cain-Sloan Co. stock as of the date of death of the decedent at $1,700 per share, or a total of $88,400. In the statement attached to the deficiency notice respondent determined that the value of such stock as of the date of death of the decedent was $2,000 per share, or a total of $104,000. The parties stipulated that the value of such stock as of the date of the death of the decedent was $1,875 per share, or a total of $97,500. Effect will be given to this stipulation upon computation of the deficiency under Rule 50.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Article 27 of Regulations 80 (1937 Ed.) has been amended recently by T. D. 5032, promulgated January 10, 1941, to provide in part as follows :
      “Art. 27. Insurance receivable by other beneficiaries. — The amount in excess of $40,000 of the aggregate proceeds of all insurance on the decedent’s life not receivable by or for the benefit of his estate must be included in his gross estate as follows :
      “(1) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) after January 10, 1941, the date of Treasury Decision 5032, and
      “(2) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) on or before January 10, 1941, and with respect to which the decedent possessed any of the legal incidents of ownership at any time after such date or, in the case of a decedent dying on or before such date, at the time of his death.”

       No similar statement tvas originally contained in either article 25 or article 27 of Regulations 80 (1937 Ed.). Article 27 of Regulations 80 (1937 Ed.) has been amended recently by T. D. 5032, promulgated January 10, 1941, to provide in part as follows : “The insured possesses a legal incident of ownership if his death is necessary to terminate his interest in the insurance, as, for example if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him.”

       Regulations 37, art. 32; Regulations 63, art. 27; Regulations 68, arts. 25 and 28; Regulations 70, arts. 25 and 28.


author: Leech :

text:
    Union Shipbuilding Company, as Alleged Transferee of Assets of Union Construction Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100025.
    Promulgated March 26, 1941.

      Paul G. Rodewald, Esq., for the petitioner.

      William A. Schmitt, Esq., for the respondent.
   OPINION.

Leech :

Respondent has proposed against the petitioner, as transferee of the assets of the Union Construction Co., a liability of $4,409.16, representing an alleged income tax deficiency of the latter company for the calendar year 1931. The issues presented are: (1) Whether assessment of the asserted liability is barred by the statute of limitations; (2) whether respondent erred in failing to allow the deduction by the transferor of $42,300 as a. loss sustained upon worthless stock; (3) whether gross income of the transferor has been overstated by respondent by inclusion of $10,534.54 in interest accrued from January 1 to January 15, 1931, upon investments acquired by it on the latter date; (4) whether gross income of the transferor has been overstated by inclusion of $571.86 in rentals accruing from January 1 to January 15,1931, upon property acquired by it on the latter date; (5) whether respondent erred in disallowing deductions by the transferor totaling $7,679.98 and representing expenses of reorganization and liquidation; and (6) whether respondent erred in failing to allow the deduction by the transferor of $550-04 representing the expense of incorporation.

The proceeding was submitted upon formal stipulations of fact, together with certain exhibits. We include by reference the stipulations of fact as our findings of fact.

Since the first assignment of error, the bar of the statute of limitations, if sustained, will dispose of the proceeding, it will be considered first.

Petitioner is a Delaware corporation, organized under the name of Pitt Securities Corporation, which name was changed later to Union Shipbuilding Corporation. Upon its organization petitioner took over, on or about June 1, 1931, in exchange for its stock, the assets of the Union Construction Co., a Delaware corporation, and assumed all of its liabilities with the exception of a contingent liability assumed by the stockholders of the latter. On June 5, 1931, the Union Construction Co., the transferor, made a distribution of all of its assets in complete liquidation of its stock and was dissolved by appropriate corporate action, its certificate of dissolution being duly filed on June 29, 1931. Its income tas return for the taxable year 1931 was duly filed on March 12, 1932, with the collector of internal revenue for the twenty-third district of Pennsylvania. In the return of the trans-feror for 1931 the information was furnished that the taxpayer had made complete distribution of its assets and had liquidated its stock. This return was verified by H. H. McClintic, vice president, and E. J. Patterson, treasurer. Patterson has also been treasurer of petitioner since its organization.

In the year 1932, following the dissolution of the Union Construction Co. and when its return for 1931 was under examination, the office of the collector with which such return was filed was formally advised of the dissolution of the corporation by letter, which also included the fact that its certificate of dissolution had been filed and the date thereof. There were also furnished copies of the various resolutions and minute entries of the corporation evidencing its liquidation and the transfer and distribution of its assets and authorizing, directing, and carrying into effect its dissolution. Following this, on January 22,1934, a waiver was filed extending the time in which 1931 taxes might be assessed against the Union Construction Co., to June 20, 1935. This waiver was signed “Union Construction Company, Taxpayer, By E. J. Patterson Treasurer.” Following this, in each of the succeeding four years, a waiver form purporting to extend the time for assessment of 1931 taxes against the Union Construction Co. lo June 30 of the succeeding year was executed, the expiration date of the last one being June 30, 1939. All of these instruments bore the seal of that company and were signed in identically the same way as the first waiver of January 22,1934, except that the form filed April 17,1937, agreeing to an extension of time to June 30, 1938, was signed “Union Construction Company and Affiliated Corporation Taxpayer, By E. J. Patterson Vice President.” Each of the waivers in question was duly signed by respondent.

On June 19,1939, respondent mailed a notice of deficiency of income tax for the year 1931 addressed to the “Union Construction Company, 1914 Koppers Building, Pittsburgh, Pennsylvania.” This was the address of that company and had been the address of petitioner since its organization.

On September 15, 1939, a petition for redetermination of the deficiency proposed against the Union Construction Co. was filed with this Board in the name of that company under Docket No. 100024. In that proceeding, on October 17,1939, respondent filed a motion to dismiss for lack of jurisdiction on the ground that, the petitioner corporation having been dissolved on June 29, 1931, its technical corporate existence under Delaware law existed only for a period of three years subsequent to that date, or until June 29, 1934, since which date its corporate existence for any purpose had been extinguished and any act by it was a nullity. This motion was sustained and the proceeding dismissed. Income taxes and interest in the amount of $6,514.38 were assessed against the transferor, Union Construction Co., on March 1, 1940, and have not been paid.

The proposed transferee liability was determined on June 19, 1939, and is thus barred by the controlling statute of limitations, unless that bar was effectively waived by either the transferor or the transferee, petitioner. Helvering v. Newport Co., 291 U. S. 485. Was the statutory bar so waived?

It is petitioner’s contention that, having dismissed the petition of the transferor corporation upon the ground that it had no legal existence subsequent to June 29,1934, we have adjudicated the fact that any act by that corporation subsequent to that date is null and void and, consequently, the ineffectiveness of the waivers executed subsequent to that date must be considered as res adjudicata.

Upon this question we agree with respondent that our dismissal of that proceeding has determined nothing save our lack of jurisdiction to pass on the issues submitted by the petition there filed. D. J. Gay, 31 B. T. A. 580. However, the question appears to be of little significance because the parties have stipulated the fact of the dissolution of the Union Construction Co. on June 29, 1931. This being so, it is established that the three years of corporate existence from date of dissolution, provided by chapter 65 of the General Corporation Law of Delaware, expired on June 29,1934. It thus follows that of a series of five consecutive waivers executed for the transferor, Union Construction Co., as heretofore detailed, only the first, executed on January 22, 1934, and extending the time for assessment to June 30, 1935, was executed during the period that corporation was in existence with power to act. This fact is not contradicted by respondent.

In D. J. Gay, supra, a former officer and shareholders of a dissolved corporation executed a purported wTaiver in the name of the corporation. In a proceeding against such officer, individually, as a transferee, we held that the alleged waiver did not extend the period of assessment. Upon the authority of that case, and those cited therein, we think that the last four alleged waivers were ineffective as those of the transferor.

That conclusion would preclude the determination of the presently contested transferee liability after June 30, 1938 (Revenue Act of 1928, sec. 311 (b) (1)), unless the last of these four alleged waivers, which was the only one purporting to cover the date of the proposed contested determination, was effective as a waiver of the liability of petitioner, transferee. See Helvering v. Newport Co., supra. Was this document thus effective? We think not.

These last four alleged waivers were identical except as to dates and were not those of the transferee, petitioner. They were not executed in its name. They do not even purport to bind petitioner. Nor is any authority from petitioner to bind it disclosed. These documents refer not to any transferee liability, but to “the amount of any income, excess-profits, or war profits taxes due under any return (or returns) made by or on behalf of the above-named taxpayer (or taxpayers) * * Cf. Milk Battle Exchange, Inc., 48 B. T. A. 33. Respondent points to the fact that Patterson, who was treasurer of the transferor corporation, and signed all the purported waivers in question, was also treasurer of petitioner, and that, as to those executed by him subsequent to the time when he was empowered to act for the transferor, he must be considered as having acted for petitioner, and his act, consequently, binding upon it. But the fact that a former officer of a dissolved and nonexistent transferor corporation executes a waiver in its name does not bind the transferee of the latter merely because he happens to be at the time an officer of such transferee. Southwestern Investment Co., 19 B. T. A. 30; Newport Co., 22 B. T. A. 833; affd., 65 Fed. (2d) 925; reversed by the Supreme Court on other grounds, supra.

However, respondent argues, on brief, that the circumstances in connection with the negotiations concerning the tax liability of the trans-feror coi’poration and the execution of the alleged waivers, coupled with the fact that petitioner is a successor corporation which acquired the assets of the Union Construction Co. through a statutory reorganization, are such as to create an estoppel against the petitioner to deny their validity as extending the time for assessment and collection of the tax of the Union Construction Co., therefore, making timely the determination of the contested transferee liability.

But respondent has raised the question of estoppel for the first time in the brief of his counsel, whereas the rule is that, to be availed of, estoppel must be specifically pleaded. Northport Shores, Inc., 31 B. T. A. 1013; Helvering v. Brooklyn City Railroad Co., 72 Fed. (2d) 274; Tide Water Oil Co., 29 B. T. A. 1208

The application of that rule here is, of course, decisive. However, assuming such plea were properly raised, we think the facts as revealed by the stipulation and exhibits fail wholly to show a basis for an estoppel against petitioner to assert the invalidity of the waivers executed subsequent to 1935. There is not the slightest indication of misrepresentation of fact by petitioner as to the dissolution of the Union Construction Co. Actually, there is no evidence of participation by petitioner in the negotiations with respondent concerning the tax liability of the Union Construction Co. Respondent was fully advised in detail by the transferor corporation of its dissolution. This information was furnished approximately two years before its corporate life expired for all purposes under the Delaware statute. With full knowledge of this fact, successive waivers were secured from the dissolved corporation. See Hull v. Commissioner, 87 Fed. (2d) 260. There is no suggestion that these waivers, executed under the name of the dissolved corporation, were furnished by petitioner or upon requests made to it. Counsel for respondent insists upon brief that the latter treated and considered the two corporations as one and that all of his dealings were actually with petitioner. But there is no evidence in the record to that effect. Moreover such contention is difficult to reconcile with the fact of the determination in 1939 of a deficiency against the transferor corporation as distinct and separate from petitioner.

It is, of course, the rule that where respondent relies upon alleged waivers to support a contested transferee liability, as he does here, any doubt as to the validity of such waivers must be resolved against respondent. D. J. Gay, supra; Southwestern Investment Co., supra; Carnation Milk Products, 15 B. T. A. 556; Farmers Feed Co., 10 B. T. A. 1069 But here we think there is no necessity even for application of that rule. The facts are convincing. It is our conclusion, upon the authorities cited, that the last four of the purported waivers executed in the name of the Union Construction Co. were ineffective to extend the time of assessment of income tax for 1931 against the petitioner, transferee, and that the period for such assessment expired on June 30, 1936 (under section 311 (b) (1) of the Revenue Act of 1928). It follows, therefore, that the contested transferee liability determined by respondent against petitioner is barred of assessment and collection.

Our decision upon this issue disposes of the proceeding, and makes unnecessary the consideration of other issues raised.

Reviewed by the Board.

Decision will ~be entered for the petitioner.

       Revenue Act of 1928, secs. 275 (a-!, 276 (b), and 311 (b) Cl).


author: HaReon:

text:
    Richard Downing and Irma Downing, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99171.
    Promulgated March 26, 1941.

      Herbert A. Rosenthal, Esq., for the petitioners.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

HaReon:

The first question is whether the debt of $95.74 owed to petitioner by the City Coal Co. is deductible in the taxable year as a bad debt. The question arises under section 23 (k) of the Revenue Act of 1936, which provides in part that a debt “ascertained to be worthless and charged off within the taxable year” shall be allowed as a deduction. Petitioner deducted the amount of the debt in question on the joint income tax return filed by him for the taxable year; and respondent disallowed the deduction in the statement attached to the deficiency notice.

Respondent does not contend that the debt in question was not charged off by petitioner on his books within the taxable year. And it is clear that the debt in question was charged off within a reasonable time after the close of the taxable year by entries on petitioner’s books made in the usual course with other closing entries as of the close of the taxable year and before his books were closed finally for that year. A. W. Blackie, 2 B. T. A. 747; Bank of Duplin, 12 B. T. A. 652; Loritan Investment Co., 21 B. T. A. 1412. However, respondent does contend that petitioner has failed to prove that the debt in question was ascertained to be worthless within the taxable year.

In our opinion, petitioner has introduced sufficient evidence to prove that the debt in question was ascertained to be worthless within the taxable year. The debt in question was relatively small, i. e., $95.74. See Paul and Mertens, Law of Federal Income Taxation, vol. 3, sec. 28.54. In the taxable year petitioner did refer the debt for collection to his attorney at Cleveland, who, in turn, referred the debt for collection to a correspondent attorney at Warren, the situs of the debtor. The correspondent attorney reported to petitioner’s attorney that he was unable to collect the debt and “that he was unable to find anything.” Cf. Patten & Davies Lumber Co. v. Commissioner, 45 Fed. (2d) 556. On December 8, 1937, the debtor filed a voluntary petition in bankruptcy. Petitioner was then advised by his attorney that the debt was worthless. Cf. Patten & Davies Lumber Co. v. Commissioner, supra. In view of the fact that the investigation made by the correspondent attorney disclosed that the debt was uncollectible, petitioner was not required to wait until the affairs of the bankrupt debtor were liquidated before deducting the debt in question as a bad debt. Patten & Davies Lumber Co. v. Commissioner, supra; Mosher Manufacturing Co., 7 B. T. A. 187. Accordingly it is held that the debt in question was ascertained to be worthless and charged off within the taxable year, and thus is deductible as a bad debt. Patten & Davies Lumber Co. v. Commissioner, supra.

The second question is whether $6,408.74, the total amount deducted by petitioner as additional expenses from the total sales price of coal sold by him for Culmerville in the taxable year, is includable in his income for that year. Petitioner did not report the amount in question as income on the joint income tax return filed by him for the taxable year; and respondent included the amount in question in petitioner’s income for the taxable year in the statement attached to the deficiency notice.

Petitioner contends in substance that in the taxable year the amount in question was subject to a substantial contingency of litigation, and that no part of the amount in question is includable in petitioner’s income until 1938 when the contingency was terminated by the settlement of tbe litigation. Respondent contends in effect that the amount in question was received by petitioner in the taxable year “under a claim of right and without restriction as to its disposition” and is includable in his income for that year even though “subsequent events may result in the determination that the recipient or claimant is not entitled to it”, and relies on North American Oil Consolidated v. Burnet, 286 U. S. 417; and National City Bank v. Helvering, 98 Fed. (2d) 98.

In North American Oil Consolidated v. Burnet, supra, the Supreme Court enunciated the following principles:

* * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.

See also Board v. Commissioner, 51 Fed. (2d) 73; certiorari denied, 284 U. S. 658; Commissioner v. Brooklyn Union Gas Co., 62 Fed. (2d) 505; Blum v. Helvering, 74 Fed. (2d) 482; certiorari denied, 295 U. S. 732; Champlin v. Commissioner, 78 Fed. (2d) 905; National City Bank v. Helvering, supra; Frederick S. Buggie, 32 B. T. A. 581.

The application of the principles set forth above to the facts present here compels the conclusion that the amount in question is includable in petitioner’s income in the taxable year. During the taxable year petitioner kept his books on the accrual basis. He invoiced the sales of coal for Culmerville to the purchasers in his own name; he guaranteed payment of all accounts; and payments were made directly to him. The total sales price of the coal sold by him for Culmerville during the taxable year presumably was debited on his books to the purchasers. From such total sales price he deducted commissions earned on sales and additional expenses incurred on sales (which totaled the amount in question), and the balance was credited to the Culmerville account. The commissions earned on sales and additional expenses incurred on sales (which totaled the amount in question) were credited to the Culmer-ville commissions account. Thus, on the accrual basis, the amount in question was received by petitioner in the taxable year. Moreover, the record indicates that the amount in question was received by him under a “claim of right.” Since the time of the execution of the sales agency agreement petitioner had deducted additional expenses from the total sales price of coal sold by him for'Culmer-ville, and Culmerville never objected to this practice until near the end of the taxable year. That the amount in question was transferred from the Culmerville commissions account to the commissions special account as of the end of the taxable year does not indicate an abandonment of his claim of right. That he persisted in his claim of right even after the end of the taxable year is shown by the fact that Culmerville instituted suit against him in July 1938 to recover the amount in question. Furthermore, the record indicates that the amount in question was received by petitioner “without restriction as to its disposition.” All payments by purchasers were made to petitioner directly and deposited by him in his own bank account. As petitioner states in his reply brief, all money that he received from the sale of coal for Culmerville was his own money. It is true that the amount in question was subject to a contingent liability to pay Culmerville an equivalent amount if the controversy over the deduction of the amount in question from total sales price went against petitioner. See Commissioner v. Brooklyn Union Gas Co., supra. And in fact petitioner’s testimony shows that the amount in question was transferred from the Culmerville commissions account to the commissions special account in order to reflect such a contingent liability. However, the contingent liability imposed no restriction upon petitioner’s use of the amount in question which he had already received. See Commissioner v. Brooklyn Union Gas Co., supra. The settlement of the suit instituted by Culmerville to recover the amount in question merely determined petitioner’s right to retain income already received. See Commissioner v. Brooklyn Union Gas Co., supra. Whatever effect the payment of $1,000 made by petitioner in connection with the settlement of the litigation in 1938 has upon his income should be reflected in a correct return of his income for 1938. See Frederioh 8. Buggie, supra. Accordingly, it is held that the amount in question is includable in petitioner’s income for the taxable year. See North American Oil Consolidated v. Burnet, supra; Board v. Commissioner, supra; Commissioner v. Brooklyn Union Gas Co., supra; Blum v. Helvering, supra; Champlin v. Commissioner, supra; National City Bank v. Helvering, supra; Frederick S. Buggie, supra. The final question is whether petitioner’s wife, Irma Downing, is liable for the deficiency in tax. The deficiency in tax arises entirely out of petitioner’s income. His wife had no income from any source in the taxable year. Therefore, she is not liable for any tax in that year, even though a joint return for husband and wife was filed. Sachs v. Commissioner, 111 Fed. (2d) 648; Cole v. Commissioner, 81 Fed. (2d) 485; Frank W. Darling, 34 B. T. A. 1062.

Decision will be entered under Rule 50.


author: TueneR :

text:
    W. R. Ross, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary Catherine Ross, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ross Brothers Horse & Mule Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94474, 94475, 94476, 98898.
    Promulgated March 27, 1941.

      Charles B. Molnnis, Esq., for the petitioners.

      James L. Baekstrom, Esq., and Jamies H. Yeatman, Esq., for the respondent.
   OPINION.

TueneR :

The principal issue presented is whether the trading business conducted through the W. E. Eoss mule account was a branch or a part of the business conducted by the corporation, Eoss Brothers Horse & Mule Co., with the result that the profits realized therefrom constituted a part of and should be included in the income of the corporation.

The petitioners claim that during the years in question the W. E. Eoss mule account was a partnership composed of four individuals, Eoss, Pershall, Jameson, and Hicks; that the trading business conducted by the partnership was separate and distinct from the commission business of the Eoss Brothers Horse & Mule Co.; and that the profits resulting therefrom were distributable directly to the four partners. The respondent claims that the mule account was part and parcel of the Eoss Brothers Horse & Mule Co., the corporation; that it was not a separate entity; and that the profits realized from that account constituted income of the corporation. By affirmative allegations contained in an amended answer, the respondent pleads in the alternative that if the Board should determine that the profits reflected by the W. E. Eoss mule account were the profits of a partnership and not of the corporation, the deductions claimed by the corporation on its return should be apportioned between it and the partnership in accordance with the provisions of section 45 of the Eevenue Act of 1934. The petitioners plead in the alternative that if the Board should determine that the auction and trading activities were the activities of a single business enterprise and the profits therefrom are to be combined for Federal tax purposes, it should further hold that the activities in question and the income therefrom were the activities and income of the “W. B. Boss Mule Account,” a partnership, and not the income of the Boss Brothers Horse & Mule Co., the corporation.

The respondent, to support his contention that the trading operations reflected by the W. B. Boss mule account were the operations of the Boss Brothers Horse & Mule Co., points, among other things, to the fact that the mule account had no separate physical facilities for conducting its business; that it had no separate finances or bank account; that all payments for the purchase of livestock through that account and for the feed and supplies for such livestock were made by the corporation; that all receipts from the sales made through the account were received by the corporation; and that all borrowings to carry, on the business of buying and selling were made by the corporation. He emphasizes particularly the fact that the corporation charged the mule account no commission on the sale of any animal carried into that account, whereas other vendors were charged $2.50 for each animal sold for $10 or more.

Petitioners contend that in the horse and mule commission business it is customary for the commission house to furnish to its customers certain facilities and services, for some of which charges are made, while as to others there is no charge; and, except for the fact that no commissions were charged on sales by and for the mule account, that account was treated in the same way as any and all other trading customers of the corporation; and, further, that there is nothing in the treatment of the mule account to indicate that the trading reflected therein was any more the trading of the corporation than the dealings of any of the other trading customers.

On first impression the answering argument of the petitioners may seem plausible and convincing, but on examination it appears so only if we presuppose the conclusion contended for. There is nothing conclusive or particularly indicative, for instance, about the fact that the trading activities have been recorded in the books of the corporation in a separate account any more than that the commissions received from the auction were separately recorded. It would seem to us good practice that the accounts should be so kept whether the trading so recorded be that of an outside trader or of the corporation itself. Furthermore, since the corporation through its auction stood to profit from the activities of its regular trading customers, there is nothing strange about the granting of the use of its facilities to such customers or the keeping of accounts on its books reflecting its dealing for or with such customers, and the keeping of such accounts for customers neither refutes nor establishes the point in issue. In fact, we find only two practices which might tend to support the conclusion that the W. R. Ross mule account was a business enterprise separate and apart from the corporation. One was the paying or crediting of the profits reflected by the mule account at the end of each year directly to Ross, Pershall, Jameson, and Hicks instead of the carrying of such profits into corporate surplus and undivided profits and then making the distribution from surplus. The other practice was that of reporting such profits for income tax purposes as the profits of the four individuals and not as the profits of the corporation. The first practice is of little significance, since the corporation at no time during its existence maintained a surplus or undivided profits account, but consistently at the end of each year paid over to the individuals named, or transferred to their personal accounts, its entire profits for the year from commissions or otherwise. As to the second practice, it is, of course, elementary that the reporting of the profits of the mule account by the individuals in their income is of no moment if in truth the trading activities and the profits therefrom were those of the corporation.

With respect to the failure of the auction to charge commissions on horses and mules handled through the mule account, which fact the respondent emphasizes as showing the unity of the auction and the trading activities, it would seem apparent that such treatment of the mule account, if a separate entity as the petitioners contend, would most likely result in very substantial savings to it at the expense of the auction. In answer the petitioners claim that very rarely were horses and mules belonging to the-mule account sold through the auction and consequently any withholding thereby of profits from the auction were insignificant. It is to be noted, however, that the corporation charged commissions on private sales made for customers as well as on sales made through the auction. The record indicates that most of the mules disposed of through the mule account were either used in filling orders received from customers away from Fort Worth or were shipped to agents for sale elsewhere and the petitioners have given us no basis for making any determination as to the percentage of such sales, which in the case of admittedly independent traders would be classified as private sales on which commissions would be charged or the percentage on which commissions would not be charged. The total sales reflected by the mule account were $843,324.17 for 1934, $1,353,035.92 for 1935, and $852,908.13 for 1936. Accordingly if the auction and the trading businesses be considered separately, it is readily apparent that through this failure to charge the mule account with commissions on its sales at auction and privately a substantial portion of what otherwise would have been profits for the auction business may have been retained by the mule account, a result which would not normally occur if the auction and trading activities were conducted by two separate entities as the petitioners claim. There are other factors, however, in respect of which the facts are fully established which in our opinion leave no doubt that the auction and the trading activities constituted a single business enterprise.

When the corporation was first organized Boss and his brothers agreed that each might trade on his own account and that the profits or losses should accrue to or against the respective individuals. They made this arrangement, according to Boss, because he was interested in trading in horses and mules, while his brothers were interested in trading in cattle and sheep. After Boss purchased the stock held by his brothers, however, the reason and need for keeping the operations reflected in the mule account separate and apart from the operations of the corporation no longer existed and the evidence of record convinces us that the business was thereafter regarded and conducted as a single enterprise. At all times subsequent to the withdrawal of his brothers and up to 1927, Boss had full direction and control of both the auction and trading activities and except for a small allowance to Hicks in 1924 and subsequent years, he received at the end of each year full distribution of all profits from all activities. In 1927, however, due to the fact that the business had grown substantially and Boss had extensive outside interests which required his attention, he decided to bring D. H. Pershall and Frank Harp, two experienced mule men, into the business, and upon the death of Harp in 1929, Jameson succeeded to Plarp’s position and rights. The bringing in of Pershall and Harp, and later Jameson, brought no change in the unity of the operations. According to the testimony of Boss, the duties and responsibilities of Pershall and Harp, and later of Pershall and Jameson, were practically the same as his except that he was “supposed to be the boss, and the guider.” Hicks did not participate in the conduct of the auction or trading activities and his duties were not affected in any way by the bringing in of Pershall, Harp, and Jameson. Further, according to the testimony of both Boss and Hicks, there was no segregation or attempt at segregation of the time and efforts of Boss, Per-shall, and Jameson in their conduct of the auction and trading activities, and in the course of conducting the auction they were very often and at the same time performing those acts and duties the results of which were reflected in the mule account.

That the two activities were treated and regarded as one business and not as two separate enterprises is further indicated, we think, by the fact that the “considered” holdings of stock in the corporation by the four individuals controlled and determined the distribution of profits from all activities. Except for the two shares purchased by Pershall and Hicks, neither Pershall, Jameson, nor Hicks bought any shares from Ross or the corporation and they paid nothing to any one for the right to share in the auction or trading profits, and so far as the recorded holdings of stocks were concerned, Ross continued to hold and own all shares except the two qualifying shares belonging to Pershall and Hicks. There is testimony, however, to the effect that an oral agreement was reached as to the number of shares of stock “considered as having been owned” by each of the individuals and to the effect also that the mule account was owned in the same proportions “as by oral agreement” the stock of the corporation “was considered as having been owned.” According to Hicks and in keeping with that understanding, the “considered” stockholdings at January 1, 1934, were: Ross, 315 shares; Pershall, 130 shares; Jameson, 130 shares; and Hicks, 25 shares. This continued until June 30, 1934, when by oral agreement the holdings were changed and from that date to the time the corporation was dissolved the stock was “considered as having been owned” 315 shares by Ross, 110 shares by Pershall, 110 shares by Jameson, and 65 shares by Hicks. Except for a slight variation in 1936, the profits from all sources, auction and trading, and prior to the deduction of the equal salary allowances to Ross, Pershall, and Jameson, were divided and paid over, or credited to the four individuals according to the exact percentages indicated by 'the division of the stock shown above. This, we think, definitely signifies that the four individuals regarded the auction and trading activities as one enterprise. The fact that the total of the amounts received by each of the four corresponds to the amounts computed by use of such percentages carried to several decimal places can not in our opinion be attributed to mere accident. This conclusion is further strengthened by the fact that in making these computations consideration was given to the shift in the percentages which took place by agreement of the parties at June 30, 1934. Some question as to the force of these facts is raised by the petitioners because the percentages were made to apply without the elimination of the amounts allowed as salary to Ross, Pershall, and Jameson, but after the elimination of the salary paid to Hicks. If that point is of importance, the reason for such treatment may be found in the fact that the duties performed by Pershall and Harp, and later Jameson, were in the management and conduct of the auction and trading activities and in the actual production of the income distributed, while the duties performed by Hicks did not relate directly to the production of such income. He continued his duties in the office, and, so far as the record shows, neither his duties nor his salary were changed or affected by the bringing in of Pershall, Harp, or Jameson. It is true that the percentages do not reflect the payments mad© to the parties for 1936 with, the same mathematical exactness as in 1934 and 1935. The variations are not in our opinion substantial enough, however, to indicate any change in the business. Eoss received approximately $110 in excess of the amount indicated by his percentage and Pershall, Jameson, and Hicks less by approximately $42, $42, and $25, respectively. The variations if expressed in the percentages were approximately an eighth of 1 percent for Eoss, one-twentieth of 1 percent each for Pershall and Jameson, and one-fortieth of 1 percent for Hicks.

In support of their contention that the auction and trading activities were separate business enterprises and should be recognized as such for income tax purposes, the petitioners have made various computations designed to show that the profits from the trading activities and those from the auction or other sources were not distributed according to the same percentages. To illustrate: On the basis of those computations, the distributions from the W. E. Eoss mule account in 1934 were 57.241 percent for Eoss; 16.982 percent for Pershall; 16.982 percent for Jameson; and 8.795 percent for Hicks, while the distributions from commissions and other income were 52.51 percent for Eoss; 19.48 percent for Pershall; 19.46 percent for Jame-son ; and 8.53 percent for Hicks. In connection with those computations, however, it is to be noted that they were applied after the exclusion of the salary allowances to Eoss, Pershall, and Jameson and that these salary allowances were charged in full to the profits attributed to the corporation as distinguished from the profits from trading. It is also to be noted that they do not take into consideration the agreement reached by the parties on June 30, 1934, as to the change of “considered” stockholdings. Furthermore, they indicate a conclusion directly contrary to the testimony of one or more of petitioners’ witnesses to the effect that the trading account was owned by the four individuals in the same proportions as “by oral agreement” the stock of the corporation “was considered as having been owned” by them.

After studying carefully the business activities carried on, the history as reflected by the evidence of record, the facts and data pertaining to those operations, the attitude and conduct of the parties in carrying on those operations, and the basis on which the profits were distributed, it is our conclusion that the two activities constituted one business enterprise, and it becomes unnecessary to consider the alternative contention of the respondent concerning the applicability of section 45 of the Eevenue Act of 1934.

Petitioners have pleaded in the alternative that, if the above conclusion should be reached, we should hold that the business was conducted by the W. E. Eoss mule account, a partnership, and not by Eoss Brothers Horse & Mule Co., the corporation. We find no merit in that contention. That the corporation was regularly organized under the law, with powers to carry on the business here attributed to it, is not open to question, and it continued in existence until its formal dissolution was effected under the law of Texas and in accordance with the resolutions adopted by its directors and stockholders on December 28, 1936. There is nothing in the record at all to support any conclusion that the auction business was not conducted by and did not belong to the corporation, and we have already stated our reasons for concluding that the auction and trading activities constituted a single business enterprise. The petitioners’ alternative contention is denied.

For the year 1935 the petitioners, W. E. Eoss and Mary Catherine Eoss, filed separate returns, reporting their share of the income from the mule account as distributions from a partnership taxable at both normal and surtax rates. In the notices of deficiencies for that year the respondent stated that, since the taxpayers had not concurred in his determination that the mule account was a part of the Eoss Brothers Horse & Mule Co., and in order to protect the interests of the Government, the distributions received by them from the mule account were treated as having been received from a partnership. In view of our decision on the principal issue, it follows that the distributions received by petitioners in 1935 constituted dividends of the corporation, subject only to surtax rates. That adjustment should be made on the recomputation hereunder.

In determining the deficiencies for 1937 the respondent held that the petitioner, Eoss Brothers Horse & Mule Co., was not dissolved until September 17, 1937, and that the income received by it from the commission business during the interval from January 1, 1937, to the date of dissolution, as well as the income received by the mule account during the same interval, was taxable to the corporation for the year 1937. His determination on this point is based on the fact that the certificate of dissolution was not issued by the state authorities until September 17,1937.

The petitioners contend that the corporation was dissolved on December 31, 1936, that on that date its assets and liabilities were transferred to a copartnership of the same name, that the capital was distributed to the stockholders, that the corporation did not exist or conduct any business at any time during the year 1937, and that therefore the respondent erred in determining that it received any taxable income in that year.

We think the petitioner’s contention on this point must be sustained. Although the formal certificate of dissolution was not issued until September 17, 1937, all other steps necessary to effect the dissolution of the corporation were consummated on or prior to December 31, 1936, and, more important, even though technically it may have still been alive, the corporation after that date had no assets, conducted no business, and received no income. The respondent’s determination on this issue is reversed.

The respondent seeks to hold petitioner W. E. Eoss liable as transferee of the corporation,, Eoss Brothers Horse & Mule Co., for the deficiencies determined against the corporation for the years 1934 to 1937, inclusive. In accordance with the resolutions adopted by its directors and stockholders on December 28,1936, and in consideration for the assumption of its liabilities exclusive of capital stock, the corporation on December 31, 1936, transferred to a partnership of the same name assets in an amount which exactly equaled the liabilities so assumed and on the same date distributed its remaining assets exactly equaling its capital stock liability, $59,800 to Eoss and $100 each to Pershall and Hicks. This was in addition to dividends and other distributions which had been paid to Eoss during each of the taxable years and left the corporation without any assets whatsoever. It is argued on behalf of petitioner Eoss that the claim that he is liable as transferee of the corporation is inconsistent and in conflict with the respondent’s claim on the main issue in that the respondent there claimed that the stock of the corporation was owned in the same proportions in which the income of the mule account was shared. With respect to the argument advanced, it is necessary only to say that for the purpose of deciding this issue it matters not whether the respondent was of the view that the four individuals were the actual owners of the stock of the corporation in the proportions on which the profits were distributed, or whether he was of the view that the stock was owned 598 shares by Eoss and one share each by Pershall and Hicks, as the stock account indicates, and that the “considered”1 ownership of the stock by the four individuals was for the purpose only of computing the distributive shares of the profits under a profit-sharing arrangement with Pershall, Jameson, and Hicks in return for the services which they were to render the corporation. The controlling fact here is that the assets of the corporation after the transfer of its business and facilities to the partnership amounted to-$60,000 and this amount was distributed to the stockholders of record,. $59,800 being paid to Eoss and $100 each to Hicks and Pershall, leaving the corporation without assets. These facts bring the petitioner W. E. Eoss within the transferee provisions of the statute and to the extent of such distribution he is liable as transferee. This liability is limited, however., to the years 1934,1935, and 1936, in as much as the corporation, whether it remained in existence after December 31,1936,. or not, had no assets, conducted no business and received no income during the year 1937.

The last issue concerns the deductibility of the three bad debts, described in our findings. It is the respondent’s position that they were worthless when the promissory notes were executed by the debtors and delivered to Boss, or in any event tbe debts became worthless prior to the year 1935. The petitioners contend that they had reasonable prospects of collecting the debts when the notes were received and that they became worthless and were properly ascertained to be so and charged off in 1935.

With respect to the Lake and Williams debts, we think the petitioners’ contention must be sustained. In our opinion the facts show that up until 1935 the petitioners were justified in believing that they had some chance of collecting at least a part of those two debts. Without an extended discussion of the facts set forth in our findings, we think it will suffice to say that the record convinces us that the petitioners properly ascertained those two debts to be worthless in 1935 and charged them off in that year. We accordingly hold that they are entitled to the deductions claimed with respect thereto.

With respect to the Golightly debt, however, we have reached the opposite conclusion. Boss testified that at the time Golightly went out of the grocery business in the latter part of 1934, he made an effort to collect the debt and found that it was a “hopeless case.” He did not, however, charge the debt off until some time in 1935. We accordingly sustain the respondent’s determination that the Golightly debt was worthless and ascertained to be so prior to 1935.

Decision will be entered under Bule 50.