author: Steenhagen:

text:
    Fredrick Rodiek, Ancillary Executor of the Will of Johann Friedrich Hackfeld, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77997.
    Promulgated February 11, 1936.

      Reuben D. SiTbUnan, Esq., for the petitioner.

      James R. Johnston, Esq., and Hugh R. Dowling, Esq., for the respondent.
   OPINION.

Steenhagen:

Petitioner is the ancillary executor of the estate of Johann Friedrich Hackfeld, deceased, who died near Bremen, Germany, on August 27,1932. Hackfeld was born in Germany, went to Honolulu in 1877 at the age of 21, and had his regular place of abode there until 1900. While on a visit to Bremen in 1888, he married a woman who had been born in Mexico. They went to Honolulu, and two daughters were born to them there. In 1894, Hack-feld became a citizen of Hawaii; in 1900, a citizen of the United States. Later in 1900, he and his family left Hawaii for Germany, seeking a healthier climate for his wife. He placed her in various hospitals and sanitoriums in Germany, but she did not improve. In 1905, he bought a residence in Bremen, and in 1910, a country estate nearby. Before the war, he made frequent business trips to Hawaii, and after 1924, made two or more to the United States; but the regular place of abode of himself and family from 1905 until his death was the Bremen house.

In January 1918 the Alien Property Custodian seized his property in Hawaii, and sold it at a fixed price, alleged to be inadequate. In 1924, the seizure was judged improper by the Attorney General, and the President ordered the proceeds of the sale to be paid over to Hackfeld. Some was restored before Hackfeld’s1 death. In 1934, a bill was introduced in the Senate to pay $3,000,000 to the estate for the injuries sustained growing out of the custodian’s sale. By Senate resolution, the bill was referred to the Court of Claims for report. The executor filed a petition, and the case is now pending.

After Hackfeld’s death, his ancillary executor in the United States filed an estate tax return, reporting a gross estate of $306,341.86, and a tax of $16,697.60. In determining a deficiency of $778,313.63, the Commissioner computed a gross estate of $3,874,176.65, which, by affirmative answer, he now seeks to increase by $1,017,887.87. Petitioner contends that decedent was at death a nonresident of the United States so that the tax should be imposed only on his property in the United States. The value of such assets as are covered by the determination, and by the affirmative answer, are separately stated in the findings.

Assignment (a) contests the determination of residence in Hawaii. Assignments (b), (c), and (d) complain that respondent failed to give effect to a marriage and inheritance agreement between decedent and his wife, and to the Bremen law of community property which, petitioner contends, affected all decedent’s property and defeated a statutory transfer at death. If this view is correct, no tax at all is due. Assignment (e) attacks the inclusion in gross estate of $3,000,000 or any amount representing the value of the claim against the United States, now pending in the Court of Claims. Assignments (f) and (g) complain of the inclusion in gross estate of any amount representing certain securities loaned by decedent to George Rodiek. Assignments (i) and (j) complain that American bank deposits and choses in action in Hawaii are improperly included in gross estate. Assignment (k) seeks a redetermination of certain stock values, but was not pressed.

Respondent’s affirmative answer demands the inclusion of property situated in Germany, England, and Switzerland. The title and value of this property is not questioned, but as an alternative to his general contentions that nothing is taxable or that only American property is taxable, petitioner contends that advances of 1,014,574.61 Reichsmarks to decedent’s daughter, Mrs. Rudolphi, were not part of the gross estate in any event because under German law Hackfeld could not have enforced repayment during his life.

The petitioner contends that at the time of Hackfeld’s death he was a nonresident citizen of the United States, and more particularly that he was resident and domiciled in Bremen, Germany; while respondent has determined and contends that Hackfeld was a resident citizen, his determination being that of residence in Honolulu, Hawaii, and his contention being broadened to the United States generally, suggesting Tenafly, New Jersey. Our findings represent our ultimate conclusion of fact from our consideration of the evidence.

The Revenue Act of 1926 provides, in section 302, for the determination of gross estate, making no distinction between that of a resident and that of a nonresident. Section 303, however, in prescribing deductions for the computation of net estate, devotes1 subsection (a) to residents and subsection (b) to nonresidents. Article 51 of Regulations 70 provides:

* * * the statute imposes the tax only upon the transfer of so much of the estate of a nonresident as, under the terms of the statute, had its situs in the United States.

This limitation is further recognized in articles 4,11, 52, 55, and is in accordance with section 303 (b), providing that:

* * * net estate shall be determined—
* * # * * * *
(b) In the case of a nonresident, by deducting from the value of that part of his gross estate which at the time of his death is situated in the United States—
* sfs * * * * *

certain named items. It was recognized in Burnet v. Brooks, 288 U. S. 378. It was tacitly recognized recently by the Finance Committee of the Senate in its comment on section 403 of the 1934 Act, imposing the tax on all the gross estate of nonresident citizens:

These sections of the House bill amend section 303 and section 304 of the Revenue Act of 1926 and section 403 of the Revenue Act of 1932 in order that Federal estate taxes will be imposed in the case of United States citizens, irrespective of whether they are residents or non-residents, * * *. The result is that under the House bill all residents of the United States and all United States citizens, irrespective of where they reside, will be fully subject to Federal estate taxes, * * *.

Article 5, of Regulations 70, states:

A resident is one who, at the time of his death, had his domicile in the United States; * * *. All persons not residents of the United States as above defined, * * * are nonresidents.

The interpretation of resident for estate tax purposes as one domiciled in this country is not unusual. In Bowring v. Bowers, 24 Fed. (2d) 918; certiorari denied, 277 U. S. 608, the court, in distinguishing the meaning of resident as used in the income tax act from its meaning in an estate tax act, said:

* * * the incidence of estate and succession taxes has historically been determined by domicile and situs, and not by the fact of actual residence.

The court quotes Matter of Martin, 173 App. Div. 3; 158 N. Y. S. 916:

» * • in many instances there is a difference between the legal intendment of the terms “residence” and “domicile” * * * but in the mat ter of succession and transfer taxes the theory of the action of the taxing power renders the terms synonymous.

See also Farmers’ Loan & Trust Co. v. United States, 60 Fed. (2d) 618; Guaranty Trust Co., Executor, 25 B. T. A. 507; L. B. Peeples, 27 B. T. A. 879; Samuel W. Weis, 30 B. T. A. 478 (on review, C. C. A. 5th Cir.).

The question for determination here is that of Hackfeld’s domicil at the time of his death. His citizenship as a citizen of the United States is not in dispute. Story, in his Conflict of Laws, 7th Ed., sec. 46, p. 41, says:

If a person had actually removed to another place, with, an intention of remaining there for an indefinite time, and as a place of fixed' present domicile, it is to be deemed his place of domicile, notwithstanding he may entertain a floating intention to return at some future period.

This has been quoted with approval in Gilbert v. David, 235 U. S. 561, and Rosenberg v. Commissioner, 37 Fed. (2d) 808.

In Williamson v. Osenton, 232 U. S. 619, Justice Holmes said:

The essential fact that raises a change of abode to a change of domicil is the absence of any intention to live elsewhere, Story on Conflict of Laws, § 43 — or, as Mr. Dicey puts it in his admirable book, “the absence of any present intention of not residing permanently or indefinitely in” the new abode.

In The Venus, 12 U. S. 253, 279, the Supreme Court, said:

* * * In questions on this subject, the chief point to be considered, is the animus manendi; * * *. If it sufficiently appear, that the intention of removing was to make a permanent settlement, or for an indefinite, time, the right of domicil is acquired by a residence even for a few days.

The Restatement of Conflict of Laws, § 9, defines domicil as “the place with which a person "has a settled connection for certain legal purposes, either because his home is there, or because that place is assigned to him by the law.”

The question of domicil has been called a mixed question of law and fact, in which intention is regarded as of high importance (Rosenberg v. Commissioner, 37 Fed. (2d) 808), and conduct is no less, and often more, significant than statement. The intention must be judged by all the circumstances by which it is made manifest. It is not a fleeting or casual or sporadic intention which controls, but a serious conception of home. Domicil is determinable by the law of the forum, which in this case recognizes that a person has but one domicil at a given time, Restatement of Conflict of Laws, § 11, and that, as to the ordinary person who has a home, it is to be stated, not in general terms of country or state, but with particularity as to the place. Id. §§ 11-13; Beale § 9.6. As Hackfeld was such a person and hot a traveler, it is necessary to determine the particular place of his home before his domicil can be stated. Hence, an affirmative proposition such as the respondent raises in his answer and urges, that Hackfeld is domiciled in or is a resident of the United States, must be supported by evidence of the location in the United States of his alleged home; while petitioner proves domicil if he establishes the fact alleged in his petition that Hackfeld’s only home was in Bremen. The Commissioner’s official determination holds that Hawaii was “the actual domicil of decedent”, and this the petitioner challenges, alleging in his petition that Hackfeld’s home at the time of his death was in Bremen. Thus the issue of fact as to domicil is complete, and nothing is added to it by respondent’s further allegation in the answer, denied in the reply, that Hackfeld “was domiciled in, and, therefore, a resident of the United States at date of death.” The burden of proof on the whole issue is on petitioner, and from all the evidence it must be determined whether he has succeeded in establishing that in fact Hackfeld’s home was in Bremen as alleged. If so, the fact must be found; if not, the omission of the Board to make such a finding, or the making of a contrary finding, would result in sustaining the Commissioner’s determination that Hackfeld was taxable as a resident citizen.

Having in mind the general considerations by which • domicil is determined, and the wide variety of controversies shown by the decisions, the evidence has been appraised and the finding made that at his death Hackfeld was at home in Bremen at 115 Parkallee, as he said in his will, and that this was his domicil. Notwithstanding that there is some evidence to the contrary, including Hackfeld’s own statements, we have' been unable to escape this conclusion as a matter of fact. No other inference can be adopted with any assurance that it comports with the idea of a “settled connection”; and when we are dealing with a question of fact, it is important that the finding be dominated by a sense of reality.

By 1932, Hackfeld had unquestionably abandoned any intention to make his home again in Hawaii. He had last lived there in 1900, and his family had never been back. His wife’s health, which was the prime cause of his leaving in 1900, had not improved, his daughters had married German nationals, and his business interests were not only removed from Hawaii but under such circumstances as would not be expected to encourage his return. In 1932, Hawaii, we can believe, meant nothing more to Hackfeld, then aged 76, than an old memory. Twenty-three years of his young life had been spent there, during which he had made a fortune, helped to establish a new political system, married, and seen the early childhood of his two daughters. Now all that was completely changed; and it is hard to believe that, after a lapse of 32 years, throughout which he had lived again in the country of his birth and made many neighborhood friendships, bought a town house and a country place, while his properties and business in Hawaii had been taken from him, he retained any serious feeling that Hawaii was the home to which he must return. True, he stated as late as 1923 that he regarded Honolulu as his home, these statements being made in connection with his claims arising out of the seizure of his property by the Alien Property Custodian and on a passport application; but these mere statements were not, under the circumstances, of much weight for a legal determination of domicil. Made almost nine years before the crucial date of death, they are deprived of all force by other statements made subsequently; for whatever may be said of the truth of the later statements as to Tenafly, New Jersey, they clearly indicate an abandonment of all expectation to return to Honolulu.

This leaves only Tenafly for consideration, and this largely because in papers filed to support his property claim and in applications for a passport and renewals as late as 1930 he said that Tenafly was his “legal residence,” that he was “of Tenafly,” or that his “address” was Tenafly, and because his agent, his attorney, his ancillary executor, and the Attorney General had said so at one time and another. The statements of these others, made without evidence of supporting knowledge, are entitled to very little weight as proof of the fact in this proceeding. His own statements, if they were intended to convey the idea of actual residence, home or domicil, are contrary to the more impressive evidence of conduct and circumstance; but it may be doubted whether by the use of such ambiguous language he meant domicil. The ownership of a vacant lot, the piece of business involving Rodiek’s home, where Hackfeld once or twice spent a weekend, fail to lend color to the establishment of a domicil in Tenafly.

It must be remembered that the determination of domicil in this proceeding is confined to the time of death, and the earlier statements and conduct are only of significance in their relation to that determination. There are clear inconsistencies in Hackfeld’s various statements, and these with their implications we have not disregarded, but have undertaken to resolve. From them, Bremen appears clearly as the place of domicil.

Up to this point the consideration of the issue of domicil has beeD confined to the matter of fact, without regard to the collateral question whether petitioner is estopped to avail himself of it. These are two separate propositions and should not be confused. If the law insists that a taxpayer must, because of his earlier statements or conduct, which are at variance with fact, accept liabilities or forego rights which the true fact does not require, clear thinking must recognize the fact and not permit it to be distorted by the greater importance ascribed to the taxpayer’s inconsistent representations. Because, in the interest of justice, the fact may be treated as overshadowed by the collateral circumstances, there is no reason for treating the fact as obliterated or refusing to recognize it. Hence, we have examined the evidence first to ascertain and determine the fact of domicil, before considering whether the petitioner is estopped to have his tax determined in accordance with it, under the nonresident provisions of the revenue act.

The Commissioner contends that, because Hackfeld, in applications to the State Department, upon which passports were issued, and in papers to support claims filed with the Alien Property Custodian, made statements which are inconsistent with the present contention of residence or domicil in Bremen, petitioner may not avail himself of such domicil — that there is an estoppel or a waiver or something akin thereto in principle, which binds petitioner by the earlier statements, either because decedent may not “benefit by his own wrong”, or he may not change his position after the Government has acted on it. The date of death is the crucial time of domicil, and evidence or assertion of domicil at another time, while it may be relevant, is not necessarily inconsistent. The distinction should also be respected between domicil and citizenship, and evidence as to the latter must appear to be relevant if it is to affect the decision as to the former. Furthermore, the weight to be given to the allegedly inconsistent evidence depends upon how crucial it was in the determination of the earlier rights; for an incidental statement made in a widely different controversy could not be regarded as so misleading as to prevent the subsequent assertion of the truth.

As to the passport application, the findings are that in 1923 Hack-feld stated in his application that Honolulu was his legal residence and Bremen his temporary residence, and that he intended to return for permanent residence in the United States. The passport was issued. Thereafter his applications of 1926, 1928, and 1930 stated that his legal residence was Tenafly, New Jersey. Whether the 1923 statement was true, we need not decide; it can make no difference here as to his home at the time of death in 1932. The later statements that Tenafly was his legal residence were untrue.

The question, therefore, is whether the respondent may hold petitioner to these statements irrespective of their truth. The evidence indicates nothing more on Hackfeld’s part than the filling in of the application form as to legal residence with the words, “Tenafly, New Jersey.” In affidavits accompanying the applications, he made a reasonably full disclosure of the principal facts as to his movements between Hawaii, Bremen, and the United States — enough to put the State Department upon notice of the possibility that Bremen was his legal domicil. In fact, the State Department was apparently unwilling to rely upon the application, but made an investigation through one of the foreign officers, who reported that in his opinion Hackfeld was domiciled in Bremen and was not entitled to the passport applied for. The passport was nevertheless issued. This it seems to us precludes a finding that the State Department acted upon the statement made by Hackfeld in his application as to his legal residence. Even, therefore, if the misstatement as to legal residence can be regarded as a deliberate misstatement of the difficult legal concept of domicil, it can not be said to have misled the Government of the United States, when the State Department was in possession of most of the facts and in position to verify all of: the evidence upon which the inference of domicil depends. Steel v. Smelting Co., 106 U. S. 447.

Leaving aside, however, that the evidence falls short of establishing the reliance of the State Department upion the appli cation alone, the passport itself is not conclusive, even as to citizenship, in a proceeding before a different tribunal. In his opinion as to alien property claims, the Attorney General stated that the President was not bound in the determination of Hackfeld’s citizenship by the issuance of the passport, and in Miller v. Sinjen, 289 Fed. 388, it was so held. We can not find, therefore, that as a matter of fact the Government in the issuance of passports since 1923 has been misled by Hackfeld’s statements upon the several applications as to his legal residence, and the omission of such a finding deprives the statements of the force of estoppel which the Commissioner would ascribe to them. This makes it unnecessary for us to consider further questions implicit in the issue of estoppel, namely, whether the Government is to be regarded as so completely unified that the statement of a citizen upon application to the State Department for a passport is to be regarded as a potential estoppel in respect of every other relation which he may have toward the Government; and whether the issuance of a passport can in any event be regarded as an act of the United States to its damage, analogous to the giving up of money or property.

The Government’s principal reliance for estoppel is upon the fact that Hackfeld procured the return of his property from the United States under the Trading With the Enemy Act, 40 Stat. 411,460; 1020; 41 Stat. 35, 977; 42 Stat. 1511; 50 U. S. C. Ann., Appendix, by means of statements and representations which amount to an assertion of domicil in the United States. This point must be rejected, primarily because whatever may be the force of Hackfeld’s statements Upon the same issue in another proceeding involving domicil during and immediately after the war, they can not be projected so far beyond that time as to conclude the determination of his domicil at the time of his death in August 1932.

During the war, Hackfeld was in Bremen and prevented from leaving to attend to the large business interests which he had in Hawaii. All of the Hackfeld properties in Hawaii were seized by the Alien Property Custodian and sold. In 1923, Hackfeld, acting through an attorney and agent in this country, presented a claim to the President for the return of his property (sec. 9, Trading With the Enemy Act). Under the Trading With the Enemy Act, a resident (meaning a domiciliary, Stadtmuller v. Miller, 11 Fed. (2d) 732; Miller v. Sinjen, supra) of Germany was, irrespective of citizenship in the United States, an enemy, and no provision was made for the return to him of property seized. As to a naturalized citizen not domiciled in enemy territory, provision was made for the return of his property if he overcame the two-year presumption of expatriation, Act of March 2,1907, 34 Stat. 1228, ch. 2534, and by section 21, amending the Trading With the Enemy Act, giving satisfactory evidence of his uninterrupted loyalty to the United States and his return or desire to return. The claim was referred by the President to the Attorney General, and after investigation by him and by the Alien Property Custodian, it was found that Hackfeld had overcome the two-year presumption of expatriation and had satisfactorily established his uninterrupted loyalty to the United States. The President thereupon allowed Hackfeld’s claim and ordered the return to him of the property seized; and thereafter, presumably as rapidly as liquidation permitted, payments were from time to time made to Hackfeld until the time of his death.

The Government’s point here is that, in that proceeding, Hackfeld could only prove citizenship and overcome the presumption of expatriation by proving that he was not a resident of Germany; that he did this by means of statements establishing domicil in Hawaii; that, having procured allowance of his claim upon the basis of these statements, his estate may not now be heard to claim domicil in Bremen; and that this is likewise true of the later statements made as to his address at Tenafly. The latest of such statements appearing in the record was in June 1928, when he gave his address as care Fared Kodiek, Laurel Avenue, Tenafly, New Jersey. Since it appears from the Attorney General’s opinion that an investigation was actually made in Germany by an agent of the Alien Property Custodian into Hackfeld’s activities during the war, as bearing upon the subject of his loyalty, it is fair to believe that the return of property was not based solely upon the bare statements of his address at Tenafly. The subjects of investigation in that matter were Hackfeld’s citizenship, residence, and deportment during the period of hostilities. Finding that at that time these were sufficient to permit the return of the property, it mattered not whether at a later túne, up to the date of death, he was domiciled in the United States or elsewhere. Conceivably, an enforced residence in Bremen during the war could thereafter and prior to 1932 have become a voluntary domicil, and there is nothing in the evidence from which we can infer that such was not the case. As the petitioner has affirmatively proved that in fact Hack-feld’s domicil at the time of death was in Bremen, the respondent can not be deemed to have overthrown this proof by evidence of a postoffice address in Tenafly in 1928, even though it had been relied upon by the President in acting upon the alien property claim.

It is said that the law will not permit the petitioner to benefit by his own wrong. Without attempting to narrow the force of this doctrine, we find it difficult to recognize its application in this proceeding. If the supporting statements in the alien property claim were untrue, the benefit was in the return of the property; and the determination of a correct tax liability here can not be regarded as a benefit resulting from that prior conduct. The usual application of the doctrine in tax cases is found where a taxpayer makes a statement redounding to his tax advantage in one year and later seeks to avoid the resulting burdens which his statement would impose upon him. Stearns Co. v. United States, 291 U. S. 54; Helvering v. Salvage, 297 U. S. 106. But the benefit of the return of his property which inured to Hackfeld in 1923 and 1924 under the Trading With the Enemy Act, depending as it did upon statements as to citizenship, residence and loyalty during the war, even if it grew from a wrongful statement, does not call for correction by a misapplication of the estate tax act, which is based upon his domicil in 1932. So far as this record shows, petitioner is not changing his or the decedent’s position as heretofore taken in alien property proceedings, but stands upon the situation which existed at the time of death.

We therefore find no occasion for the operation of the doctrine of estoppel or any other reason to determine the estate tax liability as if Hackfeld were at the time of death a resident of the United States. We proceed upon the finding that he was domiciled in Bremen, and was therefore taxable under section 303 (b) as a nonresident citizen.

Immediately before his marriage, in 1888, while in Germany, Hackfeld made a marriage agreement expressly providing that all his property should be owned in community and governed by the law of Bremen relating to community property. The petitioner relies upon this contract and the respondent would for several reasons have it disregarded. We see no reason to disregard it.

Respondent makes the point that, since Hackfeld in 1888 was no longer a German subject, having lived in Hawaii more than ten years, from which, under German law, expatriation would, it is said, have been presumed, he was not in 1888 subject to the community law of Bremen. This point falls before the fact that, regardless of the nationality of the parties, the marriage agreement was made in Bremen and expressly imported the Bremen community law as controlling in regard to the husband’s property. In addition to this is the recital in the agreement that the husband considered Bremen as his true domicil to which he and his bride would eventually return if his business permitted. This contract, so far as appears from the evidence, remained a valid and subsisting contract between the parties throughout their married life, and (omitting the will, which will be considered later) governed all their property at the time of the husband’s death. By virtue of it, all property of the wife continued to be her separate property, and all property owned or acquired by the husband was governed by the Bremen community law. Consideration of the Bremen law of community of goods is, therefore, required, not because ex proprio vigore it applied to Hackfeld as a German national domiciled in Bremen, but because the parties to the contract agreed in terms to be bound by it, and it was the law of the contract.

The petitioner’s argument is that the community property law of Bremen recognized and treated as the community not only the husband and wife but also the children of the marriage — the two daughters — as equal and participating members; that the community was unitary and continuing, and carried through the death of Hackfeld; that upon Hackfeld’s death, there was no transfer but only his elimination from the community, leaving the interests of the surviving widow and children as they were before, and hence nothing upon which the estate tax as to him could be imposed.

The law of Bremen has been proven by means of two expert witnesses, introduced by petitioner, both of whom were qualified to testify by reason of their professional knowledge and experience as German lawyers. Their testimony was extensively given in direct and cross-examination, and included much, of their professional reasoning as to correct translation and interpretation in terms adjusted to the concepts of American law. The findings of fact represent what we regard as the essence of the foreign law governing the decision of this proceeding, after reducing all the evidence and argument to definite categorical propositions. The Bremen law of community of goods in effect in 1888 was of Germanic origin and was substantially unlike the community property law of some of our Western states which was derived from Spanish law, cf. United States v. Robbins, 269 U. S. 315; Poe v. Seaborn, 282 U. S. 101; Goodell v. Koch, 282 U. S. 118; Hopkins v. Bacon, 282 U. S. 122; Bender v. Pfaff, 282 U. S. 127. It was in 1888 apparently not found in a formulated statute or code. It was later enacted into the Bremen statute of 1899 and taken into the German Civil Code, from both of which its scope and principles are now to be gathered.

The community property was owned “at collective hands” by the two spouses and their children in undivided shares per capita. While the husband had the power of administration during his life, this did not include the power of disposition in derogation of the property interests of the other members of the community. During his life, the community consisted of four — the husband, wife, and two daughters — and upon his death it became three, so that all the community property which had theretofore been owned “at collective hands” by a group of four, continued to be owned by the same community, now consisting of the remaining three. See Bek v. Miller, 8 Fed. (2d) 797; Sanchez v. Bowers, 70 Fed. (2d) 715.

If Hackfeld had not made a will but had been content that the general law of community of goods imported into the marriage contract should continue to govern the effect of his death upon the community property and the resulting tax, a difficult and interesting question would have arisen as to whether there was a transfer in the statutory sense of the emergence to his survivors of a substantial economic interest as the result of his death, Reinecke v. Northern Trust Co., 278 U. S. 339; Chase National Bank v. United States, 278 U. S. 327; Sanchez v. Bowers, supra, analogous perhaps to the operation under American law of an estate by the entirety, cf. Tyler v. United States, 281 U. S. 497; Third National Bank & Trust Co. v. White, 287 U. S. 577; Levy’s Estate v. Commissioner, 65 Fed. (2d) 412. But by section 6 of the marriage contract, set forth in translation in the findings, it was provided that the wife’s right under Bremen law in the community property upon the husband’s death was subject to his right of testamentary disposition, “which is hereby expressly reserved and which applies to half of the community property in case there is no issue from the matrimony.” The effect of the quoted clause upon the correct interpretation of the entire section is the subject of dispute between the parties here. The petitioner contends that by implication it deprived the husband of all power of testamentary disposition if at the time of death there was issue. The respondent contends that by implication if there was issue upon his death, his right of testamentary disposition was unlimited and he might dispose of the whole. There is no doubt that by section 27 of the Bremen statute the per capita share of the husband in the community property could be disposed of by him by will. Hack-feld’s per capita share was at the time of his death one fourth. The proper construction is, in our opinion, that the last clause of section 6, as translated, operated merely as a reassuring illustration of the limited extent of the husband’s reserved right of testamentary disposition. It was as much as to say that the reservation extended of course only to his per capita interest, and that such per capita interest, in case there were no children (as naturally was the situation at the time the agreement ivas made), was one half. Such an illustrative clause may seem to be supererogatory, in the light of section 27 of the Bremen statute of 1899; but the law was not so clearly formulated in 1888, and there was more reason to include such an illustrative clause than there would have been if a written statute, such as section 27, had been extant. Thus, both by the Bremen law and by the contract, Hackfeld clearly had at his death no less than a per capita or one-fourth undivided share in the community property over which he had full power of testamentary transfer, although without a will his share would have continued to be embodied in the community property.

A few days before his death, Hackfeld made a will. In it, he adverted to the marriage agreement of 1888, recognized that under it the community property law of Bremen operated at his death so as to give his widow and each daughter, as of right, a one-third community share in such property, and admonished that this be observed as underlying his will. However, he thereupon immediately proceeded in the will to dispose of the community property in a manner wholly inconsistent with the community law of Bremen. By that law, as has been seen, he had a right of testamentary disposition only over his one-fourth share. The shares in the community property (and, by the marriage agreement, all his property was community property) were undivided shares, thus leaving specific property unidentified as to ownership. By the will, however, Hackfeld, after, in section 2, devising to the widow the real property consisting of the Bremen house and the Tannenhof property, disposed of the entire estate to his executors as trustees to distribute the income to the widow and daughters during their lives and continue to hold the property into the lives of his grandchildren. Numerous specific bequests were made in section 10, and by section 11 the daughters were persuaded into an acquiescence in the will by the threat of limitation to the smaller portion which they might otherwise rightfully insist upon. The will was immediately probated, and Hackfeld’s estate is being administered in accordance with its terms. There has been no protest, and the will has been recognized both in Germany and the United States as governing the succession of Hackfeld’s property.

The petitioner insists, however, that notwithstanding the will and its recognition by everyone concerned with it as the source of suc-cessory rights, the Bremen law of community of goods must be regarded by the United States, in determining its tax, as the controlling system which operated upon Hackfeld’s community at his death; and that the effect of this is merely to remove Hackfeld from the community and leave with the community entity the same property as it had' before. If this were a matter of American law upon which an American tribunal could pass with confidence in its grasp of the relation between the marriage agreement, the community property law, and the will, we would not gainsay the duty of this Board to determine for itself to which of the three the succession was properly attributable. Cf. G. C. M. 7773, C. B. IX-2 426; George W. Burkitt Estate, 3 B. T. A. 1158. But the effect of the petitioner’s argument here is that despite his appointment as ancillary executor under the will, by virtue of which he filed the return, paid the tax he now contests, and instituted this proceeding; despite the official recognition of the effectiveness of the will in Germany, New York, and Hawaii; and despite the unquestioned acquiescence in the will by the adult daughters who are affected (the widow’s long illness may explain her silence and deprive her acquiescence of any significance in this connection), this Board must nevertheless treat the will as inoperative because it prescribes a testamentary succession at variance from the succession prescribed by the Bremen community law. This we do not feel at liberty to do. By the expert testimony, it appears that the widow was by German law entitled to elect to take or not to take under the will. This, we think, implies that the will was not without legal sanction. Cf. Smithsonian Institution v. Meech, 169 U. S. 398; Lillian M. Brinton, 28 B. T. A. 472; Francis J. Kelly, Executor, 31 B. T. A. 941 (now on appeal C. C. A., 7th Cir.). How, under German law, this sanction could be worked out, we need not attempt to discover. Enough, that it has been worked out. We treat the will, therefore, as a valid exercise by Hackfeld of the power of testamentary disposition, and we treat as bis estate all of the property, namely, the entire community property, of which he made testamentary disposition.

By section 303 (b), the computation of the net estate of a nonresident starts with only that part of his gross estate which at the time of death is situated in the United States. This eliminates the property in England, Switzerland, and Germany, including the alleged credits against the daughter abroad growing out of advances to her made by Hackfeld during his lifetime, which respondent, by affirmative answer, seeks to add. That affirmative claim rests upon the assumption that decedent was a resident, in which case his gross estate would include his interest in all property wherever situated (section 302), and his net estate would be determined by deducting the items enumerated in section 303 (a). But the determination already made that decedent, although stipulated to be a United States citizen, was domiciled in Bremen, necessarily disposes of the affirmative demand adversely to respondent, and leaves for consideration the question of the extent of the property situated in the United States.

By his estate tax return, the petitioner purported to include in gross estate all the United States property and none of the foreign property, and to claim no deductions. This disclaimer of deductions was a correct conception of his statutory duty, since by section 303 (c) his failure to include the foreign property in the return of gross estate deprived him of deductions. Furthermore, by section 303 (e), the moneys of Hackfeld on deposit with Irving Trust Co. ($12,832.04), Chase National Bank ($5,411.44), and Crocker Bank ($940.91) are expressly deemed to be property not within the United States, in view of the finding from the evidence that Hackfeld was not engaged in business in the United States at the time of his death. Burnet v. Brooks, 288 U. S. 378.

Under Burnet v. Brooks, supra, and City Bank Farmers Trust Co. v. Bowers, 68 Fed. (2d) 909; certiorari denied, 292 U. S. 644, all the property of a nonresident, whether it be tangible or intangible, which is situated in the United States is in principle included within the gross estate, and neither the mobüia doctrine nor the rule of recent decisions applicable to taxes of the states of tbe Union, (Farmers Loan & Trust Co. v. Minnesota, 280 U. S. 204; Baldwin v. Missouri, 281 U. S. 586; Beidler v. South Carolina Tax Commission, 282 U. S. 1; First National Bank of Boston, Executor v. Maine, 284 U. S. 312), is controlling. Thus the stocks and bonds, valued at $527,048.51, in the custody of Irving Trust Co. in New York are clearly within the gross estate.

The securities valued at $166,750.21 in the possession of the Canadian Bank of Commerce were owned by Hackfeld, had been “loaned” to Rodiek, and had been pledged by Rodiek to the bank as collateral security for a loan. Rodiek was insolvent, and although Hackfeld had been under no obligation to the bank, his executors, in order to get the securities, voluntarily paid oif Rodiek’s outstanding indebtedness to the bank, amounting apparently to $135,000. The petitioner contends that in no event should the gross estate embrace more than $31,750.21, the excess value of the securities over the loan. This contention must be rejected. The securities were Hackfeld’s property when he died, and since it is gross estate and not net estate we are considering, they are to be included to the full value of Hack-feld’s interest. The fact that his right to possession may have been conditioned upon the bank’s release of the pledge does not qualify his ownership so as to affect his gross estate. Any question as to a statutory deduction is out of the case, as we have seen, because petitioner claims no deductions, and because section 303 (c) precludes any. But none of the statutory list of deductions is applicable. If the pledge were made by Hackfeld for his own loan, it would avail his estate nothing in reduction of estate tax, City Bank Farmers Trust Co. v. Bowers, supra, and it must be of less avail when the pledge is voluntarily permitted by him to be made by another. Rodiek’s insolvency might operate to eliminate him as a possible debtor, 'but does not affect Hackfeld’s ownership of the securities nor impose upon him the obligation for the debt to the bank. We see no escape from the inclusion in the gross estate of $166,750.21 as the value of these securities.

The respondent, in the determination covered by the notice of deficiency, included in the decedent’s gross estate several items as property owned in Hawaii at the time of death. These are assailed in vague and general averments in the petition, which are denied in the answer. The evidence upon the subject is not sufficiently definite to support findings of fact at variance with the Commissioner’s determination. The petitioner argues that, as to Hackfeld, the amounts were at the time of death mere choses in action, either because they were part of the community of goods or because they were claims against corporations in the process of liquidation, the liquidator being itself in receivership and the claims being in litigation. Whether these hypotheses upon which the argument is built are in accordance with fact can not be determined from the meager and uncertain evidence, and we are therefore in no position to consider the soundness of the argument. The Board is “confined to the facts set out in the record”, Whitney v. Commissioner, 73 Fed. (2d) 589, and may not engage in academic consideration of hypothetical issues. Ohio Clover Leaf Dairy Co., 8 B. T. A. 1249; 9 B. T. A. 433; affd., 34 Fed. (2d) 1022; certiorari denied, 280 U. S. 588; Emanuel Cohen, 20 B. T. A. 647. We, therefore, can not say that the Commissioner’s determination as to these items was in error, and the determination is sustained. Indeed, the evidence as to the Liberty bonds suggests that they were property of the decedent in the United States; but upon this we stop short of a definitive finding or conclusion of law.

We hold, therefore, that the money on deposit in the Irving. Trust Co., the Chase National Bank, and the Crocker Bank, the properties in England, Switzerland, and Germany, including the advances made to Mrs. Eudolphi, are all excluded from the gross estate. Properly included is the value ($527,048.51) of the stocks and bonds with the Irving Trust Co., the full value ($166,750.21) of the securities pledged with the Canadian Bank of Commerce, and the four items of $95,118.60, $29.56, $45,452.00, and $13,876.13, representing properties in Hawaii.

The Commissioner has determined that the gross estate should include $3,000,000 as the value at the date of death of the so-called claim in litigation now pending in the United States Court of Claims. This is palpably erroneous. The matter, which the respondent treats as a right with a determinable value at the date of death, has never been treated as a legal right or the basis of a cause of action by Hackfeld, nor has it thus far ever been so recognized. Neither in the bill introduced by Senator Copeland nor in the resolution of the Senate referring the matter to the Court of Claims for investigation and report, was it regarded as a matter of legal obligation by the United States upon which the Hackfeld estate could proceed under a claim of right, but only as a matter of sovereign grace. There is nothing in the evidence to indicate that at the date of Hackfeld’s death there was either an actual or a potential cause of action, cf. United States v. Safety Car Heating & Lighting Co., 297 U. S. 88, but on the contrary, so far as this subsequent Court of Claims proceeding is concerned, the evidence shows that it did not take shape until after the death. The Court of Claims in such a proceeding does not enter a judgment, but makes a report to the Senate. What that report may turn out to be, no one can now foretell, and even the most favorable recommendation which may be made by that court to the Senate will be of no force to establish an enforceable legal right. The Senate will then act upon its own judgment upon a broad standard of sovereign justice, and may uncontest-ably refuse what the Court of Claims may recommend. If and when the United States actually makes financial compensation to the estate, the question of its effect upon any Federal tax may require consideration, cf. Acme Land & Fur Co., 31 B. T. A. 582 (on review, C. C. A. 5th Cir.). But at the time of death, there was nothing in this item of $3,000,000 which can now be included in the gross estate.

Beviewed by the Board.

Judgment will be entered vmder Rule 50.

       Restatement of Conflict of Laws, Domicil, § 9, p. 20; Beale, Conflict of Laws, Domicil, §§ 10.3, 10.4.

       The subject of domicil is comprehensively discussed by Professor Beale in his recent admirable Treatise on the Conflict of Laws, (1035), ch. 2. It is not a hornbook, and to quote from it here would be unsatisfactory either as omitting or including too much.

       Beale, § 41 C, p. 253.

       No weight whatever may be given in this proceeding to the evidence introduced that under German law (German Civil Code § 7) “domicile may exist simultaneously in several places.”

       Tlie respondent adds an application purporting' to have been filed by Hackfeld in 1932; but it is unsigned and there is no evidence to authenticate it, and it must be disregarded.

       Sec. 27. During tie matrimony, as well as in the event ttiat there are participating descendants after the termination of the marital community of goods through the death of the wife, the husband may dispose, mortis causa, only of his per capita share participation in the community property.

       See. 303. For the purpose of the tax the value of the net estate shall be determined—
      *******
      (c) No deduction shall be allowed in the case of a nonresident unless the executor includes in the return required to be filed under section 304 the value at the time of his death of that part of the gross estate of the nonresident not situated in the united States.
      *******
      (e) The amount receivable as insurance upon the life of a nonresident decedent, and any moneys deposited with any person carrying on the banking business, by or for a nonresident decedent who was not engaged in business in the united States at the time of his death, shall not, for the purpose of this title, be deemed property within the United States.


source: Caselaw Access Project

author: Leeoh :

license: Public Domain

text:
    Robert R. McCormick, Executor of the Estate of Katherine M. McCormick, Deceased, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44069, 51498, 51524, 51525, 51624.
    Promulgated February 11, 1936.

      Dwight P. Green, Esq., Willis D. Nance, Esq., Weymouth Kirh-land, Esq., and A. Leslie Eodson, Esq., for the petitioners.

      Bruce A. Low, Esq., and L. H. Rushbrooh, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Amelia Elizabeth White; Sarah F. C. Stewart; Alfred Cowles; Joseph Medill Patterson, Executor of the Estate of Elinor M. Patterson, deceased.

   OPINION.

Leeoh :

The respondent’s method of apportionment in computing the original deficiency was to divide the basis, applicable to the Tribune stock, between the old stock (Tribune) and the new stock (Building Corporation) in proportion to their respective values at the time the new shares were distributed, November 14, 1925. Petitioners assign error in the respondent’s application of the method prescribed in article 1599 (2) of Regulations 69. They assert there, since the new (Class A) stock represented solely the leaseholds and building, the only fair apportionment, for a basis for the Class A stock, is to apportion the basis of the Tribune stock between the value of those premises at No. 7 South Dearborn Street and the remainder of the Tribune Co.’s assets as of March 1, 1913.

The respondent now affirmatively pleads that the transaction involved did not effect a nontaxable reorganization and that the distributions made on November 14, 1925, were in the nature of ordinary dividends paid by the Tribune Co. to its stockholders. Respondent, therefore, seeks a redetermination sustaining the increased deficiencies now proposed on that basis.

The first question presented is whether a nontaxable reorganization was consummated, within the intendment of the pertinent provisions of the Revenue Act of 1926, set out in the margin.

Briefly, the detailed facts show that for many years the Tribune Co., a close corporation, operated its principal business of publishing the Chicago Tribune newspaper, in the 17-story building it had erected at No. 7 South Dearborn Street on land demised under long-term school board leases. Upon outgrowing those quarters, it purchased land on the North Side and erected a new plant in 1920. In 1923, with the adoption of plans to build, at the same location, an office building as its permanent home, the Tribune Co. knew that within a short time it would have to dispose of the premises at No. 7 South Dearborn Street. The disposition of that property was not only relevant but necessary to th.e conduct of its business for three reasons, namely, (1) it had no further use for the building in the conduct of its newspaper business; (2) its charter limited its business activities and the amount of real estate it could own or hold; and (3) it desired to end the attacks made against it by the local and state political parties, due to its ownership of such leaseholds.

On December 15, 1923, the Tribune Co. entered into a contract to sell the premises to the Union Trust Co. as of May 1,1926, for a total consideration of $4,853,650, to be paid over a term of about 55 years. In January 1924, the Tribune Co. sought legal advice as to how its interests under such contract could be transferred for the sole benefit of’ its stockholders, without incurring corporate income tax liability, and with a minimum of tax liability upon the receipt by such stockholders of the proceeds from that contract. Upon advice of counsel the plan of making such transfer was held in abeyance, pending the passage of the then proposed revenue bill (Act of 1924) containing provisions as to nontaxable corporate reorganizations. However, no definite plan to accomplish that purpose was evolved until August or September 1925, at or about the time the Tribune Co. entered into a contract to sell the premises to the Union Trust Co. for $4,060,000 cash, the latter agreeing to take title pursuant to the contemplated plan of reorganization. The proposed plan of reorganization did not pertain to the disposition of the premises at No. 7 South Dearborn Street, except as a means by which its transfer to the Union Trust Co. could pass through the Tribune Cb.’s stockholders for the sole purpose of placing them in a position to receive the proceeds of tbe sale theretofore contracted by those two companies.

Pursuant to the preconceived plan (later modified in certain aspects as necessitated by circumstances and in order to accomplish a legal transfer of title to the Union Trust Co. or its nominee) the Tribune Co., at its expense, caused the Building Corporation to be organized, to which it transferred title to the Tribune Building and leaseholds, subject to the contract of sale, in exchange for that corporation’s 40,600 shares of Class A stock redeemable at $100 per share in cash or by transfer of title to the Tribune Building and leaseholds. Immediately the Tribune Co. passed such shares on to its stockholders, pro rata, as a dividend theretofore declared out of its last accumulated earnings. In further pursuance of the plan, the stockholders then sold such Class A stock to a syndicate organized and financed by the Tribune Co., for $4,060,000 cash, 'borrowed by the syndicate from the Union Trust Co., which syndicate, upon receipt of the Tribune Building and leaseholds, in liquidation of their Building Corporation stock, transferred them to the nominee of the Union Trust Co., for the same amount, with which the loan from that company was paid, and the Building Corporation was then dissolved.

No reorganization of any portion of the Tribune Co.’s business or properties for the purpose of actually operating them as the regular business of the Building Corporation was intended. Instead, that corporation was organized for the sole purpose of acting as a corporate conduit through which title to the premises could be passed pursuant to the preconceived plan designed to meet the technical requirements of the provisions of the revenue acts defining nontaxable reorganizations and to effect a distribution of the proceeds from the sale (already agreed upon as $4,060,000) to the stockholders of the Tribune Co. The Building Corporation was brought into being for no other purpose and, as was intended from its creation, it performed no other function, after fulfilling which, it was immediately put to death.

For all practical purposes, these facts parallel those in Gregory v. Helvering, 293 U. S. 465. In that case section 112 (g) of the Revenue Act of 1928 was controlling, which is substantially similar to section 203 (c) of the Revenue Act of 1926, presently applicable. The Supreme Court there said:

When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made “in pursuance of a plan of reorganization” [§ 112 (g)] of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.

Upon authority of Gregory v. Helvering, supra, we hold that the transactions here in controversy did not effect a reorganization within the intent of section 203 (h) (1), supra. Cf. Royal Marcher, 32 B. T. A. 76; Handbird Holding Corporation, 32 B. T. A. 238.

So, neither the Tribune Co. nor its stockholders were parties to a corporate reorganization.

The transfer of the South Dearborn Street premises by the Tribune Co. to the Building Corporation, in exchange for all the latter’s Class A stock, resulted in a realized gain to the Tribune Co. Revenue Act of 1926, sec. 202. That gain was not “recognized” and thus was not taxable to the Tribune Co. under section 203 (b) (4) of the Revenue Act of 1926. But the Tribune Co. is not a petitioner here. The petitioners are shareholders or represent the interests of shareholders of the Tribune Co. That company declared a dividend out of its last accumulated earnings. Aside from the gain it realized on the exchange with the Building Corporation, the Tribune Co. then had earned surplus in excess of $4,060,000, earned since February 28, 1913.

We conclude that each petitioner or petitioner’s decedent, herein, received in November 1925 an ordinary dividend, under section 201 (a) and (b) of the 1926 Act, taxable as such upon a basis of $100 for each share of Class A stock so received. Their subsequent sale of such Class A stock, during 1925, for $100 per share resulted in neither gain nor loss.

This determination obviates the necessity of finding all of the facts relevant to and deciding the issue presented by petitioners’ assignment of error.

Reviewed by the Board.

Decision will be entered pursumit to Rule 50.

       Sec. 203. (a) upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
      *******
      (b) (3)' No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
      * * * * * * *
      (c) If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities In such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

        *******

      (h) As used in this section and sections 201 and 204 — ■
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of'stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
      (2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock' and at least a majority of the total number of shares of all other classes of stock of another corporation.
      (i) As used in this section the term “control” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

       Sec. 203. (b) (4) No gain or loss shall be recognized ii property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       The tax result here would apparently be the same had the earned surplus of the Tribune Co. then been less than $4,060,000. See Susan T. Freshman, 33 B. T. A. 394.

       See. 201. (a) The term “dividend” when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 19CL3.
      (b) For the purposes of this Act every distribution is made out of earnings or1 profits to the extent thereof, and from the most recently accumulated earnings or profits.


author: Matthnws:

text:
    Bermont Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72839.
    Promulgated February 11, 1936.

      Joseph F. Moore, Esq., and F. Edward Mitchell, Esq., for the petitioner.

      James L. Bachstrom, Esq., and O. P. Reilly, Esq., for the respondent.
   OPINION.

Matthnws:

The petitioner has been a closely held corporation since the date of its incorporation, all of its capital stock (except six qualifying shares) having been issued to the four Jones brothers, who were engaged in the oil business in the State of Oklahoma, in the amounts set out in our findings. Upon its organization these brothers conveyed to the petitioner certain leases, mining rights, and royalty interests and paid in cash to the petitioner the sum of $100,000, in exchange for all the capital stock, the properties being transferred subject to the condition that the petitioner would indemnify and save harmless each and all of the contributing stockholders against loss or damage arising out of litigation in connection with these properties which had belonged to them. Such an agreement was entered into by the parties for the reason that the stockholders anticipated that attacks were likely to be made on the titles to some of the properties transferred, and that suits might be instituted asking for an accounting for all income and profits derived from the properties during the period of claim of ownership under color of title. In other words, the properties were conveyed to the petitioner subject to any claims which might arise on account of questionable titles and it was understood and agreed that the petitioner would reimburse the transferors for any amounts required to be paid by them on account of their prior ownership of the properties.

It is to be noted that petitioner did not make any payment in money for these properties and that its capital stock was not distributed in proportion to the contributions in cash and property made to it by the stockholders. The entire cash contribution of $100,000 was paid in by B. B. Jones and M. Jones in equal amounts of $50,000. An examination of the schedules listing the properties discloses that these two individuals respectively owned approximately three fourths and one fourth of the transferred properties, E. L. Jones and B,. L. Jones together owning only about 1 percent thereof. Entries were made on the petitioner’s books to show a paid-in surplus in an amount equal to the estimated value of the properties, which was in excess of $7,000,000.

When the petitioner accepted the proposition of the transferors to convey to it these oil properties, subject to the condition that they would be reimbursed by the petitioner for any payments they might have to make as a result of their prior ownership or claim of ownership of the properties, we are of the opinion that a valid agreement was entered into under which the petitioner was legally bound to reimburse B. B. Jones for the sums paid out by him in settlement of the litigation instituted by George Tucker, under the circumstances described above. It does not follow, however, that such payment constitutes an allowable deduction from income of the petitioner for the year in which the payment was made. On the contrary this transaction would seem to come clearly within the well settled principle that the cost of property or the cost of defending or perfecting title to property is not a deductible expense. Ordinarily such outlays, whether in the form of legal fees or compromise payments, are capital expenditures and should be added to the cost of the property. Murphy Oil Co., 15 B. T. A. 1195, affirmed on this issue, 55 Fed. (2d) 17; Blackwell Oil & Gas Co., 20 B. T. A. 661; affd., 60 Fed. (2d) 257; Sunburst Oil & Refining Co., 23 B. T. A. 829; and cases cited therein. Certainly the amount paid by the petitioner in the instant case to reimburse B. B. Jones for the sums paid by him, as hereinabove set out, is not an ordinary and necessary expense incurred in carrying on the petitioner’s business, nor does it constitute a loss of the corporation which may be deducted under the provisions of the revenue laws. The respondent did not err in disallowing the deduction claimed on account of this item. See, in this connection, Commissioner v. Field, 42 Fed. (2d) 820, where the Circuit Court of Appeals for the Second Circuit held that attorney fees paid out by the taxpayer in a suit involving the taxpayer’s right to his deceased brother’s estate, under the terms of his grandfather’s will, should not be treated as capital expenditures or business expenses, saying: “expenses of this sort must fall within those general costs of protecting one’s property for which the statute makes no allowance.”

Counsel for the petitioner have argued that no question would have been raised with respect to allowing the deduction claimed herein if the validity of the agreement of indemnity had not been challenged by the respondent. It is pointed out by the petitioner that the deduction was disallowed on the ground that the judgment obtained against the stockholder was not an obligation of the petitioner corporation. Witnesses for the petitioner testified that the sum of $145,000 was paid by B. B. Jones out of his own funds on deposit in the State of Oklahoma in order that a prompt and advantageous settlement of the plaintiff’s claims might be effected, and the petitioner subsequently credited the account of B. B. Jones on its books in the amount of $145,017.85. We consider this point entirely immaterial and our conclusion would be the same if the corporation had originally made the payment in question direct to the plaintiff, George Tucker.

We do not know the nature of the litigation involving other properties of the petitioner but we do know that entries were made on the books to show payments aggregating $437.58 as expenses on account of three other lawsuits. Nothing is contained in the record to indicate that the petitioner is entitled to a deduction on account of these expenses.

The respondent’s determination is sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: SteRNhagen:

text:
    Sarah A. W. Coursey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71755.
    Promulgated February 11, 1936.

      Arthur W. Mmhen, Jr., Esq., and H. Vernon Eney, Esq., for the petitioner.

      Paul A. Sebastian, Esq., and W. Frank Gibbs, Esq., for the respondent.
   OPINION.

SteRNhagen:

The Commissioner determined a deficiency of $3,947.33 in the petitioner’s income tax for 1930, and a 25 percent penalty of $986.83 for failure to file a. return. In the notice of deficiency, he included in petitioner’s income one half of the gain derived by a trust from the sale of real property. The petitioner assails this determination primarily as improperly taxing her upon the gain of the trust; and, in the alternative, upon several subsidiary grounds. By amended answer, the respondent affirmatively claims an increase in the deficiency and penalty, averring that by reason of petitioner’s right to make a testamentary disposition of the trust corpus, she is taxable upon the entire income of the trust. The facts are stipulated.

Before August 3, 1918, petitioner had, since 1909, been the owner of a tract in Maryland containing 37.229 acres, the value of which, on March 1, 1913, was $27,921.75, and on August 3, 1918, was $74,458. On August 3,1918, petitioner and her husband convej^ed this tract, together with others, to trustees by a trust instrument, a copy of which is stipulated. The trustees were “to collect the rents and income from said property and from any other investments thereof and to pay therefrom all taxes, assessments of every kind, insurance premiums and interest upon the mortgage debts thereon”, and all expenses of administration, including a commission of 5 percent of rents and income as trustees’ compensation; and to pay the remaining net income to the petitioner for and during her life. The trustees were empowered to manage and control the property and “in their discretion to sell, mortgage, lease, or otherwise dispose of the same, either for the purpose of changing the investments of said trust estate or for the purpose of paying off any of said mortgages or for the purpose of raising the amount of any sums of principal to be paid to said settlor under the power hereinafter reserved to her to withdraw the same.”

* * * if at any time the net income from said trust estate and property should not suffice for the needs and requirements of said Sarah Agnes Watson Ooursey (and of what constitutes her needs and requirements she alone shall be judge), then in trust to pay over to the said Sarah Agnes Watson Ooursey out of the principal or corpus of said trust estate such additional sum or sums of money as, in her judgment, when added to said net income will make an amount sufficient to meet her needs and requirements; the receipts of the said Sarah Agnes Watson Ooursey to be a full acquittance and discharge to said trustees for such payments; provided, however, that the amounts of principal which may he so withdrawn by the said Sarah Agnes Watson Ooursey shall not exceed in the aggregate one-half of the net value of the principal or corpus of said entire trust estate; and for the purpose of raising the amounts so to be paid said trustees are authorized as aforesaid to make sale of any part of the property held in trust hereunder; and it is further understood and agreed that said trustees shall not be required to raise by mortgage any amounts of principal to be so paid over to the said Sarah Agnes Watson Ooursey, and that upon the sale of any part of the property held in trust hereunder, not more than one-half of the proceeds of each sale may be withdrawn by her under the power hereby reserved.
And in further trust upon the death of the said Sarah Agnes Watson Ooursey to hold the entire trust estate and property then constituting said trust estate (including both the principal then held in trust hereunder and any income not withdrawn or paid over to the said Sarah Agnes Watson Ooursey at the time of her death) for such uses and purposes and persons as the said Sarah Agnes Watson Ooursey may by her last Will and Testament or any codicil thereto have limited, directed or appointed, the said Sarah Agnes Watson Ooursey hereby reserving to herself full and absolute power to dispose of, at her death, by Will the property composing said trust estate, to or for the use of such persons or beneficiaries and in such manner as she may by her Will or codicil direct, limit or appoint; and in default of such disposition by will of said trust estate and property, or in so far as any attempted disposition hereof by Will on the part of the said Sarah Agnes Watson Ooursey may not be valid or take effect, said trustees shall hold said trust estate and property in trust to distribute and pay over the same to and among such person or persons as according to the then existing laws of Maryland, regulating the distribution of personal property of intestates, would be tbe persons wbo would take by distribution personal property of wbicb the said Sarah Agnes Watson Ooursey had died possessed and intestate, and in the proportions fixed by said laws.

During- 1930 tlie trustees sold the said 37.229 acres for $125,000, realizing, after expenses incident to the sale, $111,397.75 net.

Section 166, Revenue Act of 192'8, provides:

Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then, the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

In our opinion, section 166 covers the present case, and the petitioner, the grantor of the trust, had the power during the taxable year 1930 to revest in herself title to one half of the corpus of the trust. As provided by section 166, the income of one half of the trust for 1930 is properly to be included in computing her net income.

The petitioner argues that since the corpus of the trust consisted of land, which she was not permitted to revest in herself, the section is inapplicable. This is a strained construction of the statute which can not reasonably be adopted. Although the petitioner, as settlor of the trust, had no power to require a conveyance to her which would revest in her the title to the land, she did have power, by her own request for one half the value of the corpus, to require a sale of sufficient land to permit a distribution to her of the amount requested. This is plainly within the substantial terms of the section. The words “title” and “part of the corpus” do not imply an identification of specific property which at any given time may comprise the trust estate, and our attention is called to nothing in either the legislative history of the section or its judicial interpretation which would narrow its meaning within such exact limits. See Charles T. Fisher, 28 B. T. A. 1164. The petitioner reserved to herself the unrestricted and uncontrolled right, if she deemed it within her needs, to revest in herself an amount equal to one half of the trust corpus. This right was fully recognized in an order and decree of the court of Maryland having jurisdiction over the trust (Ex Parte In the Matter of Sarah Agnes Watson Coursey, Circuit Court No. 2, Baltimore City), which order and decree is in evidence. The state court held:

* * * that the true meaning and intent of the above quoted provision of the deed of trust herein is that Sarah Agnes Watson Ooursey shall have an absolute right at any time and for any purpose to withdraw from the corpus or principal of the said trust estate such amounts as she may desire, provided only that the aggregate sum of all amounts so withdrawn by her do not exceed! one-half of the net value of the principal or corpus of said trust estate, and the said trustees are under no duty or obligation to see to the application of said sums so withdrawn by the said Sarah Agnes Watson Coursey or to control or restrict in any manner the disposition thereof by her; that in determining the total amount which may be withdrawn from principal or corpus by the- said Sarah Agnes Watson Coursey at any one time, the trustees shall proceed as follows, that is to say: The trustees shall appraise the trust estate in their hands at the fair market value thereof at the time application is made for a withdrawal from corpus by the said Sarah Agnes Watson Coursey; to this appraised value shall be added the aggregate amount of all sums theretofore withdrawn from corpus by the said Sarah Agnes Watson Coursey, and the excess, if any, of one-half of the figure obtained by such addition over the aggregate of the sums theretofore withdrawn, shall be the maximum amount, if any, which the said Sarah Agnes Watson Ooursey may at that time withdraw from the corpus or principal of the trust estate.

This we take as the controlling construction of the trust instrument and the petitioner’s rights thereunder, Freuler v. Helvering, 291 U. S. 85. The respondent correctly held that section 166 was applicable, and it is unnecessary to consider the petitioner’s argument as to whether other sections of the statute, i. e., sections 167, 162 (b), and 162 (c), would also serve to support the determination.

The respondent now claims, however, that his determination was inadequate in including only one half of the profit in the settlor’s income, and that the entire profit should have been included. The present contention is that the settlor’s reserved power of appointment by will gave her in effect full dominion over the trust corpus, and that there were -no adverse interests. This view, we think, can not be sustained. The settlor did reserve the power of testamentary disposition, but such power had not been exercised. Until it is exercised, there is a present interest in those who would under Maryland law take by intestate succession, Mercantile Trust Co. v. Bergdorf & Goodman Co., 167 Md. 158; 173 Atl. 31. This adverse interest is enough to preclude the settlor from revesting in herself the entire corpus. Cf. William B. Armstrong, 32 B. T. A. 1261.

The petitioner contends that her power to take up to one half the estate is conditioned upon her needs, and that, since she withdrew only $6,000, this must be regarded as the largest amount suited to her needs, and that it may not be said that she could by her own unquestioned demand secure the larger amount, representing one half of the total profit of the sale. No such limit upon her power is suggested in the decree of the state court, and we are unable to read such a limitation in the trust instrument. To say that in the light of past events it may not reasonably be supposed that petitioner would exercise the power to this extent is beside the point. If such power may be exercised without hindrance, the case falls within section 166, irrespective of the petitioner’s self restraint. It is the existence of the power of revesting which controls, and not the extent of its voluntary exercise. Freuler v. Helvering, supra.

The respondent, in applying section 166 so as to tax the settlor upon one half the income of the trust, has computed this one half by treating as the whole profit the difference between the net amount received by the trust ($111,397.75), and the stipulated value of the property on March 1, 1913, ($27,921.75), or $83,476. The petitioner assails the use of the March 1, 1913, value as the base for the computation of her share of the gain, and contends that the correct basis of such computation is the value of the property ($74,458) on August 3, 1918, the date when the property was transferred in trust, and that the whole profit is thus to- be taken as $36,939.75, of which the one half attributed to the settlor is $18,469.88. The respondent’s use of the March 1, 1913, value is based upon a misconception of the statute. It is only by virtue of section 166 that any part of the profit is to be attributed to the settlor, and this section expressly recognizes that the profit is in fact the profit of the trust, but, to prevent evasion, is included within the income of the grantor. Plainly the method adopted by the statute does not proceed upon a disregard of the trust, but, recognizing the trust as a taxpayer and adopting the computation of its income as a postulate, the statute then provides that the income shall, to the prescribed extent, be included in that of the grantor, Freuler v. Helvering, supra; Dorothy Forbes, 32 B. T. A. 139; 82 Fed. (2d) 204. This is comparable to the tax upon partnership income which is imposed upon the partners, Helvering v. Walbridge, 70 Fed. (2d) 683; Edward B. Archbald, 27 B. T. A. 837; affd., 70 Fed. (2d) 720; certiorari denied, 293 U. S. 594, and the Commissioner’s argument that so much of the accretion as occurred prior to the transfer in trust thus escapes tax has no greater force than it had in those cases as to the accretion prior to the partners’ transfer to the partnership. Indeed, the fact that a trust is a taxable person, while a partnership is not taxed as an entity, would seem to make the trust case weaker for the Commissioner’s view than the partnership case.

Since the profit which is taxed to the grantor is first computed as the profit of the trust, and since the property was transferred in trust prior to December 31, 1920, section 113 (a) (4) expressly provides that “the basis shall be the fair market value of such property at the time of such acquisition.” This is in contrast with the preceding section 113 (a) (3), providing that property acquired by the trust after December 31, 1920, shall take the grantor’s basis.

In 1919 the petitioner withdrew $1,738.11 from the corpus of the trust. She contends that in computing her revestable part under section 166, this $1,738.11 must be subtracted from the 1930 value of the corpus, her withdrawable percentage thus becoming 49.2 percent, which must be applied to the trust income. This is unsound. Her withdrawable share, as determined by the state court, was in 1930 one half the then value of the trust property, such half to be diminished by prior withdrawals. From the stipulation it appears that the value of trust assets on January 1, 1930, was $127,069.37,-' and therefore the $18,469.88 which should be taxed to her is well within her revestable share.

The petitioner seeks to reduce the trust profit, and proportionately her allocable share, by $16,600 withdrawn from the trust and paid by her in 1932. It comprised $15,000 paid to her husband in compromise of a suit brought by him for a divorce and for the enforcement of an alleged (but denied) agreement by petitioner to pay him $25,000 to dismiss, as he apparently did, an earlier suit filed in 1928 against the trustees and petitioner to set aside the trust deed as in fraud of his marital rights; and “$1,600 legal fees in defense of the suit.” These amounts were not paid by the trust but personally by petitioner, albeit with money withdrawn by her from the trust. They were paid in satisfaction of a personal controversy, some part of which dealt with an unsubstantiated charge that the trust had been obtained by fraud and imposition. Cf. Sanderson v. Burnet, 63 Fed. (2d) 268. They had no effect upon the determination of the income of the trust or the part thereof properly to be included in petitioner’s income.

We hold that the deficiency should be redetermined by including in petitioner’s income $18,469.88, or one half of the trust profit.

The delinquency penalty of 25 percent follows the failure of petitioner to file a return, and must be added. Revenue Act of 1928, sec. 291; Douglas L. Edmonds, Administrator, 31 B. T. A. 962 (on review, C. C. A., 9th Cir.); Harry D. Kremer, 31 B. T. A. 566; Fashion Center Building Co., 31 B. T. A. 167.

Judgment will be entered v/nder Bule 50.

       In the complementary proceeding of Colonial Trust Co. et al., Trustees Under Deed From Sarah A. W. Ooursey, Docket No. 71756, decided herewith, the Commissioner used the value of $74,450 on August 3, 1918, as the basis for determining the profit of the trust.


author: Mbllott:

text:
    Uniform Printing & Supply Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60909.
    Promulgated February 11, 1936.

      Walter II. Echert. Esq., and Tom Teeming, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Mbllott:

Petitioner contends that it is exempt from taxation under the provisions of section 103 (7) of the Revenue Act of 1928, shown in the margin. It contends that it is a “business league” not organized for profit and that no part of its net earnings inured to the benefit of any private stockholder or individual. In the alternative, it contends that the sum of $128,943.46 distributed by it to its customers, all of whom were stockholders, represented “rebates” or “refunds” which should be excluded from its taxable income.

We shall discuss these contentions in the order of their statement, but before doing so shall dispose of respondent’s plea in bar, presented upon brief, in which he avers that a previous decision of this Board is res adjuxticata of the issues raised herein, citing in that connection Tait v. Western Maryland Railway Co., 289 U. S. 620.

The previous decision relied upon is Uniform Printing & Supply Co., 9 B. T. A. 251; affd., 33 Fed. (2d) 445; certiorari denied, 280 U. S. 591. In that case it was held that this petitioner was not a business league and its claim for exemption was denied. In affirming the decision of the Board, the court, after adverting to the fact that the profits or net income of the petitioner was included in the value of the property owned by it, which, upon dissolution, might be divided among the stockholders, said :

It necessarily follows therefore that the petitioner was organized for profit, and that the profits- or net income of petitioner company for the year 1018 did inure to the benefit of the stockholders, thereby removing it from that class of taxpayer which is exempt under section 231 (7) of the Revenue Act of 1918 [which section is identical with section 103 (7.) of the 1928 Act in all particulars here important).

In Tait v. Western Maryland Railway Co., supra, the Supreme Court decided that parties are “concluded in'a suit for one year’s tax as to the right or question adjudicated by a former judgment respecting the tax of an earlier year”, and that both the Government and the taxpayer should be relieved “from redundant litigation of the identical question of the statute’s application to the taxpayer’s status.”

The petitioner argues that the evidence presented in the former proceeding differs from that in the instant case and lays emphasis upon the change made in its corporate structure as reflected in our findings, namely, the change which occurred on September 22, 1930. It also stresses the fact that the now stock certificates provided that the surplus earnings not required in the conduct and expansion of the corporation’s business should be returned to its customers.

Respondent’s contention has substantial merit, and it may be that the previous decision of this Board, affirmed by the courts, is res adjudioata■ We prefer, however, to resolve the doubt in favor of petitioner and to determine whether or not, under the facts and the evidence before us, it is entitled to exemption.

Do our findings show that petitioner is exempt from taxation as a business league within the purview of section 103 (7), supra?

Article 528 of Treasury Regulations 74 reads as follows :

Art. 528. Business leagues, chambers of commerce, real estate boards, and boards of trade. — A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus its activities should be directed to the improvement of business conditions or to the promotion of the general objects of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not a business league; since its activities do not further any common business interest, even though all of its income is devoted to the purpose stated. A stock exchange is not a business league, a chamber of commerce, or a board of trade within the meaning of the law and is not exempt from tax.

This administrative interpretation of the term “business league” has continued over a period of several years. By clear implication it has been ratified hy Congress in the reenactment of the provision here under consideration without substantial change. It is, therefore, entitled to great weight and should not be disturbed. United States v. Hermanos y Compania, 209 U. S. 337, 339; United States v. Falk, 204 U. S. 143, 152; United States v. Safety Car Heating & Lighting Co., 297 U. S. 88.

The courts and this Board have frequently held that to be exempt from income tax the petitioner must show three facts — (1) that it is a business league, chamber of commerce, real estate board, or board of trade; (2) that it is not organized for profit; and (3) that no part of its net earnings inures to the benefit of any private stockholder. Clearly no other interpretation of section 103 (7) can be made. Cf. Northwestern Jobbers Credit Bureau, 14 B. T. A. 362; affd., 37 Fed. (2d) 880; Produce Exchange Stock Clearing Association, Inc., 27 B. T. A. 1214; affd., 71 Fed. (2d) 142; Fort Worth Grain & Cotton Exchange, 27 B. T. A. 983; Adjustment Bureau of St. Louis Association of Credit Men, 21 B. T. A. 232; Louisville Credit Men's Adjustment Bureau v. United States, 6 Fed. Supp. 196.

In its brief petitioner states that the decision of the Board in its earlier case (Uniform Printing & Supply Co., supra,) indicates that the possibility of dividends, or the possibility of an accumulation of income, was the reason why it was denied the exemption .therein claimed, and that it has now rendered such possibilities impossible by amendment to its charter and by-laws. It apparently overlooks, however, the following language in the decision, which, notwithstanding the amendments relied upon, is still applicable: “This taxpayer does, in part at least, ‘engage in a regular business of a kind ordinarily carried on for profit’ and therefore unless the regulation is wrong it must be enforced and the exemption denied.” Petitioner has made no change in the nature' of its activities. It still operates a large printing establishment from which it derives its earnings and is clearly engaged in a regular business of a kind ordinarily carried on for profit.

While the above holding is sufficient to warrant the denial of the claimed exemption, it should be noted in passing that petitioner’s surplus earnings will, very definitely, inure to the benefit of its stockholders. The resolution specifically provides that “all of the surplus earnings not in the opinion of the Board of Directors required in the conduct and/or expansion of the business of the corporation, shall each year be returned to the customers of the corporation in the proportion that the gross amount of business furnished by any customer, bears to the gross amount of business done by the company * * *.” The stockholders of the petitioner are its sole and only customers. Any distribution of earnings must, therefore, and does, inure to the benefit of its stockholders.

The fact that some of the stockholders may not receive distributive shares in any particular year because they have furnished no business to petitioner is immaterial. All of the stockholders will eventually receive some benefit from the earnings which have been used for the expansion of the business of the corporation.

That a large proportion of its profits has been devoted to this purpose is apparent from the fact that although it started with an initial investment of $35,000, it now has total assets of nearly $1,000,000. Notwithstanding the change in petitioner’s charter and bylaws, therefore, we are satisfied that its profits do inure to the benefit of its stockholders. It is not a “business league” within the purview of section 103 (I) of the Revenue Act of 1928.

The remaining question is whether the distribution made by the petitioner was, as contended by it, a “rebate” or “refund”, or a “dividend” within the meaning of the word as used in the revenue act. The statute (sec. 115, Act of 1928) says that a dividend “means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1918.” Clearly, the distribution made by petitioner was a part of its earnings or profits accumulated after February 28, 1913. It was made to its shareholders in money, and falls squarely within the statutory definition of a dividend.

The citation of additional authorities is supererogatory. Reference to a recent decision by the Circuit Court of Appeals for the Second Circuit, however, may be helpful. In Produce Exchange Stock Clearing Association, Inc. v. Helvering, supra, substantially the same contention was made as is here being made by petitioner. The court, holding that the statute was never intended to grant an exemption from tax to an association “which merely serves each member as a convenience or economy in his business”, said:

Tie statute could never have contemplated that by creating a subsidiary corporation to furnish such facilities, even though they were intended to be performed at cost, it could obtain tax exemption for its creature.

We must, and do, hold that petitioner is not entitled to exemption from taxation, and that the respondent committed no error in determining the above deficiency.

Judgment vMl T)e entered for the respondent.

       SEC. 103. EXEMPTION FROM TAX ON CORPORATIONS.
      The following organizations shall be exempt from taxation under this title — ■
      * * * * l)l # *
      (7) Business leagues, chambers of commerce, real estate hoards, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual; * * *