author: Hill :

text:
    Jennie Sapirstein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 106660, 109215.
    Promulgated October 15, 1942.

      Ezra Z. Shapiro, Esq., for tlie petitioner.

      Lawrence It. Bloomenlhal, Esq., for the respondent.
   OPINION.

Hill :

This is a consolidated proceeding for the redetermination of income tax deficiencies of $6,011.19 and $9,174.28 for the fiscal years ended June 30,1930, and June 30, 1940, respectively. The issue is the same for each taxable year, that is, whether respondent’s action in including in the gross income of petitioner the income of a trust of which she was the settlor is proper.

The facts were all stipulated and as stipulated are hereby adopted as our findings of fact. Only those facts necessary to an understanding of the issue will be set forth.

The petitioner is an individual with residence at 823 E. Boulevard, Cleveland, Ohio. The returns for the taxable years were filed with the collector of internal revenue for the eighteenth district of Ohio.

On July 1, 1938, petitioner established a trust making her husband the trustee. The corpus of the trust consisted of all her right, title, and interest in the American Greeting Publishers, a partnership of Cleveland, Ohio, in which petitioner was a 38 percent partner. Her husband and three sons were partners in this partnership. Certain realty was also included in the corpus. The trust instrument provided, inter alia:

Item II.
The Trustee shall, In the exercise of his sole judgment, and discretion, have full power to sell, lease, transfer, assign, exchange, mortgage or encumber any part or all of the Trust Estate and any accruals thereof arising in any manner whatsoever. * * *
Item III.
The Trustee shall hold and administer the Trust Estate in accordance with the terms and provisions oí the within Trust Instrument * * *
As long as my husband Jacob Sapirstein shall continue to serve as the Trustee hereunder, said Trustee shall pay unto the Settlor during her lifetime, a minimum sum of Twelve Hundred ($1200) Dollars per year out of the income of the Trust Estate and if there shall not be sufficient income to pay such annual sums of money unto the Settlor, then the Trustee shall pay any part or all thereof out of the corpus of the Trust Estate), and in addition to such minimum annual payments as hereinabove provided for, the Trustee) may, m the exercise of his sole judgment and discretion, at any time pay any additional sums of money unto the Settlor, either out of the income or the corpus of the Trust Estate. [Emphasis supplied.]
At such time as my husband, Jacob Sapirstein, shall no longer be serving as the Trustee * * * said successor Trustees shall pay unto the Settlor during her lifetime, out of the earned income of the Trust Estate, all of such income of any given year up to but not exceeding the sum of Five Thousand ($5,000) Dollars per year, * * * if * * * there shall not be sufficient income to pay a minimum sum of Twelve Hundred ($1,200) Dollars for such given year, then the successor Trustees shall pay out of the corpus of the Trust Estate a sum sufficient to yield the Settlor such minimum sum of Twelve Hundred ($1,200) Dollars per year * * *. If, in any such given year, the earned income of said Trust Estate shall exceed the sum of Five Thousand ($5,000) Dollars, all of such excess income * * * shall be added to and become a part of the corpus * ⅜ ⅜ and shall not be cumulated or considered as earned income in any succeeding annual period.
⅜ * * ⅞ * * *
Item V.
This Agreement may be terminated by the Settlor at any time during her lifetime, provided the same is terminated during the lifetime of Jacob Sapirstein, the Trustee herein named, and provided further that express written consent to such termination is first had and obtained by the Settlor from Jacob Sapir-stein, said Trustee herein named. In such event all of the assets and property of the Trust Estate herein created shall forthwith be turned over, surrendered unto and become the property of the Settlor who shall then be restored to full and complete right, title, use and possession thereof.
Item VI.
This Agreement shall terminate at the death of the Settlor at which time the entire Trust Estate, together with all accruals, additions and proceeds thereof shall be surrendered and turned over unto the duly appointed, qualified and acting executors or administrators of her estate arid shall be administered and disposed of in accordance with the terms and provisions of her Last Will anfi Testament.

There was in existence at tbe time of the execution of the trust instrument and until November 3, 1938, a last will and testament of the petitioner which provided in part:

Item 2. I give, devise and bequeath to my beloved husband, Jacob Sapirstein, all my property real, personal or mixed, wheresoever situate, which I may own or have the right to dispose of at the time of my decease, absolutely and in fee simple. In making this bequest I am not unmindful of my duty to my children, but I have complete confidence that my beloved husband will take care of my children.

On November 3, 1938, petitioner revoked that will by the execution of another last will and testament which remained in effect throughout the taxable years. This latter will provided in part:

Item II.
I do hereby give, grant, devise and bequeath unto my beloved husband, * * * all of the property, whether real, personal or mixed and wheresoever situate, constituting the entire Trust Estate and any accruals or proceeds thereof now being administered for my sole benefit under the terms of a certain Trust Agreement dated July 1, 1938, * * * which trust instrument I incorporate herein and make a part hereof as though fully rewritten herein by reference thereto and I do further order and direct, in accordance with the terms and provisions of said trust instrument that the same be terminated at once. I do hereby further give, grant, devise and bequeath unto my beloved husband, Jacob, * * * all of the rest, residue and remainder of my property, whether real, personal or mixed and wheresoever situate and of which I may be seized at the time of my decease.
If my beloved husband, Jacob, shall have predeceased me, then I do hereby give, grant, devise and bequeath all of my property, * * * in equal shares and proportions unto my beloved children, Irving, Morris, Harry and Minnie Bernice. * * *

Certain other provisions not here material were contained in this second will, providing for the distribution of the corpus in the event that both petitioner’s husband and children predecease her.

There was no express or implied contract between petitioner and her husband obligating either of them to execute a will in favor of the other, nor was there such a contract forbidding revocation, alteration, or amendment of the last will and testament of petitioner dated November 3, 1938.

Petitioner received as a cash distribution from the trustee out of the trust estate the sums of $11,539.06 and $34,682.08 during the fiscal years ended June 30, 1939, and June 30, 1940, respectively. The petitioner reported the receipt of those sums in her income tax returns.

The trust reported for the fiscal years ended June 30, 1939, and June.30, 1940, the income which was received by it or which was credited to it. It deducted the amounts paid by way of cash distribution in each of the fiscal years.

Respondent contends that the income of the trust was taxable to petitioner because the trust was revocable by her with the consent of a person not having a “substantial adverse interest” under the provisions of the trust instrument. Therefore, he contends the income of the trust is taxable to petitioner as settlor under the provisions of sections 22 (a), 166, or 167 of the Revenue Act of 1938 and the Internal Revenue Code.

Petitioner contends that her husband had a substantial adverse interest because of certain Ohio statutes relating to dower and to descent and also because of the last will and testament of petitioner.

The various material sections of the Ohio statutes as set forth in Pages’ Ohio General Code, 1938, provide inter alia: .

Sec. 10502-1. Dower. A spouse wlio lias not relinquished or been barred of it shall be endowed of an estate for life in one-third of all the real property of which the consort was seized as an estate of inheritance at any time during the marriage, but all such dower interest shall terminate and be barred upon the death of the consort except:
(a) To the extent that any such real property at any time during the marriage was conveyed by the deceased consort, the surviving spouse not having relinquished or been barred of dower therein; and
(b) To the extent that any such real property at any time during the marriage was encumbered by the deceased consort by mortgage, judgment, lien (except tax lien), or otherwise, or aliened during the marriage by judicial or other involuntary sale, the surviving spouse not having relinquished or been barred of dower therein. In the event any of the real property of which the deceased consort was seized as an estate of inheritance at decease was so encumbered, or so aliened prior to decease, the dower interest of the surviving spouse therein shall be computed on the basis of the amount of the encumbrance at the time of the death of such consort or such alienation, as the case may be, but not upon an amount exceeding the sale price of such property in any event.
In lieu of such dower interest as terminates and is barred pursuant to the provisions of this section, a surviving spouse shall be entitled to the distributive share provided by the statute of descent and distribution.
All dower interest shall terminate and be barred upon the granting of an absolute divorce in favor of or against such spouse by a court of competent jurisdiction within or without this state.
⅜ ⅝ ⅜ ⅜ * * if
Sec. 1050S-4. Statute of descent and distribution.
When a person dies intestate having title or right to any personal property, or to any real estate or inheritance in this state, such personal property shall be distributed, and such real estate or inheritance shall descend and pass in parcenary, except as otherwise provided by law, in the following course:
⅝ ⅜ ⅝ * * * *
2. If there be a spouse and one child, or its lineal descendants, surviving, one-half to the surviving spouse and one-half to such child or its lineal descendants, per stirpes.
3. If there be a spouse and more than one child, or their lineal descendants, surviving, one-third to the surviving spouse and the remainder to the children equally, or to the lineal descendants of any deceased child, per stirpes.
* * ⅜ * * * *
Sec. 10504-55. Election by surviving spouse. After the probate of the will and filing of the inventory, appraisement and schedule of debts, the probate court on the motion of the executor or administrator, or on its own motion, forthwith shall issue a citation to the surviving spouse, if any, to elect whether to take under the will or under the statute of descent and distribution; but in the event of election to take under the statute of descent and distribution, such spouse shall take not to exceed one-half of the net estate. * * *

Sections 166 and 167 of the Revenue Act of 1938 and the Internal Revenue Code provide in part:

SEC. 16 6. REVOCABLE TRUSTS.
Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
(1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
* * * * # * * then the income of such part of the trust shall be included in computing the net income of the grantor.
SEC. 167. INCOME EOS BENEFIT OP GRANTOR.
(a) Where any part of the income of a trust— *******
(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor * * *
******* then such part of the income of the trust shall be included in computing the net income of the grantor.

The issue is limited under sections 186 and 167, supra, to the question whether petitioner’s husband was a “person not having a substantial adverse interest in the disposition of the corpus or income of the trust.” The mere fact that a husband-wife relationship existed does not mean that one can not have an interest adverse to the other. Stephen Hexter, 47 B. T. A. 483.

The contention of petitioner that her husband had a substantial adverse interest in the disposition of the trust corpus and income based upon the right to conserve the trust property through the continuance of the trust in order to protect his rights of dower in petitioner’s property and his rights as an heir or distributee of her estate, after her death, either under the Ohio statutes of descent and distribution or under the will of petitioner, is, we think, without substance. That appears to be the only basis of petitioner’s claim of a substantial adverse interest on the part of her husband.

Certainly, by virtue of the terms of the trust instrument petitioner’s husband had no interest in the corpus or income of the trust which was either adverse or substantial. A revocation of the trust would in no way affect the dower rights of petitioner’s husband in her property nor would such revocation affect his rights in or to her estate, upon her decease, as an heir or distributee of such estate. Only a modification of the statutes or a revocation or modification of petitioner’s will could effectuate a change of such rights.

Thus, during the lifetime of the husband the power to revest title to the corpus in the petitioner was vested in petitioner and her husband, a “person not having a substantial adverse interest in the disposition * * * of the corpus or income therefrom.” Sec. 166, supra. The entire income could have been distributed in the sole discretion of the trustee, petitioner’s husband, a “person not having a substantial adverse interest in the disposition ⅜ * * of the income.” Sec. 167 (a) (2), supra.

The total income of the trust is taxable to petitioner under either of the above sections. Respondent’s determination in this respect is approved.

In view of our holding as above indicated, it is unnecessary to consider respondent’s further contention that the income in question is taxable under section 22 (a).

Decisions will be entered for respondent.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Estate of Harry A. Worcester, Deceased, the Central Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 108989.
    Promulgated October 15, 1942.

      Albert L. Russel, Esq., and John H. Olippinger, Esq., for the petitioner.

      Melvin 8. Huffaker, Esq., and Robert 8. Dechant, Esq., for the respondent.
   OPINION.

Van Fossan :

Respondent included the remainder value of securities contributed by the decedent to the corpus of the trust, hereinafter referred to as the corpus of the trust, as a part of the decedent’s gross estate under section 302 (c) of the Revenue Act of 1926, as amended. Respondent asserts that this amount was so includible because it was a transfer both in contemplation of death and intended to take effect in possession or enjoyment at or after death. Thus two questions are presented: First, was the transfer made in contemplation of death? and, second, did the decedent intend the transfer to take effect in possession or enjoyment at or after his death?

The first question is one of fact, the answer to which is to be gathered by “carefully scrutinizing the circumstances ⅜ * * to detect the dominant motive of the donor in the light of his bodily and mental condition.” United States v. Wells, 283 U. S. 102. The test is one of motive. If the thought of death was the impelling cause of the transfer in question, it was in contemplation of death and, therefore, includible in decedent’s gross estate. The burden of proving that death was not the motive causing the transfer is on petitioner.

After carefully weighing the facts and circumstances, together with the inferences to be drawn therefrom, we have concluded in our findings of fact that the transfer in question was not made in contemplation of death. It was made at a time when the decedent was extremely active in his business affairs as a vice president of the New York Central System and president of the Cincinnati Union Terminal Co., which was at that time constructing a $41,000,000 railroad terminal in Cincinnati. The testimony indicated that he was in good health, traveling extensively on business and pleasure trips and on occasions going with his wife to this hunting lodge in Canada beyond the reach of automobiles, where he fished and “roughed it.” He was also active in social life in Cincinnati, going out evenings as often as three or four nights a week. After retirement from business he often went on long motor trips, driving the car himself. We picture the decedent at the time of the creation of the trust as a vigorous man who, although 66 years of age, still retained a zest for living so great as to push thoughts of death into the background.

It is our opinion that motives associated with life, not with death, caused decedent to make the transfer. By creating the trust he avoided heavy personal property taxes imposed by the State of Ohio and, in addition, reduced his Federal income taxes by dividing his income between himself and his wife, thereby reducing his surtaxes. The saving of property and income taxes as a motive for making a transfer is a factor to be considered in determining whether the presumption that a transfer was made in contemplation of death has been overcome. Robert A. Taft, Executor, 33 B. T. A. 671; affd., 92 Fed. (2d) 667; affd., 304 U. S. 356; Sadie S. Stein et al., Executors, 9 B. T. A. 486. We have also found that on retirement the decedent would no longer have had available the secretary who handled his personal matters while with the New York Central Bailroad. Thus, by creating the trust he anticipated avoiding the details involved in taking care of his investments after retirement, a purpose associated with thoughts of further life.

We conclude that the transfer was not made in contemplation of death.

The second question is whether the trust constituted a transfer intended to take effect in possession or enjoyment at or after death. Petitioner in effect contends that it was not the death of the decedent, but the death of others, which determined who would ultimately take the property and that the decedent retained no string to the corpus of the trust which was released by his death. Bespondent, relying principally on Helvering v. Hallock, 309 U. S. 106, argues that, since the decedent retained the right to the income from the trust during his life in the event he survived his wife, the decedent did not intend the transfer to take effect in possession or enjoyment until his death. Bespondent further maintains that the decedent did not make a completed gift at the time of the creation of the trust.

The ultimate question before us is the same as that before the Supreme Court in Helvering v. Hallock, supra. There the question was stated as follows:

* * ⅜ -whether the transfer made by the decedent in his lifetime is “intended to take effect in possession or enjoyment at or after his death” 6y reason of that which he retained, is the crux of the problem. [Emphasis supplied.]

The trust in question was irrevocable. It provided that the income was to be paid to the decedent’s wife for her life and on her death to the decedent for his life. On the death of the survivor of them the corpus was to be distributed in equal shares to the decedent’s brother and sister or their issue per stirpes. If the brother and sister predeceased without issue the decedent and his wife, the corpus was to be distributed to the decedent’s next of kin in accordance with the intestate laws of the State of New York. Thus, the decedent retained a life estate in the trust which depended on his outliving his wife.

This proceeding is almost precisely like May v. Heiner, 281 U. S. 238. There, as here, the grantor of an irrevocable trust retained a life estate, contingent upon the grantee of another life estate predeceasing her. The Supreme Court considered as unimportant the question whether or not the grantor had predeceased her husband and held that the corpus of the trust was not includible in the grantor’s estate as a transfer intended to take effect in possession or enjoyment at or after death.

After the decision of May v. Reiner, Congress enacted a resolution, the effect of which was to include in the gross estate of a decedent an inter vivos transfer of the type involved in that decision. Subsequent to the enactment of this resolution the Supreme Court, in Hassett v. Welch, 303 U. S. 303, held that the resolution did not apply to transfers made prior to the enactment of the resolution, even though the trans-feror did not die until after such enactment. Since the transfer in question was made prior to the enactment of the resolution, our decision would be controlled by May v. Reiner if that case and Hassett v. Welch were still to be considered the view of the Supreme Court.

More recently, however, the Supreme Court reiterated in Helvering v. Hallock, supra, the following language from Klein v. United States, 283 U. S. 231:

Nothing is to be gained by multiplying words in respect of the various niceties of the art of conveyancing or the law of contingent and vested remainders. It is perfectly plain that the death of the grantor was the indispensable and intended event which brought the larger estate into being for the grantee and effected its transmission from the dead to the living, thus satisfying the terms of the taxing act and justifying the tax imposed.

The Board, in Estate of Mary H. Hughes, 44 B. T. A. 1196, faced with the problem of determining the applicability of Helvering v. Hallock, stated that the consequence of the Rallock case was that May v. Reiner may no longer be followed and that Hassett v. Welch, being deprived of the support of May v. Reiner, has no remaining force. We believe this position was adequately fortified and we adhere to the conclusion so announced. Since the case at bar presents a May v. Heiner situation, it follows that the reasoning of Helvering v. Hallock controls.

Under the provisions of section 302 (c), as amended, a transfer intended to take effect in possession or enjoyment at or after death is includible in the transferor’s gross estate. The purpose of this language was to prevent the avoidance of estate taxes by inter vivos gifts which were testamentary in character. In this proceeding the decedent gave a life estate to his wife. So far as that life estate is concerned, the gift was a present gift, not testamentary in character and, therefore, was not includible in the decedent’s gross estate. The Commissioner has recognized this to be true, since he has excluded the value of the wife’s life estate from the gross estate here involved. The enjoyment of the remainder interests in the corpus, however, was dependent upon the death of the decedent. To that extent it was testamentary in character and was a transfer intended to take effect in possession or enjoyment at or after death. Respondent is sustained.

Decision will be entered u/nder Bule 50.


author: Black :

text:
    Dolores Crabb, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 95002, 95003, 95004, 95005.
    Promulgated October 20, 1942.

      'Wright Morrow, Esq., and Marry O. Weeks, Esq., for tbe petitioners.

      Donald P. Moyers, Esq., for tbe respondent.

         Proceedings of the following petitioners are consolidated herewith: Madeline Welder Smith; Elizabeth Wood; and Estate of James F. Welder, Jr., Deceased, C. K. McCan, W. E. Callan and Roger Fleming, Independent Executors.

   OPINION.

Black :

The errors assigned in each petition are set out in full in our previous report, sufra, at page 687. Assignment of error (a) is ■ no longer before the .Board for consideration. Under assignment of error (b) the question is whether certain net income for the calendar year 1936 in the amount of $472,839 is community or separate income.

For the year 1936 Jas. F. Welder Heirs filed a partnership return of income on Form 1065 and reported therein a net income of $399,183.50. In their individual returns for the same year each petitioner (for convenience only we shall still refer to James F. Welder, Jr., as the petitioner in Docket No. 95005) treated this net income reported by Jas. F. Welder Heirs as representing separate income in the amount of $409,089 and a community loss of $9,905.50, computed as follows:

The only adjustments which the respondent made to the net income as thus reported by Jas. F. Welder Heirs and petitioners was to treat the commission for oil lease of $5,000 as a separate deduction rather than as a community deduction, and to add to the separate net income $4,125 and $68,750 as representing restored depletion in connection with the lease to the Circle W. Oil Corporation and the Humble Oil & Refining Co., respectively, which leases were made in 1934 but were surrendered in 1936. These adjustments increased the separate net income to $476,964 and reduced the community loss to $4,905.50, the details of which are set out in table form in our previous report, supra, at page 694.

At the time the proceedings were originally considered by the Board it was petitioners’ contention that the respondent erred in adding to the net income reported by Jas. F. Welder Heirs and petitioners the two items of restored depletion, and that the petitioners and the respondent all erred in treating any of the income in question as the separate income of petitioners in that all such income, under Texas law, was community income.

In our previous report we held that the respondent erred in adding to the net income reported by Jas. F. Welder Heirs and petitioners the restored depletion of $4,125 in connection with the lease to the Circle W. Oil Corporation, but that in all other respects the respondent’s determination was correct. The effect of this holding was that the separate net income was thus reduced to the amount of $472,839 ($476,964 minus $4,125), which is the amount mentioned in our previous statements of the question here involved.

Petitioners now concede that, under the decided cases, the restored depletion of $68,750 in connection with the lease to the Humble Oil & Refining Co. represents income, but contend that the entire amount of $472,839 represents community income and not separate income; that they were wrong in originally reporting the net income received by Jas. F. Welder Heirs from oil and gas bonuses and royalties as separate income; that instead of a deficiency each petitioner has made an overpayment of his income tax and is entitled to a refund; and that in any event the restored depletion of $68,750 (included in the amount of $472,839) should be held to be community rather than separate property.

The basis for petitioners’ contention that the net income of $472,839 is community and not separate income is that Jas. F. Welder Heirs is a partnership under Texas law as well as under section 1001 (a) (3) of the Revenue Act of 1936 (see footnote 2 of our previous report) and that under Texas law all income from a Texas partnership is community. We held, however, that Jas. F. Welder Heirs was, under Texas law, a joint venture, group, or pool rather than a partnership, and that under Commissioner v. Wilson, 76 Fed. (2d) 766, the entire net income of $472,839 now in question was separate property.

The Fifth Circuit in its decision of May 5,1941, sufra, affirmed the Board, and, among other things in its opinion, said:

We do not think it necessary to decide what the trust business is, because the lease and sale of mineral deposits was not included in it. Farming and ranching business was contemplated and the trust was created for that alone. All save the last of the many pages of the instrument relate to that only. The land was conveyed for but ten years, and “for the purpose of carrying on certain farming and ranch businesses.” The conveying of a base fee in minerals by lease, or selling them outright was not included. The power of the trustees to convey minerals is a separate and superadded matter, for which the trustees are created expressly the attorneys in fact of the landowners to execute the leases or deeds. They do not convey their title as trustees, but the title of the reversioners, acting as their attorneys or agents. The proceeds come not from the operations of the trust, but from the disposal of minerals which were never conveyed to the trustees. The lease bonuses are separate property.

Petitioners filed a motion for rehearing before the court, and in passing upon that motion the court in its decision of July 25, 1941, sufra, among other things, said:

We have but found a different reason in law for the Board’s conclusion that these bonuses are not community but individual income. It is true, however, that this reason or “theory” does not appear to have been urged before or considered by the Board. The petitioners contend that the evidence was not fully developed bearing upon it. It is not plain to us what new evidence could be relevant, or how any different result could follow, but we will remand the case to the Board, as petitioners request, that full opportunity may be given to present their case.

Petitioners have been given that full opportunity and additional findings of fact as shown above have been made from the evidence which was introduced at the rehearing. Based upon such additional findings, as well as the facts embodied in our former report, petitioners argue three points and an alternative to the first point. We shall consider these points in the order argued.

Point 1. — (a) Under this point petitioners argue that there is no factual support for that part of the court’s opinion wherein it is stated:

* * * They do not convey their title as trustees, but the title of the rever-sioners, acting as their attorneys or agents. The proceeds come not from the operations of the trust, but from the disposal of minerals which were never conveyed to the trustees. * * *

Petitioners contend that, considering the correctness of the above statement from a factual standpoint, the evidence submitted at the rehearing conclusively demonstrates that it is erroneous.

Petitioners contend that on the basis of the additional findings of fact the trustees of Jas. F. Welder Heirs owned all of the minerals jn the lands under discussion; that Jas. F. Welder Heirs, acting by its duly authorized trustee, made the oil and gas leases, received the bonuses, and sold the royalty oil and collected therefor; that all of these receipts were in fact and law the income of Jas. F. Welder Heirs as a separate entity; and that whatever petitioners received on Ibis account came from the operations of Jas. F. Welder Heirs and not from the disposal of minerals which were never conveyed to the trustees.

We do not think that the manner in which the leases were made or the account in which the moneys were deposited and paid out as described in our additional findings of fact would in any way change the result reached by the Fifth Circuit. The case must turn on the correct construction of the trust instrument executed on February 15, 1932, and the supplemental instrument executed on June 7, 1932. The court had these instruments before it in their entirety on review, and in construing them the court concluded that they “did not extend to the making of leases and thus raising bonuses, but that this activity must be supported as the exercise of a power of attorney added to the trust provisions.” (From the court’s opinion of July 25, 1941.)

On the basis of such a construction of the instruments, we do not think that the form the trustees adopted to carry out their authority or how they treated the transactions upon their books or in what name they deposited the money would in any way change the equitable ownership of the properties held by the trustees from that of separate to community ownership or the income therefrom in the form of bonuses and royalties from separate to community income. Following the court’s decision in Crabb v. Commissioner, supra, we think the beneficial ownership of the lands in question remained in petitioners as their separate properties and that upon its authority and the authority of Commissioner v. Wilson, supra, the net income received from oil and gas royalties and bonuses derived from such lands remains the separate properties of petitioners. We so hold.

(b) Petitioners contend in the alternative that, if the bonuses and royalties are not the income of Jas. F. Welder Heirs as a separate entity, then they must be excluded from the computation of petitioners’ taxable income for the reason that there are no determinations or pleadings on behalf of the respondent to warrant the Board in making any adjustment to petitioners’ incomes except by adjusting the amount of the income of Jas. F. Welder Heirs as a separate entity. We think this contention is without merit. As to the income from oil and gas royalties and bonuses according to the court’s holding in Crabb v. Commissioner, supra, the trustees were petitioners’ attorneys in fact, and receipt by an agent is receipt by the principal. Baker v. Commissioner, 81 Fed. (2d) 741, affirming 30 B. T. A. 188.

Point f. — Under this point petitioners reargue their contention that Jas. F. Welder Heirs was a partnership under Texas law. The court in its opinion of May 5, 1941, for reasons therein stated and from which we have already quoted, thought it unnecessary to decide that question. Under this point petitioners are in effect asking the Board to hold contrary to the Fifth Circuit in its construction of the trust instruments and then to overrule our previous holding that Jas. F. Welder Heirs is not a partnership under Texas law. It naturally follows from the construction that the court has given the trust indenture, that whether Jas. F. Welder Heirs is or is not a partnership under Texas law becomes immaterial. We, therefore, make no attempt to add anything to what we said in our former report regarding that question.

Point S. — Under this point petitioners contend that at least the restored depletion in the amount of $68,750 is community property. The respondent, without briefing the point, merely contends that this amount is also separate property and is in the same category as the above amount of $404,089. At the time the case was originally considered, petitioners’ principal contention with respect to this item was that the restored depletion was not income in any event, either community or separate. It is now settled that restored depletion of the kind here involved is “income” and petitioners concede that that question is no longer before the Board for consideration. Crabb v. Commissioner, supra/ see also Sneed v. Commissioner, 119 Fed. (2d) 767, motion for rehearing denied, 121 Fed. (2d) 725; certiorari denied, 314 U. S. 686. But the question of whether the restored depletion is community income or separate income has never been separately determined by the Board. In view of the court’s statement in its opinion of July 25, 1941, that “we will ¡remand the case to the Board, as petitioners request, that full opportunity may be given to present their case”, we shall now consider the question of whether the restored depletion is community or separate income.

Petitioners state their argument on this point in their brief, as follows:

This is another phase of the community property question which the Fifth Circuit Court did not consider; neither did the Board in its original opinion discuss it. The situation is somewhat unusual, because of the difference between the way bonuses are treated under Texas law ánd under the Income Tax Law. Under Texas law the cash bonus for an oil and gas lease is considered the proceeds from the sale of an interest in the property, and as such its classification as between separate and community property, depending upon the separate or community status of the laud from which it is derived. On the other hand, federal tax law and decisions treat such bonuses as ordinary income — not as proceeds from sales. We admit that had the leases continued in force, this difference would not have prevented the bonuses, aside from the partnership question heretofore discussed, from becoming the separate property of those who owned the land as their separate property.
But we are here dealing with cases in which the leases terminated without the extraction of any oil or gas whatsoever from the tracts leased, when the conditional sale terminated without any loss of the original title or impairment in ownership. There is no Texas case which holds that if a married person obtains a cash bonus from a lease on his separate lands, and thereafter the lease is terminated without any production whatever, so he is reinvested with good title to all of the property, such a bonus is nevertheless separate property. * * *

So far as we know, it is true that there is no Texas case which has decided the precise question which petitioners now raise. We are cited to none and we know of none. But certainly the United States Circuit Court of Appeals for the Fifth Circuit has decided in Commissioner v. Wilson, supra, following Texas cases cited therein, that bonus payments received as part of the .consideration for an oil and gas lease of a taxpayer’s separate property are the separate property of the recipient. The percentage depletion deduction of 27½ percent likewise in such cases represents a separate deduction to the taxpayer. On the other hand, if the bonus payments are received for oil and gas leases on community property, they would be community income. See J. T. Sneed, Jr., 30 B. T. A. 1121. And the percentage depletion deductions allowed against such community income would be treated as community deductions. See method used in J. T. Sneed, Jr., 33 B. T. A. 478.

Petitioners’ argument does not appear to question the correctness of the foregoing propositions, but contends that, when in some future year it is determined that there will be no oil and gas production on the leased separate estate, the restored depletion becomes community income because it no longer represents a return of capital. It seems to us that, when once the character of a bonus payment under Texas law has been determined, depending upon whether the leased property is community property or separate property, its character will not be changed merely because no actual oil and gas production ever takes place. The restoration to income in a subsequent year of the percentage depletion deduction formerly taken is simply a restoration to income of that part of the bonus payment which was taken as a deduction. This view, we think, is in harmony with the reasoning of the court in Sneed v. Commissioner, supra. The court, in that case, among other things, said:

The deduction for depletion from a bonus received never represents an actual Dui always an anticipated depletion. If the anticipated depletion does not occur and it becomes certain it never will, it then becomes plain that what was thus deducted is not a return of capital, but gain like the remainder of the tonus paid. An adjustment is due. Should it be made by reopening the tax settlement for the year the bonus was received and the deduction taken? That would be most logical and accurate. But the limitations statutes, which would prevent it in this case, do not provide for it, and administrative convenience is against it. The Commissioner from the very beginning, under the broad regulatory power attached to every authorization of the deduction for depletion, solved the problem by requiring an addition to income in the year when the status as income of the amount deducted becomes clear. * * * [Italics supplied.]

We, therefore, hold that the $68,750 depletion restored to income in 1936, which represented a deduction taken against bonus payments of $250,000 received by Jas. F. Welder Heirs in 1934 from the Humble Oil & Refining Co., was the separate income of petitioners in 1936 as determined by the respondent.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Disney :

text:
    Estate of Johnson N. Camden, Deceased, Agnes M. Camden and First National Bank and Trust Company of Lexington, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. Agnes McEvoy Camden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Dockets Nos. 106784, 106786.
    Promulgated October 20, 1942.

      Victor A. Bradley, Esq., and Charles I. Dawson, Esq., for tbe petitioners.

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

Disney :

The record in this proceeding discloses a conveyance of a life estate in real estate from petitioner Agnes McEvoy Camden to petitioner Johnson N. Camden, her husband, with remainder to the wife. The respondent urges us to consider it as in effect transferring only a lease and therefore to regard the consideration paid by the husband as prepaid rental upon the lease, taxable as ordinary income to the wife. The petitioners, on the other hand, contend that a life estate was both in form and fact conveyed, that the amount received by the wife for such conveyance was for a capital asset, and that the husband, becoming the owner of such life estate, is entitled to depreciation upon the improvements upon the property. No question is raised as to the consideration paid.

There is nothing irregular about the conveyance, though the property had belonged to the wife, and was conveyed by deed by the wife and husband to a trustee and immediately upon the same day conveyed back to the husband for life, with remainder to the wife. This procedure appears to be required by the law of Kentucky in case of conveyance from husband to wife, and respondent seems to base no contention upon such form of conveyance. The conveyance to the husband with remainder to the wife is not designated as a deed, but it specifically conveys the property for life to the husband and “to the second party, Agnes M. Camden, the remainder in said property after the life estate of J. N. Camden”; and the parties by stipulation refer to both conveyances as deeds. The habendum clause recites, “To Have and to Hold unto the party of the second part, J. N. Camden for life with remainder after said life estate to Agnes M. Camden, her heirs and assigns forever.” The granting clause grants and conveys “the hereinafter described property” and recites its descriptions by metes and bounds. In short, in form there is a plain conveyance of life estate with remainder over. This, the respondent contends, however, amounts to and should be viewed as a leasehold. As reasons for so regarding the conveyance, it is urged that the wife testified that the reason for the execution of the instrument to the trustee and by him to the husband for life, with remainder over to the wife, “was to make Senator Camden independent so that he could do whatever he wanted on the place without conferring with me. It was also to protect him if anything by accident should happen to me, that he would have a place to live in.” There was no other motive. The wife testified, when asked whether there was any other motive than those stated above, “None in the world.” In other words, the tax evasion motive is absent from this case. Since the conveyance was in form a plain grant of a life estate and no tax evasion motive may be considered, it appears that any reason for regarding the conveyance as other than that of a life estate, that is, for regarding it as a lease, must be based upon the testimony above quoted, in effect, that the idea was to make the husband independent so that he could do whatever he wanted on the place and to protect him with a place to live if anything happened to the wife. In our opinion, however, those words are, to say the least, no more indicative of intent to create a lease than to create a life tenancy. Either lease or life tenancy would give the husband a place to live. Indeed, .the expression with reference to the husband being able to do whatever he wanted on the place without conferring with his wife seems to point to a life tenancy rather than a lease, since under a lease the power of the husband would seem to be more circumscribed than in case of a life tenancy. It was elsewhere explained, in effect, that the wife did not like to see the husband put so many improvements on property which did not belong to him. All of this seems to us to indicate a lack of reason for regarding the instrument as other than what it is in form — a conveyance of a life estate.

The respondent cites a number of cases to support his view that for tax purposes we should regard the conveyance as a lease; but we find none of them parallel with the present situation. In none do we find an unequivocal conveyance of a life estate held to convey only a leasehold so that the consideration paid therefor is ordinary income. That a life estate is a capital asset can, we think, hardly be doubted, in the light of the language of section 117 (b) of the Revenue Act of 1936. A life estate is property. Codman v. Miles, 28 Fed. (2d) 823. We do not understand the respondent to deny that principle. The property was “held by the taxpayer,” was not stock in trade or property properly included in inventory or held primarily for sale to customers in the ordinary course of trade or business. Petitioner Agnes McEvoy Camden received a consideration for the transfer of such property. The trustee-grantor recites that he “does hereby grant, bargain, sell and convey * * * the hereinafter described property for life ■* * *.” Though of course the effect, whether the conveyance be regarded as sale of life estate or as lease, is in either case to convey something to the husband for life, nevertheless, with no reference in the instruments to a lease and the usual covenants of a deed appearing, we are unable to find sufficient reason for holding, as the respondent contends, that it is as if a' lease had been executed; There are essential distinctions between a life estate and a lease, which, however, we think unnecessary of discussion here. The parties intended and used language sufficient to convey a life estate and we do not think that ground exists here for disregarding the intent and terminology which appears. Hort v. Commissioner, 313 U. S. 28, cited by the respondent, involved merely payment of a lump sum in consideration of the cancellation of a lease, the nature of which was not in controversy. Estate of F. S. Bell, 46 B. T. A. 484, involved trusts set up by the petitioners, under which there was a life estate consisting only of the right to receive income from trusts set up by those retaining the right to income for life, which right was later transferred to the remainderman. Both Irwin v. Gavit, 268 U. S. 161, and Maass v. Higgins, 312 U. S. 443, cited in the Bell case, are pointedly limited to situations where the life estate consists “only of the riglat to receive the income,” and our opinion in the Bell case is so limited. Moreover, therein, speaking of the grantors of the life interest, we say, “It is not as though they had bought the life interest, and thus had a cost basis of that right by virtue of the purchase,” and point out that they had no such right in the principal of the trust as to entitle them to a return of capital through exhaustion of the interest represented by their life estates. Here petitioner Agnes McEvoy Camden had purchased the property, had set up no trust, and had a cost basis. We can not discern herein a parallel with the Bell case In Elmer J. Keitel, 15 B. T. A. 903, we held that the sale of a partnership interest, limited to the life or widowhood of the grantee, constituted a capital transaction, and held that monthly payments of the consideration paid therefor entitled purchaser to an annual deduction for exhaustion — though we also held that the state of the proof would not permit us to determine the amount of allowable deduction. Though we likened the life estate to a lease “in this respect,” that is, for purposes of section 214 (a) (8) of the Revenue Act of 1921 as to a reasonable allowance for exhaustion, etc., we do not think such comparison constitutes sufficient ground for holding in the present case that the ordinary rule as to taxation in case of a sale of a capital asset should not be applied. This is consistent with the view taken in G. C. M. 14693, C. B. XIV-l, p. 197, where it is held that upon condemnation of real estate in the possession of the life tenant, both the life tenant and the remaindermen derived profit “from the sale of their individual legal interests in the real estate and [it] is taxable to them in their individual capacities.” In a case of a sale to a stranger, of a life estate in realty, by one who had received it from the holder of the fee simple estate by gift, and was therefore required to look to his grantor’s base, we think it would not be held that the seller had no base because his grantor had held the entire estate, and that therefore the whole amount received should be considered ordinary income. In the absence of tax evasion or other intent to convey something other than a life estate, we think no different answer should be given here. The respondent points out that section 113 (b) of the Eevenue Act of 1936 makes no provision for adjusting the basis of property by reason of the creation of a life estate; but we do not think that this justifies his view of the treatment to be accorded the transaction here at hand. In effect, the argument amounts to this: If the amount received by petitioner Agnes McEvoy Camden is not taxed herein, it may be held, in case of the sale of the whole property by her after expiration of the life estate, that no adjustment of basis is required because of the sale of the life estate, and therefore the amount now received will altogether escape taxation. We think such a possibility is no sufficient reason for ignoring the indisputable fact of sale, and the fact of capital asset. If it is, the remedy lies with the legislative body and not with us. However, the manner of calculating a basis for the life estate, upon original cost depreciated, and allocated to the life estate in accordance with life expectancy tables, is in our opinion proper. We conclude that there was here a sale of a capital asset, and taxable to the grantor as such, and not as ordinary income.

It is suggested upon brief also, that petitioner Agnes McEvoy Camden has not properly proved a cost basis for the life estate sold. In the condition in which we find the record, we think there is no real controversy before us in that respect. The petitioner, reporting upon a basis of sale of capital asset, computed a loss of $985.86, by deducting from $58,904, the consideration received for the life estate, the sum of $59,889.86 as the depreciated cost of the life estate, or 32.95 percent of $181,759.82, the depreciated cost of the property. At the hearing it was agreed that there was no argument as to the original cost basis. The Commissioner in determining the deficiency did not disallow the loss claimed, but merely added to income as reported by the petitioner the $58,904 received for the life estate, as representing taxable income, and computed depreciation on improvements of a cost of $99,084.44 (though petitioner Agnes McEvoy Camden had claimed no depreciation deduction.) The petitioner computed the same amount for improvements, and, like the Commissioner, computed depreciation at 2¾ percent. The parties stipulated that as to petitioner Agnes McEvoy Camden, “the only issue in controversy in this proceeding relates to the propriety of the action of the Commissioner of Internal Revenue in taxing to her as normal income the entire proceeds ($58,904.00) received from her husband, Johnson N. Camden, as consideration for the aforesaid life estate.” The loss claimed by the petitioner was based upon a value of the life right as 32.95 percent of depreciated cost, the 32.95 percent being based upon the age of the life tenant, according to Wigglesworth’s Table of Values, which appears as recognized in the Statutes of Kentucky, Carroll’s Kentucky Statutes, 1938, page 2679, and by the Kentucky court. Under all of the above, we conclude that the respondent has adopted and used the same original basis used and proven by the petitioner for real estate and improvements, and that the only real difference between the parties is the propriety of establishing or carving out a basis for the life estate by applying the life expectancy of the grantee to the statutory life tables. We hold that the basis for the life estate was properly computed.

We therefore conclude and hold that the Commissioner was in error in adding to the income of petitioner Agnes McEvoy Camden the proceeds of the sale of the life estate.

This leaves for consideration the question as to whether Johnson N. Camden, as owner of the life estate, is entitled to deductions for depreciation. In our opinion, error on the part of the respondent in denying such deductions has not been shown. Assuming, without finding it necessary to decide that the proper and necessary basis for deduction was used by him, we find absence of a fact indispensable to such allowance, that is, that the property was “used in the trade or business” of Johnson N. Camden. The only evidence with reference to the nature of the use of the property is that “We have a residence, and Senator Camden uses it as a horse farm, he raises horses” and that it is equipped for the handling of race horses. Obviously, if this were a case, like many which we have entertained, with reference to whether property was used as a business purpose or a hobby, the language just above quoted would not be sufficient to prove use in trade or business, for it is apparent that the raising of horses or the handling of race horses may be a business or it may be a mere hobby. Though the evidence is that the property was equipped for the handling of race horses, it is not shown that it was so used, or that there was any use in trade or business. We find such evidence insufficient. The petitioner urges, however, that the respondent allowed depreciation to the wife though she had not asked for it, and that therefore the respondent can not logically deny it to the husband. We do not think that such conclusion follows from the fact. In connection with allowing depreciation to the wife the Commissioner was taking the view that she should pay income tax upon $58,904 ordinary income. If the husband is in a position to claim depreciation, the situation changes, since in that event he has acquired a capital asset and the wife is not subject to payment of the income tax upon the amount assumed by the respondent when he allowed depreciation to her. We think that the respondent may not illogically take a different view in such changed circumstances, that he has not waived the question of proof, and that in the absence of waiver petitioner has failed to make the necessary proof. That section 23 (1) of the Revenue Act of 1936 provides that deduction may be computed by a life tenant as if he were the absolute owner, does not relieve him of the necessity of showing use in trade or business.

We conclude and hold that there was no error in denying claim of depreciation by petitioner Johnson N. Camden.

The above conclusions render the other issues unnecessary of consideration.

Reviewed by the Board.

Decision will be entered under Rule 50.

Murdock, SterNhageN, Akukdell, Mellott, and Opper dissent.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      ***** * *
      (b) Definition of Capital Assets. — For the purposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with his trade or busitiess), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.


author: Arnold:

text:
    Josephine Towne Clegg, Petitioner, v. Commissioner of Internal Revenue, Respondent. Arline Towne Hotle, Petitioner, v. Commissioner of Internal Revenue, Respondent. William Stark Towne, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lindsay Towne Clegg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 105519, 105549, 105550, 105551.
    Promulgated October 23, 1942.

      Scott G. Lambert, Esq., for the petitioners.

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

      Prior to October 22, 1942, this report was approved for promulgation.

   OPINION.

Arnold:

The question to be determined is whether the amounts paid by the trustees of the trusts herein for California state income taxes and Federal documentary transfer taxes are chargeable against corpus, as determined by respondent, or against ordinary income, as contended by petitioners. If chargeable against corpus, the income distributable currently by the trustees to the beneficiary of each trust is correspondingly increased and the beneficiary is taxable thereon under section 102 (b) of the Revenue Act of 1938.

The parties agree that under the provisions of section 162 (b) each beneficiary is taxable upon the amount of income to be distributed currently and that the test of taxability to each beneficiary is not the receipt of the income but the present right to receive it, Freuler v. Helvering, 291 U. S. 35, and that the amount of income currently distributable to each beneficiary is to be determined by the laws of California. Freuler v. Helvering, supra; Letts v. Commissioner, 84 Fed. (2d) 760; Commissioner v. Dean, 102 Fed. (2d) 699; Plunkett v. Commissioner, 118 Fed. (2d) 644; Estate of Ceorge H. Balzereit, 46 B. T. A. 959; Estate of Cassius E. Wakefield, 44 B. T. A. 677; and Estate of Frederick R. Shepherd, 39 B. T. A. 38.

Upon a supplemental stipulation of facts, the petitioners introduced in evidence trustees’ accounts and decrees of the Superior Court of California approving the same for all trusts except the trust under the will of William Pierce Johnson for the benefit of Josephine Towne Clegg. They contend that the tax payments in controversy are shown in such accounts as disbursements charged against net income distributable to the beneficiary and that, since the court approved the act of the trustees in charging the taxes involved against such income, such decrees are conclusive herein.

The respondent, as to such accounts and decrees, contends (1) that the question whether state income taxes and Federal transfer taxes were chargeable to corpus or ordinary income was not presented, considered, or decided by the Superior Court of California and its decree, therefore, would not be binding upon California courts on such question and should not bind the Board, and (2) that, if it be considered that the court determined such taxes were chargeable to ordinary income, then its decrees should not be followed as contrary to the law of the State of California as enunciated by its supreme court, the Supreme Court of California having held that regular or periodically recurring expenses arising from the administration or ordinary management of a trust are paid out of income, while extraordinary and unusual expenses are chargeable against the capital, citing In re Dare's Estate, 235 Pac. 725; 196 Cal. 29; In re Gartenlaub's Estate, 198 Pac. 209; 185 Cal. 648.

As to respondent’s first contention, we think it is sufficient to say that the expense items for state income taxes and Federal transfer taxes were items entering into the computation whereby the superior court determined the amount of income distributable to the beneficiary. The question before us was therefore presented and considered by that court. Whether the trustees in making their accounts and that court properly or improperly considered such expense items chargeable to ordinary income is not for us to say if the orders and decrees of the court are conclusive and binding on us as to the amount of income distributable to the beneficiaries. The items were set forth in the accounts and it appears that such items, together with other disbursements, were charged against ordinary income, thus reducing the amount distributable to the beneficiary. <

The present right of a beneficiary of a testamentary trust to receive income therefrom is a property right and the nature and extent of that interest is determinable by local laws, the decision of the state court being final. Blair v. Commissioner, 300 U. S. 5. “State law creates legal interests and rights. The Federal revenue acts designate what interests or rights, so created, shall be taxed.” Morgan v. Commissioner, 309 U. S. 78.

'■ Section 1120 of the Probate Code of California expressly confers jurisdiction upon the court in matters pertaining to testamentary trusts. See McLaughlin v. Security-First Nat. Bank, 67 Pac. (2d.) 726; Ringwalt v. Bank of America Nat. Trust & Savings Assn., 45 Pac. (2d) 967; Security-First Nat. Bank of Los Angeles v. Superior Court, 37 Pac. (2d) 69. The Court in Freuler v. Helvering, supra, relied upon by both respondent and petitioners, referring to a decree of the same court which rendered the decrees herein, viz., the Su*-perior Court in and for the City and County of San Francisco, California, stated: “* * * the decision of that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. * * *”

Furthermore, section 1123 of the Probate Code of California provides as follows:

A decree rendered under the provisions of this chapter, [entitled “Administration of Trusts”] when it becomes final, shall be conclusive upon all persons in interest, whether or not they are in being.

That the orders and decrees of the court having jurisdiction of the trust estate, in the absence of fraud, are conclusive and binding on .the question of the amount of trust income currently distributable to trust beneficiaries in the determination of tax liability under the Internal Revenue Act, see also Letts v. Commissioner, supra; Commissioner v. Dean, supra; Plunkett v. Commissioner, supra; Estate of George M. Balzereit, supra. In Hoveland's Estate, 101 Pac. (2d) 500, cited by respondent in support of bis argument that the decrees of the court are not binding, is distinguishable and not controlling herein. In stating that the function of the superior court was simply to ascertain what money the executor had received and what proper disbursements he had made and to determine the balance of money on hand, the court was referring to accounts in the nature of current accounts filed by an executor under section 921 of the Probate Code of California. That case did not involve accounts filed by trustees under section 1120 or a decree approving same, which under section 1123 is expressly made conclusive upon all parties in interest.

Since the decrees of the superior court are conclusive of the issues involved herein, it follows, therefore, that the respondent’s determination of the amount currently distributable by including therein the items of California income tax and/or Federal transfer tax in each of the trusts under the will of William Pierce Johnson, deceased, for the benefit of Arline Towne Hotle, William Stark Towne, and Lindsay Towne Clegg, and each of the trusts under the will of Florence Lindsay Johnson, deceased, for the benefit of Josephine Towne Clegg, Arline Towne Hotle, William Stark Towne, and Lindsay Towne Clegg, must be disapproved.

No trustees’ account and decree thereon was introduced in evidence Avith respect to the will of William Pierce Johnson for the benefit of Josephine Towne Clegg. It is argued by petitioners’ counsel that the appi’oval of the accounts submitted with respect to the other trusts is necessarily determinative of the rights of Josephine Towne Clegg in such trust, since all of the trusts are identical in terms. See Jennie Arrott Adams, 44 B. T. A. 408, 415. The will provided that after the beneficiary reached majority the trustees were to pay her “the whole of the net income” of the trust fund. The will contains no provisions as to how the net income was to be determined. It is argued by counsel for petitioners that, since the trustees Avere empowered to dispose of the trust property and reinvest the same, the trustors contemplated numerous sales of the trust property and resulting tax expense.

The general rule in California is that, where the trust instrument is silent as to what expenses are to be charged against income, ordinary and regular or periodically recurring expenses incurred in the administration or management of a trust are usually payable out of trust income, while extraordinary and unusual expenses are payable out of capital or principal. In re Kruce's Estate, 51 Pac. (2d) 1174; 10 Cal. App. (2d) 426; In re Dare’s Estate, supra; and In re GartenLaub's Estate, supra. HoAvever, there are exceptions to this rule. It is not a hard and fast rule. In re Oliver's Estate, 51 Pac. (2d) 1118; 10 Cal. App. (2d) 336; sec. 840, California Civil Code.

In Dare’s Estate, swpra, cited by respondent, a portion of the assets of the trust involved consisted of a second mortgage on a tract of land subject to a first mortgage upon which certain overdue interest and taxes were unpaid. To protect the trust estate the trustee entered into an arrangement with the owner of the land to convey the land to the trust, subject to the first mortgage and overdue interest and delinquent taxes. The trustee paid such interest and taxes and also paid the war stamps on the deed of conveyance because the owner of the land or grantor -was “broke.” The delinquent taxes and war stamps were under the circumstances capital expenditures or a part of the cost of the property acquired and hence were properly classifiable as extraordinary expenses. The expenditures were, as stated by the court, for the-, benefit of the corpus of the estate and the probable enhancement in value of the corpus of the estate itself. In Gartenlaub's Estate, supra, also cited by respondent, litigation arose upon the settling of the, trustees’ accounts and concerned the interpretation of the instrument creating the trust and the proper mode of executing the trust. The Superior Court of the City and County of San Francisco allowed the' trustee $500 for attorney’s services rendered in the litigation as well, as an additional allowance for so-called ordinary services of attorneys in connection Tvith the preparation and presentation of the annual account of the trustee, both of which were ordered paid out of the-income of the trust. With respect to the $500 the Supreme Court of California held that, where it becomes necessary to remove a doubt or-. ambiguity so as to insure the correct administration of a trust, the expense thereof is an extraordinary expense which should be borne by. all parties and, if paid from principal, the life tenant as well as the ■ remainderman shares the burden, for in that event the life tenant is-deprived of the interest on the sum taken from principal. The court also held that a premium paid by the trustee on the purchase of certain bonds was properly chargeable against income, otherwise the life tenant would in effect receive a part of the principal of the trust. These cases are distinguishable from these proceedings on the facts. The income upon which the 1938 income tax was levied consisted of capital gains of $31,692.75 realized on the sale in 1937 of securities forming a part of the corpus of the trust and dividend and interest income of $21,429.53 accumulated by the trustees during the period of the minority of Josephine Towne Clegg, which income was reported as taxable to the trustees in their state income tax return for the calendar year 1937. Income taxes are an annual recurring expense and with respect to trust income must be paid by the trustee and/or beneficiary.

Josephine Towne Clegg was not only entitled to the income from the trust but to the trust corpus as well, possession only of the corpus being deferred until she arrived at the age of thirty, when the trust was to terminate and the corpus was to be delivered to her. It is true there was a provision over of the trust corpus if she died before reaching the age of thirty, but, as matters stood in the taxable year, she was not only the income beneficiary but the beneficiary of the corpus as well. Whatever expense, therefore, was necessary to preserve the corpus was for her benefit from the standpoint of both income and trust corpus. That the payment of the items in controversy was. necessary to preserve for her both the income and the corpus can not be questioned.

• Josephine Towne Clegg reached majority on October 19, 1937. As far as the record shows she has made no objection to the payment of the state income taxes and Federal stamp taxes out of the trust income. Similar items were paid out of the income of the trust created for her benefit under the will of her grandmother. An account was filed by the trustees in which the trustees charged California income tax in the amount of $135.17 and Federal documentary transfer stamp taxes in the amount of $24.81 to 1938 income. This account was approved by the Superior Court December 30, 1941, or four years after Josephine Towne Clegg attained majority, and no objection was made thereto by lier. The items involved were regarded by both the trustees and the beneficiary as ordinary expenses chargeable against income.

There is no reason for according the William Pierce Johnson trust for Josephine Towne Clegg different treatment than that given the other trusts where the identical question is involved. Under all the circumstances, we are of the opinion that the respondent erred in increasing the amount of 1938 distributable income from the trust involved reported by Josephine Towne Clegg by the amount of $2,056.74, California income taxes, and by the amount of $75.42, Federal .documentary transfer stamp taxes.

Decisions will■ he entered, for the petitioners.

       Sec. 840. Duties of Tenant for Life. The otvner of a life estate must keep the buildings and fences in repair from ordinary waste, and must pay the taxes and other annual charges, and a just proportion of extraordinary assessments benefiting the whole inheritance.


author: Mukdcck : Hill,

text:
    William Bioff, Petitioner, v. Commissioner of Internal Revenue, Respondent.

    Docket No. 111249.
    Promulgated October 27, 1942.

      B. R. Burton, Esq., for the respondent.

       Prior to October 22, 1942, this report was approved for promulgation.

   OPINION.

Mukdcck :

The Commissioner sent the petitioner a notice of deficiency advising of the determination of a deficiency in income tax of $9,200.56 and an addition to the tax of $4,600.28 for the calendar year 1988. The addition to the tax was the 50 percent for fraud provided in section 293 (b) of the Revenue Act of 1938. The petitioner transmitted to the Board a petition designed to contest the correctness of the Commissioner’s determination both as to the deficiency and as to the addition. He did not pay the fee of $10 required for filing the petition. The Board issued an order on the petitioner to show cause why the proceeding should not be dismissed for failure to pay the fee of $10 as authorized by section 904 of the Revenue Act of 1926 and as required by Rule 8 of the Board’s Rules of Practice. The hearing on this order was continued from time to time, but at no time did the petitioner appear or have anyone appear for him. The petitioner states in his petition that he is confined in a Federal penitentiary. Counsel for the respondent has moved that the Board, in dismissing this proceeding, enter an order that there is a deficiency and a 50 percent addition in ■the amounts determined by the Commissioner.

Section 1117 (d) of the Internal Revenue Code provides:

(d) Effect of Decision Dismissing Petition. — If a petition for a redeter-mination of a deficiency has been filed by the taxpayer, a decision of the Board •dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the Commissioner. An order specifying such amount shall be entered in the records of the Board unless the Board can not determine such amount from the record in the proceeding, or unless the dismissal is for lack of jurisdiction.

Section 293 of the code provides:

(a) Negt-Igence. — If any part of any deficiency is due to negligences or intentional disregard of rules and regulations but without intent to defraud, 5 per centum of the total amount of the deficiency (in addition to such deficiency) shall be assessed, collected, and paid in the same manner as if it were a deficiency, except that the provisions of section 272 (i), relating to the prorating of a deficiency, and of section 292, relating to interest on deficiencies, shall not be applicable.
(b) Fraud. — If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3612 (d) (2).

Section 1112 of the Internal Revenue Code provides in regard to procedure before the Board:

In any proceeding involving the issue whether the petitioner has been guilty of fraud with interest to evade tax, the burden of proof in respect of such issue •shall be upon the Commissioner.

Two questions naturally arise. The first is whether this is a proceeding in which the burden of proof as to fraud has been cast upon the Commissioner by statute, and the second is whether, in any event, the Board has authority under the statute to specify in its order of dismissal that there is not only a deficiency but also an additional 50 percent as determined by the Commissioner. Congress, in using the phrase “proceeding involving the issue whether the petitioner has been guilty of fraud”, must have meant an issue raised by a pleading properly filed under the rules which it authorized the Board to promulgate. While the petition has been given a docket number and stamped “Filed”, that action of the Board was taken in accordance with a long established lenient practice for the purpose of receiving the petition within the statutory period. It was tentative in character and continued so as long as the petitioner failed to comply with the requirement of the statute and the Board’s rules in regard to the payment of a filing fee. The petitioner has not taken the necessary steps to institute a proper proceeding raising any issue, since he has not paid the fee. The established practice of the Board, under such circumstances, is not to serve a copy of the petition upon the respondent. It insists that the filing fee be paid before any further action is taken. That is the only available way of enforcing its rule. Thus, the failure of the petitioner is entirely responsible for the fact that no issues have been raised and that the Commissioner has not been able to join issue with the petitioner as to fraud. Since there is no “proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax,” section 1112 does not cast any burden of proof upon the Commissioner.

The Commissioner does not want to have this proceeding dismissed unless the Board will specify in its order that there is not only a deficiency, but also an additional amount due under section 293 (b) as determined by the Commissioner. Section 1117 (d), authorizing the Board to enter an order in the case of a dismissal, does not mention the additional 50 percent. The question is whether or not the Board can, in a proper case of dismissal, enter an order specifying not only the amount of the deficiency, but also the additional amount determined by the Commissioner. The Board has already held that this can not be done where a proceeding is at issue after the filing of proper pleadings and the petitioner fails to appear on the day set for trial. Miller-Pocahontas Coal Co., 21 B. T. A. 1360. The Board said that “the revenue acts contain clear recognition of a distinction between a deficiency in tax and a penalty” when it comes to dismissal for failure properly to prosecute. There, it was clear that the statute imposed upon the Commissioner the burden of proof in the fraud issue. But that .case is not authority here, where the facts are different. Not only does the statute fail to impose any burden upon the Commissioner in cases where the petitioner has not taken the necessary steps to raise an issue of fraud, but there would seem to be no reason for a contrary intent upon the part of Congress. It has merely said to taxpayers — if you express your desire to go before the Board by filing a proper petition with it, in accordance with its rules, you can thereby impose upon the Commissioner the burden of proof in the fraud issue, but not otherwise.

The question remains whether there is statutory authority under which the Board can enter an order dismissing this case, and, at the same time, specifying that not only the deficiency, but also the addition to the tax determined by the Commissioner, are in the amounts shown in the notice of deficiency. Section 293 (b) provides that the additional amount “shall be so assessed, collected, and paid.” For the meaning of the word “so” we must go back to paragraph (a) which just precedes (b) in section 293. Paragraph (a) provides that the addition for negligence shall be assessed, collected and paid “in the same manner as if it were a deficiency.” These words mean that there is no difference between such an amount and the deficiency for these purposes. They give the Board authority to specify the amount of the addition for negligence if it dismisses a proceeding because the filing fee had not been paid. No suggestion has ever been made that the Board could not enter an order including that amount in case of dismissal for failure of the petitioner properly to prosecute. Since the same language covers the addition for fraud, the authority is the same there. The fact that the Commissioner has the burden of proof in regard to fraud, if the fraud issue is ever properly raised, is no reason for distinguishing between the addition for fraud and that for negligence where, as here, the petitioner has not complied with the Board’s rules covering the filing of a petition.

Reviewed by the Board.

Judgment will be entered that the proceed- ,. mg will be dismissed because of the 'petitioner’s failure to pay the fling fee, and an order will be entered that there is a defeiency in income tax of $9$00.50 and an addition for fraud of $ff)0038 for the calendar year 19-38.

Hill,

dissenting: Because of the provision of section 1112 of the Internal Revenue Code it is my opinion that the dismissal of this petition justifies a decision in favor of the Commissioner only in the amount of the deficiency determined by him exclusive of the additional amount determined under section 293 (b) of the code. Miller-Pocahontas Coal Co., 21 B. T. A. 1360. Cf. Board of Tax Appeals v. United States ex rel. Shults Bread Co., 37 Fed. (2d) 442.

It appears to me doubtful whether under the situation here presented the Board is authorized to dismiss the petition if such dismissal operates to exclude the so-called fraud penalty from the decision in favor of the Commissioner for the deficiency in tax determined by him. However, for the purpose of the views I wish here to express, I will assume that the Board has authority to dismiss the petition, with such consequences as legally follow.

I think the majority assumes an erroneous basis for its conclusion. It states that there is no “proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax” and that, therefore, there is no burden of proof here upon the Commissioner under section 1112.

Upon that premise the majority concludes that the Board may dismiss the petition and thereupon enter its decision in the amounts determined by the Commissioner for deficiency in tax and for the so-called fraud penalties. The mere proposal to enter a decision against the petitioner for an amount of money arising solely by reason of alleged fraud negatives the above statement that the proceeding involves no issue of fraud.

No question is presented as to the sufficiency of the matter set forth in the petition to present the issue of fraud. And wdiether so presented or not, fraud is never presumed. The petition in question was filed. Whether or not it should have been filed without the payment of the filing fee is beside the question. The fact is that the filing of the petition brought to the Board both the tax and the fraud controversies and prevented the Commissioner from assessing either the tax represented by the deficiency or the so-called fraud penalties until the proceeding instituted by the filing of the petition is disposed of by the Board. It does not matter that the petition is being dismissed merely for nonpayment of the filing fee rather than for nonprosecution. Certainly, this is not a case of lack of jurisdiction. Erving v. Dwyer, 18 B. T. A. 319; Reliance Manufacturing Co. v. Blair, 19 Fed. (2d) 798; Weaver v. Blair, 19 Fed. (2d) 16. It strikes me as axiomatic that unless a petition has been filed there is no petition for us to dismiss. And, of course, when a petition has been filed it presents the issues therein set forth. One of the issues pre- „ sented by the petition here is that of fraud with intent to evade tax. On that issue the Commissioner has the burden of proof under section 1112. So, I think it can not properly be said that under the situation here presented there is no “proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax.” The burden of proof provision in section 1112 is, therefore, applicable here.

It is true that until the petition has been served on the Commissioner and the latter has answered, the issues for decision have not been joined. But the issues tendered by the petition can not be swept aside as nonexistent unless or until the Board chooses to serve the petition on the Commissioner. The refusal or failure of the Board to serve a petition of which it has jurisdiction does not strip from the petition the involvement of the issues therein presented.

The principle underlying the order of dismissal in this proceeding can not, in my opinion, be distinguished from that involved in Miller-Pocahontas Coal Co., supra. I think, therefore, that under the order of dismissal here the decision of the Board should be confined to the amount of the deficiency for the tax determined by the Commissioner, exclusive of any amount arising by reason of alleged fraud.

Smith agrees with this dissent.


author: Hill:

text:
    Bessie M. Brainard, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 108220.

      Promulgated October 27, 1942.

      Clarence II. Klinger, Esq., for the petitioner.

      Lawrence Bloomenthal, Esg., for the respondent.

       Trior to October 22, 1042, tills report was approved for promulgation*

   OPINION.

Hill:

This proceeding involves a deficiency of $1,554.92 in estate tax. Liability has been determined against the petitioner as transferee of the assets of the estate of James W. Brainard, who died March 28, 1987. The first issue which we must decide is whether or not respondent may determine a deficiency against this petitioner in view of the fact that he did not determine a deficiency against the estate of James W. Brainard within one year from the date of a request by the executors of that estate for prompt assessment pursuant to section 313 (b) of the Revenue Act of 1926. Section 313 (b) ■provides as follows:

(b) If the executor makes written application to the Commissioner for determination of the amount of the tax and discharge from personal liability therefor, the Commissioner (as soon as possible, and in any event within one year after the making of such application, or, if the application is made before the return is filed, then within one year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in section 310) shall notify the executor of the amount of the tax. The executor, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge.

If the determination of a deficiency is not barred, then a second issue is raised, that is, what was the value of certain stock contained in the gross estate of the decedent? In evaluating that stock respondent included as an underlying asset thereof certain property which petitioner claims had been given to her prior to decedent’s death.

The facts were all stipulated and as stipulated are adopted as our findings of fact. Only those necessary to an understanding of the issues are set forth herein.

Petitioner is an individual, residing at 12491 Cedar Road, Cleveland, Ohio. She is the widow of James W. Brainarcl, hereinafter referred to as the decedent.

On or about July 28, 1938, the executors of the estate filed an estate tax return with the collector of internal revenue for the twenty-first district of New York and paid a tax of $23,248.48, exclusive of interest.

By letter dated July 26, 1938, the executors of the estate requested the respondent to make an early determination of the estate’s tax liability in accordance with the provisions of section 313 (b), supra.

On or about October 4, 1939, a decree was duly made and entered in the Surrogate’s Court of Jefferson County, Watertown, New York, determining and settling the accounts of the executors and discharging them. All funds and assets of the estate were administered and distributed by the executors prior to May 5, 1941.

On May 5, 1941, the respondent issued notices of deficiency to the executors of the estate, and to the petitioner as transferee. The deficiency has not been paid and no appeal to the Board has been made by the estate.

The issue raised on these facts is whether or not the respondent could determine a deficiency after the year period specified in section 313 (b), supra. The express wording of the statute releases the executor “from personal liability for anjr deficiency in tax thereafter found to be due.” The wording is so clear and unambiguous that we can see no reason to construe it. Nothing contained in that section refers to a release of the estate from liability for a later determined deficiency. Thus, although the executors are released from personal liability, there is no provision whatsoever which would bar the respondent from issuing a notice of deficiency to the estate or to the transferee. Cf. William B. Weigel et al., Trustees, 34 B. T. A. 237; affd., 96 Fed. (2d) 387. We hold that a notice of deficiency could be issued to the estate by the respondent even though the year period provided in section 313 (b), supra, had elapsed.

Having decided the first issue, we must now consider the question of what value certain stock included in decedent’s estate had at the date of his death. The basis of the deficiency herein is an adjustment by respondent of the value of such stock as returned for estate tax' purposes. Such value was adjusted by adding thereto the value as determined by respondent of certain property which he held was an underlying asset of the stock. The only question presented is whether that property was such asset at time of decedent’s death or whether prior thereto it had been conveyed as a gift to petitioner. It is stipulated that the “property was correctly valued at $13,219.” There is no issue as to the method of the adjustment of value or as to the correctness of the adjusted value of the stock, provided the property! in question had not been conveyed as a gift to petitioner prior to1 decedent’s death.

In 1928 decedent purchased certain real and personal property hereinafter referred to as the Henderson Harbor property. In 1931 he organized the Brainard Investment Corporation, an Ohio corpora-' tion, and in exchange for all of its authorized no par common stock transferred the Henderson Harbor property to it.

On November 28, 1931, decedent transferred all of the stock of the Ohio corporation to the Brainard Investment Co., Ltd., a personal holding company organized under the laws of Newfoundland. All of the stock of the Newfoundland company, except two qualifying shares, was owned by decedent individually. Title to the Henderson Harbor property remained in the Ohio corporation from the date of its organization until June 30,1936.

The minutes of a regular meeting of the board of directors of the Newfoundland company held on June 15, 1936, state as follows:

President Brainard further explained to the meeting that Mrs. Bessie M. Brainard was proposing to acquire the real estate at Henderson Harbor and was offering therefor $ and that in his judgment it would be for the best interest of this corporation to convey this property and avoid the responsibility for the upkeep of the same to the corporation. Whereupon Director Steele introduced the following resolution and moved its adoption which motion was seconded by Director Gillmer and unanimously adopted.
Besolution “B”
Wheeeas, this the Brainard Investment Company, Ltd., is the owner of certain lands located in the town of Henderson Harbor, County of Jefferson and State of New York, as described and set out in a deed from William S. Bice and wife to .Tames W. Brainard, dated October 1, 1928 and in due course.by James W. Brainard transferred to this corporation and which Bessie M. Brain-ard is now proposing to purchase for the sum of $ and
Whereas, in the judgment of this the Board of Directors of this corporation, said offer ought to be accepted and said real estate sold to said Bessie M. Brainard on said terms of $
Now Therefore Be It Resolved that this corporation sell and transfer to Bessie Si. Brainard all that certain tract or parcel of land situated in the town of Henderson Harbor, County of Jefferson, State of New York and conveyed by William S. Rice and wife to James W. Brainard as of the 1st day of October, 1028 and in turn conveyed by James W. Brainard to this corporation together with all of the rights, improvements, appurtenances and heredita-ments thereunto pertaining and that the officers of this corporation be and hereby are directed to complete said transaction and to deliver to said Bessie M. Brainard a good and sufficient deed of general warranty conveying all of said premises to her the said Bessie M. Brainard in consideration of said sum of $

Pursuant to the foregoing resolutions, the Henderson Harbor property was transferred to petitioner by the Ohio corporation. The deed was dated June 30, 1936, and was recorded on September 28, 1936.

On or about June 30, 1936, entries were made on the books of the Newfoundland company setting up an account receivable in the sum of $79,938.11 covering the value of the Henderson Harbor property as shown on the boobs of the Ohio corporation. That account receivable was carried as an asset of the Newfoundland company on March 28, 1937. On that date the Henderson Harbor property itself was carried as an asset on the books of the Ohio corporation. The deed to petitioner was executed without any valuable consideration to the grantor.

On August 24, 1937, a meeting of the board of directors of the Newfoundland company was held. The minutes state as follows: ■

The Following Resolution Was Proposed :
Whereas Resolution B as set forth in the minutes of the meeting of the Board of Directors of this Company beld June 15th, 1036 purporting to set forth a sale of certain real estate and personal property in said resolution described and,
Whereas pursuant to said resolution B a certain transfer was made and,
Whereas in 1936 this corporation at the request of J. W. Brainard, sole stockholder, did transfer to Bessie M. Brainard, certain real estate known as Rock Ledges, Henderson Harbor, New York, and certain personal property at that time tiie property of the corporation, and
Whereas at the time of the transfer the sole consideration was natural love and affection, and that said transfer was intended to be and was in fact a gift of said property to said Bessie M. Brainard and,
Whereas there has never existed any promise, express or implied, on the part of said Bessie M. Brainard to pay any valuable consideration in exchange for said property thus transferred and,
Whereas, Notwithstanding said facts there appears on the books of the Company an account receivable in the sum of $79,938.11 purporting to be the consideration to be received by this Company for said property. Said account receivable is the indebtedness owing by said J. W. Brainard, and is not a debt of said Bessie M. Brainard.
Now Therefore, Be It Resolved that said account receivable in the sum of $79,938.11 be stricken from the books as an asset of this Company owing by Bessie M. Brainard, and the corporate books and records corrected, so as to correctly portray this transfer, as herein set forth.
It was moved by M. E. Gillmer that said resolution be adopted. Said motion was duly seconded, and a vote being had was unanimously adopted. Mrs. Bessie SI. Brainard not voting.
On motion regularly adopted, meeting adjourned.
Attest:
Maud E. Gillmer
Secretary.
A. F. Steele, Vice- Pres.
Bessie SI. Brainard
President.
I hereby certify that the foregoing is a true copy of Resolution passed by the Board of Directors of the Brainard Investment Corporation under date of August 24, 1937.
SIaud E. Git.t.mer
Secretary.

On or about December 7, 1937, the Obio corporation filed a gift tax return for the calendar year 1937 with the collector of internal revenue for the eighteenth district of Ohio showing the gift of the Henderson Harbor property to the petitioner. On that date petitioner also filed a donee’s information return with the same collector showing the gift in the same amount as reported by the Ohio corporation.

On January 13, 1937, decedent executed his last will and testament, which stated in part as follows:

Item 11
Substantially all of the property which formerly stood in my own name is now owned by Brainard Investment Company Limited, a corporation of Newfoundland, all of the outstanding shares of which I own and all of which stand in my name, with the exception of two qualifying directors shares, the certificates for which are endorsed in blank, are in my possession and which I in fact own. Brainard Investment Company Limited owns all of the shares of Brainard Investment Corporation a corporation of the State of Ohio, which owns all of the real estate and household goods which I owned at the time of its incorporation. * * *

The petitioner contends that the Henderson Harbor property was transferred to her by the Newfoundland company as a gift. A corporation will not be presumed to give away its assets. Noel v. Parrott, 15 Fed. (2d) 669. Therefore, there must be convincing evidence that a gift was made by the corporation.' It is a fundamental requisite of a gift that the donor have a present donative intent in making the transfer. The facts do not support any such intention but rather refute it.

The resolution of June 15, 1936, does not contain words of gift ' nor show any donative intent on the part of the corporation. The subsequent bookkeeping entries are not consonant with any such intent. At no time prior to decedent’s death was the asset account of either corporation adjusted to reflect a decrease in value because of the alleged gift of the Henderson Harbor property to the petitioner. On the contrary, the Newfoundland company’s bookkeeping entry of the bills receivable item in the amount of the book value of the property, plus the fact that the Ohio corporation continued to carry the property at such book value as an asset on its books, reflects an increase of the prior asset value of Newfoundland’s stock in the amount of the book value of the property. But, since it is stipulated that the deed purporting to convey the property to petitioner was without valuable consideration, it must be conceded that such bills receivable item has no significance as a corporate asset.

In passing we note that the Ohio corporation did not file a gift tax return for the calendar year 1936 on March 15, 1937, as required by section 507 of the Revenue Act of 1932. It did, however, file .such return on December 7, 1937, long after the death of decedent and after the meeting of the board of directors of the Newfoundland company on August 24, 1937. These transactions, occurring subsequent to decedent’s death, can not relate back to a date prior thereto and thus affect the value of the gross estate of decedent.

Even if we disregard the corporate entities, no intent to make a gift on the part of decedent is shown. The will executed in 1937. negates any such conclusion.

From a consideration of all the material facts and the issues as presented we hold that no gift was intended or made and that respondent’s determination of the value of the Newfoundland company stock held by decedent’s estate was correct.

Decision, will be entered for respondent,

       Mistakenly set forth as Revenue Act of 1930 in the stipulation of facts.