author: Murdock :

text:
    Israel O. Blake, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82668, 90661.
    Promulgated December 29, 1938.

      Julius Weiss, Esq., for the petitioner.

      Allen Aiken, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner has disallowed the losses on the stock farm on the ground that the farm was operated by the petitioner as a hobby rather than as a business for profit. He relies almost entirely upon the fact that the operation of the business has resulted in a long and uninterrupted series of losses. The evidence as a whole, however, preponderates in favor of the petitioner. This small farm was operated on a relatively modest scale. The total investment of the two partners was originally about $40,000. Only about ten or twelve horses were owned at a time. The petitioner did not live at the farm at any time. The place where he spent his summers was about thirty miles from the farm. He admits that he has always been very fond of horses and that he derives the usual pleasure from a winner. The principal items of expense were for labor and feed. The expenses included the cost of some horses. The operation of the farm was businesslike in every way, unless the series of losses may be looked upon as unbusinesslike. The petitioner, who is quite keen and alert despite his advanced age, testified without contradiction that he entered into the business for the purpose of making a profit and has always conducted the business for that purpose. He furthermore testified with considerable conviction that he has no reason to regard this venture as an unprofitable one, even though he has sustained these losses. The point he makes is that he has a very valuable collection of horses to show for his investment, as well as some real estate which has constantly increased in value during the period of his holding. The whole question here is to determine whether, as a matter of fact, the intention of the petitioner has been to realize a profit from the operation of this farm, and this question may not be determined solely from the recurrence of losses. Commissioner v. Field, 67 Fed. (2d) 876; Whitney v. Commissioner, 73 Fed. (2d) 589; Commissioner v. Widener, 33 Fed. (2d) 833. We are satisfied from the entire record that such was his intention and that the Commissioner erred in concluding that he conducted the farm as a hobby or for personal pleasure. There is no question about the amount of the losses or of their relationship to the business.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Murdock: Smith,

license: Public Domain

text:
    Thelma Yount, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 87404, 89595.
    Promulgated December 29, 1938.

      A. G. Bush, Esq., Robert Ash, Esq., and H. L. Fisher, Esq., for the petitioner.

      Edward C. Adams, Esq., and Franh T. Horner, Esq., for the respondent.
   OPINION.

Murdock:

The question in this case is whether the petitioner is liable as a withholding agent for income tax due from the Mexican corporation, Cia. That question does not depend solely upon whether tax was due from the Mexican company. The Commissioner can not succeed 'unless the petitioner was a withholding agent under the terms of the statute, and as such was required to withhold some tax due from the Mexican corporation. The latter is a foreign corporation and is subject to tax only upon income from sources within the United States. Doubts as to the meaning of the statutes must be construed in favor of the petitioner, even though the result is that the Government will not be able to collect in this proceeding some tax which might be lawfully due from the Mexican corporation.

Section 144 of the Revenue Act of 1934 is entitled “Payment of Corporation Income Tax at Source.” It provides:

In the case of foreign corporations subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 143 a tax equal to 13 ¾ per centum, and such tax shall be returned and paid in the same manner1 and subject to the same conditions as provided in that section * * *.

Section 143 (b) describes the withholding agent as “All persons, in whatever capacity acting, * * ⅝ having the control, receipt, custody, disposal, or payment of * ⅜ * rent, * * * compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income * * *.” Every person required to deduct and withhold any tax under this section is required to make a return and to pay the tax. Every such person is made liable for the tax. Supplement I of the Eevenue Act of 1934 is entitled “Foreign Corporations.” Gross income of a foreign corporation is defined as including only the gross income from sources within the United States. Gross income from sources within the United States is defined in section 119. It includes compensation for labor or personal services performed in the United States, but does not include compensation for labor or personal services without the United States or rentals or royalties from property located without the United States. Income from sources partly within and partly without the United States is also defined. The statute provides:

Gains, profits, and income from—
(1) transportation or other services rendered partly within and partly without the United States * * * shall he treated as derived partly from sources within and partly from sources without the United States.

The statute further provides for the allocation of a part of such income to sources within the United States “by processes or formulas of general apportionment prescribed by the Commissioner with the approval of the Secretary.” The corresponding provisions of the Eevenue Act of 1936 are substantially similar.

It is important to note that if the foreign corporation is engaged in trade or business within the United States, or if it has an office or place of business within the United States, there is no liability upon anyone as a withholding agent under the above mentioned provisions. The respondent contends that the Mexican corporation had no office or place of business in the United States and was not engaged in trade or business in the United States, yet it conducted commerce within the United States from which it derived the income in question, and, therefore, that income was from sources within the United States. He cites in support of his contention that the Mexican corporation was engaged in commerce within the United States, Fisher’s Blend Station, Inc. v. State Tax Commission, 297 U. S. 650, and United States v. American Bond & Mortgage Co., 31 Fed. (2d) 448. The following is quoted from the opinion of the Supreme Court in thel former case:

Appellant is thus engaged in the business of transmitting advertising" programs from its stations in Washington to those persons in other states who “listen in” through the use of receiving sets. In all essentials its procedure does not differ from that employed in sending telegraph or telephone messages across state lines, which is interstate commerce. Western Union Telegraph Co. v. Speight, 254 U. S. 17; New Jersey Bell Tel. Co. v. State Board of Taxes, 280 U. S. 338; Cooney v. Mountain States Tel. & Tel. Co., 294 U. S. 384; Pacific Tel. & Tel. Co. v. Washington, ante, p. 403. In each, transmission is effected by means of energy manifestations produced at the point of reception in one state which are generated and controlled at the sending point in another. Whether the transmission is effected by the aid of wires, or through a perhaps less well understood medium, “the ether” is immaterial, in the light of those practical considerations which have dictated the conclusion that the transmission of information interstate is a form of “intercourse,” which is commerce. See Gibbons v. Ogden, 9 Wheat. 1, 189.
* ***** *
As appellant’s income is derived from interstate commerce, the tax, measured by appellant’s gross income, is of a type which has long been held to be an unconstitutional burden on interstate commerce * * *.

Respondent also gives the following quotation from the American Bond <& Mortgage Go. case:

It does not seem to be open to question that radio transmission and reception among the states are interstate commerce. To be sure it is a new species of commerce. Nothing visible and tangible is transported. There is not even a wire, over which “ideas, wishes, orders, and intelligence” are cor-ried. A device in one state produces energy which reaches every part, however small, of the space affected by its power. Other devices in that space respond to the energy thus transmitted. The joint action of the transmitter owned by one person and the receiver owned by another is essential to the result. But that result is the transmission of intelligence, ideas, and entertainment. It is intercourse, and that intercourse is commerce.

The respondent argues that the broadcasts over station XENT for the American advertisers were intended to reach listeners within the United States, and therefore, Cia was engaged in carrying on commerce in the United States. However, he seems inextricably caught on the horns of a dilemma in this argument. If Cia was engaged in carrying on commerce in the United States, then the further conclusion would seem to follow inevitably that it was engaged in business in the United States, and if it was engaged in business within the United States, then the petitioner is not liable as a withholding agent. Whereas if Cia was not engaged in carrying on commerce in the United States, then the Commissioner’s argument that it had income from sources within the United States would fail and the petitioner would not be liable as a withholding agent because no tax would be due from the foreign corporation. It may be that Congress could have taxed a part or all of the income in question by requiring it to be withheld in the hands of this petitioner, but it does not appear that Congress has done so. The question of whether or not a foreign corporation does business within the United States by broadcasting a program from a foreign country designed for listeners within the United States is one which may have to be decided in later cases. We shall refrain from deciding it at this time, since the Commissioner must lose in this proceeding regardless of how it might be decided.

Reviewed by the Board.

Decision will he entered for the petitioner.

Smith,

concurring: The respondent asks the Board to find that “Cia had no office or place of business in the United States and was not engaged in any trade or business therein.” In his brief the respondent states: “The entire income which the respondent seeks to tax came from the United States and it was paid to Cia solely because of the commerce which Cia carried on in the United States.” In the opinion of the Board it is stated: “The question of whether or not a foreign corporation does business within the United States by broadcasting a program from a foreign country designed for listeners within the United States is one which may have to be decided in later cases.” It seems to me that the question which the Board refuses to answer is inherent in this case. It is the whole predicate for the respondent’s argument that the petitioner is liable to tax as withholding agent. I think that it should be held that a foreign corporation does not transact business within the United States simply by broadcasting a program from a foreign country designed for listeners within the United States. There is no merit in the respondent’s contention upon this point. The petitioner was not a withholding agent within the purview of the taxing statute.


author: HahkoN : Smith,

text:
    Herman Goedel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84118.
    Promulgated January 3, 1939.

      Norman IF. Schur, Esq., for the petitioner.

      E. U. Woolf, Esq., for the respondent.
   OPINION.

HahkoN :

The petitioner’s liability for income tax upon an amount added to his share of income received in 1933 from the copartnership of Jacquelin & De Coppet, depends upon whether certain insurance premiums are deductible from the income of that copartnership as ordinary and necessary expenses incurred in carrying on its trade or business. The insurance in question was insurance for a term on the life of the President of the United States. We do not have to consider any question relating to the refinements of insurance law, i. e., whether or not the insurance was life insurance. For the purposes of considering the issue before us, there can be no question that the insurance premiums are premiums paid on insurance on the life of an individual and that the beneficiary of the policies was the taxpayer, who took out the policies. The deduction for the premiums is allowable only if it is an ordinary and necessary expense of the business. Berizzi Brothers Co., 16 B. T. A. 1307. We do not believe it necessary to consider a related question, namely, whether the expenditure comes within the intendment of the section relating to nonallowable deductions, namely, section 24 (a) (4) of the Revenue Act of 1932.

Respondent denied the deduction on the ground that the expenditure in question has no relation to the profit-making activities of the business and is not the type of expenditure deductible under section 23 (a) of the Revenue Act of 1932. Petitioner has the burden of proving that the respondent’s determination is wrong. Wickwire v. Reinecke, 275 U. S. 101. Respondent contends that the expenditure is not deductible as an ordinary and necessary business expense; that the partnership did not have an insurable interest in the life of the President of the United States; and that the policies for which the premiums were paid were void as against public policy.

Petitioner contends that the expenditures for the insurance premiums are such expenses as are deductible under section 23 (a) because the business interests of the copartnership were the immediate cause for incurring the expense and because the members of the copartnership made the expenditure in good faith upon the belief that the expenditure was necessary in view of an unusually large inventory of securities accumulated in the early part of 1933, as well as for other reasons evident from the findings of fact. The petitioner contends that the expenditure was a necessary one in that presumably prudent business men, i. e., the members of the copartnership, considered that the expenditure was necessary for the protection of their investments in their business. Petitioner contends that the insurance was a form of business insurance to protect an inventory of goods or that it is similar to expenditures made in hedging operations, which are undertaken to reduce the element of speculative risks on a market. Petitioner contends that continuance of the life of the President of the United States was of advantage to the business of the copartnership and that it had an insurable interest in the life of the President. In this connection, we are asked to take notice of the events of deaths of two former Presidents of the United States, President McKinley and President Garfield, and of the fact that following each demise, market prices of securities declined severely; also, that in standard works on insurance law it is reported that stockholders in companies financed by J. Pierpont Morgan have taken out insurance on his life. Finally, it is contended that to be deductible an expenditure does not need to be both ordinary and necessary. Petitioner relies on Harris & Co. v. Lucas, 48 Fed. (2d) 188, to support his argument that the statutory provision contained in section 23 (a) is to be broadly construed and that the terms “ordinary” and “necessary” are not used conjunctively, i. e., that if the expenditure is “necessary” in the conduct of business, the requirement of the statute is met and the deduction should be allowed.

To be deductible under section 23 (a) the expenditure must meet all of three requirements; it must be both ordinary and necessary, and it must proximately result from the ordinary conduct of business. See Klein, Federal Income Taxation (1929), p. 394; Welch v. Helvering, 290 U. S. 111. This Board has previously considered the decision of Harris & Co. v. Lucas, supra, and the substance of the court’s opinion in that case and has pointed out that the Supreme Court in Welch v. Helvering, supra, in construing an identical provision of the revenue acts, has given a construction to the statute contrary to that of the Circuit Court in the Harris case. The Supreme Court has made clear the rule that a business expense, to be deductible under the business expense provision of the statute, must be not only a necessary expense but also an ordinary expense. See Foye Lumber da Tie Co., 33 B. T. A. 271.

While there is a great difference in the nature of the facts and circumstances surrounding the expenditures involved in this proceeding as compared with the expenditures, facts, and circumstances in the Welch v. Helvering case, the question in this proceeding is essentially the same as the question involved in the Welch case.

It is pertinent and helpful to quote at length from the Court’s opinion in Welch v. Helvering, supra. The Court said there:

We may assume that the payments to creditors of the Welch Company were necessary for the development of the petitioner’s business, at least in the sense that they were appropriate and helpful. McCulloch v. Maryland, 4 Wheat. 316, 4 L. Ed. 579. He certainly thought they were, and we should be slow to override his judgment. But the problem is not solved when the payments are characterized as necessary. Many necessary payments are charges upon capital. There is need to determine whether they are both necessary and ordinary. Now, what is ordinary, though there must always be a strain of constancy within it, is none the less a variable affected by time and place and circumstance. Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. Cf. Kornhauser v. United States, 276 U. S. 145, 48 S. Ct. 219, 72 L. Ed. 505. The situation is unique in the life of the individual affected, but not in the life of the group, the community, of which he is a part. At such times there are norms of conduct that help to stabilize our judgment, and make it certain and objective. The instance is not erratic, but is brought within a known type.

The first question is whether the expenditure for the particular insurance premiums was an ordinary expense. On its face, an expenditure for insurance on the life of the President of the United States by a firm dealing in securities, under the facts, is not ordinary in the sense of being customary or usual. The only grounds upon which petitioner claims that the expenditures are deductible are (1) that the general condition of the securities market, in early 1933, and the partnership’s “long” position, was unusual, and (2) that the “insurance” purchased was similar to “business” insurance.

(1) Considering the first basis for petitioner’s claim, it appears that Jacquelin & De Coppet took a “long” position in its purchases of securities, investing- large sums in early 1933 to take advantage of cheap prices for securities. Large purchases were made early in the year instead of spreading purchases more evenly over the year. It must be assumed that other dealers in securities may have taken a “long” position in securities at about the same time. It is reasonable that others would avail themselves of the then prevailing low market prices. It is admitted that one of the risks of the business of any dealer in securities is fluctuations of market prices of securities. Any dealer in securities assumes proportionate increases of this risk when he undertakes to buy and accumulate a large inventory of securities. Jacquelin & De Coppet is a large firm in their business, no doubt larger than most firms of dealers. But its desire to find some way of insuring against loss a large inventory of securities can not be regarded as essentially any different from what must be the desire of every dealer to protect his inventory of securities from loss from declines in prices. In the absence of any evidence to show that others in the same business at the same time purchased similar or tlie same insurance, it must be concluded that there was really no extraordinary or unusual aspect to the position of Jacquelin & De Coppet, in early 1933, that would make the expenditure in question an ordinary expenditure within the meaning of the statutory provision. If low prices and new business confidence are favorable factors to the business of buying securities for sale at a profit, the condition of the securities market in early 1933 was very good. The morbid contingency that the copartnership sought protection against was entertained, so far as the record shows, only by members of the copartnership to the point of purchasing “insurance” on the life of the Chief Executive. Judged by normal standards of conduct in the securities business, in so far as the record before us shows, the means employed by the copartnership was not in accord with any prevailing business practice. It must be concluded that the expenditures in question were not ordinary business expenses, because of any conditions peculiar to the copartnership.

(2) It is generally recognized that the purchase of insurance to cover property loss is ordinary and prudent business practice. But there are risks incident to the conduct of the securities business that can not be insured, as a practical matter. One of petitioner’s witnesses testified that he did not know of any customary, established form of insurance that would cover losses of a dealer in securities against fluctuations in market prices. It is an essential characteristic of insurance that there be a proximate relation between the loss sustained and both the event insured against and the indemnity received. Thus, fire insurance is insurance against loss proximately caused by fire and the amount which the underwriter agrees to pay is the amount of the loss sustained, which may be less than the face amount of the policy purchased. The “insurance” purchased by Jacquelin & De Coppet did not, by its terms, refer to loss from the sales of securities within a specified time. Such possible losses were contemplated by the copartnership, of course. But the event insured against was the demise of the President. Such event was not only remote but also is only one of the many possible causes of fluctuations in market prices. The policies purchased were contracts to pay a sum certain, and no less, in the event of the death of the life assured on or before a certain date. While it may have been agreed outside the terms of the particular insurance contracts that no payments would be made if no losses from sales of securities were sustained, nevertheless there was no contractual limitation of indemnity to be paid to actual losses that might be sustained. Thus, there was lacking in these contracts the essential characteristic of insurance, i. e., the co-relation of indemnity to be paid to loss sustained. The contracts in many respects resemble wagering contracts. A wager is defined in Funk & Wagnalls’ Standard Dictionary as follows:

Wager, An agreement between two or more persons that a certain sum of money or other thing shall be paid or delivered to one of them on the happening or not happening of a specified (but uncertain) event.

It is urged that the “insurance” in question is the same or very similar to what is called “business insurance.” We understand this reference to be to such standard life insurance as is sometimes purchased by a business firm on the life of some individual closely related in some way to the business. The theory of such insurance is that the demise of the individual constitutes a loss to the business, because of the relation of the individual to the business, and the relationship is such that the beneficiary has an insurable interest in the life of the individual. There can be no question that the copartnership of Jacquelin & De Coppet did not have any insurable interest in the life of the President of the United States, upon any theory. It is an exceedingly novel theory that a business firm does have such insurable interest. Carried out, this theory amounts to saying that every business firm and every individual engaged in business in the United States has an insurable interest in the life of the President of the United States. The theory is not only fantastic but, if accepted, would introduce into the field of business insurance and business contracts grave questions of public policy. While it seems scarcely necessary to cite insurance law on the matter of what constitutes an insurable interest, and what constitutes a valid insurance contract, we refer to well known principles.

In Warnock v. Davis, 104 U. S. 715, an insurable interest is defined as follows:

* * * such an interest, arising from the relations of the party paying the insurance either as a creditor of or surety for the assured, or from the ties by blood or marriage to him as will justify a reasonable expectation of advantage or benefit from the continuance of his life.

It is well settled law in this country that a valid policy of insurance can not be taken out by one person for his own benefit on the life of another in which he has no insurable interest. 37 Corpus Juris 385; sec. 51; Warnock v. Davis, supra; Steinback v. Diepenbrock, 37 N. Y. S. 279; Dess’ Administrator v. Legenfelter (Ky.), 105 S. W. 476. In New York State there is statutory provision against issuance of insurance on the life of another, except upon application\of the person insured. The statute provides (McKinney’s Consolidated Laws of New York, book 27, par. 55) that:

* * * No policy or agreement for insurance other than a policy of group life insurance described in clause (d) of subdivision two of section one him-dred and one-a of this chapter shall be issued upon the life or health of another or against loss by disablement by accident except upon the application of the person insured; * * *

When Jacquelin & De Coppet applied for and obtained the contracts under consideration here, the President of the United States did not sign the applications to an English assurance company for term insurance on his life. The negotiations appear to have been secret and from the record it is clear that the President was wholly unaware of the applications for and the issuance of the policies.

It seems evident that the contracts entered into by Jacquelin &

De Coppet with an English company were illegal under the laws of New York. While they may have been valid under the laws of England, a point we do not decide, it seems evident that the contracts were not enforceable in the State of New York. The law will not enforce what it has forbidden and denounced. “Contracts permissible by other countries are not enforceable in our courts, if they contravene our laws, our morality, or our 'public policy? [Italics ours.] Story, Conflict of Laws, sec. 258; Ocanyon v. Winchester Repeating Arms Co., 103 U. S. 261.

Judged by standards of what is ordinary, “according to the ways of conduct and forms of speech prevailing in the business world,” Welch v. Helvering, supra; and by what similar conduct arises under similar situations, Amtorg Trading Corporation v. Commissioner, 65 Fed. (2d) 583, it is most doubtful whether other business concerns in New York State, or elsewhere in this country, accustomed to buying insurance in connection with their business, would expend funds of the ¡ business upon contracts in the nature of wagering contracts, subject j to being defeated on grounds of invalidity and violation of publiq/ policy.

We hold that the expenditures in question are not ordinary business expense within the meaning of section 23 (a) of the Eevenue Act of 1932.

We do not believe the expenditure in question meets another requirement of a deductible business expense, i. e., it appears to us not to be an expenditure incurred in the normal course of business. The record reveals no facts to show that any business firm has ever purchased a policy of insurance on the life of the President of the United States without his own application for the insurance. Further, as stated above, the event insured against was not only remote, but also only one of the possible causes of fluctuations in the market prices of securities such as are found in bank and business failures, declaration of war, and what are generally described as economic factors, all of which are likely to occur irrespective of continuance of life of the Chief Executive of the country.

It is doubtful whether the expenditure was necessary, even in the sense of being “appropriate and helpful”, with due regard for the theories that influenced members of the copartnership in making a large expenditure. Even in the considerations of the members of the copartnership, it does not appear from the record, that they thought there was any condition prevalent throughout the United States that created any emergency for or imminent danger to the business of dealers in securities such as to warrant obtaining such contracts. Cf. First National Bank of Skowhegan, Maine, 35 B. T. A. 876. Of course, there was a very remote chance that such expenditure would be of benefit to a business, but the members of the copartnership apparently were the only persons in their field of business who considered “necessary” such an expenditure. While conditions in 1933 may have been unusual as compared with prior years, and the position of the copartnership unique in 1933 with respect to its “long” position in securities, it appears from the record that the expenditure was wholly unique in the business history of this country. Where, as here, the expenditure is so unusual as never to have been made, so far as the record reveals, by other persons in the same business, when confronted with similar conditions, and we have particular reference to the fact that the insurance was upon the life of the President of the United States, then we do not think the expenditure was ordinary or necessary, so as to be a deductible business expense within the intendment and meaning of the statute. At best, the expenditure falls within “those general costs of protecting one’s property for which the statute makes no allowance.” Commissioner v. Field, 42 Fed. (2d) 820.

Upon our conclusion that the expenditures in question are not deductible business expenses under the revenue act, it is not encumbent upon us to make any conclusion upon any question of public policy. The determination of the Commissioner in this proceeding is sustained.

Reviewed by the Board.

Decision will be entered under Rule 50.

Leech concurs only in the result.

Smith,

dissenting: I am of the opinion that a business enterprise which, as an incident to the carrying on of its trade or business, pays a premium on an insurance policy to insure itself against loss is entitled to deduct from its gross income the premium paid as an “ordinary and necessary” expense of carrying on the trade or business within the meaning of section 23 (a) of the Revenue Act of 1932. If the insurance policy were a casualty insurance policy to insure against loss from theft, from storm, or from other casualty, I apprehend that no question would be raised as to the deductibility of the item. I do not see how a different result can be reached where the policy is on the life of the President of the United States for a limited period. The character of the expense does not depend upon whether the apprehended loss is from the death of the President or from any other source.

I am of the opinion that the premium is a legal deduction from gross income, in accordance with Kornhauser v. United States, 276 U. S. 145. In that case it was held that fees paid to an attorney for defending an action for accounting instituted by a former partner are deductible from gross income as ordinary and necessary expenses paid or incurred during the taxable year in carrying on the business, under section 214 (a) (1) of the Revenue Act of 1918, since, where suit against the taxpayer is directly connected with business, the expense incurred is a business expense. The Court held that the expense' proximately resulted from the carrying on of the business. That is the situation here. I do not think that the opinion of the Supreme Court in Welch v. Helvering, 290 U. S. 111, is opposed. It seems to me that the language used by the Court in that opinion supports the contention of the petitioner herein.

       The Revenue Act of 1932, section 23, provides that:
      “In computing net income there shall he allowed as deductions:
      “(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * *
      Section 183 provides :
      “The net income of the partnership shall he computed in the same manner and on the same basis as in the case of an individual, except that the so-called ‘charitable contribution’ deduction provided in section 23 (n) shall not be allowed,”


author: Disney:

text:
    Theodora Casey Topliffe, Administratrix, C. T. A. of Estate of Harriet M. Casey, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88565.
    Promulgated January 3, 1939.

      Dion iS. Bimey, Esq., for the petitioner.

      Willis R. Lansford, Esq., and Ralph F. Btaubly, Esq., for the respondent.
   OPINION.

Disney:

This proceeding involves estate tax. Respondent determined a deficiency of $5,492.97. All facts were stipulated, and such stipulation is adopted as our findings of the fact, which will be set forth herein only in so far as necessary to a consideration of the issue presented. Petitioner contends that the trust involved, though reserving income for life to the settlor, was formed in 1924, and determinable under the Revenue Act of 1924, and therefore was not as a matter of law made in contemplation of or intended to take effect in possession or enjoyment at or after death; that the remainder interests created vested at the time of formation of the trust; and that as a matter of fact the motive was not contemplation of death, but was relief from financial responsibility and based upon family precedent.

Harriet M. Casey on June 7, 1924, at the age of 84 years, executed an irrevocable trust agreement, reserving all income to herself for life. She died in 1934. In the trust instrument provision was made for remainder interest to the last survivor of settlor’s three children. Two of said children predeceased the settlor, and the petition herein was filed by her only surviving child as administratrix cum testa-mento annexo of the estate of the deceased settlor. The administra-trix filed an estate tax return, reporting a gross estate of approximately $21,000, with deductions leaving no net tax liability, and disclosing the trust agreement entered into on June 7, 1924, with assets constituting the trust fund of approximately $135,000, but asserted that no part of such trust fund was subject to inclusion asi gross estate of decedent. The Commissioner included as gross estate trust assets which had a value of $135,997.20 at the date of settlor’s death.

The joint resolution of 1931 and section 803 (a) of the Revenue Act of 1932 are prospective in operation, and the trust here involved is to be considered under the provisions of the Revenue Act of 1924; and it is not, therefore, subject to tax merely because of reservation of the income from the trust estate for life to the settlor. Hassett v. Welch, 303 U. S. 303; Welch v. Hassett, 90 Fed. (2d) 833; May v. Heiner, 281 U. S. 238. Therefore, we have for consideration the question whether under the Revenue Act of 1924 the trust was created in contemplation of or intended to take effect in possession or enjoyment at or after the settlor’s death, to be considered first as one of law and then one of fact.

The petitioner contends, in effect, that the trust passed completely beyond the settlor’s control on June 7,1924, that the settlor’s children took vested remainders on that date, and that therefore as a matter of law there was no transfer in contemplation of, or to take effect at, settlor’s death; while respondent in substance advances the proposition that the incident for the Federal estate tax is the transfer of the technical estate by title, that on June 7,1924, there was no such transfer, but that the transfer contemplated by the statute took effect at death.

The provisions of the trust instrument are somewhat peculiar, and in fact to some extent self-contradictory. The entire net income from the trust fund is to be paid to settlor during her life; yet, the trust shall cease upon death of any two of settlor’s three children, and the trust fund shall be paid absolutely to the last survivor of the three children. It is not stated that this shall be done only after settlor’s death, and in fact two of the three children died prior to the settlor. Again, no provision is made as to possibility of simultaneous death of the three children prior to settlor’s death; though provision is made for that contingency after settlor’s death by a clause stating that in default of survivor, the trust fund is to be transferred to grantor’s then surviving heirs at law per stirpes. After settlor’s death, the income is to be paid to the three children, if they survive settlor, and/or to the children surviving the one deceased. In short, the child who survives the two others is to receive the trust estate, the others only income therefrom ; but the instrument is inconsistent in that it does not limit such disposition of the trust estate to a period after settlor’s death, nor provide for succession thereto in case of simultaneous death of all three children during settlor’s life. We think, however, that the provision reserving payment of all income of the trust to settlor for life reasonably means that there shall be no transfer or devolution of the principal of the trust estate during settlor’s lifetime, even though one child has survived the others. Apparently, the instrument was so construed by the parties, since nothing indicates that the sole survivor of the children during the settlor’s life attempted to take possession of the corpus of the trust fund. There remains open, however, the question as to disposition of the principal trust fund in case all children should die simultaneously during the life of settlor. In such event, the principal would revert to the settlor, and we contemplate at least a possibility of reverter to settlor, if not a contingent remainder. Is this situation such as to indicate that title did not pass on June 7, 1924, but was to pass at settlor’s death ? So far as concerns possibility of reverter to settlor by reason of simultaneous death of the three children prior to settlor’s death, or by reason of no child surviving settlor, such possibility of reverter does not require inclusion of the trust fund in gross estate. Helvering v. St. Louis Union Trust Co., 296 U. S. 39; Elizabeth B. Wallace, Executrix, 27 B. T. A. 902; affd., Helvering v. Wallace, 71 Fed. (2d) 1002; certiorari denied, 293 U. S. 600. We think the same cases indicate that the remainder interest created herein on June 7, 1924, was vested and not contingent.

We are strongly urged, however, by the respondent to consider Helvering v. St. Louis Union Trust Co., supra, as not determinative of the instant question, upon the ground that it was based upon a consideration of the law of New York respecting taxation of execu-tory disposition under the New York transfer tax statute, that the decision did not hold that the decedent upon executing the trust deed parted with his entire estate and had merely a possibility of reverter, but merely held that a transfer took place when the deed was executed, which transfer, not having been made in contemplation of death, was not subject to the tax; whereas in the instant proceeding, respondent contends, the privilege of succession was not fully exercised by the decedent during her lifetime. Saltonstall v. Saltonstall, 276 U. S. 260, is cited as authority. Further, we are urged that the distinction between the New York transfer and the Federal estate tax was not brought to the attention of the Court in Helvering v. St. Louis Union Trust Co., supra, and therefore that that case is not a controlling precedent. Notwithstanding the earnest presentation of distinctions in this interesting question, we are unable to agree that Helvering v. St. Louis Union Trust Co., supra, does not control here, or that a contingent estate, as in Klein v. United States, 283 U. S. 231, was provided by the trust instrument here involved. We think it clear that Helvering v. St. Louis Union Trust Co., supra, and, depending thereon, Helvering v. Wallace, supra, dictate and determine for us that a vested remainder was provided by the trust instrument on June 7, 1924, and that the death of the decedent was not the incident which passed title to the trust fund. In Helvering v. St. Louis Union Trust Co., supra, there was a definite provision for reversion to grantor, if a beneficiary predeceased settlor, while here the reversion would be because of lack of provision as to disposition of title in case beneficiary predeceases settlor. Yet, therein it was held that grantor had parted with the title and all beneficial interest in the property, retaining no right which would pass to anyone as a result of settlor’s death. Obviously, nothing more was retained by the settlor herein; that is, vested interest passed at creation of the trust, and death did not effect the transfer.

This leaves for consideration the question whether, in fact, the trust was created in contemplation of death or with intent that it take effect in possession or enjoyment at or after the settlor’s death. The settlor was 84 years old at the time, she parted with practically all of her estate in the trust agreement, the provisions of the trust agreement as to provision for her children were similar to those made in her will in 1915, and her children were financially independent of her; yet there was a family precedent for the trust, since she had benefited for many years by a trust set up by her father, providing an income for her for life, and up to about the time of creation of the trust here involved, she had been freed from business affairs because of their management by her son, which arrangement terminated shortly before creation of the trust at the son’s insistence because he was forced to leave Washington because of his wife’s health. The settlor had been accustomed to traveling, was planning more traveling when the trust was created, then stated that she desired to be relieved of financial affairs, and upon completion of the trust instrument stated that she could then travel with a free mind. She lived ten years longer, and then died of pulmonary congestion. It is stipulated that on June 7, 1924, she was in good health both bodily and mentally, for one of her age, and that the creation of the trust was not prompted by any condition of mind or body that would have led her to believe that her death was then imminent or near at hand, or to be expected within the immediate or near future, or by apprehension of, or expectation of, an early demise. Because of the creation of the trust, she filed a return as to gift tax and paid a gift tax of approximately $800, as against a potential estate tax of approximately $1,400, had she died at about the time of creation of the trust, without having created same.

We conclude that death was not the dominating motive in the creation of the trust here involved and that in fact the trust was not created in contemplation of death or with intent that it take effect in possession or enjoyment at the settlor’s death. Colorado National Bank of Denver v. Commissioner, 305 U. S. 23; United States v. Wells, 283 U. S. 102.

Decision will be entered for the petitioner.


author: Smith : Black,

text:
    Allan S. Lehman, Cecile S. Lehman, Herbert H. Lehman and Monroe C. Gutman, as Executors of the Estate of Harold M. Lehman, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86829.
    Promulgated January 3, 1939.

      Edgar J. Bernheimer, Esq., and Sydney J. Schwartz, Esq., for the petitioners.

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

Smith :

This is a proceeding for the redetermination of a deficiency-in estate tax in the amount of $734,927.19, only $268,113.57 of which is in controversy.

The petitioners are the executors of the estate of Harold M. Lehman, who died a resident of the city of New York on November 14, 1933. The executors filed an estate tax return for the decedent which showed a net estate of approximately $5,000,000. Upon the audit of the estate tax return the respondent added to the gross estate $715,-844.20 representing the value, at the date of death, of the assets of two trust estates created by the decedent on December 6, 1930, and disallowed the deduction from the gross estate of $68.43, $1,631.71, and $41,552.22 representing payments made by the executors in the settlement of certain actions brought against a banking concern doing business under the firm name and style of Lehman Brothers, defendants, in the Supreme Court of the State of New York, County of New York. He also disallowed the deduction of $6,942.21 claimed by the executors as administration expenses paid during the years 1934 and 1935 for investment advisory service rendered by certain individuals for the benefit of the estate. The respondent admits error in the disallowance of the deductions of $68.43, $1,631.71, and $41,-552.22 on account of the claims referred to above and paid by the executors for the account of the estate. This leaves in issue only the questions whether the respondent correctly included in the gross estate $715,844.20 representing the value of the assets of the two trust estates referred to above, and the deduction from the gross estate of investment advisory expenses in the amount of $6,942.21.

All of the facts have been stipulated. They are summarized as follows:

The decedent, Harold M. Lehman, on December 6, 1930, executed two trust indentures by which he transferred to Allan S. Lehman, Herbert Lehman, and himself, as trustees, certain assets to be held in trust for the benefit of his brother, Allan S. Lehman, for life with remainder to Ms (Allan’s) children, or their lawful issue, or to the lawful issue of the grantor. Simultaneously with the creation of those trusts by the decedent, his brother, Allan S. Lehman, created two identical trusts conveying to himself, Harold M. Lehman (the decedent), and Herbert Lehman, as trustees, identical securities for the benefit of the decedent for life and thereafter for the benefit of decedent’s children, or their lawful issue, or the lawful issue of the grantor.

The assets and securities so transferred to each of the above described trusts consisted of a one-half part of certain assets and securities of each of the grantors which had been carried on the books of Lehman Brothers under the designation of “S. M. Lehman, trustee.”

The assets transferred to the two trusts created by the decedent had a value at the date of his death of $715,844.20.

Regarding the creation of these trusts by the decedent and Allan S. Lehman, it is stipulated as follows:

The circumstances under which * * * trusts were created by decedent and Allan S. Lehman were that in the year 1885 there had been set aside by Sigmund M. Lehman, the father of decedent and Allan S. Lehman certain monies and/or securities which were added to from time to time thereafter for decedent and Allan S. Lehman. These were the securities referred to in all of the indentures of trust as “carried on the books of Lehman Brothers under the designation ‘S. M. Lehman, trustee’.” When these securities came into the possession of Allan S. Lehman and decedent they both felt a desire to make provision for their own children and establish the future of their children securely as had been done by their father for his children. The capital of which the fund so designated on the books of Lehman Brothers consisted, had never been used or involved in the business of decedent or Allan S. Lehman and was not regarded as necessary for such purpose and at that time both decedent and Allan S. Lehman were possessed of other means and capital that appeared amply sufficient for all business or personal requirements and it was desired to continue the segregation of said capital separate and relieved so far as possible from any hazards or contingencies of business or commercial transactions for the benefit of their children and also of the decedent and his brother. Decedent and Allan S. Lehman therefore determined to devote the entire capital acquired by them as aforesaid to the establishment of trusts of which they themselves should enjoy the income during their lives and of which the income should be secured to their children in the same manner.
With the aforesaid purposes in view upon the advice of counsel the four indentures of trust dated December 6, 1930, * * * were drawn and it was upon the advice of counsel to decedent and Allan S. Lehman in order to more securely effectuate the purpose that the said securities and assets should never be at the hazard of the business commitments or transactions of decedent or his brother, that decedent became the donor of the securities and assets referred to in the two indentures of trust [exhibits 1 and 2 of the stipulation] * * * and that Allan S. Lehman became the donor of the securities and assets referred to in the two indentures of trust [exhibits 3 and 4 of the stipulation] * * * That the said indentures of trust were prepared by and under the direction of Edgar J. Bernheimer a member of the Bar of the State of New York who was the counsel of said decedent and Allan S. Lehman. * * * decedent and Allan S. Lehman both consulted said Bernheimer as to the advisability of establishing said trusts. At said time they stated that their motives and intentions were ultimately to secure to their own children these monies which they felt as a matter of sentiment their father would have liked to see go to his grandchildren. At that time they both stated to said Bernheimer that their means were very large and all that could reasonably be required for the purposes of their banking business. They stated at the same time that their then means outside of the securities and assets that ultimately became the corpora of these trusts were far in excess of any possible immediate claims of creditors but they stated that they realized that if these means became part of their capital and invested in their business and subject to unavoidable business risks and uncertainties, especially in view of the then current difficult economic situation, there might be a possibility that they would ultimately be dissipated. After conferences with and advice by said Bernheimer, it was decided to establish the trusts in question so that the monies could be segregated and kept aside from such capital as was subjected to ordinary business risks and investment to the end that so far as humanly possible the children would be secured in the ultimate enjoyment of it and the donors would be secured in the immediate enjoyment of it.
With this in view said Bernheimer advised the establishment of the said trusts and advised further that in order the better to accomplish the purposes of decedent and Allan S. Lehman and assure for all time the segregation of said monies the trusts be established in the manner appearing from the instruments themselves, the said Allan S. Lehman establishing trusts for decedent and decedent’s children in consideration of the decedent establishing identical trusts for the benefit of his brother Allan S. Lehman and Allan’s children.
At the time when said instruments were drawn and said trusts established there was never any mention or suggestion of the approaching demise of either decedent or said Allan S. Lehman nor of their state of health and there was never any indication that either of said individuals regarded his health as precarious or his approaching demise as a thing to be considered otherwise than in the natural course of life in the far future. At that time both decedent and Allan S. Lehman were in unusually robust and vigorous health, were extremely active in their business affairs as members of the banking firm of Lehman Brothers of 1 William Street, New York City, and decedent especially was accustomed to frequent excursions for the purpose of fishing and shooting. Decedent at that time was 41 years of age and was of a very athletic tendency and it was his usual custom in addition to his other physical and athletic activities to play at least several sets of tennis or games of handball every day. That decedent up to the time of the making of the transfers had never suffered from any serious illness.
Decedent at the time of the making of the transfers was worth approximately five million dollars in excess of the securities and assets transferred in trust by the indentures of trust dated December 6, 1930.
Decedent continued to be in good health and vigor and continued his daily business, athletic and social pursuits from December 6, 1930, until he was admitted to Mt. Sinai Hospital on October 24, 1933 for the operation for appendicitis as a result of which he died on November 14, 1933, the entire duration of his illness being 21 days.

All of the above described transfers of December 6, 1930, were made in the City of New York, State of New York.

The determinable annual income of the securities and assets transferred in trust by Allan S. Lehman pursuant to the indentures of trust executed by him December 6, 1930, was, at the time of the transfer, $48,431.24. The appropriate factor for determining the then present value of decedent’s right to receive such income during his lifetime, as prescribed by the Treasury Department regulations, was 14.86102. The total value of the securities and assets so transferred in trust by Allan S. Lehman, pursuant to the indentures of trust, was on December 6, 1930, $937,523.18.

The value on December 6, 1930, of decedent’s right to receive the income from the securities and assets transferred in trust pursuant to the above referred to indentures of trust was $719,737.63.

It is stipulated that:

* * * the execution of the trusts and the mating of the transfers effected thereby was not prompted by a condition of body or mind that would haw led the decedent to believe that his death was imminent or near at hand, or that his death was to be expected within the reasonably distant future.

Under the trust indentures executed by the decedent on December 6, 1930, the income of the trusts was payable to Allan S. Lehman for the period of his life. Upon his death the income, and eventually the corpus, of one of the trusts was to be paid to Allan’s son, Orin, and the income and the corpus of the other trust to Allan’s daughter, Ellen. In the event of the death of either Orin or Ellen before the death of Allan the income and the corpus were to be paid to their issue per stirpes and not per capita, or, in default of any such child or children or issue of the deceased children, to the then living issue of the grantor. The grantor was never to receive any of the income or corpus of either of the trusts created by him.

The trusts created by the decedent and by Allan S. Lehman were reciprocal. The decedent was to receive the income of the trusts created by Allan during the period of his life and upon his death his (decedent’s) children were to receive the income and the corpus.

Each of the trusts created by the decedent provided in part as follows :

Fourth : Tbe trust hereby created shall be irrevocable, except that said Allan S. Lehman, shall have the right at any time or from time to time prior to December 31, 1935, upon notice in writing to the Trustees of his intention so to do, to withdraw from the principal of the trust hereby created such amount of money as he shall specify in such notice, not exceeding $75,000, and the Trustees shall thereupon pay the same to him free and clear of said trust.

The trusts created by Allan S. Lehman contained a like paragraph giving the decedent the right to withdraw $75,000 from each trust up to December 31, 1935. The decedent never exercised his right to> withdraw any part of the principal of the trust estates created by his brother, Allan.

The trusts under consideration were all irrevocable. Neither of the grantors retained any right whatever to amend, alter, or revoke the trusts created by him. There is no provision in the trust instruments limiting the right of the beneficiaries to assign or otherwise alienate their interests in the trusts.

During the years 1934 and 1935 the executors expended $6,942.21 for investment advisory service. During these years the decedent’s estate was in the process of administration. Under the terms of the decedent’s will the executors were required to keep the entire residue of the estate invested for the benefit of the beneficiaries of the various trusts created under the will. During the year 1934 all assets in the hands of the executors amounted to a sum in excess of five million dollars. During the year 1935 the assets in the hands of the executors amounted to a sum in excess of one and one-half million dollars. The executors have waived commissions, by instruments severally signed by them.

In a proceeding brought in the Surrogate’s Court, County of New York, to settle judicially the intermediate account of the executors, no surcharge was made against the executors and the expenditure of sums for investment advisory service, as aforesaid, during the period of administration, was allowed and approved as a proper deduction made by the executors for administration expenses. The executors have received no commissions or remuneration of any kind for acting as such. It is stipulated that “* * * the expenditure of the said sum of $6,942.21 was reasonable in amount.”

We shall consider first the question as to whether there should be included in the gross estate of the decedent $715,844.20, the stipulated value on November 14, 1933, of the assets transferred in trust by the decedent by the indentures of trust dated December 6, 1930. In his deficiency notice the respondent held that the amount was properly includable in the decedent’s gross estate under the provisions of section 302 (c) and (d) of the Revenue Act of 1926, as amended.

Section 302 (c) and (d) of the Revenue Act of 1926, as amended by section 803 (a) of the Revenue Act of 1932, reads as follows:

Seo. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
* $ * * * * >?
(e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (&) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s wortli. * * * [Italics supplied.]
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

The matter in italics was added by section 803 (a) of the Revenue Act of 1932.

Since the transfers in question here were made prior to March 3, 1931, the amendment of section 302 (c) effected by section 803 (a) of the Revenue Act of 1932, set forth in italics in this subdivision quoted above, is not applicable; for it was held in Hassett v. Welch, 303 U. S. 303, that the amendment had no retroactive elfect and that where the transfer was made prior to the effective date of the amendment, or the amendment effected by Joint Resolution No. 131 adopted March 3, 1931, the property transferred was not to be included in the gross estate simply because the grantor or settlor reserved the right to receive the income of the property transferred during the period of his natural life.

In his brief the respondent states as follows:

Respondent contends that the disposition effected by the decedent [by the two trusts created December 6, 1930], respecting his interest in the securities involved, and whether viewed from the standpoint of the dispositions made by his brother through the trusts executed by him (Exhibits 3 and 4 of Stipulation), or from the standpoint of the trusts executed by the decedent (Exhibits 1 and 2), were transfers intended to take effect in possession or enjoyment at or after the decedent’s death, within the purview of Section 302 (e) of the Revenue Act of 192G, and taxable as such. This contention is not rested upon the new classifying provision incorporated in said Section, by Section 803 (a) of the Revenue Act of 1932, incorporating therein the amendment effected by the Joint Resolution of the Congress adopted March 3, 1931, as stated by petitioners. * * * On the contrary, as heretofore indicated, respondent's contention is rested upon the transfer of the right to possession or enjoyment, not the passing of the fact of possession or enjoyment or actual possession or enjoyment (dominion) out of the decedent at death. * * *

A predicate for this contention, as stated in the respondent’s brief, is that “the Federal estate tax, is a strict succession excise.” This is a statement of what the Federal estate tax is not — not of what it is. If anything is settled with respect to the Federal estate tax law, it is that it is not a “succession excise” tax.

In the early case of T. M. C. A. of Columbus, Ohio v. Davis, 264 U. S. 47, Mr. Chief Justice Taft, in referring to the estate tax imposed by section 401 of the Revenue Act of 1918, stated:

* * * It was not a tax upon succession and receipt of benefits under the law or the will. It was death duties, as distinguished from a legacy or succession tax. What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death. * * *

Mr. Justice Holmes, writing the opinion of the court, similarly declared in Edwards v. Slocum, 264 U. S. 61, that the Federal estate tax:

* * * is a tax upon a transfer of his net estate by a decedent, a distinction marked by the words that we have quoted from the statute, and previously commented upon at length in Knowlton v. Moore, 178 U. S. 41, 49, 77, 20 Sup. Ct. 747, 44 L. Ed. 969. It comes into existence before and is independent of the receipt of the property by the legatee. It taxes, as Hansen, Death Duties, puts it in a passage cited in 178 U. S. 49, 20 Sup. Ct. 751 “not the interest to which some person succeeds on a death, but the interest which ceased by reason of the death.” * * *

The point under discussion is clearly illustrated by the two Supreme Court cases, Nichols v. Coolidge, 274 U. S. 531, and Coolidge v. Long, 282 U. S. 582. In the former case the statute involved was the Federal estate tax law; in the latter case, the Massachusetts succession tax law. In Nichols v. Goolidge, Mr. Justice Reynolds, writing for a unanimous court, quoted with approval the above excerpt from Edwards v. Slocum, supra, and stated further:

The exaction is not a succession tax like the one sustained by Scholey v. Rew, 23 Wall. 331, 23 L. Ed. 99; Keeney v. New York, 222 U. S. 525, 32 S. Ct. 105, 56 L. Ed. 299, 38 L. R. A. (N. S.) 1139. The right to become beneficially entitled is not the occasion for it. There is no claim that the transfers were made m contemplation of death or with purpose to evade taxation. The provision applicable in such circumstances is not relied on and the extent of congressional power to prevent evasion or defeat of duly imposed exactions need not be discussed.

The distinction is clearly pointed out in the dissenting opinion in Goolidge v. Long, supra, written by Mr. Justice Roberts, as follows:

The one is collected on the transfer of his estate by a decedent; it taxes not that to which some person succeeds upon a death, but that which ceased by reason of death. Nichols v. Coolidge, 274 U. S. 531, 537, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A. L. R. 1081; Edwards v. Slocum, 264 U. S. 61, 62, 44 S. Ct. 293, 68 L. Ed. 564. The other is laid on the right to become beneficially entitled to property on the death of its former owner. Keeney v. Comptroller of State of New York, 222 U. S. 525, 533, 32 S. Ct. 105, 56 L. Ed. 299, 38 L. R. A. (N. S.) 1130; Nichols v. Coolidge, 274 U. S. at page 541, 47 S. Ct. 710, 71 L. Ed. 1184, 42 A. L. R. 1081.
The latter type of excise has existed in Massachusetts for years, and the courts of that commonwealth have consistently construed the statutes as they did in (his case.

Reliance is also placed by the respondent in his brief upon Klein v. United States, 283 U. S. 231. In that case the estate tax was sustained upon the ground that the transfer was in fact intended to take effect in possession and enjoyment or after death. The deed provided in the habendum clause that the grantee should have the land for the term of her natural life, but that if she died before the grantor the reversion in fee should be and remain vested in the grantor. It was further provided that “on condition that the grantee survive the grantor, then the grantee should, by virtue of this conveyance, take and hold the land in fee simple.” In sustaining the tax the Supreme Court said:

* * * The life estate is granted with an express reservation of the fee, which is to “remain vested in said grantor” in the event that the grantee “shall die prior to the decease of said grantor.” By the second clause the grantee takes the fee in the event — “and in that case only” — that she shall survive the grantor. It follows that only a life estate immediately was vested. The remainder was retained by the grantor; and whether that ever would become vested in the grantee depended upon the condition precedent that the death of the grantor happen 'before that of the grantee. The grant of the remainder, therefore, was contingent. * * *

The Klein case is an excellent illustration of the meaning of the phrase “transfer * * * intended to take effect in possession or enjoyment at or after his death,” contained in section 302 (c). Since the title to the assets to be transferred remained vested in the grantor until his death, the transfer did not take effect until the death of Klein.

By the indentures of trust executed by the decedent, Harold M. Lehman, on December 6, 1930, he turned over to the trustees all of his right, title, and interest in and to the assets forming the corpora of the trust estates. In May v. Reiner, 281 U. S. 238; Reinecke v. Northern Trust Co., 278 U. S. 339; Shukert v. Allen, 273 U. S. 545; McGregor v. Commissioner, 82 Fed. (2d) 948; and Kaufman v. Reinecke, 68 Fed. (2d) 642; it was held that a' transfer in trust of the character here involved takes effect irrevocably at the time of the actual transfer of assets to the trustee and that, in the absence of actual contemplation of death, assets thus transferred are not includable in the gross estate.

We think that the transfers in question were not transfers to take effect in possession and enjoyment at the date of death of the decedent.

We think, too, that the transfers were not made in contemplation of death within the meaning of section 302 (c) of the Revenue Act of 1926. The leading case upon this point is United States v. Wells, 283 U. S. 102. In that case the Court, speaking through Mr. Chief Justice Hughes, said:

* * * The words “in contemplation of death” mean that the thought of death is the impelling cause of the transfer, and while the belief in the imminence of death may afford convincing evidence, the statute is not to be limited, and its purpose thwarted, by a rule of construction which in place of eontem-plaHon of death makes the final criterion to be an apprehension that death is “near at hand.”
If it is the thought of death,' as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. Such transfers were made the subject of a distinct gift tax since repealed. As illustrating transfers found to be related to purposes associated with life, rather than with the distribution of property in anticipation of death, the Government mentions transfers made “for the purpose of relieving the donor of the cares of management or in order that his children may experience the responsibilities of business under his guidance and supervision.” The illustrations are useful but not exhaustive. The purposes which may be served by gifts are of great variety. It is common knowledge that a frequent inducement is not only the desire to be relieved of responsibilities, but to have children, or others who may be the appropriate objects of the donor’s bounty, independently established with competencies of their own, without being compelled to await the death of the donor and without particular consideration of that event. There may be the desire to recognize special needs or exigencies or to discharge moral obligations. The gratification of such desires may be a more compelling motive than any thought of death.

The Court further observed:

* * * transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the trans-feror’s motive. Death must be “contemplated,” that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. * * *

In Thomas C. Boswell et al., Executors, 37 B. T. A. 970, the Board stated:

* * * We are required to determine whether “the impelling cause” for that transfer was decedent’s contemplation of his death. United States v. Wells, 283 U. S. 102. “Contemplation” is defined as the “act of the mind in considering with attention.” Webster’s New International Dictionary, 2d ed. * * *

The circumstances under which the trusts were created are described in the stipulated facts as quoted above. It appears from those facts that the decedent and his brother, Allan, shortly after coming into the possession of their portions of a trust estate created by their father in 1885, desired to make the same provision for their children as had been made for themselves by their father. The trust assets thus received were not needed by the sons in their banking business. They did not want those trust assets to be subject to the hazards of business and the trusts were created in the form in which they were created for that reason.

Both the decedent and his brother were in excellent health. In the negotiations leading up to the creation of the trusts no reference was made by either of the brothers to any thought of death. So far as could be seen they had many years of life before them.

Since the trusts were created more than two years prior to the death of the decedent, the statute makes no presumption that the transfers were made in contemplation of death. There is nothing in the record from which it might be inferred that contemplation of death was the predominant motive for the making of the transfers, which is the criterion for the determination in accordance with United States v. Wells, supra. The stipulation of facts is convincing that, the transfers were not made in contemplation of death.

In his brief the respondent makes a further contention that if the principal of the trust funds may not be included in the gross estate as having been transferred in contemplation of or intended to take effect in possession or enjoyment at or after death, it must, nevertheless, be held that the transfers are to be included in the gross estate to the extent of $150,000, because by the reciprocal trusts the decedent gave his brother, Allan, the right to withdraw from the corpora of the trusts created by him $150,000, in exchange for the right which his brother, Allan, gave him to withdraw $150,000 from the trusts created by Allan.

It can not be questioned that the decedent gave to his brother, Allan S. Lehman, the right to receive the income for life of the two trust estates created by him and a right to withdraw $150,000 from the principal of the trust estates during his life or until December 31, 1935, in exchange for similar rights of the decedent in the trust estates created by Allan. Up to the date of his death the decedent had the power to bring into his own estate $150,000 of the corpora of the trusts created by Allan. The right to make this withdrawal out of the reciprocal trusts created by Allan was the equivalent of a right in the decedent to withdraw that amount from the trust estates which he had created. This right had a value at the time of decedent’s death of $150,000. It was an interest in property “which ceased by reason of the death.” Edwards v. Slocum, supra. We are of the opinion that the respondent did not err in including the $150,000 in the gross estate of the decedent.

The final question for consideration is whether the $6,942.21 expended by the executors for investment advisory service during the years 1934 and 1935 is a legal deduction from the gross estate as an administration expense. The respondent submits that payments are not deductible from the gross estate as administration expenses because they were made to enable the petitioners to keep the residuary estate profitably invested for the benefit of the beneficiaries under the testamentary trust created under the decedent’s will. The stipulated facts show that the Surrogate’s Court allowed the payments as administration expenses. The Board has no doubt that they were expenses legally incurred and paid by the executors in the administration of the estate and that they are a legal deduction from the gross estate.

Reviewed by the Board.

Judgment will be entered umder Rule 50.

Black,

dissenting: I agree with the majority opinion wherein it holds that the corpus of the two irrevocable trusts executed by decedent, Harold M. Lehman, December 6, 1930, may not be included in decedent’s gross estate under the provisions of section 302 (c) of the Revenue Act of 1926. It seems clear that both trusts were irrevocable and were not made in contemplation of death and were not intended to take effect in possession or enjoyment at or after death.

I do not agree to that part of the majority opinion which holds that $150,000 should be included as a part of decedent’s gross estate under section 302 (d) of the Revenue Act of 1926 because at the time of decedent’s death he had the right to withdraw $150,000 from two trusts which were simultaneously executed by his brother Allan S. Lehman. Manifestly if the right to withdraw this $150,000 had survived decedent’s death and was available as an asset to decedent’s estate, then it is includable as a part of decedent’s estate. This inclusion would be by reason of the provisions of section 302 (a) of the Revenue Act of 1926, and not by reason of section 302 (d) of the same act.

Section 302 (d) reads:

(d) To tbe extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

In the two trusts which decedent executed he retained no power to make any change in the trust corpus, either alone or in conjunction with any other person. He did confer upon his brother Allan the right to withdraw $75,000 from the corpus of each trust at any time or from time to time prior to December 31, 1935. This right, so far as the record shows, Allan possessed at the time of decedent’s death and it continued until December 31, 1935. But this was no reservation of a power to decedent, and the fact that his brother Allan conferred upon decedent similar rights in two trusts which Allan executed at the same time, it seems to me, does not affect the situation under section 302 (d).

Congress can of course tax such transactions by means of the gift tax and has done so in revenue acts enacted subsequent to the dates of the execution of the trusts herein involved. I do not believe however that section 302 (d) of the Revenue Act of 1926 can properly be construed so as to make includable in decedent’s gross estate the $150,000 which the majority opinion holds should be included. When decedent died his right to withdraw that $150,000 from trusts which his brother Allan had created ceased and nothing passed from the dead to the living. Hasbrouck v. Bookstaver, 114 N. Y. S. 949.

Article 13 of Treasury Regulations 80 (1937 Ed.), Estate Tax, would seem to cover the situation which we have here, where it says: “Nor should anything be included on account of an interest or an estate limited for the life of the decedent.”

In my judgment the $150,000 in question was so limited and is therefore not includable as a part of decedent’s gross estate.

ArundeUj, Van Fossan, Leech, and Aenold agree with this dissent.


author:
Disney:
      Mellott, Leech,

text:
    City Bank Farmers Trust Company, as Trustee of a Trust under the Last Will and Testament of Angier B. Duke, Deceased, for the Benefit of Anthony Newton Duke, Petitioner, v. Commissioner of Interanal Revenue, Respondent. City Bank Farmers Trust Company, as Trustee of a Trust under the Last Will and Testament of Angier B. Duke, Deceased, for the Benefit of Angier B. Duke, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76031, 76046.
    Promulgated January 4, 1939.

      G. H. Graven, Esq., and Rollin Browne, Esq., for the petitioner.

      J. R. Johnston, Esq., and I). Hurd, Hudson, Esq., for the respondent.
   OPINION.

Disney:

The petitioner contends and respondent denies that petitioner, as trustee, was carrying on a trade or business within the meaning of the statute. This question has received our attention many times, and of course it depends largely upon the situation in the particular case being considered. Petitioner urges similarity particularly to John H. Watson, Jr., et al., Trustees, 85 B. T. A. 706, while respondent points out especially George Vanderbilt Trust, 36 B. T. A. 967. In the former case facts are summarized in the statement that “The estate was large and the petitioners were given wide powers of management, control, sale and reinvestment of the trust corpus”, in addition to the statement that the gross income was $762,640.85, all of which, except $56,018.64, was interest on Federal and state obligations, exempt from income tax. Question as to whether the trustees were carrying on a business under section 23 (a) of the Revenue Act of 1932 apparently was not an issue in the case until raised in respondent’s brief. We held that commissions allowed by the probate court to the trustees for services performed in the management of the trust estate were expenses incurred in carrying on trade or business. In George Vanderbilt Trust, supra, the trustees paid attorneys’ fees and claimed deduction under section 23 (a) of the Revenue Act of 1928 as ordinary and necessary expenses incurred in carrying on a trade or business. The only facts appearing were that by the will executors were appointed with power to invest and reinvest the principal, to collect the income, to pay taxes and expenses, and to distribute to beneficiaries, but how these powers were exercised did not appear, except as to the distributions. Taking the view that the trustees may have been mere passive conservators of an investment trust, we held that carrying on a trade or business had not been shown.

Here, the trust instrument confers powers not dissimilar to those involved in George Vanderbilt Trust, supra, but we think with some limitations of importance to a decision of the question at hand; for here there is distributed to the trustee for each trust one-fourth of the testator’s residuary estate for purposes in effect as follows: To collect, and receive the income, revenues and profits, and to pay, apply, and distribute same to and for the support, education, and maintenance of the beneficiary for life and, after his death, per capita for the support, education, and maintenance of his lineal descendants, payments, applications, and distributions during minority to be within the uncontrolled discretion of the trustee. It is specifically provided that the-trustee shall have the power “to hold, manage and invest, and from time to time as need be, to re-invest the properties held in said Trust for the benefit and advantage of the beneficiaries thereof in such good. and productive stocks, bonds or mortgages as will produce, if possible, a sure and regular income.” Any investments made by the testator may be retained without liability for loss or shrinkage, or the trustee may change the property into other property as it deems best, with power to sell, exchange, etc., and invest the proceeds in any property it thinks best, but the testator charges the trustee “to be more careful as to the security of the funds than as to the acquisition of higher rates of interest, my desire being to have my property prudently and securely managed rather than hazarded in what may promise great gains.”

We conclude from the above language that investment and reinvestment, though within the discretion of the trustee, must be limited to “stocks, bonds or mortgages as will produce, if possible, a sure and regular income.” In fact, the record is plain that this is what was done. The increase reported by the trustee for the period from February 26, 1926, to December 31, 1929, differs only $55 in the two trusts (one reporting $21,635.44 and the other $21,580.44), indicating that the two trusts were handled almost exactly the same, and the same conclusion is drawn from the fact that there is less than $1,000 difference (out of approximately $963,000) in the amount of income received in the two estates during the time covered by the report and from the fact that there is a difference of only about $8 in the amount of expenses chargeable against principal out of approximately $12,800 of such expenses in each estate, while the expenses chargeable against income in the two estates varied only about $200 out of approximately $29,000 each. It is apparent that these estates were handled by the trustee in a routine manner. Moreover, it is stipulated that the gross income of both trusts, approximately $126,000 in the case of each, was entirely from interest and dividends for the year 1931 and the report filed by the trustee for the period from February 26,1926, to December 31, 1929, shows that, out of $29,608.74 of expenses chargeable against income, only $1 was expense of anything other than payment of taxes, state or Federal, and $2.50 for notary fees. One dollar was for cost of Federal and state stamps for transfer of 250 rights of Marland Oil Co. In the other estate exactly the same situation is shown. Out of $29,815.82 expense chargeable against income, $1 was spent for Federal stamps on the transfer of 250 rights of Marland Oil Co., $2.50 for notary fees, and the rest was expense of state or Federal taxes. Income tax reports for 1931 ask (in addition to taxes) only $5.50 as to the one trust, and $6.11 as to the other, under the heading of deductions. In other words, those are the amounts of expenses incurred by the two estates in those years which could possibly be classed as expense of business; while reference to the ledgers kept by the two estates reflecting income and expense throughout the year 1931 indicates only a very few dollars of expense, and most of this for small items of a few cents each for collection charges on coupons. In the estate of Angier B. Duke, Jr., the total expense shown by the ledger for the year (except $30.52 taxed in the surrogate’s decree) is $27.95, all of which is shown to be the cost of Federal stamps, mailing bonds, and collection of coupons. The same is true in the trust for Anthony Newton Duke, where we find (except for $30.53 taxed in the surrogate’s decree) a total of $28.74, all of which consists of small items of Federal stamps, cost of mailing bonds and coupon collection charges. Moreover, as above seen, the report of the trustees for the period from February 26,1926, to December 31,1929, demonstrates only one transaction in each estate — the transfer of 250 rights in Marland Oil Co., and the report for 1931 for one trust shows an income of $126,729.09, and a loss on sale of securities of $872.61 from nine sales of securities, seven of which were purchased in 1926, and two in 1928, with a total sale price of $86,670.38; while the other trust reports an income of $126,460.28, and a loss of $1,295.06 from sale of twelve securities, all but one purchased in 1926, the other in 1928, with a total sale price of $90,430.42. Plainly, securities were being held, not dealt in.

The above facts demonstrate conclusively to us that this is a case of passive investment and not of carrying on a business, for not only is the trustee limited in its investments, but it is cautioned in effect to be a safe investor rather than a participant in trade or business, and, plainly carrying out the testator’s injunctions, it conducts no business, because it has, as above seen, no expenses of conducting business other than the collection of coupons and mailing bonds, amounting to a few dollars, and an even more negligible amount for transfer stamps or notary fees. In George Vanderbilt Trust, supra, there was no evidence to convince us of business done or trade carried on; here the evidence is pointed and positive that, practically speaking, the only activity of the trust was to watch investments and collect coupons. In John H. Watson, Jr., et al., Trustees, supra, the trustees had “wide powers” of management and investment as contrasted with the narrow powers herein, and the present question apparently arose only when brief was filed by respondent. We do not think that case decisive of the issue which arises from the evidence herein. Extensive authority need not be compiled to demonstrate that a mere passive investor, collecting interest and clipping coupons, and making a very few reinvestments, is not engaged in trade or business. Alice G. Kales, 34 B. T. A. 1046; Helen W. Heilbroner, 34 B. T. A. 1200. That situation here affirmatively appears, as well as the limitations indicated by the trustor, amounting to a direction to trustee to be passive investor rather than to engage in trade or business.

In Estate of Hetty H. R. Green, 27 B. T. A. 1195, trustees under a testamentary trust had power to rent, lease, sell, or convey real estate, to invest and keep invested the proceeds of the property, to change investments, and to manage and control the trust estate and exercise all powers necessary to that end. The income received during one of the taxable years was derived from 75 capital transactions, 71 of which consisted in receiving money paid for redemption of bonds at maturity, and the other 4 comprising sales of 1 lot of stock, 2 mortgages and a parcel of land. Whenever property was acquired it was taken as an investment, never for the speculative purpose of deriving profit from a sale thereof later on. We commented that, with certain exceptions, the net income of a trust shall be computed in the same manner as that of an individual and that petitioner was not engaged in buying and selling real estate and securities with a view to profit on the transaction, that out of 75 capital transactions only 4 were other than reception of money to redeem bonds at maturity, and that they were occasional, isolated transactions, not a business regularly carried on. We further noted that the language employed by the testatrix to safeguard the trusteed property clearly indicated that the purpose was to conserve the estate corpus and to protect it from the hazards of active business enterprise. “The whole tenor of the instrument distinctly negatives any idea that the estate should regularly carry on a business for profit, and the evidence shows, we think, that none was carried on.” We therefore concluded and held that net loss deductions were properly disallowed. The very few transactions shown by the record in the instant proceeding are of the same nature as those considered in the cited proceeding and our comment upon the language of the testatrix indicating a purpose to conserve the estate, rather than carry on a business for profit, can be precisely applied to the settlor’s language in the trusts here at hand.

We therefore hold that the trustee in the case of each trust here involved was not carrying on any trade or business, and that the expenses, viz., trustee’s commissions paid from principal, sought to be deducted as ordinary and necessary expense of carrying on trade or business under section 23 (a) of the Revenue Act of 1928, were properly denied by the respondent. This conclusion makes it unnecessary to pass upon the other question presented as to whether the fact that the commissions in question were charged to corpus of the trust, under the surrogate’s order, prevents their classification as business expense.

Reviewed by the Board.

Decision will be entered under Rule 50.

Van Fossan and Aenold dissent.

Mellott,

concurring: Although agreeing with the majority, that the petitioners were not engaged in a trade or business, I am of the opinion that, even if they were, the particular commissions in issue are not deductible. They were paid by the petitioners to themselves in 1931 out of trust corpus, and apparently were never considered by them as deductible items until after substantial deficiencies had been determined against them, the correctness of which they now concede. They had been allowed under section 285 of the Surrogate’s Court Act of New York on the basis of principal received and paid out. They were nonrecurring items, chargeable to and deductible from corpus. If application had been made by them to the Surrogate’s Court ir 1926, when the corpus was paid over to them, they would have been entitled to have received at least 50 percent of the commissions at that time; In Re Bushe, 227 N. Y. 85, for, under the construction by the New York courts of the section under which the allowances were made, they became entitled to that portion of the allowances immediately upon receipt of the property.

In my opinion the commissions in controversy could not be said to be “ordinary and necessary expenses paid * * * in carrying on any trade or business” even if the petitioners were engaged in a trade or business.

Smith, Turner, and Harron concur in the above.

Leech,

dissenting: The respondent admittedly allowed deductions of commissions, similar to those now contested, in his determination of the present deficiencies. He asks for no increased deficiencies because of error in that action. But if that was right, it would seem so, only, if the petitioning bank, as trustee of each of the two trusts, was carrying on business during the taxable year. However, respondent disallows the deduction of similar additional commissions which are now in controversy, because, he says, the bank, as such trustee, was not carrying on business. In my judgment, his position is wholly inconsistent. Either the petitioning bank, as trustee for these trusts, was carrying on business during the taxable year, or it was not. If it was, not only those commissions, the deduction of which was allowed by the respondent, are deductible, but the contested additional commissions are likewise deductible. I think the bank, as such trustee, was more than a passive conservator of investments and was carrying on business during the taxable year. The record, to me, clearly establishes that fact. In my opinion, the additional commissions, now in dispute, are deductible as well as those the deduction of which respondent has allowed and is not now contesting.

Arundeul and Tyson agree with this dissent.