author: Smith:

text:
    Estate of G. Percy McGlue, Deceased, M. Edith McGlue, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96799.
    Promulgated May 21, 1940.

      Lionel B. Farr, C. P. A., for the petitioner.

      Elmer L. Gorbin, Esq., for the respondent.
   OPINION.

Smith:

Our first question is whether the executors’ fees in the amounts of $70,806.14 from the estate of B. F. Saul and $9,926.75 from the estate of James F. Shea are includable in decedent’s gross estate. The item of $70,806.14 was not reported as an asset of the decedent’s estate in the estate tax return filed by his executors, but was added to the gross estate by the respondent in his deficiency notice. The item of $9,926.75 was reported in decedent’s gross estate, but the petitioner in this proceeding alleges that this was error and that the respondent erred in not eliminating the item from the value of the gross estate.

Section 802 of the Revenue Act of 1926, as amended by section 404 of the Revenue Act of 1934, provides in part:

The value of tfie gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the United States—
(a) to the extent of the interest therein of the decedent at the time of his death.

The term “property” as used in the quoted section of the statute embraces all choses in action, including claims for compensation for services performed. E. S. Heller et al., Executors, 10 B. T. A. 53; Jackson B. Kemper, Administrator, 14 B. T. A. 931.

It has been held that the right of a deceased partner, under a partnership agreement, to share in the profits of the partnership for a period following his death is a property right, or asset of the estate, which should be included in his gross estate at its present worth. Grahame Wood et al., Executors, 26 B. T. A. 533.

In William P. Blodget et al., Executors, 13 B. T. A. 1243, it was held that the executors of an estate in process of administration were taxable on the income received from a partnership of which the decedent was a member only to the extent that the amount received exceeded the value at which, the chose in action, that is, the right to the income, was included in decedent’s gross estate for estate tax purposes.

In Jackson B. Kemper, Administrator, supra, we held that certain amounts representing salary and bonus which were due a decedent at the date of his death were not income to his estate when collected by the administrators, but were assets which should have been included in the gross estate for estate tax purposes.

Although we have held in a companion case, Docket No. 98446, Estate of G. Percy McGlue, 41 B. T. A. 1186, involving the income tax liability of this decedent for the taxable year in which his death occurred, that the executors’ fees here under consideration did not constitute income “accrued” at the date of decedent’s death, because they had not been allowed by the Probate Court and because the amount that would eventually be allowed was uncertain, it does not follow that the decedent’s claim for such fees was not of value and was not an asset which should be included in decedent’s gross estate for estate tax purposes.

As a duly appointed executor of both of the estates, the decedent up to the time of his death had performed services for which he was entitled to compensation in some undetermined amounts. The right to such compensation was a claim or a chose in action which constituted an asset of the estate and must be included in the gross estate at its value at the time of decedent’s death.

The amount of $10,806.14 included in the gross estate by the respondent as representing the executors’ fees due the decedent from the B. F. Saul, estate is one-half of the amount claimed as a deduction for executors’ fees in the estate tax return filed on behalf of the estate, the decedent being one of the two executors of the estate. The amount of $9,926.15 which the respondent included in decedent’s gross estate as the executors’ fees due from the estate of James F. Shea is the amount which was allowed as executors’ fees by the Probate Court in a report filed by the surviving executor of the James F. Shea estate in February 1936. The amount of $37,000 was claimed for “estimated executors’ commissions” in the Federal estate tax return filed on behalf of the James F. Shea estate by the executors in June 1935, but this amount was not finally allowed.

The evidence before us does not show that the value of the decedent’s cláims for executors’ fees from either the estate of B. F. Saul or the estate of James F. Shea was any less than the amounts at which the respondent has included them in decedent’s gross estate. The inclusion of the amounts of $70,806.14 and $9,926.75 in the value of decedent’s gross estate is therefore sustained.

The remaining issue relates to the office furniture and books which the respondent included in the decedent’s gross estate at a value of $500. Petitioner contends that this property is not includable in the gross estate, and, in the alternative, that if included there should be allowed an offsetting deduction of a like amount.

It is plain that the property in question was the property of the decedent at the time of his death. Under the contract between the decedent and Burke it was to become Burke’s property at the time of decedent’s death, if not otherwise disposed of by the decedent before that time. The Federal estate tax is imposed generally upon all property passing from the decedent at the date of his death. The value of the office furniture and books, as to which no question is raised, must be included in the decedent’s gross estate.

By her alternative plea the petitioner claims the deduction of a like amount, that is, the value of the property at the date of decedent’s death, as a claim against the estate for legal services performed by Burke, or for other consideration passing to the decedent under his contract with Burke.

The evidence before us on this issue consists of nothing more than the mere statement in the stipulation of facts that the decedent and Burke entered into the agreement and a copy of the agreement itself. We do not know whether Burke ever performed any legal services for the decedent or for his estate or whether the decedent or his estate actually received anything of value under the contract. In these circumstances it must be held that the evidence of record affords no basis for the allowance of the claimed deduction.

Reviewed by the Board.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Disnet:

license: Public Domain

text:
    Adolph B. Spreckels, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94621, 95639.
    Promulgated May 21, 1940.

      Walter Slack, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION".

Disnet:

1. Are selling commissions paid by a trader in securities deductible as business expense?

After the decision of the Circuit Court in Winmill v. Commissioner, 93 Fed. (2d) 494, we allowed selling commissions' as well as purchasing commissions, in Harry H. Neuberger, 37 B. T. A. 223. On appeal to the Circuit Court our decision as to selling commissions was affirmed. Neuberger v. Commissioner, 104 Fed. (2d) 649. Certiorari was not applied for by the Commissioner. We think the dicta in Helvering v. Winmill, 305 U. S. 79, and in Helvering v. Union Pacific R. R. Co., 293 U. S. 282, referred to by respondent, are not decisive of the.point here presented. We hold therefore that the respondent upon the point is in error, and that the selling commissions are allowable deductions.

The result, as to the year 1935 and in proceeding No. 94621, is that we find there is no deficiency and that there is an overpayment of tax by the petitioner in the amount of $1,323.70 paid on December 11, 1936, both within three years before the filing of claim therefor by amendment to the petition filed on June 8, 1939, and within three years before the filing of the claim for refund on Mjarch 9, 1939.

As to the year 1934, in proceeding No. 95639, a different situation is presented. The result of a stipulation entered into at the hearing is that there was an overpayment for the year 1934, but the respondent objected to the filing of the amendment to the petition, on the ground that the claim of overpayment thereby advanced was not timely, being presented for the first time on June 8, 1939, more than three years after the payment of the last installment of tax. Respondent relies on Commissioner v. Rieck, 104 Fed. (2d) 294; certiorari denied, 308 U. S. 602, and the cases therein cited, and says that case bars consideration of the selling commissions as new grounds for claim of overpayment, because set up by amendment after the statute had run. Petitioner refers us to Georgie W. Rathborne, 39 B. T. A. 56. In the latter we followed our decision in Edward E. Rieck, 35 B. T. A. 1178, which was reversed by Commissioner v. Rieck, supra. In both cases we had entertained and allowed claims for overpayment on new grounds set up in amended petitions, on the theory that such amendments related back to the filing of the original petition, and were therefore not within the bar of the statute. This theory is untenable since the decision of the Circuit Court in the Rieck case. Petitioner, however, seeks to avoid the effect of that decision by a contention that “The new error assigned in the amended petition does not give rise to this overpayment, but serves to prevent its reduction on account of other adjustments.” He also argues:

* * * petitioner is not asking for a refund of any taxes paid by reason of bis failure to deduct selling commissions in preparing bis 1934 income tax return, but is asking for the full allowance of a timely refund claim resulting from a failure to claim a deduction for stamp taxes paid during that year, the amount of which the respondent seeks to reduce by asserting other errors in the return. Petitioner claims the right to offset these other errors by the amount of selling commissions paid and thereby secure the full amount of his timely refund for the stamp taxes.

In other words, petitioner in effect contends that he is utilizing the claim as to deductible selling commissions, not as new ground for claim of overpayment, but merely to offset the offset which the Commissioner, by other items, set up against the origine 1 claim of overpayment on grounds of stamp taxes paid but not deducted. Thus, petitioner seems to argue, the original claim for refund, timely filed, is left alive and undiminished, and he now claims thereunder. Thus petitioner seeks by indirection to accomplish what can not be. done directly. We think there is no essential difference between the situation here and in the Rieck case, for we think that petitioner is in fact relying upon new grounds for the overpayment. The amended petition, after reciting the facts as to payment of selling commissions of $23,909.29 and alleging thus deductibility, concludes:

Wherefore, petitioner prays that this Board may hear the proceeding and determine that there is no deficiency in income tax due from petitioner for the calendar year 1934, and that petitioner has overpaid bis income tax for said year in the sum of $4,087.61, and that the amount of said overpayment was paid within three years before the filing of a claim for refund of said overpayment on December 23, 1937, and within three years before the filing of the original petition herein and that this petitioner is entitled to a refund of $4,087.61.

It thus appears that claim of overpayment is in fact set up anew in the amended petition, and that the only reason therefor lies in the new facts recited — the- selling commissions. We think it apparent that the selling commissions are the ground of claim of overpayment. That there is new claim of overpayment is demonstrated by the fact that the claim is for $4,087.61 instead of $3,650.36, the amount of overpayment claimed in the original petition. Also, it is noteworthy that the $4,087.61 overpayment claimed in the amendment is the amount of the original refund claim, filed with the Commissioner prior to determination .of deficiency. Thus it appears that petitioner is now relying, not upon his original claim of overpayment of $3,650.36, but instead upon the refund claim. But that refund claim was in effect allowed by the Commissioner, for in determining the deficiency he agreed (except as to $80) that the payment of stamp taxes, pressed as ground of the refund claim, was a deductible item, and therefore gave credit, in effect, against the deficiency otherwise appearing, of the amount of the refund claim, with the small exception of $80. In Suhr v. United States, 18 Fed. (2d) 81, a very similar situation appears. There a claim for refund was, as here, filed prior to determination of deficiency because of claim that nontaxable stock dividends had been reported as income. After examination of the taxpayer’s books the Commissioner gave the taxpayer credit for the dividends, but found a deficiency because of other matters. The taxpayer appealed to the Board, alleging that there was no deficiency, but an overpayment. He also filed an action in the Federal court. The question was as to jurisdiction of the court. On appeal the Circuit Court said, as to the overpayment : “He was simply entitled to have the overpayment credited against his other tax liability.” This seems exactly what the Commissioner did herein. We think it disposed of the original refund claim, that the petitioner here should not now be heard to rely upon that claim, and that he is in fact relying upon the new grounds as to selling commissions, barred by the statute. We find no material distinction between the situation here and that in Commissioner v. Rieck, supra. Moreover, that case has lately been approved and followed in Commissioner v. Dallas, 110 Fed. (2d) 743, wherein the facts were similar to those in the Rieclc case. The court held that a refund of the overpayment was barred, under section 322 (d) of the Bevenue Act of 1932, by the lapse of more than two years before the filing of the amended petition which first set up the grounds of ovei‘-payment.

On April 30, 1940 (41 B. T. A. 986), we reconsidered the decision entered in Denholm & McKay Co., 39 B. T. A. 767, and, following Commissioner v. Rieck, supra, and Commissioner v. Dallas, supra, held that an amended petition filed more than three years after payment of tax does not relate back to the time of filing of original petition so as to authorize the crediting or refunding of an overpayment in tax attributable to a new issue raised in the amended petition, under section 322 (d) of the Bevenue Act of 1934, as amended.

It appearing, from evidence adduced since the filing of the amendment to the petition, that the last payment of tax had been made more than three years before the amendment, we conclude and hold that the petitioner’s claim for refund of overpayment is barred by the statute of limitations. Sec. 322 (d), Bevenue Act of 1934.

Decision will be entered under Bule 50.


author: OppeR:

text:
    The Moock Electric Supply Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96284.
    Promulgated May 21, 1940.

      Wendell HerbrucTc, Esq., and Albert B. Arbaugh, Esq., for the petitioner.

      DeWitt M. Evans, Esq., W. W. Kerr, Esq., and Thomas F. Callahan, Esq., for the respondent.
   OPINION.

OppeR:

In 1931 The George D. Harter Bank of Cleveland, Ohio, closed its doors. In 1932 the bank reopened under an agreement of the type now familiar, whereby certain of its assets were segregated in a subsidiary corporation and depositors agreed to look to the latter for satisfaction of a portion of their claims. Petitioner, as a depositor in the bank, accepted the new arrangement and received for its $50,000 certificate of deposit in the bank a partially restricted deposit claim of 65 percent and a “certificate of participation” against the subsidiary corporation for the remaining 35 percent. It is stipulated that at that time this certificate had a fair market value of 10 percent of its face.

In 1935, petitioner sold this certificate for about 30 percent of its face amount and claimed the difference as a loss, limited to $2,000 by the capital loss provisions.

Respondent disallowed the deduction and charged petitioner with income representing the difference between the fair market value of the certificate in 1932 and the amount realized in 1935. The deficiency resulting is the subject of this controversy.

Although petitioner has filed no brief, its position at the hearing was that the certificate was received in 1932 in a nontaxable reorganization ; that gain or loss thereon was postponed until disposition or some other identifiable event created a taxable result; and that that occurred in 1935 when the certificate was sold.

Respondent’s position continues to be that taken in the deficiency notice, that since petitioner could have taken a deduction in 1932 representing the difference between the original deposit and the value of what was then received, considering the participation certificate to be worth 10 percent of its face, it can not take the deduction in 1935 upon the sale.

It is not clear whether respondent’s contention is that the loss in 1932 proceeded from a sale or exchange, in relinquishing the old obligation and accepting the new, or from ascertainment of the worthlessness of a debt. If the former, he must be met by the holding in Charles T. Carlson, 39 B. T. A. 185, 190, that such a transaction was not a sale or exchange. That case presented facts identical with those at bar, with the possible exception that here the new obligation was partly that of the bank’s subsidiary. But respondent’s counsel expressly disclaimed reliance upon any such distinction at the hearing; it was made clear that it did not make any difference in his contention “that this certificate of participation was issued by a theoretically different entity than the original bank.” And even assuming, contrary to the Carlson case, that this could be a sale or exchange, the claim would seem to be subject to disallowance at that time by reason of the tax-postponing effect of section 112. Edith M. Greenwood, 41 B. T. A. 664.

On the hypothesis of a bad debt it may be assumed that, if this petitioner had determined to deduct a part of the original deposit in 1932, it would have been permitted to do so under the Carlson case. But on this assumption, the consideration which respondent apparently overlooks is that that claim would manifestly have been based upon partial and not complete worthlessness. At least 75 percent of the original obligation was apparently collectible and clearly no deduction based upon that portion of the debt would have been permitted. And nothing seems to be better settled than that partial worthlessness, as distinguished from total uncollectibility, is a ground for deduction which may be pursued or relinquished by a taxpayer entirely at his option. If he fails to take a deduction for partial worthlessness in any year, it does not have the effect of foreclosing him from a reliance upon different developments at another time. Blair v. Commissioner, 91 Fed. (2d) 992 (C. C. A., 2d Cir.); see American Cigarette & Cigar Co. v. Bowers, 92 Fed. (2d) 596 (C. C. A., 2d Cir.); Freeman-Dent-Sullivan Co. v. United States, 21 Fed. Supp. 972; G. C. M. 18525, 1937-1 C. B. 80, 82. Total worthlessness or disposition of the obligation remained open to this petitioner as a ground for deduction, notwithstanding the possibility that partial worthlessness may have appeared in an earlier year.

For that reason it seems unnecessary to resort to cases which consider whether a deduction for partial worthlessness might be taken, if claimed, or to attempt to analyze the present facts in the light of such cases. Cf. Eastern New Jersey Power Co., 37 B. T. A. 1037, with Charles T. Carlson, supra. It suffices that the present transaction does not show a taxable sale or exchange in a prior year; nor a debt deductible only at such earlier time. The disposition of the obligation being claimed now as a sale and the operation thereon of the capital loss limitations having been recognized and accepted by the petitioner, the deficiency was erroneously determined.

Decision will lye entered under Rule 50.


author: Hill:

text:
    Cherokee Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sunset-Lucille Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93962, 93964.
    Promulgated May 22, 1940.

      Robert M. L. Baker, Esq., for the petitioners.

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

Hill:

The common issue in these consolidated proceedings is whether under the facts stated the petitioners realized income during the taxable year equal to the difference between the petitioners’ cost and the face value of certain mortgage certificates which were accepted by the Mortgage Guarantee Co. at the latter figure in satisfaction of petitioners’ indebtedness. There were set forth in the petitions additional assignments of error which apparently were abandoned before trial, as to which we render no decision.

The argument of the petitioners is that the terms of the purchase of the realty provided for an exchange of property — the mortgage certificates for the real estate — and that the gain, if any, is to be determined under sections 111 and 112 of the Revenue Act of 1934. Petitioners contend that no gain resulted from the exchange, since the fair value of the property acquired in each case did not exceed petitioners’ cost.

The $175,000 price named in the Cherokee contract and the $112,500 set forth in the Sunset-Lucille contract, petitioners argue further, are merely figures in “a method of accounting adopted by the parties, and a definite and fixed obligation on the part of the petitioners to pay the face amount thereof in money or money’s worth was not incurred.”

The respondent’s position, on the other hand, is that the obligation of the petitioners to pay fixed amounts in money is plain on the face of the contracts and that the satisfaction of those debts at less than their face value resulted in income to the petitioners.

We think the petitioners must be sustained.

The two agreements for the purchase of the realty here involved must be construed each as a whole. Whatever obligations the contracts created to pay in money the petitioners’ notes, were modified by the provision for their payment in mortgage certificates to be accepted at their face value. Passing for the moment petitioners’ argument that the effect of this provision is to remove any obligation to pay the notes in money, we think the least force that may be assigned to it is to construe the provision as allowing an exchange of properties as an alternative method of discharging the debt. By following this method through the petitioners acquired, in so far as the mortgage certificates were accepted in exchange for the real estate, properties the fair value of which in each case is to be compared with petitioners’ cost in recognizing the gain, if any, arising from these dealings. We think the naming of a price for the properties in excess of the fair value in each case can not alter the character of the transactions. In the method employed by the petitioners in discharging their obligations it had no more importance than a book entry to balance the aggregate par value of the certificates transferred.

This alternative method of payment provided in the original obligation is the factor here present which differentiates this case from those on which the respondent places reliance. In United States v. Kirby Lumber Co., 284 U. S. 1, and in Helvering v. American Chicle Co., 291 U. S. 426, the debts which were discharged at less than their face value were absolute obligations not modified by any alternative methods of payment. The taxpayers escaped the full measure of their liabilities through dealings wholly unconnected with their original contracts. In the present case, on the other hand, the obligations assumed were met in the very terms which were specified and no income has resulted unless, as will presently be considered, gain may be recognized on the exchange. Cf. also, Carlisle Packing Co., 29 B. T. A. 514; L. D. Coddon & Bros., Inc., 37 B. T. A. 393.

We conclude, viewing these transactions as an exchange of property in so far as the mortgage certificates were accepted in payment for the realty, that the fair value of the property so acquired did not exceed the cost of the certificates transferred. We have considered all the pertinent evidence and have found that the property acquired by the Cherokee Co. at the time of acquisition had a value not in excess of $129,672.19. Since this is the aggregate cost of the obligations transferred from the purchaser to the vendor plus the $85,000 first mortgage indebtedness, we hold that the Cherokee Co. realized no gain or income from the transaction here in question.

The value of the properties acquired by the Sunset-Lucille Co., which we have also determined from a consideration of all the pertinent evidence, was at the time of purchase not in excess of $101,427.81. Since this amount does not exceed the aggregate cost of the certificates transferred plus the $71,000 first mortgage indebtedness and the $19,000 cash payment, we hold that the Sunset-Lucille Co. realized no gain or income from the transaction here in question.

The situation in the present case is not unlike that in Columbia Pacific Shipping Co., 29 B. T. A. 964, where the taxpayer corporation declared a dividend of a certain fixed amount payable in certain stock, owned by the corporation, at its par value. The Commissioner determined that the taxpayer realized income through the discharge of its obligation to pay the dividend so declared equal to the difference between the cost of the stock distributed and its par value. We held that although the declaration of the dividend named a fixed sum, it was made payable, in effect, in kind and no income therefore was realized by the corporation. See also General Utilities & Operating Co., 29 B. T. A. 934; affd., 296 U. S. 200. Cf. Twin Ports Bridge Co., 27 B. T. A. 346.

If the contracts here are regarded as essentially contracts of purchase and sale, as distinguished from exchanges, with provisions permitting payment in either one of two ways, the result is the same regardless of the value of the property purchased. There is no gain or loss on the purchase of property. Palmer v. Commissioner, 302 U. S. 63. By making payment in the medium most advantageous to them, the petitioners acted entirely within the terms of the contracts, discharging fully their obligations in the manner provided for and not for any lesser sum. The optional provisions for payment through the medium of the vendor’s obligations modified those provisions of the contracts which stated a definite sum, so that it can not be said that there was a money obligation on the part of the purchasers. See General Utilities & Operating Co., supra.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Black. :

text:
    Lucile Brian Harrison, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90919.
    Promulgated May 22, 1940.

      John O. Snook, Esq., for the petitioner.

      Alvin B. Peterson, Esq., for the respondent.
   OPINION.

Black. :

Petitioner contends that the $21,041.41 in controversy, under the terms of the agreement had to be paid in all events, out of the principal of the estate as well as out of income and, therefore, the rule governs which was laid down by the Supreme Court of the United States in Burnet v. Whitehouse, 283 U. S. 148; and Helvering v. Pardee, 290 U. S. 365, and that as a consequence the $21,041.41 is neither income to petitioner nor was it deductible from the income of the estate of decedent, John H. Harrison, in making its own income tax return. In our opinion the two cases above cited are not applicable to the question which we have here to decide.

If the $21,041.41 in question was paid to petitioner as interest or as compensation in lieu of income from a delayed testamentary trust of which she was the principal beneficiary, it is taxable to her regardless of what fund it was paid from. Cf. Minnie L. Wolf, 32 B. T. A. 959; affd., 84 Fed. (2d) 390. In that case, among other things, we said:

* * * Once the proposition is accepted that the amount is interest and received by the petitioner as such, it matters not what the source of the interest is; and, Just as in the Whitehouse case it was said that annuities are tax free irrespective of the adventitious fact that they may in one year be paid from income and in another year from corpus, so interest is taxable irrespective of whether it be paid from income or corpus. * * *

But, says petitioner in the instant case, the $21,041.41 was not interest, qua interest, and that calling it by that name in the compromise agreement does not make it interest. Petitioner cites in support of that contention numerous decisions by the Board and the courts which have held that the mere calling a payment “interest” does not make it interest if the facts show that it is not such. We are in agreement with these decisions and feel that it is unnecessary to discuss them in detail.

In view of the fact that decedent by the terms of a prenuptial agreement expressly agreed that he would set aside $250,000 of his property in his will to be held in trust for and during the natural life of petitioner, of which she should receive the entire net income for life, and in view of the fact that decedent’s will expressly recognized the validity of this prenuptial agreement and the further fact that notwithstanding these provisions, such payment has never been made by the executors to the testamentary trustee, we do not think the compromise agreement does violence to the usual and ordinarily understood meaning of the term “interest” when it says that, “the said executors shall pay to the party of the first part [petitioner] interest at the rate of six per cent. (6%) on the Three Hundred Thousand Dollars ($300,000) which the will of John H. Harrison provides shall be paid by said executors to Chicago Trust Company, of Chicago, Illinois, as Trustee for the party of the first part * *

But even if the $21,041.41 here involved can not be correctly denominated “interest” within the meaning of the word as used in section 22 (a) of the Revenue Act of 1928, we still think it is taxable to petitioner. If the $300,000 testamentary trust had been set up as directed by decedent's will and the income therefrom paid to petitioner, it is true that it would not have been interest paid to her. Nevertheless, the income from the testamentary trust would have been taxable income to petitioner. Irwin v. Gavit, 268 U. S. 161.

Although the decedent has now been dead more than ten years, the testamentary trust which the will directed should be set up has never been set up. However, by agreement which seems to be satisfactory to all the interested parties, the petitioner is being paid, in lieu of the income from such a trust, 6 percent on $300,000, less a credit of $150 per month paid to Caroline Sims, the other beneficiary of the testamentary trust. These payments presumably are being made quarterly to petitioner on the last days of March, June, September, and December, respectively. Also, it seems clear that such payments are being made out of income of the estate, for paragraph 3 of the compromise agreement, from which we have quoted in our findings of fact, contains, among other things, the following language: “said trust fund cannot be paid under the terms of said will until the stock of the deceased in the Commercial-News is sold, and during said interim the earnings of said stock in said Commercial-News will be more than the six per cent. (6%) interest herein provided for to be paid to the party of the first part.” Can it be said that such payments, even though strictly speaking they are not interest, are not taxable income to petitioner? For reasons we have already stated, we think no such contention can soundly be made. Petitioner contends that if Burnet v. Whitehouse, supra, and Helvering v. Pardee, supra, are not sufficient authority to exclude such payments from taxable income, then certainly the recent Supreme Court decision in Lyeth v. Hoey, supra, would exclude them. Petitioner contends that there is no difference in tax incidence between the $100,000 payment made to petitioner under the compromise agreement and the $21,041.41 made to her under the same agreement. We can not agree.

It is clear that the $100,000 payment was made to her not under the will, but because she was the sole heir, under the laws of the State of Illinois, of decedent John H. Harrison, and it is equally clear that under Lyeth v. Hoey, supra, none of this $100,000 is taxable income to her. The Commissioner concedes as much and no longer contends that petitioner owes any deficiency for 1931.

While it is true that payment of the $21,041.41 was made under the same compromise agreement as the $100,000, we do not think that the nature of the two payments is the same. It seems perfectly clear to us that this $21,041.41 payment was made to petitioner not because slie was the sole heir to John H. Harrison, but to carry out the terms of a prenuptial agreement recognized in the will, and was in lieu of income which she otherwise would have received under the will from a testamentary trust which has never been set up. The compromise agreement seems to clearly show that fact. So far as the record shows, petitioner is still receiving these payments at the rate of 6 percent per annum on $300,000 less the $150 per month paid to Caroline Sims. If the $21,041.41 in question is not taxable to petitioner because of Lyeth v. Hoey, supra, then by the same line of reasoning none of these subsequent payments of 6 percent on $300,000 would be taxable to petitioner.

We do not think that Lyeth v. Hoey, supra, stands for so broad a doctrine as that. In her brief, petitioner, in addition to the authorities which we have already discussed, strongly urges as a decision in her favor the Board’s recent decision in Chase National Bank of the City of New York et al., Executors, 40 B. T. A. 44. We think that case is distinguishable on its facts from those in the instant case. There the widow by compromise agreement was to receive an annuity of $9,000 for life, payable in all events whether there was income or not, in addition to an annuity of $9,000 which she was already entitled to receive under the will of her deceased husband. It is plain that this additional life annuity of $9,000 which she received was as an heir of decedent, and not as an income beneficiary under the terms of the will, just as it is plain in the instant case that petitioner received the $100,000 as an heir of decedent. Under the circumstances narrated above, we held in the Chase National Bank case that both Burnet v. Whitehouse, supra, and Lyeth v. Hoey, supra, forbade the taxing of the $9,000 annuity to the widow or allowing it as a deduction from the income of the estate. For the reasons already stated, we do not think such a rule applies to the $21,041.41 here in question. This $21,041.41 was no part of an annuity, as we view it, but was income received from the estate in lieu of other income which would have been received if the testamentary trust had been set up. As to this item we sustain the Commissioner.

Reviewed by the Board.

Decision will he entered that there is no deficiency and no overpayment in income tax for the year 1931.


author: Oppee :

text:
    Ralph Perkins and Katharine H. Perkins, (Husband and Wife), Petitioners, v. Commissioner of Internal Revenue, Respondent. Katharine H. Perkins, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ralph Perkins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 96124, 96125, 96126.
    Promulgated May 24, 1940.

      Henry M. Groves, O. P. A., for the petitioners.

      DeWitt M. Evans, Esq., and Thos. F. Callahan, Esq., for the respondent.
   OPINION.

Oppee :

These proceedings, consolidated for hearing and consideration, were brought for a redetermination of deficiencies in income tax as follows:

A question relating to certain accounting and bookkeeping expenses for the years 1935 and 1936 in Docket No. 96126 being apparently conceded by petitioner, the questions remaining for decision are as follows:

I. Whether the proper basis for computing depreciation of property acquired by gift is cost to the donor, or fair market value on the date of gift.
II. Whether insurance policies surrendered for cash, in accordance with a tender made by the issuing company, constituted a sale or exchange.
III. Whether petitioners in Docket No. 96124 are entitled to a total loss for the taxable year of an investment by Ralph Perkins in the sum of $17,250 in the Fourteenth Carnegie Co.
TV. Whether the loss sustained on certain bank deposits which were sold during the year gives rise to a deduction for a bad debt or is a capital" loss.
Y. Whether petitioner in Docket No. 96126 sustained a loss in the sum of $13,963.50 on the sale of second preferred and common stock of The Hill Clutch Machine & Foundry Co.

The above issues and the respective findings thereon will be independently considered hereinafter.

First Issue.

The facts are stipulated and are found accordingly. Two pieces of real property are involved, the controversy being the same as to each. One was received by petitioner as part of a gift from her father on July 29, 1982. On that date the father’s cost of these buildings was $103,-733.29. Their fair market value was $20;000. On August 23, 1935, petitioner received the other parcel as a gift from her mother, to whom the cost of buildings on that date was $25,750, the fair market value being $5,954. Both parcels had been used by the donors for pleasure and no depreciation thereon had been allowed or allowable to them. They have been operated by petitioner for profit since acquistion. The remaining useful life is stipulated in each instance. Petitioner has claimed depreciation and the only question is whether for that purpose cost to the donor or fair market value on the date of gift is the proper basis.

Section 114 (a), Revenue Act of 1934, prescribes that the basis for depreciation shall be the adjusted basis set forth in section 113 (b) for the purpose of determining the gain upon sale. The adjustments called for by that section being inapplicable, we are referred thereby to 113 (a) for the unadjusted basis which, in the case of gifts after December 31, 1920, provides that “the basis shall be the same as it would be in the hands of the donor.” Petitioner contends that these sections are conclusive and that, since the donor’s basis for purposes, of computing gain would be his cost, petitioner’s basis for depreciation must be the same.

We are unable to dispose of tbe question in such, simple terms. Petitioner’s donors could make a similar argument if they had converted the property to business uses, because the unadjusted basis of property is ordinarily the cost, and their situation would not fall under any of the specified exceptions. Nevertheless, we know that where nonbusiness property is converted to a business use the loss is to be computed not upon the basis of cost but of fair market value on the date of conversion. Heiner v. Tindle, 276 U. S. 582. This is also the proper basis for depreciation under similar circumstances. Charles J. Thatcher, 24 B. T. A. 1130. When, therefore, the statute speaks as in 113 (a) (2) of the donee’s basis as being the same as that of the donor it seems necessary to infer that, since the donor would take as his basis for depreciation the fair market value at the time of conversion, so must the donee. The fact that this provision appears in the section relating to computation of gain and not in that relating to the basis for depreciation is without significance when we bear in mind that the latter section must be modified in instances where the property involved is converted to a business use. Even though the conversion took place at the moment of acquisition by this petitioner, it was nevertheless a conversion, since the property had no depreciation base before. See Robert H. Montgomery, 37 B. T. A. 232. No matter what her basis for gain or loss, her basis for depreciation is computed upon conversion value, just as it would be, irrespective of gain or loss basis, in the hands of her transferor. Charles J. Thatcher, supra.

Any other treatment creates a situation so anomalous as to seem obviously outside the legislative purpose. If petitioner’s argument is sound, the same result would follow if the property had been converted to business purposes by the donor and thereafter transferred to petitioner. The donor’s basis for gain would continue to be his cost, see Deposit Trust & Savings Bank, Executor, 11 B. T. A. 706, though for purposes of depreciation it would be conversion value. Nevertheless, upon the transfer to the donee the basis for depreciation would automatically transmute into the donor’s basis for gain, for that is what petitioner’s literal reading of the legislation would produce. And the same would be true if the conversion took place long after petitioner’s acquisition. If these results are unwarranted, as we think there can be no doubt they are, the position urged by petitioner is only slightly less so. Respondent’s computation of depreciation on the basis of fair market value at the time of acquisition must, we think, be approved, not because the acquisition is significant, but because that happens also to be the time of conversion.

Second Issue.

The facts involved in this issue are stipulated. They are so found. The petitioner Ralph Perkins, referred to in the discussion of this issue as petitioner, received in 1929 by gift from his mother two tontine policies of insurance on his father’s life, of which his mother had been the irrevocable assignee. Petitioner assigned the policies in 1931 as collateral security for a loan. In the present tax year, 1934, the creditor, with petitioner’s consent, surrendered both policies for cash to the respective insurers and applied the proceeds to petitioner’s indebtedness. The question is whether the stipulated gain of $9,119.68 was a capital gain or ordinary income.

The parties agree that the policies represented capital assets of petitioner. The controversy is whether the surrender was a sale or exchange. Revenue Act of 1934, sec. 17.

Upon first impression that question would seem to be disposed of by George A. Hellman, 33 B. T. A. 901, where the Board said:

* * * “The words ‘sale or exchange’ are ordinary words o£ well established meaning.” They do not include the surrender of a life insurance or annuity contract wherein the insured receives a payment of an obligation according to the terms of the insurance policy.

Petitioner, however, urges the inapplicability of that decision, by reason of the concluding words in the quoted language, in that here the surrender was not the result of “the terms of the insurance policy.” It is his position, not controverted by respondent, that at the time of surrender the policies had no specified cash or loan value and that the transaction “was in accordance with a tender made by the insuring company.”

This variation in the facts seems to us insufficient to convert the present transaction into a sale or exchange and we do not read the language of the Hellman opinion as placing that emphasis upon the terms of the policy. Settlement with an obligor is not commonly considered a sale to him of his obligation. Hale v. Helvering, 85 Fed. (2d) 819 (App. D. C.). The settlement may be for a smaller' amount than the face of the obligation and therefore obviously at variance with its terms without impairing that conclusion. Hale v. Helvering, supra; James R. Stewart, 39 B. T. A. 87. Similarly, the time when settlement is made may vary from the date when the obligation is unconditionally due. This follows from the principle that the redemption of a bond prior to maturity does not constitute a sale or exchange, Fairbanks v. United States, 306 U. S. 436; John H. Watson, Jr., 27 B. T. A. 463. Consequently, the mere absence of a term in the agreement sanctioning the settlement seems inadequate to justify treating it as a sale. These obligations, in our view, were surrendered to the obligor as effectively as though provision for such surrender — either at the obligor’s option, as in the case of bonds called for prepayment, or at the option of the obligee, as in the case of insurance policies possessing cash surrender values — were expressed in the instruments themselves.

There is additional authority for this result in section 117 (f), Revenue Act of 1934. The characterization there of the redemption of certain specified evidences of indebtedness as “exchanges”, and the failure to include such obligations as those involved here, is persuasive evidence that it was not intended to treat the surrender of insurance policies as sales or exchanges for the purpose of applying the capital gains provisions. Avery v. Commissioner (C. C. A., 9th Cir.), 111 Fed. (2d) 19. We conclude that the payments of petitioner’s policies were not sales or exchanges and that the gain resulting therefrom was ordinary income.

Third Issue.

The principal facts pertaining to this issue were stipulated and are hereby found accordingly. They show that the Fourteenth Carnegie Co. was incorporated under the laws of Ohio on December 28, 1927, commencing business as of January 1, 1928; that petitioner Ralph Perkins, referred to in this issue as petitioner, owned one-half of its capital stock at a cost of $250; that the books of account of the corporation as of December 31, 1984, show an account payable to petitioner in the sum of $17,306.27; that the balance sheets and operating statements of the corporation show deficits for each of the years 1930 through 1936, the assets as at December 23, 1936, being $87,351.06, with a capital deficit of $62,160.84; and that on the latter date a voluntary petition in bankruptcy was filed by the corporation, which was finally adjudicated a bankrupt on January 7, 1938.

In addition to the foregoing we find from the testimony that petitioner and the other owner of the corporation’s capital stock agreed at the time of its organization that additional capital would be required by the corporation, which would be contributed by them on an equal basis, and that between December 28, 1927, and January 1, 1934, petitioner had contributed additional capital in the sum of $17,000; that during the calendar year 1936, the secretary of the' corporation ascertained that its principal tenant would not renew its lease and that, since it would be difficult to secure an adequate rental for the property, the corporation should file a bankruptcy petition; and that the corporation filed a state franchise tax return for the calendar year 1936 and a Federal capital stock tax return for the fiscal year ending June 30, 1936, and paid the former tax.

Petitioner claimed a deduction on account of the investment represented by these transactions for both 1934 and 1936. The issue, however, is materially clarified by concessions in the briefs of both parties. Petitioner “makes no claim to this deduction as a bad debt loss for any year. Furthermore, the- petitioner abandons his claim that this investment became worthless prior to the calendar year 1936.” (Petitioner’s reply brief.) Respondent, on the, other hand, appears to have no serious concern over treatment of the item as “capital investment”, but contends that no identifiable event has been shown warranting the deduction as a loss and that, if the situation is to be treated as a complete liquidation of the corporation, the distribution thereon is not shown to have occurred, and the deduction must be limited when allowable by the provisions of section 117, Revenue Act of 1936.

The evidence seems to us to warrant the conclusion that two identifiable events sufficient to indicate worthlessness of petitioner’s capital investment took place in the taxable year 1936. The first was the loss of the corporation’s tenant. The critical nature of this development was demonstrated by the subsequent filing of a voluntary petition in bankruptcy, which might also be treated as an identifiable event. See William L. Taylor, 37 B. T. A. 1055. If the latter were the only evidence appearing, so that petitioner’s claim of worthlessness would be supported solely by bankruptcy and ultimate liquidation, it might be necessary to pass upon respondent’s alternative contention that petitioner’s loss resulted from á corporate liquidation, and that under the provisions of section 115 (c) it would be subject to the capital loss limitations of section 117. See White v. United States, 305 U. S. 281; Helvering v. Weaver Co., 305 U. S. 293. Here, however, petitioner’s claim of worthlessness being adequately supported by the independent event consisting of the loss of petitioner’s principal asset, his contention that the stock was worthless prior to and separate from the bankruptcy is sufficient to eliminate the necessity of considering that point. But cf. Edith M. Greenwood, 41 B. T. A. 664. A loss predicated upon the worthlessness of stock may be allowed independent of the occurrence of any sale or exchange. De Loss v. Commissioner, 28 Fed. (2d) 803 (C. C. A., 2d Cir.). We see no reason why it may not also be allowed independent of any liquidation. Respondent’s determination on this issue is overruled.

Fourth Issue.

The facts involving this issue, as stipulated by the parties, are hereby found. They are to the general effect that the petitioner, Katharine H. Perkins, referred to in the discussion of this issue as the petitioner, had deposits in two closed or liquidating banks of $2,317.24 and $296.18, which on January 1, 1936, had been held some three and five years, respectively, on which no payment was made during the tax year 1936, and on which the aggregate loss incurred by her in the tax year was $2,202.56, that amount being claimed as a bad debt in petitioner’s income tax return for that year.

We also find from evidence submitted at the hearing that during 1936 petitioner instructed her husband, Ralph Perkins, to attend to taking a loss in 1936 on such deposits and that he sold the larger claim on December 10 of that year for $407.90 and the smaller claim, on December 31 for $2.96. Petitioner kept books of account and the difference between these amounts and the face of the deposits was charged off on her books to profit and loss as of December 31,1936.

There being no question of petitioner’s loss or its amount, the parties are in dispute solely as to whether it may be taken as a deduction for a bad debt or must be considered a capital loss subject to the limitations contained in Revenue Act of 1936, section 117.

Debts partially or totally worthless may, of course, be written off, Revenue Act of 1936, section 23 (k). But there seems little doubt that in the alternative they may be sold or exchanged. Austin Corbin, 2d, 39 B. T. A. 1163; McClain v. Commissioner (C. C. A., 5th Cir.), 110 Fed. (2d) 878; Edith M. Greenwood, 41 B. T. A. 664. There is no reason to assume that a chose in action such as a bank deposit may not be disposed of by sale in the same manner as any other debt, and the evidence is clear that that is in fact what was done with the claims in this proceeding. Debts must be considered property, see Twin Ports Bridge Co., 27 B. T. A. 346, 355, and these obligations do not fall within any of the exceptions to the definition of capital assets contained in section 117.

It seems to us to follow that petitioner is limited by the capital loss provisions. It is, in fact, only the sale that entitles her to take a deduction for any loss whatever, for no other evidence of the uncol-lectibility of the indebtedness has been produced. We are, therefore, unable to make that independent determination of worthlessness which it is incumbent upon the taxpayer to permit us to do. Higginbotham-Bailey-Logan Co., 8 B. T. A. 566. Mere evidence of market value is insufficient for that purpose, Ruth Wight Bill, 38 B. T. A. 796; see West End Pottery Co., 7 B. T. A. 927. Moreover, after the sale “there was no bad debt left to be charged off.” McClain v. Commissioner, supra.

Such cases as James R. Stewart, 39 B. T. A. 87, and Charles T. Carlson, 39 B. T. A. 185, are clearly irrelevant. There the disposition of the indebtedness took the form of a settlement with the obligor. The question was whether that constituted a “sale or exchange,” and on the authority of Hale v. Helvering, 85 Fed. (2d) 819, the Board determined that it did not. And see discussion of the second issue, supra. Here, however, there appears to be no question that the disposition of petitioner’s claims was by way of sale to a third person, and we have no leeway to construe the transaction otherwise. Be-spondent’s determination in this respect was correct.

Fifth Issue.

The stipulated facts on this issue are hereby found accordingly. They are in substance as follows: Balph Perkins, in this issue referred to as petitioner, on July 25, 1935, sold to A. C. McDaniel 750 shares of second preferred stock and 375 shares of no par value common stock of The Hill Clutch Machine & Foundry Co., an Ohio corporation, for a price of $18,750. Petitioner acquired the stock on May 24, 1932, by gift from his father, who had owned it since before March 1, 1913, at which date book value was second preferred, $87.06 a share; and no par common, no value.

From the record made at the hearing we find the following additional facts:

The above sale by the petitioner to McDaniel was the first sale ever made of the second preferred and no par common stock of the company. The book value of the second preferred stock of the company was $100 per share on June 30, 1932, as shown by the company’s regular quarterly statement as of that date; the book value of the no par value common stock on this date was approximately $63.80 per share. June 30, 1932, was the date of the company’s regular quarterly statements nearest to May 24, 1932.

Petitioner claimed a loss of $13,963.50 on the sale of the stock, which respondent disallowed “for lack of substantiation as to the basis of the stock.”

The sole ground relied upon by respondent in his brief for contesting the allowance of the claimed deduction is that “no statement of earnings of the company or other information which would tend to show what the fair market value of the stock was at the date of gift has been submitted. In view of the lack of evidence in this respect and the fact that the Commissioner’s determination is prima facie correct, respondent contends that the petitioner has failed to sustain his burden of proof in respect to this item.”

Under the present circumstances petitioner’s burden of proof was sufficiently discharged; “the book value of those [corporate] assets is some evidence of their actual 'value sufficient to shift the burden of going forward to respondent.” B. F. Edwards, 39 B. T. A. 735, 737.

No point has been máde by respondent that the basis used by petitioner in computing the loss claimed on his return was March 1, 1913, value rather than the donor’s cost, which, under the amended provisions of the 1934 Act, appears to constitute the donor’s basis for computing loss. Section 113 (a) (14). No cost basis to the donor has been shown, but we regard that as due to the implied concession that cost and March 1, 1913, value were identical. This must have been the theory upon which the case was presented, since respondent’s counsel stated at the hearing: “The stipulation of substantially all the facts involved in all years has been agreed to.” Omission of a fact so fundamental as the basis upon which petitioner’s loss is to be computed would have been inconsistent with this statement, but it may be justified upon the assumption described above. On this issue the decision will be for petitioner.

Decision will loe entered under Rule 50.

       SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      (a) Basis fob Depreciation. — The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property.

         SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      * * .f * *■ * *
      (b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.

       SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property ; except that—
      # * * * * * *
      (2) Gifts After December 31, 1920. — If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that for the purpose of determining loss the basis shall be the basis so determined or the fair market value of the property at the time of the gift, whichever is lower. * * *

       SEC. 117. CAPITAL GAINS AND LOSSES.
      * * * * * * «*
      (f) Retirement of Bonds, Etc. — For the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by an# corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

       “While the stipulation of facts and exhibits attached thereto state and show that the item in dispute was shown on the records of the Fourteenth Carnegie Co. as ‘accounts payable — Ralph Perkins’ it would seem in Tiew of the testimony of the petitioner that perhaps the item in question may be considered as a capital investment” [Respondent’s brief.]


author: Sternhagen :

text:
    William H. Stanley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96558.
    Promulgated May 24, 1940.

      William H. ¡Stanley pro se.

      Gerald W. Broohs, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined that the trust was in lieu of alimony and for that reason he included the trust income in petitioner’s gross income. The petitioner assails this, contending that the trust was not in lieu of alimony, and that he had no obligation to pay alimony or, under Illinois law, to support his divorced wife.

The trust was made before the divorce proceeding was begun and, as appears from the record, was not an incident of divorce or separation, even though the wife soon thereafter left the petitioner’s home and did not return. When made, therefore, the trust had no color of alimony. So much of the Commissioner’s rationale is mistaken. However, the trust might have become an alimony trust if it had later served the petitioner as a discharge of any obligation by reason of a divorce decree against him requiring him to pay alimony. But there was no such decree against him and no alimony award. He was the plaintiff in the divorce proceeding and the decree expressly provided that the defendant should have no alimony.

In Illinois the wife under such circumstances is apparently not entitled to alimony as a matter of right. Schneider v. Schneider, 286 Ill. App. 575; 4 N. E. (2d) 123. Furthermore, even if the petitioner had been the defendant in the divorce proceeding, the trust agreement was a final settlement and the court had no jurisdiction to modify the decree as to alimony. Kelley v. Kelley, 317 Ill. 104; 147 N. E. 659; Smith v. Johnson, 321 Ill. 134; 151 N. E. 550; Smith v. Smith, 334 Ill. 370; 166 N. E. 85.

The trust agreement was irrevocable, the petitioner had before 1935 completely discharged all liability which he had to his former wife, and he had no remaining or continuing obligation, the law of Illinois during the taxable years had been clearly announced to that effect, and the petitioner was, therefore, free from tax on the trust income. Helvering v. Fuller, 310 U. S. 69.

Decision will he entered under Rule 50.


author: Van Fossan:

text:
    Kilby Steel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99528.
    Promulgated May 24, 1940.

      L. B. Liles, Esq., Hartwell A. Greene, Esq., and J. J. Scarbrough, Jr., Esq., for the petitioner.

      John B. Stmers, Esq., for the respondent.
   OPINION.

Van Fossan:

The respondent determined a deficiency of $9,427.59 in income tax for the taxable year 1936 consequent on the disallowance of a credit of $46,404.83 claimed by petitioner on account of a contract restricting the payment of dividends. The contract, dated November 25, 1935, was with the Federal Reserve Bank of Atlanta, Georgia, and the First National Bank of Birmingham, Alabama. It provided:

So long as said items of indebtedness, or either of them, • are unpaid, the company will not declare dividends in any form on its capital stock except with the permission, in writing, of the National Bank and the Reserve Bank.

The respondent held:

The quoted provision of the contract does not contain language which would operate as a legal restriction upon you as to any amounts which can be distributed as dividends, unless the written permission of the bank or banks to make such distribution is refused. Since written permission of the bank or banks to declare a dividend was not refused, this paragraph does not operate to qualify you for the allowance of a credit under the provisions of Section 26 (c) (1) of the Revenue Act of 1936, and the credit taken on your return is, therefore, disallowed.

The facts were stipulated in large part and the stipulation was made part of the record in the case. ■ Certain additional facts were adduced by oral testimony.

The contract above referred to dealt with an indebtedness of petitioner to the National Bank in the sum of $163,750, evidenced by two notes, and obligated the Reserve Bank to participate in the carrying of the loan. Paragraph 18 of the contract set forth the restriction on the payment of dividends above quoted. At various times during 1936 petitioner sought and obtained from the banks concessions reducing the monthly payments under the contract.

During 1936 petitioner sustained a large operating loss and its financial position was badly strained. To obtain working capital, meet pay rolls, and similar accounts and continue to operate, petitioner was obliged to sell securities already pledged to the banks. Numerous conferences were held with bank officials and the officials were reluctant to make concessions. At the end of 1936 arrears on monthly payments under the contract amounted to $40,000. Petitioner had but $5,000 in cash and was dependent on collections to meet pay rolls then due. There was also approximately $50,000 then due in accounts payable. Petitioner had no free or unpledged assets.

Petitioner, during the taxable year, did not declare or pay a dividend of any type on its capital stock. It did not request, either orally or in writing, permission from either of the banks to pay a dividend nor was such permission granted. It is stipulated that had such request either orally or in writing been made of the banks, the request would have been refused. Sound business and banking practice would not have sanctioned the payment of a dividend in any form during 1936. Petitioner’s officers knew from their many conferences with bank officials that a request to pay dividends would be refused and would have discredited them with the banks.

Though no copy of any ruling of the respondent was presented at the hearing, reference was made to a letter written by the Commissioner under date of December 23, 1936, to a firm of attorneys at Toledo, Ohio, respecting a similar situation in which it appears that the Commissioner stated that in such a case formal written application for permission to pay dividends was a prerequisite regardless of the known futility of such action. This letter was not formally or officially published, but it was agreed that the letter appeared during 1937 in privately printed tax services. Petitioner had no knowledge of this letter in 1936.

At the hearing respondent’s counsel, with commendable frankness, admitted that the proposed interpretation of section 26 (c) (1) of the Eevenue Act of 1936 in this case seemed harsh. We will go further and hold that it is arbitrary and without legal sanction. There had been no authoritative published ruling or interpretation by the Commissioner and, hence, petitioner had no notice, either actual or imputed, of any such procedure. In fact, no such procedure was legally required. In the situation present, it would have been a vain and purposeless thing for petitioner to . make the request. Petitioner was bound by the contract provision against dividends. The situation is just such as the statute was designed to meet. Respondent is reversed.

Decision will he entered for the petitioner.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      •# # * * * <« #
      (e) Contracts Restricting Payment op Dividends.—
      (1) Prohibition on payment op dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May I, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


author: Mellott:

text:
    Lucy M. Gloss [Glos], Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90301.
    Promulgated May 24, 1940.

      Louis B. Montfort, Esq., for the petitioner.

      David Altman, Esq., for the respondent.
   OPINION.

Mellott:

The Commissioner determined a deficiency in gift tax for the calendar year 1935 in the amount of $5,197.02. The proceeding was submitted upon an agreed statement of facts.

Petitioner transferred property having a presently agreed value of $878,896.05 to trustees of three trusts, referred to as Trust No. 266, Trust No. 267, and Trust No. 271. The major portion of the property, $798,336.86, was transferred to Trust No. 266 for the benefit of Clara Glos Bates, Albert H. Glos, and Mabelle Glos Larkin, one-third each. Property having a value of $23,995 was transferred to Trust No. 271 for the benefit of the same individuals and in the same proportions.

It is unnecessary for present purposes to discuss the terms and conditions of these two trusts. When the proceeding was originally submitted this Board had taken the position that a trust was the “person” for the purpose of determining the number of exclusions which should be allowed under section 504 (b) of the Revenue Act of 1932. The Commissioner was relying upon our decisions as limiting the petitioner herein to but three exclusions, one for each of the three trusts created. See Commissioner v. Wells, 88 Fed. (2d) 339; Noyes v. Hassett, 20 Fed. Supp. 31; Commissioner v. Krebs, 90 Fed. (2d) 880, arid the other cases cited in Wilton Rubinstein, 41 B. T. A. 220 (on appeal, C. C. A., 8th Cir.).

After the reversal of some of our decisions and the enunciation of a contrary view by several of the Circuit Courts of Appeal, we promulgated the Rubinstein case, supra, and Edwin Goodman, 41 B. T. A. 472, holding that where a trust is made for the benefit of several beneficiaries one exclusion of $5,000 should be allowed under section 504 (b) of the Revenue Act of 1932 for each beneficiary in computing the amount of gift tax due.

In the gift tax return filed by this petitioner, she took three $5,000 exclusions under Trust No. 266 and none under Trust No. 271, the beneficiaries under the two trusts being the same. On the authority of Wilton Rubinstein and Edwin Goodman, supra, we hold that the petitioner correctly computed her gift tax upon the property transferred to these two trusts. See also Hutchings v. Commissioner, 111 Fed. (2d) 229; Mary duPont Faulkner, 41 B. T. A. 875.

After the promulgation of our opinions in the Rubinstein and Goodman cases, we entered an order on March 12, 1940, directing the Clerk of the Board to receive and file such additional brief or briefs as should be tendered by the parties within thirty days. Additional briefs have been filed, presenting the views and arguments of the respective parties upon the only remaining question — Is petitioner entitled to any exclusions in computing the gift tax in connection with the transfer of property under Trust No. 267?

In the notice of deficiency it is stated that the gifts under this trust constitute “future interests against which no exclusions are allowable” since “neither the income nor principal is to be paid to the beneficiaries thereunder until after” the death of the settlor. The presently agreed value of the property conveyed to this trust is $63,048.75.

The trust instrument provides that the trustees therein named shall hold, manage, invest, and distribute the property as a trust fund, upon the terms and conditions thereinafter set out; that the trustees shall pay all of the necessary costs and expenses of “administering and protecting this trust”, the remainder of the income, thereinafter called “net income” to be accumulated “until the time provided for distribution”; and that:

* * * after the death of the Donor the remaining Trustees shall, as promptly as possible and as at their discretion may seem best, proceed to liquidate all of the assets of this trust estate and when, and as so liquidated and from time to time as the liquidation proceeds and in the discretion of the Trustees may seem advisable, shall pay and distribute the trust estate, together with all accumulations thereof as follows:
To: Mattie Mierboff, 10/98tlis thereof;
To: Mattie Volkerning, 4/98ths thereof;
To: Lydia Harndorf, 4/98ths thereof;
To: Laura Schween, 4/98ths thereof;
To: Ella "Watermann, 4/98ths thereof;
To: William Schween, 4/98ths thereof;
To: Florence Bopp, 2/98ths thereof ;
To: Eleda M. Heidemann, 2/98ths thereof;
To: Clara Glos Bates, 20/98ths thereof;
To: Mabelle Glos Larkin, 5/98ths thereof;
To: Carol Bates Edwards, 2/98ths thereof;
To: Helen Balgemann, 22/98ths thereof;
To: Henry Magers, 5/98ths thereof ;
To: St. Peter’s Evangelical Church, of Elmhurst, Illinois, 2/98ths thereof;
To: Church of Our Savior Episcopal; of Elmhurst, Illinois; 2/98ths thereof;
To: First Congregational Church of Elmhurst, Illinois; 4/98ths thereof;
To: German Luthern Church, of Elmhurst, Illinois; located at 3rd and Michigan Street, Elmhurst, Illinois; 2/98ths thereof;
Section S. Such liquidation and distribution shall be solely at the discretion of the Trustees but distribution shall not in any event be delayed more than five (5) years from the date of the Donor’s death; and the Trustees may from time to time in theib sole discretion as the liquidation proceeds pay any one or all of the Donees prorata or in full as they deem best; and—
In the event that any of the individual or personal Donees above named be not living at the time provided herein for distribution or any part thereof then the share that should have been paid to such deceased Donee shall be paid to their heirs at law, or whomsoever such deceased Donee may designate by his or her Last Will and Testament; and
Ftjethermoee, No disposition, charge or encumbrance, transfer or assignment of the interest of any Donee in this trust shall be of any validity or legal effect, or in any wise regarded by the Trustees, nor shall it in any way be liable to any claims of any creditor of such Donee; and all such payments of the interest of any beneficiary shall be made in person to such beneficiary if living.

Petitioner contends that in computing the net gifts under this trust there should be deducted, under section 505 (a) (2) (B) of the Revenue Act of 1932, the amounts given to the four churches, which she computes to be $6,484.56. She also contends that she is entitled to two exclusions of $5,000 under section 504 (b) of the same act for the gifts to Mattie Maierhoff and Helen L. Balgemann and to the exclusion of the total amounts given to all the other beneficiaries except Clara Glos Bates and Mabelle Glos Larkin, the amounts given to each of them being less than $5,000. No exclusion is claimed as to the gifts to Clara and Mabelle, they being two of the donees named in the other trusts. Petitioner thus determines that but $26,462.03 ($63,048.75 — $6,484.56—$30,102.16) of the property transferred to this trust is subject to the gift tax.

Respondent argues that the dissenting opinions in Edwin Goodman, supra, and Rheinstrom v. Commissioner, 105 Fed. (2d) 642, rather than the majority opinions, enunciate the correct rule. He places considerable reliance upon the reports of the Congressional Committees and especially the portion thereof stating that “the term ‘future interests in property’ refers to any interest or estate whether vested or contingent, limited to commence in possession or enjoyment at a future date.”

In Thomas E. Wells, 34 B. T. A. 315, 317, we pointed out that, while the definition of the term in the first portion of the committee report indicated that it was “intended to apply to any interest of which the donee would not take immediate and actual physical possession”, the possibility of that being the true intent “is tempered by the next sentence, which gives the reasons for the insertion of the future interests provisions.” We concluded that, inasmuch as the eventual donees were specifically named in the trusts there under consideration and the value of the gifts to them was readily ascertainable, there was no such difficulty as the Congressional Committee feared and that it should be held the donees took present rather than future interests. We premised tbat partially upon the assumption that what Congress had in mind as a future interest was a remainder or a reversion supported by an intervening estate. Upon appeal (Commissioner v. Wells, supra), the court held that the gifts were of present interests, the donor having divested himself of all interest in the property and the donees — the trusts — having accepted it and put it to instant use for the directed purpose.

We dare not rely very heavily upon the court’s decision in the Wells case; for the theory upon which it was based has now been abandoned. Wilton Rubinstein, supra; Edwin Goodman, supra; Rheinstrom v. Commissioner, supra; McBrier v. Commissioner, 108 Fed. (2d) 967. But we are still of the opinion that the views expressed by us in Thomas E. Wells, supra, are sound. Congress, in the enactment of the gift tax law, included transfers in trust, whether the gifts be direct or indirect (sec. 501 (b), Revenue Act of 1932), provided they are irrevocable. (Sec. 501 (c), Revenue Act of 1932. Sanford's Estate v. Commissioner, 308 U. S. 39.) The parties agree that such a transfer was made in the instant proceeding. Petitioner retained no interest in the property. Legal title vested in the trustees; but they held it for the benefit of the named beneficiaries. True, the beneficiaries were not to come into possession of the corpus or the accumulated income until the death of the settlor; but they were the only ones who had any “interest or estate” whatsoever in the property. That this was the intent of the settlor is indicated not only by the provisions of the trust instrument directing the trustees to “pay and distribute the trust estate” to the beneficiaries but also by the provision requiring payment to be made to the heirs at law of any deceased beneficiaries or to “whomsoever such deceased Donee may designate by his or her Last Will and Testament.” We do not intimate that the giving of a power to dispose of the property by will is decisive of the issue, whether the interest is present or future; for, as pointed out in Law of Future Interests, Simes, vol. 3, sec. 731, “with the exception of possibilities of reverter and rights of entry for breach of condition * * * all varieties of future interests * * * are alienable by will in the United States.” But we do feel that where, as here, the settlor not only irrevocably gives the property to the donees but also gives them the right to dispose of it by will, she intended to transfer to them, and actually didi transfer, a present rather than a future interest.

Some courts have held that a power of appointment in itself is an interest in property. State v. United States Trust Co. of New York, 99 Kans. 841; 163 Pac. 156. Perhaps this is not the majority view. Cf. Shattuck v. Burrage, 229 Mass. 448; 118 N. E. 889, and Tax Commission of Ohio v. Oswald, 109 Ohio St. 36; 141 N. E. 678. However, in Law of Future Interests, Simes, vol. 2, sec. 535, it is stated: “* * * jf the exercise of the power need not be postponed to a future time, then it is a present interest and not a future interest.” There is nothing in the trust instrument under consideration requiring the exercise of the power to be postponed to a future time, which, though we do not consider it to be conclusive, at least supports the view we have reached that the interests of the named beneficiaries are present.

The instant proceeding is not distinguishable from Rheinstrom v. Commissioner, supra; McBrier v. Commissioner, supra; Davidson v. Welch, 22 Fed. Supp. 726; affd., 102 Fed. (2d) 100; Edwin Goodman, supra; and Pelzer v. United States, 31 Fed. Supp. 770, in any substantial particular. Eespondent contends that it is, “in that the trustees [in the cited cases] could make current payments as well as accumulate for future distribution”, while in the instant proceeding their only power is to accumulate. We intimated in Charles W. Deeds, 37 B. T. A. 293, and Edwin Goodman, supra, that we felt this circumstance to be important; but, in view of the fact that none of the courts have seen fit to apply it in cases coming before them, we refrain from doing so here.

It was stipulated that the petition should “be deemed amended, as of the date of the filing of this stipulation, so as to claim the overpayment, if any, resulting from the adjustment by the Commissioner in decreasing the value” of “one item of property in Trust 266 from $2,500 to $2,000.” Effect will be given to this stipulation in the computation to be made under the Board’s rule, and

Decision will be entered under Rule 50.

       SBC. 505. DEDUCTIONS.
      In computing net gifts for any calendar year there shall be allowed as deductions:
      (a) Residents. — In the case of a citizen or resident—

      (2) Charitable, etc., Gifts. — The amount of all gifts made during such year to or for the use of—
      * * * * * * *
      (B) a corporation, or trust, or community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals; no part of the net earnings of which inures to the benefit of any private shareholder or individual;

        * * * * * * *

       SEC. 604. NET GIFTS.

        if if * >!< * * *
      (b) Gifts Less Than $6,000. — In the case of gifts (otter than of future interests in property) made to any person by the donor during the calendar year, the first $6,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.

       Section 504. Net Gifts.
      By subsection (b) of the House bill a gift or gifts to any one person during the calendar year, if in the amount or of the value of $3,000 or less, was not to be accounted for in determining the total amount of gifts of that or any subsequent calendar year. Likewise, the first $3,000 of a gift to any one person exceeding that amount is not to be accounted for. Your committee believed the exemption was insufficient, and accordingly increased it to $5,000. Such exemption, on the one hand, is to obviate the necessity of keeping an account of and reporting numerous small gifts, and, on the other, to fix the amount sufficiently large to cover in most cases wedding and Christmas gifts and occasional gifts of relatively small amounts. The exemption does not apply with respect to n. gift to any donee to whom is given a future interest. The term “future interests in property” refers to any interest or estate, whether vested or contingent, limited to commence in possession or enjoyment at a future date. The exemption being available only in so far as the donees are ascertainable, the denial of the exemption in the case of gifts of future interests is dictated by the apprehended difficulty, in many instances, of determining the number of eventual donees and the values of their respective gifts. (72 Cong., 1st Sess., Sen. Kept. No. 665.)


author: Opper:

text:
    President and Directors of Manhattan Company and Joseph F. Poey, Executors, Estate of Jacob F. Haubeil, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94412.
    Promulgated May 24, 1940.

      Frederick W. Ritter, Esq., for the petitioners.

      Frank M. Thompson, Jr., Esq., E. O. Hanson, Esq., James C. Maddox, Esq., and E. M. Woolf, Esq., for the respondent.
   OPINION.

Opper:

The deficiency at bar was determined by respondent on the ground that petitioners’ decedent, having elected during his lifetime to return gain upon the installment basis, was taxable in the year of his death upon the unreported installments by force of the provisions of section 44 (d), Revenue Act of 1934. This is contested upon several grounds which may best be summarized by a quotation from petitioners’ brief:

* * *, firstly, [AT that since the installment obligation, which is the subject of the dispute herein, was specifically devised, and since the income upon said installment obligation was not and will not be received by the petitioner, no tax, therefore, can be levied against it; secondly, [B] that since the transferee is a charitable institution, it is not subject to tax on the specific legacy, and, therefore, it was not required that a bond be filed, as provided for in section 44 (d) of the Internal Revenue Act of 1934; and, thirdly, [C] that, if a bond was required to be filed, the petitioner made an honest attempt and offered' to comply immediately upon ascertaining the facts.

A. — The subject of the present dispute is, of course, not the current income flowing from the installment obligation. It is the gain upon the acquisition thereof, which, but for the provisions of section 44 (b), would have been taxable to the decedent in the year of such acquisition as a gain upon the property exchanged therefor. By section 44 (d), however, the postponement proceeding from 44 (b) terminates upon the transmission to another of the installment obligation and the postponed tax is thereupon accelerated. The result is that upon such transmission, whether by way of sale or bequest, a tax is imposed upon the original transferor, in spite, or perhaps because, of the fact that he is no longer in a position to realize upon any of the remaining installments. It is accordingly no obstacle to liability that “income upon said installment obligation” will “not be received by the petitioner.” Current income on the installment obligation is not the subject of this dispute. That, along with future installments of principal, will presumably be received by the hospital as the specific legatee of the obligation. But the tax in controversy is not upon such payments, but upon capital gain realized by the decedent during his lifetime. Moore v. United States (Ct. Cls.), 10 Fed. Supp. 143; certiorari denied, 296 U. S. 583. Neither theoretically nor practically will this tax fall upon the hospital. Reference to legislative policy encouraging charitable bequests can, therefore, have no bearing.

Of course there is an exception to everything that has been said. That flows from the provisions of the same section that a bond may be filed assuring the return as income by the transferee of the installments which have as yet escaped taxation, and that thereupon the accelerating provisions shall become inoperative. That involves petitioners’ second contention.

B. — The proposition that the provisions of section 44 (d) requiring the filing of a bond in order to exclude the unpaid installments from decedent’s income was inapplicable where a charitable institution became the transferee, was advanced by the Government in Archie R. Conner, Administrator, 37 B. T. A. 890, as the justification for the respondent’s failure there to receive and approve the proffered bond. This position was rejected by the¡ Board and respondent’s refusal was characterized as arbitrary and without foundation in the law. Whether or not the hospital, if it chose to i’etum the installments as its income, in order to comply with-the conditions of a bond if given, would have been required to pay a tax may be left open here as it was in the Conner case, where we said (p. 896): “Whether the legatees can escape a tax on the income returned is not a matter which Ave have to determine.” The giving of the bond is not dependent upon any such speculation. If given, its effect is as described in section 44 (d), Archie R. Conner, Administrator, supra. The failure to give it must have the opposite effect, upon the reasoning of that case, and unless we are prepared to read out of the section something which is unmistakably there.

C. — We may pass the question whether an “honest attempt” to comply with the exception was in fact made. The excuse offered for failure to file a bond at the time required by respondent’s regulations is that petitioner was then unaware of the installment character of the obligation, in spite of the ten-month interval between decedent’s death and the date of filing the income tax return which constituted the event fixing the time for filing the bond. No explanation of the interval between that time and the abortive compliance five months later is attempted, although petitioners’ testimony shows that they were informed of the requirements “a few days after you filed the return.” The effort at compliance, when ultimately resorted to, consisted not of the tender of an adequate bond but of Treasury notes accompanied only by an affidavit. Petitioners were then aware of respondent’s regulations, as evidenced by their Exhibit #4. These prescribe the form and penalty of the obligation to be submitted, presumably in pursuance of the statutory requirement of “a bond in such amount” as the Commissioner may prescribe. No such instrument, no bond of any kind, was tendered. The Government securities could not, of course, replace the provisions of the bond itself; their function would merely be to eliminate the necessity of sureties thereon.

The omission to proffer an adequate penal bond sufficient to bind the obligors with incontrovertible finality is, of course, no mere technicality. The tax obligation is, as we have said, primarily that of the decedent for the last taxable year of his life. If, in the meantime, the statute of limitations were to run upon that primary liability, only the force of the bond would enable respondent to collect the tax from the third person to whom the obligation was transferred, or from decedent’s personal representatives upon the default of such person. It is reasonable to assume that this situation presents both justification and necessity for the statutory condition of a penal bond.

Such considerations may, however, be laid to one side, for not even a.n “honest attempt” which falls short of fulfillment will suffice. “To the argument for liberal construction in favor of the petitioners because section 44 (d) is a relief provision, it is enough to say that what the petitioners ask is not a construction of the statute but a complete disregard of it.” Mabelle M. Evarts, 39 B. T. A. 861, 864. We consider this proceeding indistinguishable from the situation there, for although the legatee here is a charitable institution, the legatees there returned the income as their own and paid the tax thereon. Even if the hospital could avoid tax on the income returned by it, a question we have expressly reserved, there was as little additional tax collectible in the Evarts case since the tax on the legatees there appears to have been paid in full.

Petitioners make no such contention as that “exact compliance with the regulations was impossible. The law does not require the impossible.” F. Harold Johnston, Executor, 33 B. T. A. 551, 555. And cf. Mabelle M. Evarts, sufra. Nor could they or do they contend that a bond properly jirepared, executed, and assured was tendered to respondent and arbitrarily refused by him. Archie R. Conner, Administrator, supra.

All that appears is that for certain results to follow, the statute specifically requires the filing of a bond and that no such bond has ever been filed or tendered. This is the irreducible minimum of the condition prescribed by the statute. Failure to perform it is highly substantial and leaves the tax results where they were before, a liability of decedent for which petitioners are accountable.

Decision will he entered for respondent.

       SECTION 44. INSTALLMENT BASIS.
      *******
      (d) Gain oe Loss upon Disposition op Installment Obligations. — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange — the amount realized, or (2) in the case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. This subsection shall not apply to the transmission at death of installment obligations if there is filed with the Commissioner, at such time as he may by regulation prescribe, a bond in such amount and with such sureties as he may deem necessary, conditioned upon the return as income, by the person receiving any payment on such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and had received such payment.

       Regulations 86, art. 44-5.

       Revenue Act of 1926, sec. 1126 ; Regulations 86, art. 44-5, supra.