text:
    Continental Illinois Bank & Trust Company, Executor under the Last Will and Testament and Codicils Thereto of Edward E. Ayer, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52617.
    Promulgated January 30, 1934.

      Hugh W. McCulloch, Esq., for the petitioner.

      J. R. Johnston, Esg., and Paul O. Oroarhin, Esg., for the respondent.
   OPINION.

Smith :

The question presented by this proceeding is whether the gift tax imposed by the Revenue Act of 1924 attaches to the value of annuities payable to others than the purchaser thereof, the annuity contracts being purchased in 1925 and the other annuitants paying no consideration or an inadequate consideration therefor.

The provisions of the Revenue Act of 1924 material to a disposition of the issue are as follows:

Sec. 319. For tlie calendar year 1924 and each calendar year thereafter, a tax equal to the sum of the following is hereby imposed upon the transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly, and upon the transfer by a nonresident by gift during such calendar year of any property situated within the United States, whether made directly or indirectly:
1 per centum of the amount of the taxable gifts not in excess of $50,000;
*******
Seo. 320. If the gift is made in property, the fair market value thereof at the date of the gift shall be considered the amount of the gift. Where property is sold or exchanged for less than a fair consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the consideration received shall, for the purpose of the tax imposed by section 319, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.

Article 7 of Regulations 67 (Treasury Decision 3648) sets forth the manner of determining the value of a gift which takes the form of an annuity. In subdivision (7) it is stated:

* * * "wiiere the donor purchases an annuity for the donee payable at the end of annual periods throughout the life of the latter the value thereof, as of the date of the gift, should be determined by Table A, a part of this article. * * *

The record in this case does not show that Edward E. Ayer’s wife and daughter paid anything for the annuities procured for them by Ayer. The value of the annuities payable to them has been computed by the respondent and the method of computation is not challenged by the petitioner, except that the petitioner raises a question as to the correctness of using a 4 percent table for the determination of the value in view of the fact that the Liberty Loan bonds constituting a gift to the Newberry Library bore 4¾ percent. For reasons which will be stated below, we affirm the Commissioner’s determination.

It will be noted from section 319 of the taxing act above quoted that the gift tax is imposed upon the “ transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly.” By section 320 it is provided that if property is sold for less than a fair consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the consideration received shall be taxable as a gift. In Murry Guggenheim, 24 B.T.A. 1181, this Board said:

* * ⅜ we think it must be conceded that the term “ gift ” as used in the statute merely designates the transfers selected for tax, i.e., only such transfers as are donative in character have been selected. The term designates the character of the transfer rather than the medium used in effecting it. * * *

The petitioner contends that a donative intent was lacking upon the part of Ayer in making the transfers to the University of Chicago and to the Newberry Library; that Ayer purchased annuity contracts from these institutions and paid a valuable consideration therefor. We are of the opinion, however, that this is not correct. In the first place, there is no assumption that either of these institutions was in the business of making annuity contracts. The institutions would not have entered into the contracts unless the elements of a gift were present. In the second place, at the time of the making of the transfer- to the University of Chicago Ayer was 84 years old, and his wife and daughter were 80 and 59 years old, respectively. The application of mortality tables to the annuities payable clearly shows a gift to the institutions. In the third place, the contract made with the University of Chicago specifically provides:

* * * In making tbe above gift tbe party of tbe first part has been prompted both by a desire to co-operate in tbe furthering of the educational work of The University of Chicago and by a desire to express his regard for his friend, Mr. Martin A. Ryerson.

Clearly, this indicates an intention on the part of Ayer to make a gift of some value to the University of Chicago and the respondent has determined that a gift was made to each of these educational institutions by Ayer, which gift is not subject to tax by virtue of section 321 (a) (2) of the Revenue Act of 1924.

We also think it clear that there was an expectation on the part of all concerned that annuities would be paid by the educational institutions to Ayer’s wife and daughter after Ayer’s death; also that a gift may take the form of an annuity to other than the purchaser of the annuity. The regulations provide for the taxation of a gift taking the form of an annuity. It appears to us to be immaterial whether the annuitant is to receive the annuity from the date the contract is entered into or from a future date. Where one purchases an annuity for another he has at least indirectly made a gift to that other and the gift tax is imposed upon transfers made “ directly or indirectly.”

The petitioner cites article 1 of Regulations 67, to the following effect:

* * * A transfer which is neither a sale nor an exchange does not involve a gift if there is a valid, even if not an adequate, consideration for the transfer.

We are of the opinion that the sentence of the regulation quoted has no application to the situation presented in this proceeding. Clearly, Ayer intended by his contracts with the educational institutions to provide for his widow and daughter, either or both surviving him. The transfers of the property made by Ayer in 1925 were desired to accomplish this purpose. From the date the contracts were entered into the wife and daughter acquired rights of value— rights to receive annuities after the death of Ayer and for the period of their lives. The value of their rights was, in our opinion, an appropriate subject for the imposition of the gift tax. Cf. Burnet v. Guggenheim, 288 U.S. 280.

The petitioner further contends that the respondent was not justified in determining the value of the annuities to Ayer’s wife and daughter by the use of mortality tables, and in its brief states:

* * * it should be particularly noted that under the provisions of the contract dated December 9, 1925, Mr. Ayer delivered to The Newberry Library, United States Fourth Liberty Loan Bonds, bearing interest at 4½%. The tables used by the Commissioner of Internal Revenue in computing the value of life estates are based upon a return of not more than 4% of interest per annum on the investment. As these Liberty Loan Bonds bore interest during the lifetime of Mr. Ayer at the rate of 4¼%, the use of 4% tables gives an improper result, assuming that it is proper to compute this tax with the aid of any mortality tables.

It must be manifest that in the valuation of the annuities payable to Ayer’s wife and daughter resort must be had to mortality tables. The use of such tables in the valuation of annuities has often been upheld by the courts. Cf. Ithaca Trust Co. v. United States, 279 U.S. 151. The contention of the petitioner that the respondent has erred in using a 4 percent mortality table in connection with the valuation of the annuities payable by the educational institutions is in our opinion without merit. The mere fact that the Liberty bonds turned over to the Newberry Library bore interest at the rate of 4½ percent is immaterial. The Newberry Library was not required to retain those bonds to maturity or for any particular period. The record contains no evidence that the annuities were not properly valued in accordance with the respondent’s regulations. The contention of the petitioner upon this point is therefore not sustained.

Reviewed by the Board.

Judgment will ~be entered for the respondent.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Colorado Life Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68355.
    Promulgated January 30, 1934.

      R. H. Walker, Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has determined a deficiency in income tax for the year 1930 in the amount of $1,439.76. The only issue is whether a certain payment made by the petitioner in the taxable year was interest and therefore deductible from income in such year in conformity with section 203 (a) (8) of the Revenue Act of 1928.

The petitioner is an insurance company, with its principal office at Denver, Colorado. It was organized in 1919 with authorized capital of $200,000, of which $100,000 was paid in and the balance subscribed for. In 1921 it reinsured its business, distributed its assets to its stockholders and retired all its capital stock except two shares. In 1927 it was relicensed to do business in the State of Colorado, the laws of which provide that no insurance company shall operate therein unless it is possessed of an actual paid-up cash capital of not less than $100,000 and that whenever such minimum amount has been fully paid in and deposited with the commissioner of insurance, license to do business may be issued.

When it was decided to revive the petitioner in 1921, an agreement was entered into between it and a so-called “ Director’s Pool ”, which provides as follows:

(Par. 2) WHEREAS, the Company desires to obtain sufficient funds at this time- to obtain from the Insurance Department of the State of Colorado authority to begin the writing of Life Insurance for the reason, among other reasons, that assurances have heretofore been given, to the purchasers of Endowment Bonds issued by the Company that on or about this time such authority would be obtained; and
■(Par. 3) Whereas, the Pool is willing to advance to the Colorado Life Company, in one or several payments, a sum not exceeding One Hundred and Fifty Thousand Dollars ($150,000) as the Pool may determine, on condition that the Company make a satisfactory contract with the Pool by which the total of all payments made by the Pool to the Company shall be repaid to the Pool out of the surplus of the Company in excess of Fifty Thousand Dollars ($50,000) as hereinafter provided, and upon the further condition that the Company shall pay the Pool one per cent (1%) of the Premium Income of the Company for twenty-five years, as hereinafter provided; and

Paragraph 3 was subsequently modified to provide that the surplus out of which petitioner was to redeem the shares of stock issued to the pool should be $60,000 instead of $50,000.

The agreement further provided as follows:

(Par. 10) Whenever, if ever, the Company shall have made purchases from the Pool aggregating the total value of all payments made by the Pool to the Company with interest as aforesaid, then and thereupon the Pool shall immediately assign and deliver to the Company all of said Par Value shares and Full Participating shares which shall not have theretofore been assigned and delivered to the Company.

Pursuant to the foregoing provision of the agreement the “ Director’s Pool ” paid the petitioner $100,000 in November 1921, made additional payments prior to the taxable year of $26,500, and at the date of the first payment received 2,000 par value and 8,000 full participating shares - of stock. Shortly thereafter it delivered back to the petitioner one fourth of each class of stock so received and the petitioner issued to it 2,500 limited participating shares. The payment of $100,000 to the petitioner in November 1927 enabled the petitioner to secure a license to transact business as an insurance company in the State of Colorado under sections 25 and 31 of the insurance law of that state.

In November 1930, pursuant to the agreement, petitioner reacquired all its stock theretofore issued to the “ Director’s Pool ” by the payment thereto of $126,500, plus $17,'705.76 representing 8 percent per annum provided for in such agreement.

The petitioner contends that the payment of the aforesaid $17,705.76 in the taxable year was in discharge of interest then due on its indebtedness and, therefore, deductible from its income in that year as provided in section 203 (a) (8) of the Revenue Act of 1928. The respondent has determined that the amount in controversy was paid in connection with the redemption of the petitioner’s stock and must be regarded as a dividend under the provisions of section 115 (a) and (g) of the Revenue Act of 1928.

If the amount paid by the Director’s Pool ” to the petitioner in 1927 was a loan secured by pledge of stock, it is clear that petitioner had no paid-in capital at that time and that its license to transact an insurance business was wrongfully obtained. We must presume that the commissioner of insurance required proof of compliance with all the pertinent provisions of the insurance laws of the state before the issue of the license. Having represented that the money in hand at the date of application for a license was paid-in capital, we are of the opinion that petitioner should not now be heard in a plea that such money was borrowed and the amount thereof a debt. Angelus Building & Investment Co., 20 B.T.A. 667; affd., 57 Fed. (2d) 130.

After careful consideration of all the facts herein and of the applicable statutory provisions of the State of Colorado and the Federal revenue acts, we conclude that the “ Director’s Pool ” bought the stock in question under an agreement to resell the same to the petitioner as and when surplus earnings might be available. In the transaction in the taxable year petitioner redeemed its stock, which had a basic value of $126,500. The Commissioner correctly determined that the amount paid to the “ Director’s Pool ” in excess of such basis should be treated as a dividend.

Decision will be entered for the respondent.

       SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.
      (a) General rule. — In the case of a life insurance company the term “ net income " means the gross income less—
      *******
      (8) Interest. — All interest paid or accrued within the taxable year on Its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations ol the united States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title; * * *

       Section 25. Cash Capital Deposit.
      No joint stock life insurance company shall be permitted to do any business in this state unless it is possessed of an actual paid up cash capital as follows: Eire insurance companies * * * and life insurance companies not less than $100,000 * * *.
      Section 31. Whenever such capital stock has been subscribed and not less than the amount required by this act shall have been fully paid in aDd deposited with the Commissioner as required by this act, they shall notify the Commissioner who shall cause an examination to be made either by himself or some disinterested person especially appointed by him for the purpose and who shall certify under oath that the provisions of this act have been complied with by said company as far as applicable thereto. A subscription of stock within the meaning of this act shall include only bona fide subscriptions from the public and not subscriptions by the corporation, association or individual who holds the same as sales agent or broker or for speculation or for the primary purpose of reselling same. * * *

       SEC. 115. distributions BY CORPORATIONS.
      (a) Definition of dividend. — The term “ dividend ” when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
      *******
      (g) Redemption of stoclc. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. * * *


author: TRAAimelb:

text:
    Blaine L. Stoner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67525.
    Promulgated February 1, 1934.

      J. Henry O'Neill, Esq., for the petitioner.

      Dean P. Kimball, Esq., and Edward G. Adams, Esq., for the respondent.
   OPINION.

TRAAimelb:

It is tlie contention of the petitioner that $50,000 of the total consideration received by the seller from the buyer on May 29, 1929, was turned over to the seller impressed with a trust or restriction imposed by the buyer and for that reason it did not constitute a part of the gross income until it was released from the restriction. Under the terms of the contract it was agreed that the seller would deduct from the purchase price a sum not less than $50,000 and would deposit such sum in the bank, subject to the conditions of the contract. This provision of the contract was carried out and the $50,000 was actually paid to the seller and thereafter the seller deposited $50,000 in a bank, subject to the conditions of the quoted provision of the contract. That sum was for the purpose of guaranteeing that certain things would be done.

The petitioner relies upon the case of Cleveland Trinidad Paving Co., 20 B.T.A. 772; affd., 65 Fed. (2d) 85. In that case there was a contract which provided that a municipality should withhold from the consideration payable to the contractor upon completion of a paving contract a certain sum to secure the contractor’s obligation to guarantee maintenance of the paving for a period of years. We held that the contractor did not have an unqualified right to receive the full consideration upon the completion of the contract and that therefore the amount withheld was not income to him at that date. But in this case the seller of the property actually received the full consideration, including the $50,000, and after receiving it deposited it in the bank. It became the seller’s money and not the money of the purchaser. The taxpayer, that is, the seller, received interest on the money.

In the case of North American Oil Consolidated v. Burnet, 286 U.S. 417, the taxpayer received in 1917 certain moneys the right to which was then being litigated in court. Though the taxpayer’s title was uncertain and contingent upon the outcome of the litigation, it had the use of the moneys and the court held that they were taxable income in 1917, when received. In the case of Mead Construction Co., 3 B.T.A. 438, where a contractor had a contract with a municipality for pavement construction, the contract provided that the contractor after completion of the work should give the municipality a certain indemnity undertaking in the form of city bonds, United States bonds, or cash, at the option of the contractor. When cash was used it was withheld from moneys due the contractor. In deciding that the full contract j>rice was income we said:

If, in tlie present appeal, tlie contractor in fact received the contract price and in fact transferred cash or bonds to' the city for deposit as required, the contract price would have been income notwithstanding the deposit or pledge for proper maintenance. But tlie procedure was simplified and the city retained the deposit fund in the first instance. The fact that it did so with the heavy hand of its municipal power does not change the taxpayer’s contractual right to the full compensation and its obligation to make deposit. The legal effect is quite the same.

The petitioner in this proceeding argues that the case at bar is distinguishable from the Mead Construction Co. case, supra, because in the Mead case there was no restriction on the right of the taxpayer to receive compensation in full. However, we can not overlook the fact that the taxpayer in this case did actually receive compensation in full and was required to provide an indemnity fund after receipt of full compensation. In the case of Federal Development Co., 18 B.T.A. 971, there was a sale of real estate and the seller promised to oust a tenant within a certain period. Title to the property was passed and the consideration paid, except $50,000 which was retained by the purchaser to guarantee the performance of the seller’s agreement to oust the tenant. As in the case at bar, interest on the $50,000 was paid to the seller. We held that this sum of $50,000 was taxable income to the seller, although, unlike the case at bar, it was not actually paid to the seller within the taxable year. In that case we said:

The fact that in concluding the transaction the Federal Reserve Bank, instead of paying over the entire amount of the purchase price and then receiving back a deposit of $50,000 from petitioner, retained that sum from the total makes no difference. The result is the same in any event. The retaining of this amount was a use of it as funds of the petitioner in carrying out the latter’s obligation to make a deposit. The sum was held from that time forward as money belonging to petitioner, interest being paid the latter for the time it was held. The fact that one who sells property guarantees the purchaser against some contingency arising in a future year and makes a deposit as security for the guarantee does not lessen by the amount of the guarantee or the amount of the deposit the profit which he had made on the sale. If in such case the happening guaranteed against takes place in the following year and a portion of the deposit is in consequence lost, the result is one affecting income for that year to the extent of the loss.

In view of the authorities aforesaid it is our opinion that the $50,000 received by the petitioner as a part of the purchase price of the property and deposited by it to guarantee against the happening of certain contingencies should be included in the gross income of the petitioner for the year involved. Cf. Erwin R. Effler, 29 B.T.A. 784.

Judgment will he entered under Rule 50.


author:
Leech :
      Van Fossajst,

text:
    Kate Allerton Johnstone, as Executrix of the Estate of Allerton Johnstone, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66798.
    Promulgated February 1, 1934.

      John H. Bogardm, Esq., for the petitioner.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

Leech :

The respondent contends that the transfers made by trust A and trust B were intended to take effect in possession or enjoyment at or after the decedent’s death, that in trust B the decedent reserved the power to alter, amend, or revoke the trust, and that the properties constituting the corpus in all three trusts passed by general powers of appointment which were conferred on the decedent by the respective instruments creating the trust and which were exercised by him by will. Consequently, the respondent contends that the corpus of all three trusts should be included in the gross estate for purposes of the Federal estate tax.

Section 302 (c), (d), and (f) of the Revenue Act of 1926 is applicable to the issues and reads in part as follows:

Seo. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
⅜ ⅜ ⅜ ⅜ # * *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth; * * *

It is the petitioner’s contention that by trust A and trust B the decedent made irrevocable transfers of the properties therein described; that the transfers were complete at the respective dates on which the trusts were executed; that the powers of appointment conferred on the decedent by the trust instruments were limited and not general powers; and that, consequently, the value of the corpus of neither of these two trusts should be included in the gross estate under any of the quoted provisions of the statute.

The tax imposed by section 302 (c) of the Revenue Act of 1926 is an excise on the transfer of property by death. Young Men’s Christian Assn. v. Davis, 264 U.S. 47; Nichols v. Coolidge, 274 U.S. 531; May v. Heiner, 281 U.S. 238. The real subject of the tax is the shifting of the economic benefits of the property. Saltonstall v. Saltonstall, 276 U.S. 260; Chase Natl. Bank v. United States, 278 U.S. 327. The phrase in section 302 (c) of the Revenue Act of 1926, “to take effect in possession or enjoyment at or after his death,” includes the trusts or interests in a trust passing from the control of the donor at his death. Reinecke v. Northern Trust Co., 278 U.S. 339. In accordance with these principles the corpus of trust A and trust B should be included in the gross estate under the provisions of section 302 (c).

In both of the trusts executed by him the decedent reserved at least a qualified control of the ultimate disposition of the corpus of the trust. He was unmarried at the date of the execution of the trusts and remained so until his death. If he died without issue it was provided that the corpus of the trusts should go to the person or persons or corporations appointed by him by his last will, or, there being no such appointment, to his heirs at law under the laws of descent of the State of Illinois. ' If the decedent died without issue and exercised the power to appoint the beneficiary or beneficiaries of the trusts, he could divert the corpus thereof from his heirs at law. He could, moreover, revoke any will in which he had at any time exercised the power of appointment and so could have caused the property at his death to vest in his heirs at law, if at death he had no issue. The exercise of the power, however limited it may be, would bring about the shifting of the economic benefits of the property. Likewise, failure to exercise the power of control would operate with similar effect. Chase Natl. Bank v. United States, supra.

As a matter of fact, the decedent appears to have exercised the power of control over the ultimate disposition of the corpus of trust A and trust B by his last will.

It is our opinion that the instruments creating the trusts, by their provisions respecting the disposition of the trust properties at the decedent’s death, left the transfers uncertain and incomplete as to him, and, therefore, subject to the tax. Saltonstall v. Saltonstall, supra; cf. Bullen v. Wisconsin, 240 U.S. 625.

Moreover, in trust B the decedent reserved a power to alter and revoke the trust which was exercisable by the donor with the consent in writing of the trustee or trustees. The petitioner, citing White v. Erskine, 47 Fed. (2d) 1014, argues that, since the power to alter or revoke could be exercised only with the consent of the trustees, who were adverse parties, no taxable interest passed from the decedent at his death. It is our opinion that this question has been settled adversely to the petitioner by Reinecke v. Smith, 289 U.S. 172. In that case the Supreme Court had before it a similar question, arising under the provisions of section 219 (g) of the Revenue Act of 1924. That section relates to the taxation of income. But the Court, citing Burnet v. Guggenheim, 288 U.S. 280, pointed out that the same considerations as to ownership and control affect the power to impose a tax both on the transfer of the corpus and upon the income.

Section 219 (g) of the Revenue Act of 1924 provided that where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income' of the grantor. In the Reinecke v. Smith case the person in conjunction with whom the grantor reserved the power to revest in himself the title to the trust was the trustee. The Supreme Court, after some consideration of the duties of the trustees, said that the case must be viewed as if the reserved right of revocation had been vested jointly in the grantor and a stranger to the trust. The Court further said:

⅜ * ⅜ V7e think Congress may with reason declare that, where one has placed his property in trust subject to a right of revocation in himself aDd another, not a beneficiary,,he shall be deemed to be in control of the property. We can not say that this enactment is so arbitrary and capricious as to amount to a deprivation of property without due process of law. * * *

There is no distinction in principle between Reinecke v. Smith, supra, and the question now under consideration. We, therefore, conclude that trust B is within the provisions of section 302 (d).

In view of the foregoing we deem it unnecessary to consider whether the powers of appointment reserved to himself by the donor (the decedent) of trust A and trust B were general and, therefore, within the purview of section 302 (f).

The respondent has included in the gross estate for purposes of estate tax the corpus of trust 0, which was created by the decedent’s mother for his benefit for life. It provided that upon his death the corpus of the trust was to go (1) to his issue; (2) in the event that the decedent died without issue, to the person or persons or corporations appointed by the decedent by his will; (3) in the event of failure of heirs of his body and failure to exercise the power of appointment, to the decedent’s legal heirs under the laws of descent of the State of Illinois, excluding his father. ■ The decedent, dying without issue, exercised this power by his will in accordance with the provisions of sections 1330 and 1331 of the Civil Code of the State of California, which was the state of his residence.

Was such power, so exercised, general or special?

The instrument creating the power, to which we must look for its limitations, is unambiguous. Therefore nothing can be added thereto, United States v. Gleason, 175 U.S. 588, nor do we need the assistance of any rule of construction. Calderon v. Steamship Co., 170 U.S. 272. . Obviously, the donor neither intended to nor did reserve the right to modify, alter, or amend the power of appointment beyond its life as defined by the instrument creating it. Such definition, in limiting the exercise of the power to the will of decedent, which became effective only at his death, Ithaca Trust Co. v. United States, 279 U.S. 151; Knowlton v. Moore, 178 U.S. 41, expressly made the life of the power concurrent with the life of decedent. The former lapsed with the death of the latter. After decedent’s death, in no event, was there any power which could be changed. Cf. Cowman v. Classen, 156 Md. 428; 144 Atl. 367, and cases cited therein.

In our opinion, the clear and unambiguously expressed intention' of the donor in granting the) disputed power in trust C was that, provided decedent died without heirs of his body and the grantor had not modified, altered, or amended it, decedent could exercise the power by will in favor of any person.

A power of appointment is general when it can be exercised in favor of any person the donee may select. It is -special or limited when exercisable only in favor of persons or classes of persons designated in the instrument creating the power. Fidelity-Philadelphia Trust Co. v. McCaughn, 34 Fed. (2d) 600; certiorari denied, 280 U.S. 602; Farmers Loan & Trust Co. v. Bowers, 29 Fed. (2d) 14.

Conditions or contingencies bearing only upon the right to exercise a power of appointment do not limit it when exercised, and thus are not material in determining whether a power is general or special. J. Gilmore Fletcher, Executor, 29 B.T.A. 503.

In our judgment, the power of appointment here in question, contained in trust 0, was a general power of appointment granted decedent, with limitations only upon the right to exercise it, within which decedent clearly acted, J. Gilmore Fletcher, supra, and subject to divestiture or change by the happening of a condition subsequent — the modification, alteration, or amendment of the power by the donor — which had not occurred when the power was exercised. Cf. Cowman v. Classen, supra, and cases cited therein, Vaughn v. Converse, 184 Iowa, 891; 169 N.W. 144.

Further, though it be said that the mother had the right to modify, alter, or amend the instrument creating the questioned trust and, a fortiori, the power contained therein, until her death, as petitioner contends, which right we deny existed here, the record discloses the exercise of the power granted within its expressed limitations, the passing of the property covered thereby to the appointee under the power, and no modification, alteration, or amendment thereof. Certainly, then, even under petitioner’s contention, rnvtil so changed, the property included in trust C could and did pass by the exorcise of that power of appointment. Cf. Jones v. Clifton, 101 U.S. 225.

We conclude the power of appointment granted to decedent in trust C is a general power of appointment and the property passing thereunder is therefore within section 302 (f) of the Revenue Act of 1926.

Reviewed by the Board.

Judgment will he entered for the respondent.

Van Fossajst,

dissenting: Being of the opinion that under the facts of the case and the law as I understand it, the power of appointment was not a general power, I dissent from the above report as to trust C.


author: Aeundell : Seawell,

text:
    Columbia Pacific Shipping Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50968.
    Promulgated February 1, 1934.

      Erskine Wood, Esq., and M. M. MaMMessen, Esq., for the petitioner.

      William E. Davis, Esq., and Paul E. Waring, Esq., for the respondent.
   OPINION.

Aeundell :

The errors assigned by the petitioner are (a) that the Commissioner erred by holding that it and the China Pacific Co., the owner of all of the capital stock of the petitioner, properly filed separate returns of income for 1928, and (b) that the Commissioner erred by including as taxable income of the petitioner the amount of $165,688.89, claimed to represent a profit realized by petitioner in connection with the declaration and discharge- of a dividend declared. May 15, 1928, because of the difference between the cost ($1,861.11) and the declared fair market value. ($167,500) as of the date of distribution of 1,675 shares of the capital stock of the Steamship Jefferson Myers, Inc., transferred to the China Pacific Co. as a dividend on May 16,1928.

In the report heretofore promulgated it was held as follows with respect to the first issue: “ The first error assigned is not discussed in the brief for the petitioner, though no statement that it is abandoned is made therein. The record shows that S. P.,Fleming, who was secretary-treasurer of petitioner, requested permission to file separate returns for the taxable year 1928 in view of the fact that the China Pacific Co. was in process of liquidation and had filed notice of dissolution with the Commissioner of Corporations for the State of Oregon. The permission was granted by the Commissioner after the petitioner complied with the provisions of article 632 of Regulations 69, to which its attention was directed.

“ On March 14, 1929, the petitioner, the Asiatic-American Steamship Co. and the China Pacific Co. filed separate'returns, indicating-on the returns or attached thereto the information that .the Commissioner had granted permission for so doing> section 142 (a) of the Revenue Act of 1928 authorizing the granting of such permission by the Commissioner. Where a separate return is filed by . one member of an affiliated group pursuant to the election afforded in the revenue act, the remaining members of the group may not file a consolidated return and all members of the group are thereby forced to file returns and compute tax liabilities on a separate basis. Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; Fontana Union Water Co., 24 B.T.A. 1045; Apartment Corp., 17 B.T.A. 876.

“ The returns having been filed and accepted by the Commissioner, he was at liberty to proceed to examine and audit them and to reject or refuse to receive amended returns, consolidated or otherwise. Such under the statute was within his power and discretion. United States v. Blair, 293 Fed. 846; certiorari denied, 264 U.S. 587; Rose v. Grant, 39 Fed. (2d) 340; Brownsville Ice & Storage Co., 18 B.T.A. 439; Pine Ridge Coal Co., 23 B.T.A. 489.

“Under the facts and circumstances, fully set forth in our findings of fact, we are of the opinion and so hold that the petitioner, the Asiatic-American Steamship Co. and the China Pacific Co. having filed separate returns for the year 1928, which were accepted by the Commissioner as properly filed, the Commissioner committed no error in refusing to accept from the petitioner a consolidated return for the period in 1928 during which those companies were affiliated.”

Upon reference to the Board the prior opinion, in so far as it deals with the first issue, as set out above, is affirmed.

The second issue is whether petitioner realized income through the declaration and payment of a dividend in the capital stock of Steamship Jefferson Myers, Inc. The cost of the stock to petitioner was $1,861.11 and the par value $167,500. Respondent has treated par value as also being fair market value and there is no evidence to show error in this respect. The difference of $165,638.89 between cost and fair market value the respondent has included in income on the theory that upon the declaration of the dividend on May 15, 1928, petitioner incurred a liability to its stockholders in a definite amount and that the partial discharge thereof by transferring property cosi-ing less than the value at which it was transferred to the stockholder's constituted income. In the prior report the respondent’s action in this respect was sustained. Upon consideration by the Board we are unable to see any substantial distinction between the facts in this case and those in General Utilities & Operating Co., 29 B.T.A. 934. In that case, upon consideration of the dividend resolution, we reached the conclusion that it imposed upon the corporation only an obligation to distribute in kind, that it was discharged in that way, and that, upon authority of the decided cases, no gain or loss resulted to the corporation. The cases dealing with this question are reviewed at length in the opinion in that case and no useful purpose would be served in again setting them out here. In this case we conclude that the intent of the directors of petitioner as expressed in the resolution of May 15, 1928, was to declare a dividend payable to the extent of $167,500 in stock of Steamship Jefferson Myers, Inc., and that the dividend was paid in that way, and, following General Utilities & Operating Co., supra, petitioner realized no taxable gain.

Reviewed by the Board.

Decision will be entered under Rule 50.

Seawell,

dissenting: I disagree with the conclusion reached on the second issue.

When petitioner’s board of directors resolved, as it did, that “ $619,760.00 be and it is appropriated and set aside from the surplus profits of the company for the payment of a ten hundred sixteen percent (1,016%) dividend upon its outstanding capital stock,” it created a liability of itself to its sole stockholder in the sum of $619,760. W. E. Caldwell Co., 6 B.T.A. 47. When petitioner discharged that liability, under a further resolution of its directors and the consent and acquiescence of the stockholder, by the transfer to the stockholder of assets of the petitioner at a valuation equal' to the liability, as it did, petitioner received income in an amount equal to the difference between the cost of those assets to petitioner and the liability so discharged. Callanan Road Improvement Co., 12 B.T.A. 1109; Bacon-McMillan Veneer Co., 20 B.T.A. 556. If a dividend in kind was intended there is no apparent reason to mention the amount of the dividend in dollars or the percentage of the capital stock, for neither was involved.

Black, Sternhagen, and Adams agree with this dissent.


author: Adams :

text:
    Anna M. Chambers and William J. Gealy, Trustees under the Last Will of Fred N. Chambers, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55713, 64538.
    Promulgated February 1, 1934.

      James H. Gourtney, Esq., for the petitioners.

      G. R. Marshall, Esq., for the respondent.
   OPINION.

Adams :

These proceedings, which have been consolidated, involve proposed deficiencies in income tax of $1,042.36 for the year 1927 and $410 for the year 1929. The sole question for determination is whether the gain realized from the sale of certain securities and real estate is taxable as income to the trust estate or to the beneficiaries. The cases were heard by Honorable William D. Love, now deceased.

The petitioners are the trustees of the estate of Fred 1ST. Chambers, who died testate in May 1918 and by his last will and testament (included herein by reference), admitted to probate in Pennsylvania, provided for the distribution of his residuary estate as follows:

Thied — And all tie rest, residue and remainder of my estate, real, personal and mixed, of whatsoever kind and wheresoever situated, of which I may die seized or possessed, I give, devise and bequeath unto my said wife, Anna M. Chambers and William J. Gealy, and the survivor of them, to have and to hold jointly, in trust, nevertheless, for the following uses and purposes, and not otherwise, to-wit:
a. — To manage and control the said estate, sell and dispose of any part or all of my personal and mixed property, lease, sell and dispose of all or any part of my real estate, upon such terms and conditions and for such price or prices as to the said trustees, or the survivor of them shall seem proper, and to make, execute and deliver good and sufficient leases, deeds and conveyances for said real estate, or any part thereof, and to receipt for the rentals and considerations thereof; to borrow money when said trustees may deem it necessary in the proper management of said estate, and to pledge said personal property and mortgage said real estate and mixed property to secure the same; to operate said real estate and leaseholds for oil, gas, or other purposes; to receive all moneys due said estate from any source and to invest the same and to change investments and make new investments, and in general to do all other things in the premises which said trustees or the survivor of them, shall deem for the best interests of the estate, and all said property to have and to hold for the following uses and purposes and not otherwise.
b. — -To keep said estate together and intact as- to principal except as hereinafter provided, and the income thereof to divide into equal portions; one-half of said income, or so much thereof as may be necessary, is to be used by said trustees for the support and education of my daughter, Thalia Lee Chambers, until she shall arrive at full age, and after she shall be of full age, said trustees shall pay over to her, the said Thalia Lee Chambers, during her natural life, so much of the income from said one half of my said residuary estate, as in the discretion of said trustees may be proper and necessary for her proper use and maintenance, in a suitable manner; said estate and income, however, not to be liable in any w,ay for the debts, contracts, or liabilities of my said daughter, Thalia Lee Chambers, or any husband she may have; provided, however, that said trustees, should they deem said income not sufficient for the proper education or maintenance of my said daughter, may use so much' as may be necessary of the principal for said purposes; and further, said trustees, after my said daughter shall be of full age may allow her such control over said estate or any part thereof as in their judgment may be to her best interests, and may after she becomes of full age, assign or pay over to her, absolutely, a part or all of the principal of her share of said estate; any income from said half of said estate, not used for my said daughter nor paid over to her, shall be kept separated and invested for her benefit and shall not go in any way to increase the remaining one-half of said estate; at the death of my said daughter, all of said one-half of said residuary estate and accumulated income not distributed shall be paid to the lawful issue of said Thalia Lee Chambers, if she leave any to survive her, and if she leave no lawful issue then it shall be paid to my said wife, Anna M. Chambers.
e. — The income from the remaining one-half of said residuary estate is to be paid by said trustee at least semi-annually, to my said wife, Anna M. Chambers, during her natural life, and at her death the undistributed principal from which said income is derived, is to be paid as she may by her will direct, and if she leave no will to the persons who under the intestate laws of the State of Pennsylvania would be entitled to her estate, and in the same proportion as they would take under said intestate laws; neither said principal however nor income shall be liable to attachment in the hands of said trustees, for any debts, contracts or liabilities of my said wife, Anna M. Chambers, after my daughter becomes of full age, however, and should at any time thereafter said trustees, or the survivor of them, determine to pay over and distribute to my said daughter any share of the principal of my said estate as hereinbefore provided, then they shall at the same time likewise pay and distribute to my wife a like part of her share of my estate, so that the principal of said estate in the.hands of said trustees, or the survivor, shall always be held by them, one-half for my said daughter, and one-half for my said wife, and no distribution of said principal shall be made to one of the two, without the making of a like distribution to tije other. * ⅜ *

Anna M. Chambers is the widow of decedent. Thalia C. Taylor, referred to in decedent’s will as Thalia Lee Chambers, is the daughter of the decedent. She attained the age of 21 years in 1919.

For the taxable years before us petitioners rendered Federal income tax returns for the estate of Fred 1ST. Chambers on Form 1041, which disclosed net income amounting to $25,328.38 for 1927 and $22,170.48 for 1929. Such income was indicated in these returns as distributable in equal portions to Anna M. Chambers and Thalia C. Taylor, who included such alleged distributable amounts in their individual income tax returns for those years.

Included in the income reported by the estate for 1927 and 1929 as distributable to the beneficiaries were gains from the sale of stocks in domestic corporations and from the sale of a certain building formerly belonging to the Chambers Hardware Co., in the respective amounts of $21,173.66 and $15,491.10.

At the time of his death Fred N. Chambers was the owner of 694 shares out of a total of 1,000 shares of the issued capital stock of the Chambers Hardware Co., then insolvent. In 1919 the Chambers Hardware Co. was liquidated and the trustees acquired the building known as the Chambers Hardware Co. Building at a cost of $7,000. Upon sale of this building a profit was realized in the amount of $2,028 in the year 1929.

In his audit of the returns of petitioners for the trust estate (Form 1041) for the year 1927, the respondent accepted the amount of gains from the sale of stocks as set out above. For the year 1929 he determined the gain to be $15,500.09. There is no dispute as to the amounts as thus determined. He determined, however, that these gains were taxable to the trust estate and not to the beneficiaries.

The Commissioner considered that the profits from the sale of the corpus of the estate were not part of the income of the estate which was distributable, and that such gains were taxable to it, since they were gains accumulated to the corpus of the estate and became part of the corpus and were not income from the operation of the property of the estate.

The petitioners contend that the gains derived from the sale of stock and the building purchased in 1919 are not different from other income of the estate obtained as rents, dividends, etc., and are taxable to the beneficiaries as distributable income of the estate, whether distributed to the beneficiaries or not. They urge that all income received by the trust over and above the amount necessary to keep the estate intact must be distributed to the beneficiaries under the provisions of the will and the laws of the State of Pennsylvania. Our attention is called to the Pennsylvania statute, Act of 1853, which provides that no person shall by any deed, will or otherwise, settle or dispose of any -real or personal property so that the rents, issues, interest, or profits thereof shall be accumulated for any longer term than the life of the grantor, settlor, or testator and during the minority of the person, who, under the instrument directing such accumulation, would, if of full age, be entitled to the rents, issues, interest, or profits so directed to be accumulated, and in every case where a direction shall be otherwise, such direction shall be null and void, and such rents, issues, and profits shall go to the person who would be entitled thereto if such accumulation had not been directed. It is argued that under the provisions of the will construed in connection with this statute the trustees have no power to hold any income or profit derived from the trust estate, except such amounts as may be necessary to keep the principal “ intact ”, and all property coming into their hands in excess thereof is income distributable to the beneficiaries. We do not agree with this contention.

Petitioners urge that the value of the estate at the time of the death of the testator fixed by the Treasury Department for estate tax purposes is to be treated as the “ intact principal ”, and rely upon our decision in Anna M. Chambers, 17 B.T.A. 820. While that case involved the same trust estate as the one before us, it differs from this case in very material respects. In that case the question before us was whether the beneficiaries were entitled to receive the income of the trust estate undiminished by depreciation and depletion and by losses upon sales of securities and from fires. There, referring to the direction in the will “ to keep said estate together and intact as to principal except as hereinafter provided,” we said: “ The parties concerned have ¡interpreted this to mean that the capital is to be kept intact by reserving a sufficient amount out of income to provide for depreciation and depletion of capital assets of a wasting nature ”, and we gave effect to the interpretation placed upon the will by the parties in interest, and held that the distributable income of the trust estate is only the amount of income remaining after the deduction of the reserve for exhaustion, and after capital losses have been made good. The question of whether the profit realized on the sale of a capital asset is part of the principal or is income distributable to the life beneficiaries was not before us. In the Chambers case we said:

The plan of the revenue act is to tax annually to the beneficiary of any trust his distributable share of the income of the trust for such year and to tax to the trustee in his fiduciary capacity any income which is not distributable. The act thus presents, in the computation of taxable income the same problems which are presented to a court upon an accounting in determining whether items of income or expenditure are to be credited to or charged against the beneficiary or the remainderman. Ordinarily gains or losses from the sale of capital assets do not affect the computation, of the income of the beneficiary but are chargeable to the corpus of the fund. * * *

The reason in that case that the losses did affect the computation of the income of the beneficiary was the fact that they were made up from income and reduced the distributable income. This was due to the direction in the will to keep the principal intact.

The interpretation which petitioners now seek to give the will would preclude the addition to the principal of any capital gain whatsoever during the continuance of the trust. This we think is contrary to the intentions of the testator and to the laws of Pennsylvania. Nor does it appear that the parties in interest have adopted that construction, for there is no evidence that the trustees distributed all income and profits, including the capital gain in question, to the beneficiaries during the years before us.

In re Waterhouse’s Estate, 308 Pa. 423; 162 Atl. 295 (decided by the Supreme Court of Pennsylvania in 1932), involved the apportionment, between the life tenant and the remainderman of a trust estate, of the proceeds received from the sale of stock. In the opinion the court said:

Tbe value of a trust estate, where its income is paid to life tenants with remainder over, is determined as of the time the testator dies and is called intact value. It is so named because that value is to be kept intaet for re-maindermen in the various subsequent distributions of income that might impair it. * * * Intact value may be increased by stock purchases, contributed surplus or any other capital increase not attributable to earnings, Dickinson’s Estate, 285 Pa. 449, 453, 132 A. 352; Packer's Estate, (No. 1) 291 Pa. 194, 197, 139 A. 867; Jones v. Integrity Trust Co., 292 Pa. 149, 149 A. 862, ahd it is subject to capital losses. Dickinson’s Estate, supra; Packer’s Estate, supra.

The court held that, where stock is sold for a price greater than the intact value and the increase is due to the accumulation of income, the proceeds are apportionable, the trustees receiving as much as is necessary to preserve the intact value and “ only so much of the balance that represents income goes to the life tenant.”

But where the greater value is due to the stock’s earning power, good will, or its intrinsic, speculative, or enhanced market value, all the proceeds are part of the corpus and belong to the remainderman; the increase is capital gain. See Nirdlinger’s Estate, 290 Pa. 457, 462, and authorities cited on page 479, 139 A. 200, 56 L.R.A. 1303.
The presumption is that the proceeds from the sale of stock belong to the corpus of the trust, and the burden of proving that they do not rests on the person asserting a claim to them. McKeown’s Estate, 263 Pa. 78, 85, 106 A. 189; Nirdlinger’s Estate, supra.

Clearly, under the laws of Pennsylvania, capital gain from the sale of stock becomes a part of the corpus and is not distributable to the life tenant as income from the estate. Only where such gain is shown to represent income is it distributable to the life beneficiaries. Here there is no showing that any of the gain in question represents income. Petitioners argue in their brief that certain shares of the stock sold were purchased from accumulated income, but there is no evidence of this fact before us.

Admitting that all income from the trust estate was distributable to the beneficiaries, and taxable to them whether distributed or not, the corpus, or any part of it, was distributable only at the discretion of the trustees. The capital gain which became a part of the corpus of the trust is not income distributable under the will to the beneficiaries, and is not taxable to them. Cf. William H. Hotchkiss Estate, 16 B.T.A. 1334; Marion Shainwald Sevier, 14 B.T.A. 709. The petitioners have failed to show that any part of the gain here in question was from income or that it was actually distributed. They have, therefore, failed to overcome the respondent’s ' determination.

Reviewed by the Board.

Decision will be entered for the resfondent.

       Pennsylvania Statutes (1920), see. 18868 — Act of April 15, 1853, P.L. 503.


author: SteRnhagen : Steenhagen:

text:
    Edgar L. Marston, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edgar L. Marston, Trustee of The Jennie C. H. Marston Trust Estate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61961, 61960.
    Promulgated February 1, 1934.

      Ojiarles T. Gowenhoven, Jr., Esq., and H. Maurice Fricllund, Esq., for the petitioners.

      Byron M. Goon, Esq., and Vernon F. Weelüey, Esq., for the respondent.

      Docket No. 61961.

   OPINION.

SteRnhagen :

1. It is stipulated that petitioner paid Mrs. Chapin $3,000 each year “ out of the income of said trust,” but that he included it in the gross income shown on his individual tax return. This was plainly an error which he is now entitled to have corrected. The opposition to his claim seems to involve a misconception of the question as one of the petitioner’s right to a deduction for an amount which he in his individual capacity gave to Mrs. Chapin. Being, however, rather a question of his right to exclude from his own income an amount which he never received from the trust — the answer is clear — it should be excluded.

2. Being of opinion, from all the evidence, that there were no sales of the Moose Mountain and Cumberland shares by petitioner, we have omitted to include findings that sales, occurred. The motions which petitioner went through to simulate sales were in our opinion merely to promote a sham. The presence of the auctioneer and the broker, and the payment of their charges, added nothing to substantiate a sale. If there had been a genuine sale, it would have been just as effective if made directly by the petitioner individually to himself as trustee, and it was a waste of effort for him as an individual to tell himself as trustee to buy it at the auction and fix the price to be bid. So far from indicating a genuine sale, the devious method discloses artifice to give the appearance of substance.

Whether there has been a sale depends upon the juristic intent of the parties, and this is determinable by the trier of the facts from the evidence as to words, conduct, and other circumstances which manifest the intent. The Commissioner having officially determined that no bona fide sale took place, the petitioner must establish not only that there seemed to be a sale or that he had gone through the forms which people usually employ to carry out their intention to sell, but also that the forms and seeming were vitalized with the genuine intent to definitively sell. In judging this, our judicial duty does not require that we should recognize as true what our more common sense regards as specious. The history of the shares during petitioner’s ownership, of which he was fully aware, would normally restrain him from unloading them upon a trust of which he was the fiduciary; and there is a natural reluctance in attributing to him an intention to do so.

Were there still a lingering doubt as to the change of ownership and the realization of loss sustained, it would be dispelled by the incident of the Blair claim when the petitioner took the Moose Mountain shares and delivered them in satisfaction of his obligation. While this subsequent act is only a makeweight in the evidence, it corroborates the belief that a legally effective sale was never intended and never regarded as having occurred. The ambiguous promise by petitioner to the beneficiaries when Blair took the shares adds nothing to his argument but confusion.

We are of the opinion that both the alleged transactions between the petitioner individually and himself as trustee in Moose Mountain shares and Cumberland shares lacked legal reality, and the claimed losses were not sustained because the shares were not sold. However real was the diminution in their value, there was no realization of loss without a genuine sale.

Docket No. 61960.

Respondent determined a deficiency of $5,561.10 in petitioner’s income tax for 1929, in part by disallowing a loss on the alleged sale of stock by its trustee to himself as an individual.

FINDINGS OF FACT.

Petitioner is the trustee of an inter vivos trust created March 12, 1923, by Jennie C. H. Marston, who died prior to 1928. By the trust instrument she conveyed all her property to petitioner, who was her husband and a resident of New York, for the purpose of collecting the income and profits therefrom, deducting all expenses or charges connected with the management, and paying the balance to her for life, and on her death to pay the income to himself as life beneficiary after advancing from it sufficient funds to support her mother. On the trustee’s death, the corpus was to be divided among the settlor’s and trustee’s three children who were 44, 41, and 30 years of age in 1928. The mother was surviving in 1929.

In 1927 [as stipulated], the trustee acquired for the trust 1,800 shares of the common stock of Clinchfield Coal Corporation at a cost of $46,800. These shares were placed, with other securities of the trust, in its separate deposit box. On November 6, 1929, they were formally offered for sale at public auction and struck down for $5,400. After the deduction of selling costs, a check for $5,099 was deposited to the credit of the trust, and a sale was entered on its books in November 1929, to reflect a net loss of $41,701. At the auction the stock was bid in by a brokerage firm acting on behalf of petitioner individually. The brokers presented their check for $5,400 on November 6,1929, and the certificate was delivered to petitioner’s secretary, who deposited it in his personal safe-deposit box. The beneficiaries consented to and approved of the alleged sale.

At the time in 1925 [as testified by Marston], when the trust is alleged to have acquired these shares from petitioner individually, he took a loss in respect thereof on his individual return.

OPINION.

Steenhagen:

For reasons essentially similar to those just stated as to the alleged sales by Marston individually to Marston trustee, we are unable to find from the evidence that there was a sale by Marston trustee to Marston individually, and therefore affirm the respondent’s disallowance of the deduction for loss.

Reviewed by the Board.

Judgment in both 'proceedings will be entered under Rule 50.

McMahon concurs in the result.

'Smith and TRAMmell dissent.


author: Sea well : Trammell,

text:
    R. T. Buzard, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. T. Dusenbury, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42793, 43017.
    Promulgated February 1, 1934.

      James P. Quigley, Esq., for the petitioners.

      J. R. Johnston, Esq., and L. M. Berrien, Esq., for the respondent.
   OPINION.

Sea well :

The findings of fact and opinion herein of the Division were promulgated May 31, 1933, 28 B.T.A. 241. As the result of a motion filed by the petitioners, the decisions entered on June 3,1933, pursuant to the report of the Division, were corrected on July 12, 1933, so as to show that the transferee liability of the petitioners for unpaid income and excess profits taxes of the Navarro Lumber Co. for 1919 and 1920 was $31,199.72 in the case of petitioner Buzard, and $26,947.70 in the case of petitioner Dusenbury, plus, in each case, interest thereon at the rate, of 6 percent per annum from February 26, 1926.

On August 9, 1933, the petitioners filed a motion for review of the Division report and decisions by the Board. By orders entered on August 10, 1933, the Chairman of the Board directed that “ the orders of Division No. 4, entered July 12, 1933,” be reviewed by the Board.

The petitioners claim that the decisions of July 12,1933, are wrong in that they provide for cumulative liability in excess of the unpaid taxes and interest on the deficiencies. There is no merit to the first point. The liability of transferees for unpaid taxes of corporations is several. Phillips v. Commissioner, 283 U.S. 589.

Transferee liability includes interest on the value of the assets received, provided claim is made therefor by the respondent. Henry Cappellini, 16 B.T.A. 802; Wayne Body Corp., 24 B.T.A. 524; Continental Baking Co., 27 B.T.A. 884; C. P. Ford & Co., 28 B.T.A. 156. We think such a claim was made in these proceedings.

The statements attached to the deficiency notices contain the fol-Dwing paragraph:

Under the provisions of Section 280 of the Revenue Act of 1926, there is proposed for assessment against you the amount of $53,086.18 plus any accrued penalty and interest representing your liability as a transferee of the assets of the Navarro Lumber Company for outstanding tax assessed against said company for the years 1919 and 1920 as per statement.

The petitions filed by the transferees allege as error the proposal of the respondent to assess “ interest or penalties ” due to delinquency of the transferor. In his answers to the petitions the respondent alleged that the petitioners were liable for outstanding taxes of the transferor for 1919 and 1920, with interest as provided by law.

We think these facts establish a claim on the part of the respondent for such interest on the unpaid taxes as is allowed by law. The deficiencies determined against the transferor for 1919 and 1920 were assessed, respectively, in April and March 1928, when the Revenue Act of 1926 was in force. Section 283 (d) of that act makes interest a part of the tax.

But the petitioners contend that the stipulation provides for a maximum transferee liability, including interest, of $26,947.70 in the case of petitioner Dusenbury, and $31,199.72 in the case' of petitioner Buzard.

The income and excess profits tax liability of the transferor is stipulated to be $13,568.75 for 1919, and $17,630.97 for 1920, a total of $31,199.72. The amounts received by the petitioners in liquidation of the Navarro Lumber Co., and their liability as transferees on account thereof, is set forth in the stipulation in .the following words and figures:

That the Board may find and determine that E. T. Dusenbury, Petitioner,.on August 7,. 1922, received distributions in liquidation of the Navarro Lumber Company in the sum and of the value of $26,947.70, for which he is liable as a transferee of said the Navarro Lumber Company, under Section 280 of the Revenue Act of 1926, unless the Board should find and determine that the assessment of said liability against him is barred by the Statute of Limitations; that R. T. Buzard, Petitioner, on said August 7, 1922, received distributions in liquidation of the Navarro Lumber Company of an amount and value equal to and in excess of the sum of the aforesaid deficiencies with respect to the Navarro Lumber Company for the taxable year 1919 and 1920, in the respective amount of $13,568.75 and $17,630.97, making the sum of $31,199.72, for which he is liable as a transferee of said The Navarro Lumber Company under Section 280 of the Revenue Act of 1926, unless the assessment of said liability against him is barred by the Statute of Limitations.

There is nothing in this agreement of facts expressly limiting the liability of the petitioners to the amounts claimed by them, and the language used does not, as we understand it, infer as much. It goes no further than provide a basis for finding that the petitioners received specified amounts in liquidation of the Navarro Lumber Co. in order to establish their status as transferees. The amount of interest involved is considerable. Had the parties intended that the amounts received represented the maximum liability of the petitioners for taxes and interest, words clearly evidencing such intent would have been employed. We are unable to find that the parties agreed to limit the total liability of petitioner Dusenbury to $26,947.70, and petitioner Buzard to $31,199.72, as claimed.

The maximum amount assessable against transferees was first before us in Henry Cappellini, supra. We said there:

While the courts seem to hold divergent views as to when interest begins to run against stockholders who.are liable to creditors of a corporation, we are impressed with the decision in United, States v. Snook, 24 Fed. (2d) 844, as being a fair and equitable rule to be applied in transferee eases.' That decision, where the tax liability was greatly in excess of the amount received by the transferees in distribution, holds the transferees liable to the full-extent bf the amounts received by them with interest from “ the fair average date of receiving ” the sums distributed. Cf. McWilliams v. Excelsior Coal Co., 298 Fed. 844. That method of computation represents the maximum liability of the transferees and applies where the tax and interest imposed on the corporate transferor is greater than the amount received in distribution, plus interest from that date. Where the tax and interest thereon is less than the amount distributed to any one transferee, then the liability of such transferee would be limited to the amount of tax and interest thereon.
Accordingly, it is held in these cases that the amount the respondent may assess in each case is the amount of taxes owing by the Masontown Coal Co., plus interest at the rate of 6 per cent per annum from February 26, 1926; provided, however, that the liability of any one of the petitioners shall not exceed the amount received by him in distribution, plus interest at 6 per cent per annum (the legal rate in Pennsylvania) from the date of distribution. In other words, the maximum amount assessable against any one of the petitioners is the lower amount of either (1) the tax plus interest from February 26, 1926, to date of assessment, or (2) the amount received in distribution, plus interest from the date thereof, viz., August 15, 1920, to date of assessment. In these cases, the amount of tax being less than the amount received in distribution, and February 26, 1926, being a later date than that of the distribution, the amount assessable is $4,268.39, plus interest from February 26, 1926. An order will be entered accordingly in each of the proceedings.

This is still the rule before the Board. Edward H. Garcin, 22 B.T.A. 1027; Wayne Body Corp., supra; Frederick L. Watson, 25 B.T.A. 971.

In the Garcin and Watson cases the amounts received in 1920 by the petitioners as transferees were less than the amount of taxes found to be due from the transferors. In each proceeding we held the liability to be the amount received in liquidation, plus interest at the rate of 6 percent per annum (the prevailing legal rate in New York and Massachusetts) from the date, of distribution of the corporate assets.

The transferor was a California corporation and the petitioners are residents of San Francisco, California. In that state the legal rate of interest is 7 percent per annum. Act 3757, General Laws of California.

Petitioner Buzard having received at least $31,199.72, the amount of taxes owing by the transferor, in liquidation of the corporation, his transferee liability is, in accordance with the cases cited, that amount, plus interest at the rate of 6 percent per annum from February 26, 1926.

Petitioner Dusenbury received the sum of $26,947.70 on August 7, 1922, as a transferee of the corporation. The sum so received in distribution, plus interest thereon from the date of receipt to February 7, 1934, an estimated date of assessment against; the transferee, at the rate of 7 percent per annum, the legal rate of interest in California, amounts to $48,640.70. The unpaid taxes of $31,199.72 of the transferor, plus interest thereon at the rate of 6 percent per annum from February 26, 1926, to February 7, 1934, amounts to $46,078.13. The latter sum being less than the former one, the maximum liability of petitioner Dusenbury, following Henry Cappellini, supra, is the amount of the unpaid taxes, plus interest thereon at the rate of 6 percent per annum from February 26, 1926, to the date of assessment.

The order of the Division entered July 12, 1933, in Docket No. 42793, involving petitioner Buzard, is affirmed, and the Division order entered the same date in Docket No. 43017 will be modified so as to provide that the liability of petitioner Dusenbury as a transferee for unpaid income and excess profits taxes of the Navarro Lumber Co. for 1919 and 1920 is $31,199.72, plus interest thereon from February 26, 1926, to the date of assessment at the rate of 6 percent per annum.

Reviewed by the Board.

Sternhagen, Van Fossan, Murdock, and Matthews dissent.

Trammell,

dissenting: My objection to the opinion and decision in this case goes back to the opinion appearing in 28 B.T.A. 247 and not to the decision on the issue discussed in the foregoing opinion. In my opinion the entire .case was before the Board. The proceeding reported in 28 B.T.A. above referred to in my mind was properly before the Board when the Chairman referred the orders referred to in the above opinion to'the Board for consideration.

This case involves the question as to whether a corporation, dissolved as this one was and completely dead (see Crossman v. Vivienda Water Co., 89 Pac. 335; Van Landingham v. United Tuna Packers, 208 Pac. 977; Hogan v. Superior Court, 241 Pac. 587, and other cases decided by the Supreme Court of California), could file an appeal with the Board; that is, whether the prior proceeding which was reported in 10 B.T.A. 690 constitutes an appeal instituted by the Navarro Lumber Co. In my opinion the question as to whether the Board had jurisdiction in the case of the Navarro Lumber Co. is not conclusive. The notice of deficiency being addressed to the Navarro Lumber Co., that company being completely dead at that time, and the proceeding being-instituted by trustees not for the Navarro Lumber Co., but for the creditors and stockholders of that company, even if they had the effect of giving the Board jurisdiction to hear the proceeding, do not mean that the Board had jurisdiction of the Navarro Lumber Co. Conceding that the Board had jurisdiction of the parties before it, if the Navarro Lumber Co. was not before it (he Board did not have jurisdiction of that company, and if it did not have jurisdiction of the company the statute of limitations bars any proceeding against the transferees. The opinion' refers to the individuals as being trustees for the corporation. This is contrary to the statute and the decisions of California. They were trustees for creditors and stockholders and had no power whatever to act in the corporation’s name or for the corporation. Whether we had jurisdiction of a proceeding instituted by these individuals having authority to act for' creditors and stockholders has no relation to the question of our jurisdiction over the corporation. The transferor corporation itself was not before us, it being dead. It is admitted that the petitioners herein are transferees, the only real question being as to whether the statute of limitations has run against them.

A proceeding filed with the Board under the 1924 Act with respect to the Navarro Lumber Co. would not have the effect of extending the statute of limitations as to transferees of that corporation unless that corporation itself filed the appeal, or unless it was filed by persons authorized by law to act for it. If that corporation was never before the Board, notwithstanding the fact that we may have had jurisdiction to determine the question of the tax liability of those who were before us, we had no jurisdiction with respect to that company, and the running of the statute was not suspended while the proceeding was before the Board. While section 277 of the 1928 Act contains a provision that the statute will be suspended if a proceeding with respect to a deficiency is placed on the docket-of the Board until the decision of the Board becomes final, there was no such provision in either the 1924 or the 1926 Act.

I do not think that a corporation which is completely dead can be estopped (see Newport Co. v. Commissioner, 22 B.T.A. 833; affirmed 65 Fed. (2d) 925), and although certain individuals purporting to act for the corporation may have given us jurisdiction in so far as those persons who appeared before us were concerned, in my opinion, that fact can not preclude the defense that the statute of limitations has run against the corporation. And when the statute has run against a corporation, a transferor, section 280 provides a specific limitation as to when the statute runs against the transferee. Under this statute the period had expired before' any action was taken against these transferees. Under section 400 of the Civil Code of California, which governs in this case, the Navarro Lumber Co. was Completely dissolved by a decree of the court and the directors or managers of the corporation at the time of its dissolution were trustees for the creditors and stockholder,¡s and not trustees for the corporation. Therefore the persons who instituted the appeal when the Navarro Lumber Co. case was before the Board were not acting for the corporation and had no power to so act. All of the facts relating to this matter were fully disclosed in the proceedings before the Board. From the face of the petition and the power of attorney and other papers it was apparent that the Navarro Lumber Co. was completely dead. While the proceeding was filed in its name, that could not make it live. .

In the case of Kieckhefer v. United States, 4 Fed. Supp. 1013, the Court of Claims held that, in the case of a dissolved corporation which was completely dead, being without authority to execute a waiver in its own behalf, “ It necessarily follows that no agent could act for it in that regard.” In this case if the Navarro Lumber Co. could not act in its own behalf, no agent could act for it. See also Newport Co., supra.

The fact is that no one even pretended to give authority to institute the proceedings before this Board in the previous proceeding-under the 1924 Act. The trustees for the stockholders - and creditors gave Heberle the power of attorney to act before the Treasury. Under that authority he not only acted before the Treasury, but before this Board, setting out, however, a full and complete statement of his authority and the facts as to the dissolution of the corporation. But the individuals giving such authority had no such power to act themselves in behalf of the corporation. This appears of record. The fact is there was no corporation. Its existence was not continued after the decree. There was no one with authority to bring an action in the name of the corporation or to defend in its name. Those individuals could act only for the creditors or the stockho'ders.

For the foregoing reasons I think the Board was in error i i the case reported in 28 B.T.A. 247, which is impliedly affirmed in the foregoing opinion.


author: ARundell:

text:
    Briskey Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60899.
    Promulgated February 2, 1934.

      Charles D. Kayes Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

ARundell:

From the operations of petitioner’s branch house in India a profit of $55,699.52 was realized in 1929. Upon this profit a tax of $8,591.60 was asserted by the Government of India, and by reason of such tax petitioner claims a credit of $6,126.23 against its United States income tax. There is no dispute as to the figures. The controversy is whether profit from the operation of the branch in India was income from sources without the United States.

The statutory provision here involved is -section 131 of the Revenue Act of 1928, which in subsection (a) allows to a domestic corporation a credit against its United States income tax for the amount of “ income, war-profits, and excess-profits taxes paid or accrued * * * to any foreign country ”, but the amount of such credit is limited under subsection (b) to the same proportion of the United States tax which the net income “ from sources without the United States ” bears to the taxpayer’s entire net income. There is no question as to the character of the tax imposed by the Government of India. This was levied under the same statute as the tax in Burk Brothers, 20 B.T.A. 657, in which case we construed the tax to be an income tax within the meaning of the credit provisions of the Revenue Act of 1926.

Whether the profit from the skins shipped by petitioner’s branch was from sources without the United States depends upon whether the sales were made in India, as contended by petitioner. Counsel for respondent argues that the sales were made in the United States by petitioner’s home office and that the India branch was merely a purchasing agent.

An examination of the operating methods of petitioner’s branch leads us to the conclusion that the sales of skins were consummated in India- The transactions were initiated by orders given by purchasers to the home office.

It is stipulated that the India branch purchased skins to fill the orders cabled by the home office. As the petitioner did not have on hand the skins to fill the orders, the skins being acquired by the branch only after receipt of orders by the home office and transmittal to India, it follows that the acceptance of an order by the home office did not effect a sale. It was, at the most, a contract to deliver goods. Low v. Andrews, 15 Fed. Cas. No. 8559. The earliest moment that there could be a sale under such circumstances was when the goods were acquired in India and appropriated to the contract. Sales, 55 C.J. § 28. It appears from correspondence in evidence that it was the practice of the India office to ship the skins in casks, each cask being marked in a way to be identifiable by the purchaser. Upon shipment the India office notified the home office by cable giving the name of the customer and the value of the shipment. The purpose of this was to enable the purchaser to cover the shipment by insurance and also advise it of the amount being drawn by the India office against the purchaser’s letter of credit. In our opinion the sales were effected in India. It was there that the goods first came into possession of petitioner, through its branch; there that the goods were appropriated to the contract; there that the price to the purchaser was fixed. The final acts consummating the sales were performed in India, and in this respect there is a close analogy to the case of Compania General, etc. v. Collector, 279 U.S. 306. In that case negotiations for the sale of goods produced in the Philippine' Islands were carried on in the United States and goods were shipped to purchasers in the United States. It was stipulated that the goods were “ sold ” in the United States, but the Supreme Court refused to accept that as decisive of the question presented, in view of the further stipulation that the sales were “ subject to confirmation and absolute control as to price and other terms and conditions by the plaintiff’s Philippine branch.” While the Supreme Court did not explicitly pass on the question of where the sales were made, in view of the ambiguity of the stipulation and the failure to disclose full details of the transactions, it affirmed the lower court, which held the sales were made in the Philippine Islands. In its opinion the Supreme Court says that if “ the confirmation was,, in each case, given by the Philippine branch direct to the buyer, or was otherwise the final act consummating the sales within the Philippine Islands ” then “ the final acts of petitioner making effective the sales, which were the source of profit, took place in the Philippine Islands as an incident to and part of its business conducted there.” The opinion continues:

If, in fact, the sales were thus made in the Philippine Islands, we think it unimportant whether the merchandise sold was exported before or after its sale * * ⅜. For, in such a case, the entire transaction resulting in a profit, with the exception of negotiations in the United States preceding the sale, would have taken place in the Philippine Islands.

In the case before us, as heretofore pointed out, at the time of the negotiations in the United States the goods were not in possession of petitioner and a completed sale could not be effected, and the final acts consummating the sales were performed in India.

The present case is unlike that of Burk Brothers, supra, wherein we found that the only part of the business transacted by the taxpayer in India “ was to buy its raw material there and ship it into the United States and then convert it into the finished product and sell the manufactured products here.” None of the skins shipped by the India branch were for its home office. Such skins as were shipped direct to the home office were for the account of others and the home office received therefrom only a commission. This case is also distinguishable from Richard L. Birkin, 5 B.T.A. 402; Yokohama Ki-Ito Kwaisha, Ltd., 5 B.T.A. 1248; and Tootal Broadhurst Lee Co., Ltd., 9 B.T.A. 321, in all of which there were actual sales in the United States from which the income in question was derived.

It is our opinion, and we so hold, that the sales of skins by petitioner’s branch were consummated in India; hence the income taxed by India was from sources without the United States and petitioner is entitled to the credit claimed.

Reviewed by the Board.

Decision will he entered} for the petitioner.

Smith, Murdock, and McMahon dissent.


author: MaRqtjette:

text:
    The Evans Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43044.
    Promulgated February 2, 1934.

      Briggs Simpich, Esq., for the petitioner.

      James E. Polk, Esq., for the respondent.
   OPINION.

MaRqtjette:

Tbe first issue presented for decision is whether the petitioner is entitled to have depreciation on the patents and buildings which it acquired from E. S. Evans <& Co. computed on cost to it, or on the same basis as when owned by the transferor. It is entitled to use the basis of cost to it (section 204 (a) and (c) of the Revenue Acts of 1924 and 1926) unless section 204 (a) (7) of these acts applies. Both parties concede that the transfers and transactions between E. S. Evans & Co., The Corporation, and the petitioner constituted a reorganization within the meaning of section 203 (h) of these revenue acts. It is clear that the petitioner acquired the property of E. S. Evans & Co. after December 31, 1917, and that it acquired the property in connection with a reorganization. Piedmont Financial Co., 26 B.T.A. 1221.

The question then is whether E. S. Evans remained in control of the petitioner immediately after the transfer of the property from E. S. Evans & Co. to it. It is not essential that Evans should retain control for any length of time. It is sufficient that he was momentarily in control. Federal Grain Corp., 18 B.T.A.. 242. As shown by our findings, every act involved in reorganization had been completed before 11 a.m. on December 31, 1923. All the transfers had then been made. Evans owned all the stock of The Corporation, which owned all the stock of the petitioner, which, in turn, had already acquired the property of E. S. Evans & Co.

Up to this point neither E. W. Bassick nor the Bassick-Alemite Corporation had any contractual relations with any one of the three corporations. Neither was in any way a party to the reorganization or concerned therewith. The only contract was for the purchase of stock which belonged to Evans. So far as the record discloses Bas-sick was concerned only with the purchase of the 51 percent interest in the business. Evans would have been unable to complete his contract with Bassick if he had not retained either ownership or control of the stock which he had contracted to sell. After reorganization was complete, Evans was able to deliver under his personal contract because, and only because, he had, through his ownership of The Corporation, control of the stock of the petitioner, which owned the business which was, in fact, the subject matter of the sale.

In our opinion immediately after the transfer of the property of E. S. Evans & Co. to petitioner, E. S. Evans, who owned all the stock of the transferor, was in control of the petitioner, and the determination of the respondent in this respect is approved. (Schmieg, Hungate & Kotzian, Inc., 27 B.T.A. 337.) West Texas Refining & Development Co., 25 B.T.A. 1254, on which, the petitioner relies, is not in point. There the corporations involved were parties to the reorganization.

We have found that the factory buildings transferred by E. S. Evans & Co. resulted in the crediting to his account of the sum of $51,436, thereby reducing his indebtedness to the company by that amount, and we have found that these buildings had a fair replacement value of the same amount. Under these facts we are of the opinion that the factory buildings cost the company $51,436, and that the petitioner is entitled to depreciation on the buildings at that cost. A question is raised as to the cost of patents transferred by E. S. Evans to E. S. Evans & Co. It is evident from the testimony that by far the larger part of the value we have found to adhere to the patents and licenses is to be attributed to the contract between the Studebaker Corporation and the Copony Auto Loading Co. on the one hand, and E. S. Evans <⅞ Co. on the other. This contract cost the company nothing. Evans himself testified that the patents which he transferred to E. S. Evans & Co. just prior to the reorganization were minor improvements on the basic patents covered by the contract. Under these circumstances it is impossible for us to find what part, if any, of the indebtedness of Evans which was released to him had any relation to the patents transferred by him to the company. It is evident that the credits made to Evans’ account with respect to the patents were mere bookkeeping entries which had no relation whatever to the value or cost of the patents. In the absence of any evidence as to the cost of such patents we are unable to determine a proper basis for depreciation.

Certain adjustments to income have been stipulated between counsel for the respective parties and these adjustments will be taken into consideration on final settlement.

Reviewed by the Board.

Judgment will be entered under Bule 50.