author: Arnold:

text:
    Briggs-Killian Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92562.
    Promulgated November 14, 1939.

      Robert L. B onfield, Esq., aud Ira B. Taylor, Esq., for the petitioner.

      I. M. Tullar, Esq., for the respondent.
   OPINION.

Arnold:

Section 45 of the Bevenue Act of 1936, set forth in the margin, authorizes the respondent to distribute, apportion, or allocate gross income between or among organizations, trades, or businesses that are owned or controlled directly or indirectly by the same interests, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect income. Invoking the authority conferred by this section, the respondent has determined that it is necessary to allocate the profits resulting from completion of the Nueces County paving project to this petitioner. The applicability of the section is not only challenged by petitioner but also its constitutionality if applied to the instant facts.

The legislative purpose of section 45 was to prevent the avoidance of taxes or the distortion of income by the shifting of profits from one business to another. Asiatic Petroleum Co. v. Commissioner, 79 Fed. (2d) 234, 237, affirming 31 B. T. A. 1152; certiorari denied, 296 U. S. 645. To accomplish this purpose the Congress vested broad discretionary powers in the respondent. Where, as here, the respondent has exercised his discretion, the burden is placed upon the petitioner of showing that respondent’s determination is arbitrary and that he has abused the authority vested in him. Welworth Realty Co., 40 B. T. A. 97, 100; Connery Coal & Investment Co. v. Commissioner, 84 Fed. (2d) 485. Nowland Realty Co. v. Commissioner, 47 Fed. (2d) 1018.

The petitioner has attempted to meet its burden by showing that section 45 has no application to the present circumstances. The contract between M. B. Killian and Heldenfels Brothers was produced for the purpose of showing that it was a private agreement between the contracting parties. No portion of this agreement indicates that Killian was acting for any one other than himself. Hel-denfels Brothers was a separate organization connected in no manner with petitioner or any other Briggs company affiliate. Killian and R. W. Briggs testified unequivocably that it was an individual undertaking, and no facts or circumstances were developed on cross-examination, or otherwise, which refuted or weakened their statements.

The respondent relies upon Asiatic Petroleum Co., supra, and upon the fact that profits were divided by Killian and Briggs upon the same basis as their stock ownership in petitioner; that the books and records of the paving job were kept by the same party that kept the books and records of other Briggs companies; that petitioners’ machinery and equipment and its mechanic were used in completing the contract, and that Killian, individually, was financially unable to perform this contract. These factors are all evidentiary and must be weighed in determining the issue, but they are insufficient, when considered with the other facts of record, to justify a conclusion that profits individually earned should be allocated to and taxed as the income of a corporation not a party to the undertaking. To so hold would, in our opinion, be an unwarranted extension of section 45 which would distort rather than clearly reflect income. The cited case is not controlling because it involved an entirely different factual situation.

According to respondent the fact that R. W. Briggs, individually, owns a majority of the stock in a number of companies creates a situation where two or more organizations, trades, or businesses are owned or controlled directly or indirectly by the same interest. If, says respondent, section 45 permits a “distribution, apportionment, or allocation” of income within a group of related or controlled corporations, in order to arrive at the true tax liability of a corporation, wherein does the statute prevent him from making a distribution, apportionment, or allocation of income to a corporation within that same-group when that corporation attempts to shift the profit outside a group in order to avoid its true tax liability ?

The answer to this question is that there is no business relationship between the single individual contract performed here and the continuing business enterprise of this petitioner. If the individual were continually engaged in the same line of endeavor as petitioner, used the latters’ assets, its employees, its office force, etc., it might be necessary, that, in order to clearly reflect income, the accounts of the two businesses, individual and corporate, should be consolidated. But there was no confusion of accounts here which required a distribution, apportionment, or allocation in order to clearly reflect income. Respondent makes no effort to justify his determination upon the ground of confusion in the accounts or inability to determine income. In fact, the opposite is true; the amount of profit was determined without apparent difficulty from the books and records. Petitioner received none of the profits and we seriously doubt that if losses had resulted respondent would have made any allocation of such losses so as to permit a deduction thereof by petitioner. Ellison v. Commissioner, 76 Fed. (2d) 509; Remco S. S. Co. v. Commissioner, 82 Fed. (2d) 988.

We are satisfied that respondent’s determination, if sustained, would project section 45 into a tax field that was not contemplated by Congress when that section was enacted. The purpose of the section was to permit respondent to act where the necessity existed, and where, without some affirmative action on his part, taxes might be evaded, or income would not be clearly reflected. Here, there was no attempt to evade taxes, and, since petitioner’s books and accounts clearly reflect its income, there was no necessity for respondent to invoke section 45. His action in that regard is, therefore, disapproved.

Decision will be entered wnder Rule 50.

       SEC. 45. ALLOCATION OF INCOME' AND DEDUCTIONS.
      In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the united States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.


source: Caselaw Access Project

author: Hum:

license: Public Domain

text:
    Sam J. Reckford, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90607.
    Promulgated November 14, 1939.

      Walter J. Fried, Esq., for the petitioner.

      Frtmlc M. Thompson, Jr., Esq., for the respondent.
   OPINION.

Hum:

During the taxable year 1932 petitioner admittedly sustained a loss of $16,194 from the sale of shares of stock of the Texas Gulf & Sulphur Co. which had been held by him for more than two years. The question presented is whether or not such loss was a capital loss; that is, a loss resulting from the sale of a capital asset. If the stock was not a capital asset, as defined in section 101 of the Revenue Act of 1932, the loss is subject to the limitations of section 23 (r) (1), and is allowable only to the extent of the gains from similar sales or exchanges. If the stock was a capital asset, the amount of the loss is allowable in full as a deduction from gross income.

Since it is conceded that petitioner had held the shares of stock in controversy for more than two years, the question of whether or not such shares constituted a capital asset within the meaning of the statute depends upon whether or not they were held by him primarily for sale in the course of his trade or business; and this raises for decision the question of whether or not petitioner’s stock market activities in 1932 constituted a trade or business.

Under the facts set out above, respondent contends that petitioner was engaged in carrying on such a trade or business during the taxable year, while petitioner, although admitting that he was a market trader in prior years, contends that in the taxable year his trading activities had been reduced to such an extent as to take him out of that classification.

No hard and fast rule of general application can be laid down as to just what constitutes a trade or business. Each case must stand on its own facts. But we can not agree, as petitioner argues, that the extent of the market activities of a taxpayer in a particular year are necessarily determinative of his classification as a trader or otherwise. The extent of the market operations' may be an important factor in determining whether or not the taxpayer is merely a passive investor, but beyond that point the extent of such activities tends only to define the difference between a large and a small trade or business. In determining whether a trade or business was being carried on, a factor of more decisive importance than the volume of transactions lies in whether or not the taxpayer’s market activities consisted of dealing in securities for speculative purposes, or for investment purposes.

Thus the court in Kales v. Commissioner, 101 Fed. (2d) 35, reversing 34 B. T. A. 1046, held that where the taxpayer made all decisions affecting the sale or purchase of securities and employed a bookkeeper with whom she held conferences three or four times a week, such activities were sufficient to take her out of the class of a passive investor; that she was carrying on a trade or business.

Likewise, in Miller v. Commissioner, 102 Fed. (2d) 476, it was held that a taxpayer who does no more than is usually done by a passive investor who gives reasonable attention to preserving his investments and changing them from time to time, so as to obtain a fair income therefrom, is not engaged in carrying on a trade or business.

But it has also been held that the management of investments may constitute a trade or business, so that expense incurred in that connection is deductible as business expense. Austin D. Barney et al., Executors, 36 B. T. A. 446.

Petitioner concedes that he was a trader in securities in years prior to the taxable year 1932. In our opinion the evidence is not sufficient to take him out of such category during the taxable year. The difference between petitioner’s market activities in the taxable year and the prior years is one of degree only. During the year 1932 he had 130 market transactions, consisting of 55 purchases and 75 sales; they involved 18,250 shares of stock, having a total value of slightly less than $400,000. Petitioner was not a mere passive investor in respect of such transactions. He was not investing his surplus funds; he was engaged in speculative operations on the market, buying and selling securities in the hope of realizing gain. Questioned on this point, and particularly in reference to the shares of stock of the Texas Gulf & Sulphur Co., the sale of which- gave rise to the loss in controversy, petitioner testified:

Q. Mr. Reekford, what was your main idea in trading in securities; was it for investment or was it for profit on selling, buying?
A. Well, * * * I thought I was going to he able to make a profit; over eighty-one times the past years I was able to do so. * * *
Q. There was no other stock in ’32 than Texas stock which you had held for as long a period as two years?
A. There was no other stock in my speculative account.
Q. What other stock did you have * * * that length of time?
A. The stocks which belonged to me outright, and in my box, but not speculative.

In support of his contention, petitioner cites our decisions in Clinton Gilbert, Jr., Executor, 20 B. T. A. 765; Francis M. Weld, 31 B. T. A. 600; Edward E. Trost, 34 B. T. A. 24; and DeWitt Page, 34 B. T. A. 590. These cases are distinguishable on the facts, and are not controlling here, for the reason that in each it was found that the securities involved had been purchased and held for investment and not primarily for sale in the course of the taxpayer’s trade or business. In the Weld case, we said:

We are of the opinion that a professional naan, such as a lawyer or doctor, who invests his surplus income in the purchase of stocks or other property with an idea of sale at a future date at a profit is not ordinarily to be regarded as holding such shares primarily for sale in the course of his trade or business.

In the Page case, we stated:

Although the petitioner had large holdings of shares of stock in many corporations, the evidence all indicates that he was not, so far as the year 1932 is concerned, an active trader in the market. He did no trading on margin in 1932. * * * He had a large estate which it was necessary for him to keep invested for income purposes. The investment of his money was not the carrying on of a trade or business within the contemplation of the statute. Cf. Rogers v. United, States, 41 Fed. (2d) 65; Taylor v. Commissioner, 76 Fed. (2d) 904.

In the instant proceeding, respondent has determined in effect that petitioner during the taxable year was engaged in carrying on the trade or business of buying and selling securities on the market for profit, and that the shares of stock in controversy were held primarily for sale in the course of such trade or business. The evidence presented is not sufficient, in our opinion, to justify us , in disturbing respondent’s determination.

Decision will be entered, for the respondent.

       SBC. 23. DBDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:

      (r) Limitation on Stock Losses.—
      (1) Losses from sales or exchanges of stocks and bonds » * * which are not capital assets (as defined in section 101), shall be allowed only to the extent of the gains from such sales or exchanges * * *
      SEC. 101. CAPITAL NET GAINS AND LOSSES.'

      (c) Definitions. — For the purposes of this title—

      (8) “Capital Assets” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of a taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business * * *


author: Smith:

text:
    Orrin G. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92489.
    Promulgated November 14, 1939.

      Lawrence E. Green, Esq., for the petitioner.

      James T. Haslam, Esq., for the respondent.
   OPINION.

Smith:

This proceeding is for the redetermination of a gift tax deficiency of $2,543.54 for 1935. In determining the deficiency the respondent has included in petitioner’s gift tax return for 1935 the “interpolated terminal reserve value” of certain insurance policies on petitioner’s life which in a prior year the petitioner had conveyed to a trust, reserving the power during, his lifetime to alter, amend, or revoke the trust. This power was relinquished by the petitioner on December 31, 1935, giving rise to respondent’s determination of the gift tax liability in respect of the policies.

By an amendment to his answer filed in this proceeding the respondent alleges that there should be included in petitioner’s gift tax return for 1935 a further amount of $257,594.75 representing the value on December 31, 1935, of certain securities which the petitioner conveyed in trust on December 29, 1919, with a power reserved in the trustees to alter or amend the trust, subject, however, to petitioner’s right of veto as to any change in the beneficial interests, which right the petitioner relinquished on December 31, 1935. Respondent claims an increase in the deficiency resulting therefrom.

Further issues raised by the pleadings have been settled by the stipulation that petitioner is entitled to the specific exemption of $50,000 for the year 1935, instead of $40,000 allowed in the deficiency notice, and that petitioner is entitled to an exclusion for the year 1935 of $5,000 instead of $3,452.53 allowed in the deficiency notice with respect to the trust dated December 29, 1919, and a further exclusion of $5,000 with respect to the trust created January 14, 1929.

On December 29, 1919, petitioner conveyed to his wife, Cecile Thomson Wood, and two other persons, as trustees, certain securities, the income from which was to be paid to Cecile Thomson Wood for life and upon her death the remainder of the trust property was to be paid to or held in further trust for the benefit of petitioner’s childreii or their issue. The trust instrument provided in material part as follows:

Second: * * ' * Said trustees may in their'unrestricted discretion, anything to the contrary herein notwithstanding, at any time or from time to time pay over any part or parts of the principal of said trust fund to or for the benefit of said Cecile Thomson Wood during her lifetime, upon her request in writing, for any purpose which the trustees in the exercise of their unrestricted discretion approve, * * *
Fourth : This instrument may be amended at any time or from time to time by the concurrent action of all the trustees for the time being and of all persons at the time of full age and legal capacity to whom or for whose education, maintenance and support all or any part of the net income is payable, except that no amendment shall he made inconsistent with the provisions of Article First unless during the lifetime of said Orrin G. Wood and with his concurrence in •writing. * * *

Prior to 1935 there were several amendments to the trust instrument by the trustees which are not here material. By an amendment dated February 26, 1935, petitioner was named a trustee to fill a vacancy caused by the retirement of one of the original trustees.

By written instrument executed December 31, 1935, by the trustees, Cecile Thomson Wood, Orrin G. Wood (the petitioner), and Keith McLeod, and by Cecile Thomson Wood as beneficiary, the trust instrument was further amended as follows:

B. We hereby strike out the provisions of Article Fourth of the original trust instrument and insert in lieu thereof the following: ,
This instrument may be amended at any time or from time to time by the concurrent action of all the trustees for the time being and all persons at the time of full age and legal capacity to whom or for whose education, maintenance and support all or any part of the net income is payable except that no amendment shall be made which shall vest in, revest in or cause to be paid to Obbin G. Wood any part of the corpus or income of the trust fund, or to give to Obedst G. Wood any benefit of the trust fund, direct or indirect. Any amendment shall be by instrument in writing and under seal, which shall be recorded wherever this instrument may by law be required to be recorded. No such amendment shall have effect as against any bona fide purchaser for value relying upon this instrument who has no notice of such amendment.
(2) Okrin G. Wood hereby releases and relinquishes any power given to’him by Article Fourth of the original declaration of trust to prevent any amendment being made.

On the same date, December 31,1935, the State' Street Trust Co. of Boston, Massachusetts, was named as trustee to succeed the petitioner, who resigned.

The securities held by the trustees on December 31, 1935, under the trust instrument of December 29, 1919, as amended, had a value on that date of $230,679.13, inclusive of accrued interest in the amount of $1,036.68 and exclusive of certain shares of stock of the Brown Paper Mills, Inc., which the petitioner transferred to the trust on February 6, 1935. Petitioner reported these shares in his gift tax return for 1935 at a value of $1,164 but the respondent valued them in his deficiency notice at $3,880. The value of this stock at the date of the gift is at issue in this proceeding.

Respondent’s contentions are that the above’ amendment to the trust instrument made December 31, 1935, constituted a completed gift in that it was a relinquishment by the petitioner of his sole power to prevent further amendments to the trust and in that it expressly prohibited any future amendment which might benefit the petitioner.

The gift tax imposed by section 501 of the Revenue Act of 1932 is upon transfers by gift during the calendar year. There can be no doubt that the transfer of the securities by the petitioner to the trustees on December 29, 1919, was a valid transfer and constituted a completed gift unless the power reserved by the petitioner prevented the vesting of complete beneficial title in the donees. The power reserved by the petitioner was the power, during his lifetime, to veto any change that the trustees might make in the beneficial interests provided for in the original trust instrument. The petitioner himself had no power whatever to alter, amend, or revoke the trust. These powers were-lodged in the trustees. Petitioner did serve as one of the three trustees for a short period in 1935 and during that period shared with the other two trustees the powers to amend the trust instrument, but he had no sole power at any time to alter, change, or revoke the trust. Moreover, under the provision of article fourth above, the trust could not be amended at any time except with the consent of Cecile Thomson Wood, who was not only a trustee, but was also a beneficiary to whom all of the net income of the trust was payable during her lifetime. As to the petitioner, the securities passed out of his ownership and beyond his control in 1919 when they were transferred to. the trustees. Petitioner’s reserved power to veto any change made by the trustees in the beneficial interests of the trust was not the equivalent of a power in the petitioner himself to change or alter the trust.

The respondent argues that the interest of Cecile Thomson Wood as a life beneficiary of the trust was not adverse to the interest of the petitioner in the corpus of the trust. This contention, we think, is unsound. The trustees had it within their power, upon the request in writing of Cecile Thomson Wood, to have distributed to her the principal of the trust. Furthermore, an interest in the income of a trust is, perforce, an interest in the corpus of a trust from whence flows the income. Irwin v. Gavit, 268 U. S. 161; Jane B. Shwerick, 37 B. T. A. 454; Sophia P. O. Morton, 38 B. T. A. 419; Paul W. Litchfield, 39 B. T. A. 1017. In Reinecke v. Northern Trust Co., 278 U. S. 339, the Court said:

* * * Since the power to revoke or alter was dependent on the consent of the one entitled to the beneficial, and consequently adverse, interest, the trust, for all practical purposes, had passed as completely from any control by decedent which might inure to his own benefit as if the gift had been absolute.

We think that the gift of the securities here was complete with their transfer by the petitioner to the trustees on December 29, 1919. In any event, we do not think that there was any completed transfer of the trust property by gift in 1935 merely by reason of petitioner’s relinquishment of his right during his lifetime to veto any change made by the trustees in the beneficial interests of the trust.

On February 6, 1935, petitioner transferred to the trust created on December 29, 1919, 388 shares of the common stock of the Brown Paper Mills, Inc. He reported a gift of those shares in his gift, tax return for 1935 at a value of $3 per share, or a total value of $1,164. The respondent has determined that the value of this stock was $10 per share, or $3,880 for the 388 shares.

The Brown Paper Mills, Inc., is engaged in manufacturing various types of craft paper at Monroe, Louisiana. Its stock is not listed and is held principally by the Brown family. The common stock has no par value. During 1934 and 1935 the stock was quoted in the Standard Stock Service as having a “bid” price of from $2.50 to $3 per share and an “offering” price of from $4 to $5 per share. The corporation’s net earnings in 1934, after payment of taxes, interest, and dividends on preferred stock, amounted to approximately $5.80 per share of common stock. Such earnings for 1933 amounted to about 50 cents per share of common stock while for 1932, 1931, and 1930 there were deficits of between $2 and $4 per share.

On the evidence before us we determine that the value of the common stock of the Brown Paper Mills, Inc., on February 6, 1935, was $5 per share.

By a trust indenture dated January 14, 1929, the petitioner transferred to his wife, Cecile Thomson Wood, Hermann F. Clark, and Keith McLeod, as trustees, all of his rights and interests, except the right to disability payments, in 18 policies of insurance on his life. During petitioner’s life the trustees were to pay the income from such trust properties to petitioner’s wife, or, in their discretion, add a part of all of such income to the corpus. After petitioner’s death the trust fund was to be divided into two parts, one of which was to be held for the benefit of petitioner’s wife for life, with remainder over to or for the benefit of petitioner’s surviving children or their issue. The other part, or both parts if petitioner’s wife should predecease him, was to be distributed to or held for the benefit of petitioner’s surviving children or their issue. By article seventh of the trust instrument petitioner reserved to himself during his lifetime the right:

D. To change and alter any or all of the trusts herein set forth and declare new trusts of the property in any way or manner. No exercise of this power shall exhaust it. It may, however, he released, extinguished, or restricted by a like instrument so signed and delivered by me.

By article eighth a similar power to change or alter the trust, after petitioner’s death, was vested in a committee of five consisting of the three named trustees and two other persons, or their successors. The power was exercisable by any three of the committee of five.

On December 31,1935, the petitioner executed a written instrument by which he relinquished the power reserved unto himself, during his lifetime, to change or alter the trust as set forth in article seventh and conferred such powers on the committee of five named in article eighth.

The petitioner did not in 1935 or any prior year report any gift in respect of. the transfer of his interests in the insurance policies held by the trustees under the trust instrument of January 14, 1929. In determining the deficiency herein the respondent has included such policies in petitioner’s gift tax return for 1935 at a valuation of $112,907.41, representing the “interpolated terminal reserve value” at December 31, 1935.

It is stipulated that the aggregate cash surrender value of the policies in question at December 31, 1935, was $111,088.80.

Petitioner contends, first, that he is not liable for any gift tax by reason of the relinquishment in 1935 of his power to change or alter the beneficial interests in the trust created on January 14, 1929, because after such relinquishment the power to change or alter continued in the committee of five and could be exercised by any three of them without the concurrence of Cecile Thomson Wood, the only one of the committee who had any “adverse” interest in the trust property.

Petitioner concedes in his brief, however, that under the decisions of Hesslein v. Hoey (C. C. A., 2d Cir.), 91 Fed. (2d) 954; certiorari denied, 302 U. S. 756; Sanford v. Commissioner (C. C. A., 3d Cir.), 103 Fed. (2d) 81; (certiorari granted, May 15,1939); and Harriet W. Rosenau, 37 B. T. A. 468, “it seems as if the action taken on December 31, 1935, with reference to the trust under Indenture dated January 14, 1929, constitutes a taxable gift.”

In Hesslein v. Hoey, supra, the court said:

* * * We are to determine whether Congress has indicated its legislative intention to impose a gift tax upon a transfer in trust when the settlor divests himself of all beneficial interest in the property transferred hut reserves the power to alter the disposition of the property in any way he may from time to time see fit, save only that the alteration must not revest any interest in himself or his ■ estate. This restriction prevents the power reserved from being as absolute as that considered in Burnet v. Guggenheim, supra, but the power is nevertheless broad enough to enable the donor, subject only to the exception stated, to make a complete revision of all he has done. Such a reservation of power, if it is cut off by the settlor’s death, requires that the corpus of the trust be subjected to an estate tax. Porter v. Commissioner, 288 U. S. 436, at page 443, 53 S. Ct. 451, 453, 77 L. Ed. 880 where the court said that, so far as concerns the estate tax, “there is no difference in principle between a transfer subject to such changes and one that is revocable.”
We think this is equally true so far as concerns the gift tax. When the donor reserves power to change the beneficiaries at will, whether the reservation be phrased as a power to revoke or as a power to alter in any manner not beneficial to the donor or his estate, nothing has been done to give assurance that any part of the principal will ever be received by the named donees. * *■ *

Upon authority of the cases cited we hold that petitioner’s relinquishment of his right to change or alter the beneficial interest in the trust properties on December 31, 1935, constituted a gift of the value of such properties on that date.

Petitioner further contends, however, that in any event the value of the insurance policies held by the trustees at December 31, 1935, was not their “interpolated terminal reserve value” of $112,907.41 as determined by the respondent, but was the cash surrender value of the policies which was $111,088.80.

It is not explained just what is meant by the term “interpolated terminal reserve value” or what method the respondent used in his valuation. However, the argument made by the respondent on this point in his brief is that “the value of life insurance policies is to be determined by the cost to purchase a similar contract.”

In Ernest A. Cronin, 37 B. T. A. 914, we accepted the cash surrender value of life insurance policies as representing the best evidence of their fair market value, rejecting the Commissioner’s valuation based on the cost of a new, like policy. The Cronin case was followed in Mary H. Haines, 37 B. T. A. 1013; affd., Commissioner v. Haines (C. C. A., 3d Cir.), 104 Fed. (2d) 854; and Elizabeth S. Kirk et al., Executors, 39 B. T. A. 902.

In Commissioner v. Haines, supra, the court pointed out that at the time the gift of the policies was made in 1934 the Commissioner’s regulations then in force (article 2 (5) of Kegulations 79, 1932, 1934, and 1935 editions) provided for their valuation for gift tax purposes on the basis of their “net cash- surrender valúe.” These provisions of the regulations were in force at the date of the gift of the policies under consideration in the instant case.

Bespondent relies upon Ryerson v. United States, 28 Fed. Supp. 265, where the United States District Court for the Northern District of Illinois held that the cost of a new similar policy at a given date was the criterion of the value for gift tax purposes of an insurance policy. With all due respect for the opinion of the court in that case, we adhere to the view expressed in the Cronin case and other cases cited above and hold that the value of the policies in question at the time of their assignment was their cash surrender value on that date.

Decision will be entered wader Rule SO.


author: Van Fossan:

text:
    Sherman Ewing, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93013.
    Promulgated November 15, 1939.

      Russell G. Rogers, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Van Fossan:

The question in this case is the basis for computing gain or loss to the petitioner on the sale of certain of the securities received as above set out. Petitioner contends:

(1) The legacy was general and not specific, citing Kenaday v. Sinnott, 179 U. S. 606; Matter of Hodgman, 140 N. Y. 421; Matter of Beecroft, 146 Misc. 344.
(2) Petitioner acquired the securities by purchase on December 16, 1933, and not by “bequest, devise or inheritance”, citing Matheson v. Commissioner, 31 B. T. A. 493, affd., 82 Fed. (2d) 380; and Suisman v. Eaton, 15 Fed. Supp. 113, affd., 83 Fed. (2d) 1019; certiorari denied, 299 U. S. 573.
(3) Petitioner’s proper basis for computing gain or loss on the sale of such securities was their cost to him on December 16, 1933, not their values at the date of the death of decedent (February 8, 1933).

Respondent contends that the securities were acquired by bequest and that the basis on sale by the beneficiary is the fair market value of the same at the date of death of decedent.

In a recent case, William R. Kenan, Jr., et al., Trustees, 40 B. T. A. 824, we had for consideration the question of gain or loss to the fiduciary in a situation where the fiduciary was directed by will to pay the legatee $5,000,000 when she attained the age of 40, with authority to substitute securities of equal value at the date of payment. We held that taxable income is realized if the fiduciary uses the securities, the value of which at the time of payment is in excess of their basis to the estate. It was further held, following Suisman v. Eaton, 15 Fed. Supp. 113; affirmed, per curiam, 83 Fed. (2d) 1019; certiorari denied, 299 U. S. 573; rehearing denied, 299 U. S. 621, that the disposition is a “sale or other disposition” and that the discharge of the right of the legatee is the amount realized.

Albeit in the Kenaav case the Board, not there having the question of basis to the beneficiary, refrained from ruling on that question, the logic of the opinion and the observations of the Board in mooting the question indicate clearly that, as a corollary to that decision, petitioner here must be sustained. We quote:

* * * The beneficiary received a bequest of $5,000,000 in . cash which could be paid in an equivalent of securities and did not receive a bequest of any securities. Her acquisition of the securities was unlike that of a residuary legatee or heir whose title relates back to that of the testator and who is affected by any change in value of the property. There is reason to give the latter taxpayers the basis of value at the date of death of the testator. The situation of the beneficiary here is quite different and perhaps her basis is the value of the securities when she acquired them in satisfaction of her claim against the trust for cash or its equivalent. Perhaps then for the first time they were appropriated for such use and then for the first time she acquired any interest in them.

The question which was reserved in the Kenan case, being here presented, we hold that, under the facts stated, the basis to the beneficiary for computing gain or loss on the subsequent sale of securities received in satisfaction and discharge of the legacy of $300,000 was their cost to him, i. e., the fair market value of such securities as determined on December 16, 1933, the date when petitioner acquired them from the executor. The legacy was general and not specific. The transaction by which petitioner acquired the securities was a “sale or other disposition.” Sec. ill, Kevenue Act of 1934; Suisman v. Eaton, supra. The securities were not “acquired by bequest, devise, or inheritance” as provided by section 113 (a) (5) of the Bevenue Act of 1934.

Decision will be entered wader Rule 50.


author: Van Fossan :

text:
    Cornelia V. W. Kellogg, Executrix of the Estate of Frederic R. Kellogg, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89143.
    Promulgated November 22, 1939.

      G. M. Tappen, Esq., for the petitioner.

      Alien T. Ahin, Esq., for the respondent.
   OPINION.

Van Fossan :

-The issue here presented is whether or not the transfers in trust were intended to take effect in possession or enjoyment at or after the grantor’s death and thus the trust corpus should be included as a part of the taxable estate.

The respondent’s theory is that by the terms of the trust the decedent retained a reversion in the trust corpus, while the petitioner contends that he reserved no power or interest other than income for life. Even if the trust contains a possibility of reverter running to the next of kin or heirs of the decedent, the petitioner asserts that such a possibility is so remote as to render the corpus not taxable.

Being confronted with Hassett v. Welch, 303 U. S. 303, the respondent has abandoned his original ground, as stated in his notice of deficiency, that the value of the trust should be included in the gross estate of the decedent because its income was to be distributed to him, as grantor, during his lifetime and bases his contention solely on that portion of section 302 (c) of the Revenue Act of 1926, as amended by section 808 of the Revenue Act- of 1982, which relates to the decedent’s intention to make the transfer take effect in possession or enjoyment at or after his death. • :

The respondent relies on Klein v. United States, 283 U. S. 231. In that familiar case the grantor, by deed, conveyed land to his wife to hold during her natural life and reserved a remainder'to himself if his wife predeceased him. The Court there held that only a life estate was vested and whether or not the remainder would ever become vested in the grantee depended upon the condition precedent that the death of the grantor happened- before that of the grantee. In Helvering v. St. Louis Union Trust Co., 296 U. S. 39, however, the Court distinguished the Klein case under facts more nearly resembling those in the case at bar.

In the St. Louis Union Trust Co. case the decedent provided that the income from the trust should be paid to his daughter for life, with the remainder to certain designated persons. The trustee was given discretionary power to terminate the trust whenever he might deem-it wise to do so, whereupon the estate was to revert to the grantor. If the daughter should predecease the grantor the trust was to terminate and the trust estate was to be transferred- to the grantor, to be his absolutely. The Court there said:

Tñe case of Klein v. United, States, 283 U. S. 231, which is strongly relied upon by the Government, does not support its position. There the grantor, 16 months prior to his wife’s death, conveyed to his wife by deed a life estate in certain lands. But in the event that she survived, the grantor “and in that case only” she was to take the lands in fee simple. The effect of this-deed, we held, was that only a life estate was vested, the remainder being retained by the grantor; and whether that should ever become vested in the grantee depended upon the condition precedent that the grantor die during the life of the grantee. The grantor having died first, his death clearly effected a transmission of the larger estate to the grantee. But here the grantor parted with the title and all beneficial interest in the property, retaining no right with respect to it which would pass to anyone as a result of his death. , Unlike the Klein case, where the death was the generating source of the title, here, as the court below said, the trust instrument and not the death was the generating source. The death did not transmit the possibility, but destroyed it.

So bere, tbe decedent transferred the title to the trust corpus and retained only a right to its income, terminating at his death. That reservation does not render the trust corpus taxable, May v. Heiner, 281 U. S. 238. He then provided that after his death the current income should be paid to his wife during her life., Upon her death he directed that the estate should be divided among their children under certain conditions immaterial to this discussion. If any child should die his share was to go to his heirs or to the appointees in his will or, in the absence of such beneficiaries, to his next of kin. However, if all of the grantor’s children should predecease him and his wife, leaving no spouse or issue surviving the grantor and his wife, then and then only was the trust corpus to pass to the grantor’s next of kin.

Thus the grantor retained no right of reversion whatever in himself and only in a very remote contingency would the estate go to his next of kin. -But that possible transmission to the next of kin was dependent not upon the grantor’s death, but upon the death of various intermediary, persons who were all living at the date of the grantor’s death. After the decedent’s death the acquisition of the corpus by either his children and their descendants or by his next of kin was no more definite and certain, than before that event. Hence, the decedent’s death had no effect on any specified interest of his children or on any potential interest- of his next of kin in the property sought to be taxed as a part of his estate. See Thomas C. Boswell et al., Executors, 37 B. T. A. 970.

The respondent relies on certain decisions of the courts of New Jersey to establish the fact that the remainders given to the decedent’s children were not vested. The cases he cites are all distinguishable on fact and do not support his position.

There is no controversy here with respect to what individuals may take under , the trust instrument, as to the character of their share or the conditions controlling their devolution. We are concerned only with the incidents of tax from the viewpoint of the Federal taxing statutes. Under these circumstances, the decisions of the Federal courts and not of the local courts must govern. Lyeth v. Hoey, 305 U. S. 188.

We hold that the corpus of the trust was not properly included in decedent’s gross estate.

Decision will be entered under. Rule 50.


author: OppeR :

text:
    Everett D. Graff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92212.
    Promulgated November 22, 1939.

      Laird Bell, Esq., William N. Haddad, Esq., and Garleton Blrnnt, Esq., for the petitioner.

      Dewitt M. Evans, Esq., J. M. Morawski, Esq., F. R. Shearer, Esq., and Gerald W. Brooks, Esq., for the respondent.
   OPINION.

OppeR :

Respondent can not be sustained in his principal contention, that the entire income of the trust is taxable to petitioner because some part or all of the income was used by his wife in defraying household expenses. We have found as’ a fact that there was no agreement, 'express or implied, included in the trust instrument or collateral to it, which placed any restriction upon the use of the trust income by the beneficiary. The doctrine of Douglas v. Willcuts, 296 U. S. 1, is thus inapplicable, Jay C. Hormel, 39 B. T. A. 244, at least unless we can óombine with it the provisions of section 167 of the Revenue Act of 1934. And, since the most that can then be said is that the power to apply the trust income to the grantor’s obligations was derived from a voluntary discretion exercised by the wife, who

is undeniably adversely interested in that same incojne, there is no foundation for the application of section 167. Henry A. B. Dunning, 36 B. T. A. 1222; Ralph L. Gray, 38 B. T. A. 584. See Fredericks; Barbour, 39 B. T. A. 910.

The alternative contention is that at least the capital gains of the trust which were retained as additions to principal..under the local law are taxable to the grantor under section 167, as being accumulations of income held for future distribution to .him. This is resisted on the ground that petitioner’s ultimate enjoyment of the accumulations is dependent under the terms of the trust on his survival of his wife.

There is no room for speculation as to the fact of accumulation. We know that the capital gains existed; that they were retained; and that for purposes of Federal taxation they constitute accumulated income. Rollins v. Helvering, 92 Fed. (2d) 390 (C. C. A., 8th Cir.),; certiorari denied, 302 U. S. 763; Charles Kaplan, 26 B. T. A. 379. It remains only to consider whether under the. unambiguous language of the trust such accumulations were, within the statute, held “for future distribution to the grantor.”

In Charles Kaplan, supra, we ruled unequivocally, under facts substantially identical with those before us, .that they were. This decision was, as we said in Preston R. Bassett, 33 B. T. A. 182, “affirmed in principle”, 66 Fed. (2d) 401 (C. C. A., 1st Cir.). In Fanny M. Dravo et al., Executors, 34 B. T. A. 190, 194, and in Mary Ryerson Frost, 38 B. T. A. 1402, under comparable facts, we- came to a similar conclusion. See also John N. Fulham, 40 B. T. A. 48.

Section 167, unlike 166, deals with the interest of a grantor in trust income. Since, by definition, the act of creating the trust constitutes a severance from the grantor’s property of whatever is assigned to the trustees, the subject matter of 167 may otherwise be described as the taxation of certain retained interests: of the grantor in the income of the trust. Prior, to the transfer-the grantor’s legal and beneficial right to receive income from the property was absolute. By the trust he parted with that interest to some extent. Whether section 167 comes into operation thus depends on whether the beneficial interest with which he parted was, as a- matter of law, great enough so that it can be said that the accumulations of income did not continue to be held for his benefit.

By article IY of the present deed of trust, the 1985 amendment being admittedly inapplicable to these years, it is provided that during the lifetime of petitioner’s wife he may revoke the trust with her consent, and upon such revocation the trust estate is to pass as petitioner directs; and by article II that upon her death the trust property becomes petitioner’s absolutely, if he shall then be living. What we said in Mary Ryerson Frost, supra, p. 1404, applies with equal force here: “This is literally within section 167 and also harmonious with its intendment as interpreted by the First Circuit Court of Appeals in the Kaplan, case. Furthermore, this is not a mere possibility of reversion. Cf. William E. Boeing, 37 B. T. A. 178 (on review C. C. A., 9th Cir.); John Edward Rovenslcy, 37 B. T. A. 702, for the right to control the use of the * * * [accumulation] does not lie inchoate pending the grantor’s survivorship of the husband, but is a power existing at all times in her, first in conjunction with her husband and then alone.”

In other words, petitioner failed to dispose of the beneficial interest in the capital gains which he possessed prior to the declaration of trust, “the remainder being retained by the grantor”, see Helvering v. St. Louis Union Trust Co., 296 U. S. 39, 45. By retaining that interest, first in conjunction with the life tenant and thereafter absolutely, the grantor has himself created an arrangement whereby the accumulations of income to which section 167 refers are being held for future distribution to him. They would continue to be so held except for the possible happening of a condition subsequent, namely, his prior death. That event would for the first time terminate his continuing beneficial interest in that part of the trust income with which we are here concerned. Klein v. United States, 283 U. S. 231.

The fact that in the Frost case the accumulations would pass to the grantor only upon her revocation, while here they come to the petitioner by the express provisions of the trust without his affirmative act, constitutes no distinction between the two cases. In the former the effect is to provide that at the end of the accumulation period (the husband’s life) the grantor’s power to revoke gave her discretionary control over the accumulations; whereas here at the end of a similar period resumption of control over the accumulations by the grantor is automatic. But section 167, in its present form, operates as effectively upon accumulated trust income where it “is * * * held * * * for future distribution to the grantor” as it does where that future distribution may be contingent upon the exercise of a nonadverse discretion. See Report of Ways and Means Committee, 72d Cong., 1st sess., House Report 708, p. 25. Cf. Morris v. Commissioner, 90 Fed. (2d) 962 (C. C. A., 2d Cir.); Preston R. Bassett, supra, 186, decided under earlier acts.

For the foregoing reasons, the accumulations may not be said to be held for any person other than the grantor, and we conclude that the income represented by the capital gain is within the purview of section 167. ;

Reviewed by the Board.

Decision will be entered wnder Rule 50.

Aiujndell and Van Fossah dissent.

       SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or

      then such part of the income of the trust shall be included in computing the n« t income of the grantor.

       As distinguished from section 166, see Phebe Warren McKean Downs, 36 B. T. A. 1129.

       “ The present law taxes the income of a trust to the grantor when in his discretion * * * the trust income may be held or accumulated for future distribution to him * * *. Trusts have been established in which income is held or accumulated for the grantor which fact it is contended removes such trusts from the operation of this section. Here again it is not at all certain that the courts will uphold such devices; yet the statute may well be clarified to remove any doubt that the income of such trusts is to be taxed to the grantors. Accordingly, the section has been amended * *


author: Smith :

text:
    Estate of Cyprian A. Sporl, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92588.
    Promulgated November 22, 1939.

      Arthur A. Moreno, Esq., and F. W. Gaudin, Esq., for the petitioner.

      Joe D. Hughes, Esq., and William P. Blahe, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency in estate tax of the estate of Cyprian A. Sporl, Sr., of $5,864.02. The pleadings present the following issues:

1. The deductibility of certain administration expenses, allowed to the extent of one-half by the respondent — the estate consisting entirely of community property — but claimed in whole by the estate.

2. The right of the estate to a credit for inheritance taxes paid to the State of Louisiana.

3. The inclusion in the gross estate of the value of certain second mortgage bonds of the Shipside Storage Co. (This issue is raised affirmatively by the respondent in an amended answer.)

4. Whether there should, be included in the gross estate all or only one-half of the excess over $40,000 of the proceeds of insurance policies on decedent’s life, where the policies were taken out by the decedent after marriage and the premiums on such policies were paid out of community income; and whether, if only one-half of the proceeds is to be included in the gross estate, the $40,000 exemption should apply to such one-half or against the entire amount.

The decedent, Cyprian A. Sporl, Sr., died intestate, a resident of New Orleans, Louisiana, on January 27, 1936. No letters of administration were ever issued. The heirs at law, the widow, and decedent’s two sons were placed in possession of the estate, all of which consisted of community property, by order of the Civil District Court, New Orleans, Louisiana, and they are the petitioners herein.

The issues raised by the proceeding will be considered in order.

1. There was reported in the estate tax return filed by the petitioners herein a gross estate of $316,758.71, representing one-half of the total value of the estate which the decedent and his wife owned in community. The estate consisted of real- property, stocks and bonds, and other miscellaneous properties.

Among the deductions claimed in the return under administration expenses were executors’ commissions of $1,585 and attorneys’ fees of $20,000. The respondent in his audit of the return allowed one-half of each of these amounts. He determined a net estate of $196,090.31 under the 1926 Act and a net estate of $256,090.31 under the 1932 Act.

Under section 303 of the Revenue Act of 1926 an estate is permitted to deduct from the gross estate

(a) In the case of a resident * * *—
(1) Such amounts for funeral expenses, administration expenses, claims against the estate, * * * as are allowed by the laws of the jurisdiction, * * * under which the estate is being administered, * * *

In his deficiency notice the respondent states:

You contend: “The attorney’s fee and administration expenses should be allowed in full, because said expenses were incurred solely in administering the affairs of the decedent, Cyprian A. Sporl, Sr., and for the prime purpose of segregating the Estate of decedent from the vested one-half interest of his surviving widow in order to vest same in the heirs of said decedent, * * *.” For the purpose of Federal estate tax the deductions are limited to the amounts payable on account of decedent’s estate, which does not include the widow’s community interest. As the tentative determinations were made on that basis, no adjustment is in order.

In their petition the petitioners state:

• The attorney’s fee and administration expenses should he allowed in full, because said expenses were incurred solely in administering the affairs of the decedent, Cyprian A. Sporl, Sr., and for , the prime purpose of segregating the Estate of decedent from the vested one-half interest of his surviving widow in order to vest same in the heirs of said decedent.
Said attorney’s fees and administration expenses should be allowed in full because same were necessary for the immediate purpose of determining the inheritance taxes due the Treasury of the United States and the State of Louisiana.

All of the material' facts stated in the petition have been denied by the respondent in his answer.

No evidence has been offered and no argument has been made in the brief of the petitioners in support of the allegation of error as to the disallowance of one-half of the amount of executors’commissions and one-half of attorneys’ fees.

If the total amounts of executors’ commissions and attorneys’ fees were concerned with the administration of the one-half of the community property that was owned by the decedent, the full amounts paid would be legal deductions from the gross estate. Lang’s Estate v. Commissioner, 97 Fed. (2d) 867. We can not say, however, upon the evidence of record that the respondent was in error in disallowing the deduction of one-half of the amounts of executors’ commissions and attorneys’ fees. The determination of the respondent upon the point in question is affirmed on failure of proof on the part of the petitioners to show error in the respondent’s determination.

2. At the hearing before the Board proof was submitted of payment to the State of Louisiana of $8,484.06 inheritance taxes in respect of the property included in the decedent’s gross estate. Bespondent concedes in his brief that such taxes are allowable as a credit to the extent proved.

3. The estate owned $46,000 of Shipside Storage Co. second mortgage 6 percent bonds dated January 1, 1932. They were appraised as having no market value and were so returned. The respondent contends that they were worth either their face value or 15 percent of their face value, which was the price paid for them by the decedent in December 1933.

Interest upon the bonds was paid throughout the year 1936. The paying corporation was not, however, earning sufficient amounts for the payment of the interest. The corporation was advised by counsel that in the determination of earnings for the payment of interest it was not necessary to provide for depreciation, and accordingly interest was paid long after there were any earnings available for such payment.

No interest has been paid on the bonds since 1936. In 1938 efforts were being made to reorganize the corporation under section 77 (b) of the Bankruptcy Act.

The Shipside Storage Co. had outstanding an issue of first mortgage bonds in the amount of approximately $296,000. The fair market value of its property in 1936 was less than the amount of the first mortgage bonds outstanding. The Canal Bank & Trust Co. in liquidation in 1936 owned $100,000 par value of the second mortgage bonds. In the latter part of 1936 or in 1937 it made an application for a loan from the Reconstruction Finance Corporation. In connection with such application the second mortgage bonds in question were listed as having a nominal value. The Reconstruction Finance Corporation refused to place any value upon the bonds and returned them to the petitioner with the notation “No loan value assigned” and held that they were not eligible fori collateral purposes. The entire evidence in the case shows that the bonds were absolutely unsalable in 1936.

Article 13 of Regulations 80 (1934 Edition) provides that property is to be included in the gross estate at “the fair market value thereof at the time of decedent’s death.”

By an amended petition the respondent claims that these bonds had a fair market value equal to their par value. On brief he contends that the value was at least 15 percent of the par value. The burden of proof to show that the bonds had a fair market value at the date of decedent’s death is upon the respondent. The respondent has not met this burden. Accordingly his claim that the bonds should be included in the gross estate either at their par value or at 15 percent of such value is not sustained.

4. The remaining issue is as to the amount to be included in the gross estate in respect of the value of six policies of insurance on decedent’s life taken out by the decedent. All of the policies were taken out on application of the decedent alone after his marriage to Adrienne de Lappe, who survived him, and all premiums were paid from community funds. The aggregate face value of the policies was $100,990. Five of the policies were issued by the Penn Mutual Life Insurance Co. of Philadelphia on February 25, 1925, and the sixth by the Massachusetts Mutual Life Insurance Co. of Springfield, Massachusetts, on October 24,1927. In one of the policies for $25,000 the beneficiary named in the policy was “Adrienne DeL. Sporl, the insured’s wife, if living; otherwise to Cyprian A. Sporl, Jr., and Harold D. Sporl, the insured’s sons, equally or to the survivor of them.” In two of the policies, one for $10,440 and one for $10,550, the insurance company was to retain the proceeds and pay the interest thereon to the widow for life, with remainders over to the two sons of the decedent. In the fourth policy, for $25,000, the income for life was to be paid to the decedent’s mother, with the remainder over to the decedent’s four sisters. The fifth policy, for $15,000, was payable to one of the sons, and the sixth policy, for $15,000, to the other when each arrived at a certain age. In each of the policies there was reserved to the insured the right to change the beneficiary, to surrender and receive the surrender value of the policy, or to use it as collateral on a loan. The decedent died without exercising any of those rights.

In the estate tax return the policies were listed as having a face value of $100,910, whereas the amount should have been $100,990. They were included in the net estate of decedent at one-half of $60,970 (the excess over $40,000) or at $30,485. In the determination of the deficiency the respondent has valued the policies at $100,990 and has included in the net estate the excess of that valuation over $40,000. The total valuation of the policies is not questioned. The petitioners contend that only one-half of the value of the policies ($50,495) less $40,000, or $10,495, is includable in the decedent’s net estate.

Section 302 of the Revenue Act of 1926 provides in part as follows:

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—
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000. of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

Section 302 (g) of the Revenue Act of 1926 is the same as section 302 (g) of the Revenue Act of 1924 and has not been changed or amended by any of the subsequent acts and the provision was in force and effect both at the time the policies were taken out by the decedent and at the date of his death.

As was stated by the United States Circuit Court of Appeals for the Fifth Circuit in Igleheart v. Commissioner, 77 Fed. (2d) 704, the manifest purpose of section 302 (g) “is to include in the decedent’s estate for purposes of the tax the proceeds of all insurance on his life receivable under policies acquired through expenditure by him.” See Chase National Bank v. United States, 278 U. S. 327. Since the decedent had no separate estate, premiums were of necessity paid out of the community estate. In view of this fact it is the petitioner’s contention that only one-half of the value of the policies is to! be taken into account under section 302 (g) and that out of that one-half value of the policies should come the specific exemption of $40,000.

The question present in this proceeding is substantially the same as that which was presented in Newman v. Commissioner (C. C. A., 5th Cir.), 76 Fed. (2d) 449. The decedent in that case, Edgar Newman, died on March 9,1928. At the time of his death there were in existence 15 life insurance policies on his life. The decedent retained the right to change the beneficiary up to the date of his death. The court held that the entire proceeds of the policies were includable in the gross estate of the decedent, and in the course of its opinion it said:

Appellants with great confidence press the further argument that the case presented is, within articles 25 and 28, Treasury Regulations [70'], a case of the payment of premiums in part by the beneficiary and in part by the decedent. They say this results from the operation in Louisiana of the community property system. That under its operation, as stipulated, the premiums the husband paid must be regarded as paid with community funds and therefore one-half by the insured, and one-half by his beneficiary. That this being so, it must be held that, within the meaning of the regulations, the beneficiary paid one-half of the premiums, and the decedent only one-half. That this contention is more logically than legally sound, we think a little reflection will show. We think it may well be doubted whether these regulations would be valid if so construed. They were adopted under a statute which does not in terms authorize any diminution on account of community payment of premiums but on the contrary, in plain terms, requires that all over $40,000 of the proceeds >of policies taken out by the insured in favor of the beneficiariy, be included in his gross estate. In this view, it may well be doubted whether the regulations if so construed, would not be beyond administrative power. “The only authority conferred, or which could be conferred, by the statute is to pnake regulations to. carry out the purposes of the act — not to amend it.” Miller v. United States, 55 S. Ct. 440, 442.
We raise the question, however, not to decide, but to reserve it. For we think, in the light of the settled law as to these premium payments, that there is no basis for the claim that they fall within the regulations invoked. That law is that when, during the existence of the community, a husband, as here, takes out a policy payable to his wife as beneficiary, but with the right reserved to change, and pays the premiums out of the community, though the proceeds at his death become her separate property, Succession of Desforges, 135 La. 49, 50, 64 So. 978, 52 L. R. A. (N. S.) 689; Nulsen v. Herndon, 176 La. 1097, 1098, 147 So. 359, 88 A. L. R. 236; Sizeler v. Sizeler, 170 La. 128, 127 So. 388; Douglass v. Equitable Life Assur. Soc., 150 La. 519, 90 So. 834, the transaction is regarded as a gift by the husband to the wife, and the; estate of neither is regarded as having paid the premiums so as to be entitled to reimbursement on account of their payment. Kelly v. Kelly, 131 La. 1024, 60 So. 671; Succession of Bofenschen, 29 La. Ann. 711; Martin v. McAllister, 94 Tex. 567, 63 S. W. 624, 56 L. R. A. 585; Whitesell v. N. W. Mut. Life Ins. Co. (Tex. Com. App.) 221 S. W. 575.
In the light of this rule of law, it' would be a strained construction creating an unwarranted lack of uniformity, and raising grave doubts as to their validity, which would give to these regulations the meaning contended for. We think it our duty to avoid such construction.

An application for certiorari in that case was denied by the Supreme Court, 296 IT. S. 600.

The petitioners contend that this decision of the United States Circuit Court of Appeals for the Fifth Circuit in the Newman case can not stand in the light of the decision by the Supreme Court in Lang v. Commissioner, 304 U. S. 264. In that case the decedent died in 1929, a resident of the State of Washington, which, is a community property state. There were several insurance policies on his life, made payable to Ms wife and cMldren, wMcb bad been taken ont after marriage while decedent was a resident of that state and on wMch the premiums had been paid out of community funds. The opinion of the Supreme Court answered certain questions which had been propounded to it by the United States Circuit Court of Appeals for the Ninth Circuit. The Court stated :

The court below concluded that the laws of Washington established a community between spouses which is a separate entity, “just as a corporation or an association,” and that life insurance purchased with its funds is community property whose character the husband cannot defeat through change of beneficiary.
Accepting as correct, for present purposes this construction of the local law, also treating the facts disclosed by the certificate as the essential ones, we come to consider the questions submitted for instructions which are restated in order more definitely to indicate our understanding of their significance.

The Court then cited article 25 of Regulations 70 to the effect that:

“* * * Where a portion of the premiums were paid by the beneficiary and the remaining portion by the decedent the insurance will be deemed to have been taken out by the latter in the proportion that the premiums paid by him bear to the total of premiums paid.”

The above provision of Regulations 70 Was omitted from Regulations 80 (1934 Edition), approved November 7, 1934. It substitutes for what might be termed the “payment of premiums” test of the old regulation the “legal incidents of ownership” test. The new regulation was in effect when the Supreme Court decided the Lang case, but the Court deemed it unnecessary to pass upon its validity, saying:

Treasury Regulations 70 were in force when Lang died and are applicable to his estate. It is unnecessary for us to consider the meaning, validity or effect of the changes introduced by Regulations 80.

The Court further said:

Articles 25 and 28 of Regulations 70 define the words “policies taken out by the decedent upon his own life.” Earlier regulations gave the same definition. Nothing else appearing, it must be treated as approved by Congress. Helvering v. Bliss, 293 U. S. 144, 151, 55 S. Ct. 17, 20, 79 L. Ed. 246, 97 A. L. R. 207. Counsel for the Commissioner suggest that it is at variance with the statute, unreasonable and without effect; but we think this objection is clearly untenable.
Under the community property statutes of Washington, Rem. Rev. Stat. Wash. § 6892 et seq., as interpreted below, one-half of the amounts of community funds applied to payment of premiums was property of the wife. To that extent she paid these premiums. Where she is the beneficiary, under the words of the Regulations she became entitled to the proceeds of the policy in proportion to the amount so paid.
Where children were named beneficiaries and premiums were paid from community funds the situation is not within the precise words of. the Regulations; but the rather obvious reason underlying the definition of what constitutes a policy “taken out by the assured” should be respected. In the absence of a clear declaration it cannot be assumed tbat Congress intended insurance bought and paid for with the funds of another than the insured and not payable to the latter’s estate, should be reckoned as part of such estate for purposes of taxation. See Igleheart v. Com’r., 5 Cir., 77 F. 2d 704, 711.

It will be noted from the above excerpts from the opinion of the Supreme Court in the Lang case that its opinion was predicated upon the laws of the State of Washington as interpreted by the Supreme Court of that state and upon the Commissioner’s regulations. The Supreme Court said that under the laws of the State of Washington “life insurance purchased with its [community] funds is community property whose character the husband cannot defeat through change of beneficiary.”

We think that the laws of the State of Louisiana, as interpreted by its Supreme Court, are materially different from the-laws of the State of Washington.

In Sizeler v. Sizeler, 170 La. 128; 127 So. 388, it was said:

As the proceeds of life insurance policies form no part of the estate of the deceased, and, inure to the beneficiary “directly and, by the sole terms of the policy itself," the right of the defendant to the avails of the policies in this case does not arise from legal coverture, nor from the civil effects of marriage contracted in good faith, but solely from the terms of the policies in which she has been named the beneficiary by the decedent. * * *

In Douglass v. Equitable Life Assurance Society, 150 La. 519; 90 So. 834, it was stated as the settled law of Louisiana that where the wife is named beneficiary in an insurance policy on the husband’s life the husband may change the beneficiary, if the right to do so is reserved to him in the policy contract, so as to cut off the wife’s interest in the proceeds of the policy.

At the date of the death of the decedent, January 27, 1936, Regulations 80 were in force, article 25 of which reads as follows:

Art. 25. Taxable insurance. — The statute provides for the inclusion in the gross estate of insurance taken out by the decedent upon his own life, as follows: (a) All insurance receivable by, or for the benefit of, the estate; (b) all other insurance to the extent that it exceeds in the aggregate $40,000.
The term “insurance” refers to life insurance of every description, including death benefits paid by fraternal beneficial societies, operating under the lodge system. Insurance is considered to be taken out by the decedent in' all cases, whether or not he makes the application, if he pays the premiums either directly or indirectly, or they are paid by a person other than the beneficiary, or decedent possesses any of the legal incidents of ownership in the policy. Legal incidents of ownership in the policy include, for example: The right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. The decedent possesses a legal incident of ownership if the rights of the beneficiaries to receive the proceeds are conditioned upon the beneficiaries surviving the decedent.

The respondent’s argument in this case is that since the decedent had the right up to the date oí his death to change the beneficiary and to give the insurance proceeds to any person whom he might select without the wife’s consent, the total value of the policies should be included in the gross estate. This clearly is the law which would apply to the estate of a decedent in a noncommunity property state. It appears to us that it was the intention of Congress to take into account all policies of insurance on the life of a decedent where at least the decedent had legal incidents of ownership in the policies at the date of his death. Chase National Bank v. United States, supra; Old Point National Bank, Executor, 39 B. T. A. 343. We are of the opinion that the respondent did not err in his determination that $60,990 should be included in the decedent’s net estate in respect of the sis insurance policies in question.

We have carefully considered the last paragraph of the Supreme Court’s opinion in the Lang case, in which it was said:

* * * In the absence of a clear declaration it cannot be assumed that Congress intended insurance bought and paid for with the funds of another than the insured and not payable to the latter’s estate, should be reckoned as a part of such estate for purposes of taxation. * * *

The language of section 302 (g) of the Revenue Act of 1926, which was construed by the Supreme Court, has not been changed since then. But we are uncertain as to whether the observation of the Court controls the instant proceeding in the light of the Commissioner’s amended regulations. We think that it does not. If the value of insurance policies on the life of a decedent is includable in the net estate only in the proportion that the amount of premiums paid by the decedent out of his separate estate bears to the entire amount of premiums paid, many questions difficult of solution are presented- — as, for instance, where the premiums are paid by the beneficiary out of funds borrowed or given to the beneficiary by the insured.

The respondent’s determination in this case is clearly warranted by the decision of the United States Circuit Court of Appeals for the Fifth Circuit in Newman v. Commissioner, supra. We believe that we should follow that opinion until the Supreme Court has expressed its dissent therefrom, especially in view of the change in the regulations contained in article 25 of Regulations 80.

In view of our holding in this case, it is unnecessary to consider the petitioners’ contention that the $40,000 specific exemption should be deducted from one-half of the face value of the policies and only $10,495 be included in the net estate. Although this point lurked in the Lang case, which was decided by the United States Circuit Court of Appeals for the Ninth Circuit in Lang's Estate v. Commissioner, sufra, it does not seem to have been specifically considered, the court simply holding that one-half of the excess of $40,000 of the life insurance policies in that case was to be included in the net estate of the decedent.

Reviewed by the Board.

Decision will he entered wider Bule 50.


text:
    Jessie G. Brown, as Executrix of the Last Will and Testament of Milton Hay Brown, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91093.
    Promulgated November 24, 1939.

      Albert O. Schlipf, Esq., and Logan Hay, Esq., for the petitioner.

      Franklin F. KoreTl, Esq., for the respondent.
   OPINION'.

Smith:

The only question for the determination of the Board is whether the decedent’s interest in the trust estate created on December 24,1923, should be included in his gross estate at the value thereof at the date of his death, and, if not the whole thereof, whether any portion should be so included. The respondent contends that the decedent had a one-third interest in the trust estate and that the total value of that one-third interest at the date of his death, March 12, 1935, namely $241,808.45, should be included in the gross estate. The petitioner, on the other hand, contends that no part of the value of that one-third interest should be so included.

The following provisions of section 302 of the Revenue Act of 1926, as amended by sections 401 and 404 of the Revenue Act of 1934, are applicable to the issues raised:

Sec. 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, except real property situated outside the United States [as amended by sec. 404, Act 1934]—
(a) To the extent of the interest therein of the decedent at the time of his death * * *;
(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) (1) [As amended by sec. 401.] 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; and
(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.

Prior to her death on October 28, 1923, Kate Hay Brown owned an undivided one-half interest in a number of farms and other parcels of real property inherited by her from her father. Upon her death her husband, Stuart Brown, inherited a one-third undivided interest in fee and each of their three children inherited a two-ninths interest in fee in the estate. The heirs decided that it was impracticable to set off their interests in metes and bounds and decided that it was to the interest of all to keep their interests undivided. They therefore created a trust, evidenced by the trust instrument executed on December 24, 1923. Stuart Brown contributed his undivided one-third interest and each of the three children contributed his two-ninths interest to the trust estate, the spouses of the married children joining in the conveyance. Under the trust agreement Stuart Brown was to receive and did receive during his life the income upon his one-third interest in the trust estate and each of the children received the income upon the two-ninths interest contributed by each. After the death of Stuart Brown, who died intestate on October 26, 1924, each of the three children received the income upon a one-third undivided interest in the trust estate. Under the terms of the trust agreement each of the three children had the right to receive one-third of the income of the trust estate for life. Each also had a limited power of appointment as to one-third of the corpus of the trust estate after the death of Stuart Brown on October 26, 1924.

It is the contention of the respondent first that there should be included in the gross estate of Milton Hay Brown, the decedent herein, the value of one-third of the corpus of the trust estate, admitted to be $241,808.45. He claims that section 302 (d) of the Revenue Act of 1926, as amended by section 401 of the Revenue Act of 1934, warrants such inclusion. That section, however, requires the inclusion in the gross estate of any interest in property “of which the decedent has at any time made a transfer.” Since the property transferred to the trust estate by Milton Hay. Brown was only a two-ninths interest in the estate of his mother, we shall first consider whether the value of that two-ninths interest is includable in the gross estate.

The respondent cites section 302 (c) of the Revenue Act of 1926 as being applicable to this case. That subdivision of section 302 requires the inclusion in the gross estate of property transferred by the decedent “in contemplation of or intended to take effect in possession or enjoyment at or after his death.” No contention is made by the respondent that the transfer made to the trust by Milton Hay Brown on December 24, 1923, was in contemplation of death and the stipulated facts are that at the time of the transfer he was 36 years of age and was suffering from no mortal illness and was in normal health for a man of his age. This stipulation conclusively shows that the transfer to the trust by the decedent was not in contemplation of death. Neither is any contention made by the respondent that the transfer made by Milton Hay Brown on December 24, 1923, was “intended to take effect in possession or enjoyment at or after his death.” The decedent, his sisters, and their father all made their transfers to the trust on the date that the trust instrument was executed. The trustees held title to the property after that date and the decedent and his sisters and father had the enjoyment of the income from the property from that date. We therefore are of the opinion that section 302 (c) of the Revenue Act of 1926 has no application to this case.

Section 302 (d) of the applicable statute requires the inclusion in the gross estate of a transfer made by the decedent “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.” It will be noted that the provision does not require that the transieror have a power to alter, amend, or revoke the trust instrument. If he has any power to change the enjoyment of the property up to the date of his death the value of the transferred property is includable in the gross estate. The Board and the courts have so held in numerous cases.

The petitioner contends that the transfer by Milton Hay Brown was made prior to the time that the provision contained in section 302 (d) was in effect; that it was a completed transfer prior to the effective date of the statute, and that therefore the value of the transferred property may not be included in the gross estate. It should be noted, however, that section 302 (h) of the Revenue Act of 1926 provides that that section is effective whether the transfer was made before or after the enactment of the Revenue Act of 1926. The Board and the courts have held in numerous cases that transfers made prior to the effective date of the Revenue Act of 1928 are controlled by section 302 (d). All that is necessary to make the subdivision operative .is that the transferor shall have up to the date of his death the right to change or alter the enjoyment of the property. See Bank of New York & Trust Co., Administrator, 20 B. T. A. 677, 684; Day Kimball et al., Administrators, 29 B. T. A. 60; affd., per curiam (C. C. A., 2d Cir.), 71 Fed. (2d) 1011; Luis James Phelps el al., Executors, 27 B. T. A. 1224; Mary A. B. duPont Laird et al., Executors, 29 B. T. A. 196.

In Frederick Foster et al., Executors, 31 B. T. A. 769, the Board sustained the respondent’s determination that the value of a trust was properly includable in the computation of his gross estate with the following statement:

The respondent has included the value of the trust corpus, in the amount above set out, in gross estate of the decedent under section 302 (d) of the Revenue Act of 1926. The respondent concedes that the trust was irrevocable, but takes the position that the retained power of the decedent to direct the disposition of the trust property constitutes a jwwer to alter or amend.
The statutory provision cited by the respondent requires the inclusion in gross estate of property transferred in trust by a decedent “where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power * * * to alter, amend, or revoke.” Under the trust instrument in this case the trust property would go to the grantor’s children if he died intestate. But he reserved the power in the trust instrument to provide by will for the holding of the property upon further trusts “for the benefit of such children or their survivor or issue.” The power thus retained was one to change materially the enjoyment of the trust property. The grantor could, and did by his will and codicil, divest the children of the remainder interest they would have taken under the trust indenture had he died intestate, and make them life tenants. In this respect the present case differs from that of Equitable Trust Co. of New York, Administrator of Bercsford, 31 B. T. A. 329, where it was held that under the grantor’s retained power she “could not divest the class named as remaindermen but could only designate the proportions in which the members of the class would take.” In the instant case, as pointed out above, the grantor could do much more; he could not only change the remainder interests of the children inter sese, but could entirely divest them of any remainder interest. This was, a power to materially change the enjoyment of the property, and as said in Dort v. Helvering, 69 Fed. (2d) 836, if the trust instrument “contain a right to change the enjoyment, it is within the terms of the act.” We are of the opinion that the power retained by the decedent to change the enjoyment of the property comes within the provisions of the statute and the trust property should be included in gross estate. See Porter v. Commissioner, 288 U. S. 436; Hoblitzelle v. United States, 3 Fed. Supp. 331; Bank of New York & Trust Co., Administrator, 20 B. T. A. 677; H. T. Cook et al., Bxemtors, 23 B. T. A. 335; affd., 66 Fed. (2d) 995; Day Kimball et al., Administrators, 20 B. T. A. 60.

In Estate of Daniel Guggenheim, 39 B. T. A. 251, tlie Board said;

The cited cases [Helvering v. Helmholz, 296 U. S. 93, and White v. Poor, 296 U. S. 98] are authority for holding that the mere power to terminate a trust and distribute the proceeds to the beneficiaries is not a power to alter, amend or revoke; but this was not the only power reserved by the settlor. He reserved the power to “alter, define and prescribe the relative interests of the beneficiaries in the trust fund or the income thereof.” This is the power which formed the basis of respondent’s determination that the trust corpus should be included in his gross estate. The obvious purpose of Congress in enacting section 302 (d), supra, was to prevent the avoidance of estate taxes in cases where settlors retained control over trust estates by reserving in themselves the power to alter, amend, or revoke, even though title could not be regained by them. Until the death of the decedent there was always the possibility of the exercise by him of the reserved power to change and alter the relative interests of the beneficiaries. This power to alter and change the economic benefit gave the decedent a substantial control over the trust property, and his death, therefore, was “the source of valuable assurance passing from the dead to the living.” Porter v. Commissioner, 288 U. S. 436. Such power can not be considered a trivial or inconsequential one. HobMiaelle v. United, States, 3 Fed Supp. 331; Holderness v. Commissioner, 86 Fed. (2d) 137; Commissioner v. Chase National Bank of New York, 82 Fed. (2d) 157; certiorari denied, 299 U. S. 552; Porter v. Commissioner, supra; Witherbee v. Commissioner, 70 Fed. (2d) 696.

Under the trust instrument of December 24, 1923, Milton Hay Brown reserved a power exercisable by will to change the devolution of the property contributed by him to the trust. If that power bad not been exercised his three children would have inherited a right to receive the income of Milton Hay Brown’s share of the trust estate and also to receive their portions of the corpus. Milton Hay Brown had, however, reserved the right to control the devolution of his interest in the trust estate. He could have cut off any one or all three of his children and his wife and have named his sisters or any other descendants of Kate Hay Brown to receive his interest in the trust property. This power of control over the trust property warrants the inclusion in the gross estate of the, property which he transferred to the trust. Dort v. Helvering, 69 Fed. (2d) 836; certiorari denied, 293 U. S. 569. It was immaterial whether the power which he retained was a special power or a general power. So long as he had the power to control the course of the devolution of the property, it was includable in his gross estate under section 302 (d) of the applicable statute.

The only question remaining for decision is whether the respondent was correct in including in the decedent’s gross estate the one-ninth interest in the trust estate which represented a one-third interest in the trust estate owned by Stuart Brown up to the date of his death in 1924.

Prior to the creation of the trust on December 24, 1923, Stuart Brown had an undivided one-third interest in fee in the estate of Kate Play Brown. Joining with his children he transferred this property to the trust on December 24,1923, with the right to receive the income for life and with the further right to say who of the descendants of Kate Hay Brown should receive his share upon his death.

He died in 1924 without exercising such limited power of appointment. Upon his death his three children, one of whom was the decedent in this proceeding, each succeeded to one-third of his one-third interest in the trust estate or a one-ninth interest in the total trust estate. The decedent had the right during his life to receive and did receive the income from this one-ninth interest. He also had by virtue of the trust instrmnent a limited power of appointment in respect of that one-ninth interest the same as he had formerly possessed with respect to the two-ninths interest transferred by him to the trust. It is clear that if Stuart Brown had deeded to Milton Hay Brown a right to receive for life one-third of the income of his share of the trust estate, the value of that one-third interest would not be includable in the gross estate; for the life estate would have come to an end at his death and no property would be transferred from the dead to the living as the result of his death. May v. Heiner, 281U. S. 238. The gift would have been made prior to the amendment of the estate tax law on March 3,1931, and hence the amendment would not control. Hassett v. Welch, 303 U. S. 303. There can be no difference between a gift by deed of a life .interest and an inheritance of a life estate. See Morsman v. Burnet, 283 U. S. 183. But Milton Hay Brown also acquired upon the death of his father a limited power of appointment in respect of the remainder interest in one-ninth of the trust estate acquired by him from his father. The value of a limited power of appointment is not includable in the gross estate. Farmers' Loan & Trust Co. v. Bowers (C. C. A., 2d Cir.), 29 Fed. (2d) 14; Whitlock-Rose v. McCaughn, 21 Fed. (2d) 164; Leser v. Burnet (C. C. A., 4th Cir.), 46 Fed. (2d) 756.

The question arises as to whether the inheritance by Milton Hay Brown of a life estate coupled with a limited power of appointment as to the remainder interest warrants the inclusion of the one-ninth interest in his gross estate. We think it does not.

The simple facts are that the interest in the corpus of the trust estate owned by his father, Stuart Brawn, never became a part of the decedent’s estate. He simply had a right to receive the income for life from one-third of his father’s interest in the trust estate, with a limited power of appointment with respect thereto. Since the property never became a part of the decedent’s estate, there was no transfer of that property from the dead to the living as a result of the death of Milton Hay Brown. If he had not exercised the limited power of appointment his children would have succeeded to his share of his father’s interest in the trust estate as a result of the conveyance by Stuart Brown to the trust estate in 1923.

The respondent contends, however, that the entire one-third interest in the trust estate over which Milton Hay Brown had a limited power of appointment up to his death in 1935 is includable in the gross estate by virtue of paragraph twenty-four of the trust instrument. That paragraph gave to the three children of Kate Hay Brown, with the written consent of Stuart Brown, if living, and of Logan Hay, if living, the power to revoke in whole or in part all or any of the trusts in the instrument and to appoint and direct that the entire trust estate or any part or parcels then held under the instrument should be conveyed absolutely and in fee simple to such person, persons or corporations as directed by the instrument of revocation.

The only applicable provision of the taxing act which requires the inclusion in the gross estate of transfers of property where there is a power of revocation is section 302 (d), and that, as above pointed out, refers only to transfers by “the decedent.” It may be true, however, that where a decedent has power by an instrument of revocation to bring property under his own dominion and control, the value of such property may be included in the gross estate under section 302 (a) of the statute. That requires the inclusion in the gross estate of the interest in property “of the decedent at the time of his death.” We do not think, however, that a power of revocation which may not be exercised by the decedent alone could constitute an interest in property within the meaning of subdivision (a).

The case of Reinecke v. Northern Trust Co., 278 U. S. 339, involved seven trusts created by the decedent. The Supreme Court held that two were taxable because subject to a power of revocation in him alone. In each of the others the decedent reserved a power to limit, change, or modify, to be exercised in four of the trusts by joint action of himself and a single beneficiary, and in the remaining one by himself and a majority of the beneficiaries acting jointly. As the title was put beyond the decedent’s control at the time of the creation of the trust instrument, the Supreme Court held that these transfers were not includable in the gross estate.

In Mackay v. Commissioner (C. C. A., 2d Cir.), 94 Fed. (2d) 558, it was held that the power to revoke which was not exercisable by the decedent alone rendered transfers made by the decedent (not in contemplation of death) beyond the pale of the statute, where, as here, the trust was created prior to the effective date of the Revenue Act of 1924.

The decedent’s two sisters had an interest in the trust estate. The sole purpose for the creation of the trust estate in 1923 was to keep the interests of the heirs of Kate Hay Brown together. Kate Hay Brown inherited an undivided one-half interest in the estate of her father, which consisted of many farms and other pieces of real estate. The properties had never been separated between herself and her brother, Logan Hay. A joint operation of the farms and other pieces of real property was believed to be for the interest of all. Logan Hay, the decedent’s uncle, had a one-half undivided interest in the many farms and other pieces of real property exactly the same as the children of Kate Hay Brown had. Presumably this was the reason that his consent was to be obtained before there could be any revocation of the trust instrument.

Since the decedent did not alone have a right to revoke the trust instrument, we think that the power of revocation contained in paragraph twenty-four does not warrant the inclusion in the gross estate of the decedent of the interest in the trust estate acquired by him from his father. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85; White v. Poor, 296 U. S. 98; Estate of Waldo C. Bryant, 36 B. T. A. 669, 672.

The respondent’s action is reversed in including in the gross estate of the decedent any more than a two-ninths interest in the trust estate.

Reviewed by the Board.

Decision will Toe entered wider Rule 50.