author: Steknhagen :

text:
    Belle-Vue Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99564.
    Promulgated December 6, 1940.

      Norman Blocls, Esq., for the petitioner.

      Lloyd W. Greason, Esq., for the respondent.
   OPINION.

Steknhagen :

Because of petitioner’s financial difficulties, substantially all of its shares were in 1929 transferred in trust to representatives of its principal creditors with the voting rights. The same persons formed a creditors’ committee and took the control and management of the business. In 1934 the trust was continued for a five-year period, and the creditors agreed to an equal extension of time for payment of the debts. After sustaining steady losses, petitioner made a profit in 1933 and 1934, but made no payment on its notes. It made profits in 1936 and 1931, and paid $53,100.73 and $77,906.55, respectively, on the notes. It claimed a credit of $53,100.73 for 1936 and of $56,920.94 (the amount of its net income) for 1937 in the computation of its undistributed profits tax. It assails the Commissioner’s disallowance of these credits.

By section 14 of the Revenue Act of 1936, a surtax is imposed upon the net income of corporations. By section 26 (c) the following credits are allowed:

(1) PROHIBITION on Payment op dividends. — Aii amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1986, which provision expressly deals with the payment of dividends. * * *
(2) Disposition op profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. * * *

Petitioner invokes both subsections. It contends that a prohibition against dividends was implicit in the trust agreement and the 1934 contract with the creditors extending the time of payment, the shareholders having been told not to expect anything for many years, if ever; that these agreements were made to avoid a receivership; and that the creditors’ control, given to assure a payment of debts, precludes dividends until the debts are paid. No provision of the contract, however, “expressly deals with the payment of dividends”, or “with the disposition of earnings and profits”, which is the condition upon which the statute bases the credit. As petitioner suggests, the term “earnings and profits” need not appear literally in the contract if it is clear from other terms that debt payments from earnings and profits are required. G. B. R. Oil Corporation, 40 B. T. A. 738; Michigan Silica Co., 41 B. T. A. 511 (on review C. C. A., 6th Cir.). But the present contract, instead of forbidding dividends, expressly contemplates the possibility of their payment, and provides that the trustees upon receipt must turn them over to the original shareholders. Petitioner calls this provision a precautionary measure and points to the improbability that the creditors would permit a dividend when they held unpaid notes of large amount and petitioner was in such a precarious financial condition.

To support the statutory credit, a contract is to be construed according to its legal effect rather than in the light of an assumed business policy. In Cooperative Publishing Co., 40 B. T. A. 466 (on review C. C. A., 9th Cir.), the exemption of section 14 (d) (2) was denied to a corporation which contended that its condition was equivalent to receivership because of insolvency and a proceeding to foreclose its assets. In Moloney Electric Co., 42 B. T. A. 78, 85 (on review C. C. A., 8th Cir.), the credit of section 26 (c) (2) ivas denied, the Board saying:

Petitioner contends that the facts bring it “within the letter and the spirit of the section.” It may be that it is within the spirit; but that is not sufficient. * * * It is our duty to construe the statute precisely as written; and unless the petitioner brings itself within its terms it can not prevail.

It is probably true that, under the circumstances and consistently with the spirit of the trust agreement and the contract extending the time for payment of the notes, no dividends would be declared by petitioner because the controlling trustee-creditors would not permit it; and that a request for such permission “would have been a vain and purposeless thing.” Kilby Steel Co., 41 B. T. A. 1237. But petitioner never agreed to refrain from declaring a dividend. Its shareholders simply placed the control of the business and finances in the hands of others. Even if it be treated as party to this arrangement by its agreement in the debt extension contract to implement the trustee-creditors’ control, still its commitments did not expressly involve dividends. Petitioner’s directors, as good business policy, would probably have refrained from paying dividends. Petitioner contracted not to borrow without the creditors’ approval, and to sell its assets if an offered price would have covered its debts; but this was not a contractual restriction on the payment of dividends. Even though its financial condition was an effective obstacle to any such payment, the statute provides only for a contractual inhibition. By the trust agreement the shareholders gave the creditors’ committee a free hand to act for the betterment of the corporation’s condition and the payment of its debts; the trustees acted for the shareholders in voting the shares. The directors, however, had full power to declare a dividend if the petitioner’s condition warranted it. It was the financial condition and not a contractual prohibition that prevented the payment of a dividend. Section 26 (c) (1) provides for no credit in such case.

In Page Oil Co., 41 B. T. A. 952, 964, the contract expressly prohibited the payment of a dividend until certain debts were paid, and provided further that if a dividend should be declared, the debts would immediately become due. It was held that that was not a provision for election, but that such a declaration of dividend would have been a violation of the contract. To the same effect is Auto Interurban Co., 40 B. T. A. 161. Sutcliffe Co., 41 B. T. A. 1009, recognized the effectiveness of a contract prohibiting dividends, and held that it was not to be disregarded because the parties had by later agreement reduced the scope of the restriction. In Monroe Abstract Corporation, 41 B. T. A. 5, the taxpayer expressly agreed to deposit 5 percent of income in a fund to cover losses; the credit was denied. In Davison-Joseph Campau Realty Co., 41 B. T. A. 675, a bylaw restricting dividends was held not to support a credit. In Thibaut & Walker Co., 42 B. T. A. 29, the contract was between the taxpayer and its four shareholders, and, unlike petitioner’s, did expressly limit dividends. The Board held it insufficient to support the credit., saying:

Obviously the corporation was a party to the above agreement and the agreement contains a provision which expressly deals with the payment of dividends. Also, a distribution in excess of 10 per cent during the taxable years would have violated the provisions of the agreement. Nevertheless, it is our opinion that section 20 (c) (1) does not apply. The corporation did not contract that it would refrain from paying dividends in excess of 10 per cent. On the contrary, it was the four individuals who agreed that as directors they would vote in favor of a dividend policy limiting the dividends to 10 per cent and requiring that the next $15,000 of earnings be added to capital. Congress intended to give a credit to a corporation only where the corporation had bound itself not to pay a dividend. This is reasonably clear from the language of the section. The legislative history indicates that Congress was trying to relieve situations in which a corporation had contracted with creditors to retain its earnings for their protection, but did not have in mind contracts such as this one, entered into by parties inside the corporate group to refrain from declaring dividends for their own mutual benefit.

For similar reasons petitioner is entitled to no credit by virtue of section 26 (c) (2). Although, as has been said, the term “earnings and profits” need not appear literally in a contract to support the claim for credit, Joell Co., 41 B. T. A. 825; Moloney Electric Co., supra; G. B. R. Oil Corporation, supra; Michigan Silica Co., supra; nevertheless, as said in the G. B. R. Oil Corporation case:

the basic intent of Congress seems to have been to include in the provision only contracts which inevitably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments.

Petitioner was not bound by contract to apply current earnings to satisfaction of its debts. In fact, in 1934 it made a profit of $15,-630.47 and paid nothing on the debts. A mere probability that some or all of that amount would be so used later would be insufficient, for what the statute prescribes is an express written contractual provision that “earnings and profits of the taxable year * * * be paid within the taxable year in discharge of a debt * * This provision has not been loosely applied. Cf. Moloney Electric Co., supra; Hub Clothing House, Ltd., 39 B. T. A. 900. In petitioner’s case no payment or setting aside was specifically required for any year; the directors were free to exercise their untrammeled judgment.

Petitioner relies only on the “spirit” of the contract and the intention of the shareholders that the creditors’ committee use all earnings to pay debts. It demands a construction of the contract as including a restriction upon dividends by implication from the circumstances of its financial condition. But it refrained from such an express restriction, and the statute is clear that only an express provision is to be recognized for the purpose of the credit. “The argument based upon equity is of no avail where there is no statutory provision allowing a credit.” J. A. Dougherty's Sons, Inc., 42 B. T. A. 892.

The Commissioner’s determination must be approved.

Petitioner contends that chapter 22, article 5A, section 1179, of Michie’s North Carolina Code (1989), which prohibits the payment of a dividend by a corporation if its debts exceed two-thirds of its assets, is sufficient to entitle it to the credit. Such a contention has been rejected, Commissioner v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46; Crane-Johnson. Co. v. Commissioner, 311 U. S. 64. Petitioner suggests, but does not argue, that section 26 (c) is unconstitutional. The constitutional validity has been sustained in Commissioner v. Northvcest Steel Bolling Mills, Inc., supra.

The Commissioner’s determination is sustained.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: TuRnee:

license: Public Domain

text:
    Walter M. Priddy and Swannanoa H. Priddy, Petitioners, v. Commissioner of Internal Revenue, Respondent. Phillip Harry Lipstate and Gertrude Faber Lipstate, Petitioners, v. Commissioner of Internal Revenue, Respondent. C. C. Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93255, 96049, 97845.
    Promulgated December 6, 1940.

      Harry 0. Weelcs, Esq., and B. B. Gannon, Esq., for the petitioners.

      D. D. Smith, Esq., and F. H. Wigsell, Esq., for the respondent.
   OPINION.

TuRnee:

The respondent has included in the taxable income of the three petitioners, Priddy, Lipstate, and Crews, as additional compensation for services rendered to the Sabine Eoyalty Corporation, certain amounts representing the fair market value of the shares of stock delivered to them during the year 1935. He relies on Indianapolis Glove Co. v. United States, 96 Fed. (2d) 816, and several other cases cited and discussed by the court in that decision.

The petitioners contend that they acquired the shares of stock by purchase, rather than as compensation for services rendered, and that no taxable gain in any amount was realized upon the receipt thereof. On brief they cite Omaha National Bank v. Commissioner, 75 Fed. (2d) 434; Gordon M. Evans, 38 B. T. A. 1406; and Electric Storage Battery Co., 39 B. T. A. 121, but they do not seem to rely on any particular case.

The argument presented by the parties seems to be predicated on the assumption that the transaction between Priddy and the corporation, in so far as the tax question is concerned, should be treated the same as the transactions between the corporation and Lipstate and Crews. We think the assumption is correct, because they all received the stock in the same manner and under the same corporate resolutions.

In the resolution of October 8, 1981, the only reason indicated or explanation given for the understanding that the corporation would hold in its treasury 10 percent of the first authorized stock for petitioner Priddy was that he was “taking the leading part in organizing this company.” The resolution does not contain anything indicating that the corporation agreed to sell or that he agreed to purchase the stock in question, nor does it indicate that they contemplated such a transaction. It is true that at the same time another resolution was adopted which gave the original subscribers the opportunity, after one-half of the stock of the corporation had been sold, to subscribe pro rata for the remaining one-half of the stock at the original price of $4 per share before it was offered to others, but the stock in question was not acquired under this latter resolution.

The stock was in fact delivered to the three petitioners under and pursuant to the resolution adopted by the Texas corporation on November 10, 1933, and the provisions contained therein leave no doubt as to the nature of the transaction. That resolution recited that petitioner Priddy was “largely instrumental” in the organization of the corporation and' that it was understood that he would receive the stock in question “conditioned upon the performance of the work which he was to do.” Then the resolution provided that the stock would be “held in the treasury” and “remain the property of the corporation” until the time and upon the contingency mentioned and would be delivered to Priddy only upon full compliance with certain conditions, namely, that he “will continue the management of the affairs of the Sabine Eoyalty Corporation upon a nominal salary to be fixed from time to time, and if and when the common stock dividends paid to the original investors have equaled the sum of $4 per share.” Priddy had agreed with Lipstate and it was understood from the beginning by all the interested parties that the latter would be entitled to receive a portion thereof, or 1,000 shares, provided that he put forth his best efforts in promoting the affairs of the corporation, also that he would become its secretary and treasurer and would serve on the executive committee. It was likewise agreed and understood that Crews would be entitled to receive 300 shares, provided he served as president of the corporation and a member of the executive committee and used his influence in promoting the affairs of the corporation. The three petitioners performed the duties required of them and in August 1935 the dividends paid on issued and outstanding stock aggregated more than $4 per share and the stock in question was delivered to them.

The transactions as finally consummated clearly lacked certain essential elements of sales. The corporation never agreed to sell the stock, the petitioners never agreed to purchase it, and they did not in fact purchase it. If they had not rendered the services required of them and if the dividends on outstanding stock never had aggregated as much as $4 per share, they might never have become the owners of the stock. Assuming that the petitioners could have purchased the stock in question at any time under the resolution above referred to by paying in the difference between the aggregate dividends paid per share) and $4, the fact still remains that they did not do so with respect to the stock in question. They gave nothing for the stock except their services, and we think they received it as compensation for such services. Indianapolis Glove Co. v. United States, supra.

The record shows that none of the stock in question was issued or outstanding and no dividends were paid thereon until it was delivered to petitioners in August 1935. They were not entitled to any part thereof until it was delivered to them, and it constituted income to them at that time to the extent of its fair market value. The respondent has determined that the fair market value of the stock was $7 per share and on that basis has computed the additional compensation received by each petitioner. They have not shown that this determination is erroneous, and it is accordingly sustained.

The next issue is whether the petitioner, Walter M. Priddy, sustained a deductible loss in 1935, either ordinary or capital, as a result of the foreclosure by the John. Hancock Life Insurance Co. of the second deed of trust on the Brooks Thompson farm.

Petitioner Priddy contends on brief that as a result of the foreclosure sale his interest in the property, which he claims .exceeded $55,000, became a total loss in 1935 and is deductible from gross income in its entirety as an ordinary loss, citing John O. Fowler, 40 B. T. A. 1293; and Commissioner v. Hammel, 108 Fed. (2d) 753; certiorari granted, 310 U. S. 619. His position seems to be that, although legal title had passed to others in 1927 or 1928, he still retained some interest or equity in the property until the date of the foreclosure sale and that the loss was not realized until that time.

The respondent contends that the petitioner lost his investment in the property prior to or during 1928 and that the loss is not deductible in 1935. He argues that the transaction whereby the petitioner conveyed the property to the committee of three or four individuals selected bj the creditors, which conveyance was made in 1927 or 1928, must be considered a sale of the property as of the date of the conveyance, and when so considered it establishes the loss of his investment in the property, citing Rogers v. Commissioner, 103 Fed. (2d) 790; certiorari denied, 308 U. S. 580, or, if he retained any interest in the property subsequent to that conveyance, such interest was acquired by the receivers, as officers of the court, when the property was transferred to them, citing Atlantic Trust Co. v. Chapman, 208 U. S. 360, 370, 371, and that such interest was subsequently disposed of by sale to the creditors’ committee, citing Berry v. Harrell, 83 Fed. (2d) 671; certiorari denied, 299 U. S. 559. He also argues that the petitioner abandoned any interest he had in the property prior to 1935, citing Rhodes v. Commissioner, 100 Fed. (2d) 966; Realty Operators, Inc., 40 B. T. A. 1051; and W. W. Hoffman, 40 B. T. A. 459. He further contends that the cost of improvements on the farm could not be included in petitioners cost basis because he has not proven the depreciated cost of such improvements.

The petitioner’s contention that he retained an interest or equity in the property until the date of the foreclosure sale seems to rest on the fact that the debtors had an oral understanding with the creditors that if any residue remained after all the debts were paid, such residue would be distributable to them, and further that they had hopes of thereby salvaging something out of the properties conveyed.

The record shows that at the time the creditors’ committee took over the properties it was estimated that the combined claims of the various creditors were in excess of $6,000,000 and that the combined value of all the properties to be taken over was around $4,000,000. See Thomas v. Perkins, 108 Fed. (2d) 87. The record also shows that at that time the committee held unsecured and partially secured claims against the petitioner Priddy in the amount of $3,038,023.53, and he testified that the total value of his assets was around $2,000,000. It thus appears doubtful whether he had any well founded hopes of salvaging anything out of the properties conveyed. Moreover, the hope that some residue would remain after the debts had been paid and the oral understanding that such residue would be distributed to the debtors do not establish that the loss was sustained in 1935. The facts of record indicate that the loss was sustained in 1927 or 1928, and we think that is the only reasonable conclusion that can be reached. In any event we do not think the petitioner has overcome the prima facie correctness of the respondent’s determination, and it is accordingly sustained. In view of this conclusion, it is unnecessary to consider the question of whether a loss sustained as a result of a foreclosure sale constitutes an ordinary or capital loss, which question is pending before the Supreme Court.

The next issue involves the question of whether the respondent erred in disallowing the deduction of a portion of the business expenses claimed by the petitioner Priddy to have been incurred and paid in 1935 and 1936.

On his return for 1935 Priddy deducted the amount of $2,304 as business expenses, $1,200 of which represented expenditures for meals, hotels, etc., while he was absent from Wichita Falls and included living expenses while in Tyler, and the remaining $1,104 represented automobile expenses computed at the rate of 5 cents per mile, which included mileage covered on week-end trips between Tyler and Wichita Falls. On his return for 1936 he deducted as business expenses an amount of $2,776 representing combined expenditures for automobile, meals, hotels, etc., which amount was arrived at by substantially the same method of computation as employed in arriving at the deduction for 1935. Of the deductions claimed the respondent disallowed $926.07 for 1935 and $1,116.06 for 1936.

The dispute centers around the location of Priddy’s “home” as that term is used in section 23 (a) of the Be venue Acts of 1934 and 1936. In Mort L. Bixler, 5 B. T. A. 1181, we said that a taxpayer’s “home”, as that term was used in the statute, was his “place of business, employment, or the post or station at which he is employed.” We held that a taxpayer may not keep his place of residence at a point where he is not engaged in carrying on a trade or business and take a deduction for his living expenses while away from such residence or deduct traveling expenses for trips between his place of business and such residence. That case has been consistently followed. Charles E. Duncan, 17 B. T. A. 1088; affd., 47 Fed. (2d) 1082; Jermie A. Peters, 19 B. T. A. 901; and George W. Lindsay, 34 B. T. A. 840.

The facts here show that Priddy’s “home”, as that term is used in the applicable revenue acts, was at Tyler, Texas, which was his principal place of business and the place where his employment by the Sabine Eoyalty Corporation necessitated the maintenance of regular living quarters. He was not away from his “home” in the pursuit of a trade or business while he was in Tyler and he is not entitled to deduct the cost of meals and lodging incurred and paid while he remained in that city. The same is true with respect to the expenses ascribed to the automobile trips made to Wichita Falls for the purpose of visiting his family over week ends.

While it is true that Priddy was also a salaried officer of the Ellis Drilling Co. and the Walter Priddy Corporation, which offices required hinT to make occasional trips to Duncan, Oklahoma, and Wichita Falls, he testified that those corporations usually paid his traveling expenses. If there were any exceptions during the taxable years, they are not shown by the record.

Being of the opinion that Priddy was not entitled to deduct living expenses while in Tyler, nor the automobile expenses of the weekend trips to Wichita Palls, and considering the amount of time spent at Tyler and the number of such week-end trips, we think the respondent was reasonable in his disallowance of $926.07 of the business expenses claimed for 1935 and $1,116.06 for 1936. His action is accordingly sustained.

In the notice of deficiency the respondent determined that in 1935 the petitioner Lipstate received commissions in the amount of $2,082.20, that he reported only $1,315.20, and that the difference of $767 should be added to his income. Lipstate testified that the credits entered in his “commission account” included an opening entry of $867 under date of January 1, 1935, which had in fact been earned in 1934 and had been collected in cash during that year and reported in his 1934 income. *

: On brief the respondent seems to be willing to accept the explanation offered by Lipstate (at least he does not argue otherwise), but he is still unwilling to concede the issue. He now contends that during 1935 commissions of $3,175.40 were credited to the “commission account.” Then, for some reason, he deducts $59.17, which he says was the credit balance in Lipstate’s “employee account”, and arrives at the figure of $3,116.23, which he states was either paid or beneficially credited during that year. From this figure he deducts $2,182.20 ($1,315.20 reported in 1935 plus $867 allegedly received in 1934) . and arrives at the figure $934.03, which he now contends that Lipstate neither reported as income nor accounted for.

With respect to this new contention of the respondent it will suffice to point out that the $3,175.40 which he now contends was credited on the “commission account”, represents gross credits and does not take into consideration the adjusting debits entered thereoil.

We have carefully checked a photostatic copy of the commission account introduced as evidence and we have found that it shows net credits representing commissions earned in 1935 in the total sum of $1,637.20. On brief the petitioner contends that in computing the net credits entered on the account, two offsetting items in the respective amounts of $80 and $81, which had not been entered asi debits on the account, should be taken into consideration. The explanation entered on the account with respect to these two items is so confusing that we are unable to reach any such conclusion and in the absence of any other evidence on this point the contention is rejected. The account shows net credits in the amount of $1,637.20 and, since Lip-state reported only $1,315.20, the difference should be added to his taxable income.

Several other issues were raised in the petitions of Walter M. Priddy and 0. 0. Crews, but they presented no evidence or argument with respect thereto and such issues will be regarded as having been abandoned by them.

Decisions will be entered under Rule 50.


author: Arundell :

text:
    Milk Bottle Exchange, Inc., Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99515.
    Promulgated December 6, 1940.

      Jesse I. Miller, Esq., for the petitioner.

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

Arundell :

This proceeding is before us on the motion of counsel foT the respondent for leave to file an amended answer. The motion is resisted by the petitioner.

The deficiency notice on which the proceeding is founded is addressed to the Milk Bottle Exchange, Inc., and proposes the assessment of income' and profits taxes and penalties as transferee of assets of the Central Indiana Milk Dealers Bottle Exchange, Inc. A petition was timely filed alleging error in the respondent’s determination in several respects. Counsel for the respondent answered, denying en'or and alleging facts designed to sustain his determination of transferee liability. Reply thereto was filed by counsel for the petitioner. On April 10, 1940, counsel for the respondent moved for leave to file an amended answer and tendered therewith the proposed amended answer. The motion alleges in part:

A further investigation by respondent of the facts indicates the conclusion that petitioner is not a transferee of Central Indiana Milk Dealers Bottle Exchange, Inc., but is the same corporate entity as Central Indiana Milk Dealers Bottle Exchange, Inc., with merely a change in name. The proposed amended' answer * * * contains allegations in accordance with respondent’s present understanding of the facts, from which the above conclusion is drawn. Due to uncertainty as to the effect of said facts, however, the proposed amended answer * * * in the alternative, pleads additional facts upon which liability of petitioner as a transferee may be based.

By the proposed amendment the respondent seeks to sustain deficiencies determined for the fiscal year’s October 31, 1932, 1933, 1935, and 1936, as liabilities of the petitioner either as a taxpayer or a transferee. Stated 'otherwise, ;the respondent, having determined transferee liability, now seeks to convert the proceeding instituted on his notice of determination into a proceeding against the original taxpayer by an amendment of the pleadings.

The pleadings in the case contain no facts as to the operation of the statute of limitations. However, on brief counsel for the respondent asserts that returns for all years were filed on June 4, 1937. This being so, the period for assessment for the years 1932 and 1933 terminated on June 4,1939, which was some ten months before the respondent moved to amend. As to the other two years, 1935 and 1936, the statutory period for assessment is three years and did not expire before June 4, 1940 — after the motion for leave to amend was filed.

The procedure for collection of deficiencies in the case of a taxpayer is provided for in section 272 of the Revenue Acts of 1932, 1934, and 1936. The procedure for enforcing the liability of a transferee is prescribed by section 311 of the same statutes. The provisions of these sections are well known and do not need detailed repetition here. It is enough for present purposes to point out that section 311 provides that the liability of a transferee shall “be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in tax * * This provision does not merge a tax liability and a transferee liability, nor does it make one proceeding cover both liabilities. When transferee proceedings were first brought within the jurisdiction of the Board by the Revenue Act of 1926, the conference report said that the transferee section (280) “makes the procedure for the collection of the amount of the liability of transferees conform to the procedure for the collection of taxes * * * for procedural purposes the transferee is treated as a taxpayer would be treated? (Italics added.) Construing the procedural provisions of the Revenue Act of 1926 relating to taxpayers and transferees in Edward Michael, 22 B. T. A. 639, we said:

* * * There is nothing which would lead to the belief that Congress intended that in one proceeding there must be determined not only the amount of the tax due from the taxpayer for the year involved, but also the amount for which he might be liable, at law or in equity, upon account of the tax of some other taxpayer. The two liabilities are separate and, distinct, arise from different states of fact and are based upon entirely different theories. They present two distinct causes of action upon either of which it would naturally be assumed proceedings might be maintained independently. [Italics added.]

In the Michael case the respondent first sent notices to petitioners of liability as transferees of a corporation for income tax for 1922. While petitions for redetermination of such liability were pending before the Board, the respondent sent to the same persons notices of deficiencies in their individual income taxes for 1922. The petitioners took the position that the second notices were notices of a second determination in respect of the same taxable year and therefore of no effect because prohibited by section 274 (f) of the 1926 Act. Disposing of the contention of the petitioners, we said:

* * * The effect of the argument advanced by the petitioners is that in one proceeding there must be determined the liability of the petitioner for his own taxes and his liability, in law or in equity, for the taxes of all other taxpayers. We find nothing in the statute or in the committee reports which evidences such an intent. Such a construction of the act would involve great difficulty in its administration and would practically render valueless the provision of the law which grants a longer period in which to assert the liability of a transferee of assets. It is a construction which is to be indulged only if the statute clearly requires it.
The argument of the petitioner is that the notices mailed November 19, 1926, asserting liability under section 280 of the act are “notices of a deficiency” and are “mailed to a taxpayer.” Unless both of these contentions are sound, the petitioners’ argument must fail.
Section 280 distinguishes between “the liability, at law or in equity, of a transferee of property of a taxpayer” and “a deficiency in a tax.” It provides that the former shall “be assessed, collected and paid in the same manner” as the latter. This serves to make the procedure similar, but the language clearly differentiates between a liability as transferee and a deficiency. Had Congress intended the construction for which petitioner contends it would have been much simpler to have modified the definition of a deficiency to include such a liability. Instead we find it drawing a distinction.

The Michael case was affirmed by the Circuit Court of Appeals for the Second Circuit in a per curiam opinion which adopted in full the opinion of the Board, 75 Fed. (2d) 966; certiorari denied, 296 U. S. 579. The Michael case is quoted by the Court of Appeals of the District of Columbia as authority for the proposition that a taxpayer and a transferee are so separate and distinct that a tax paid by one as a taxpayer may not be set off against its transferee liability. Continental Oil Co. v. Helvering, 100 Fed. (2d) 101, 110.

In California Iron Yards Corporation v. Commissioner, 82 Fed. (2d) 776, the petitioner was a transferee and claimed that the notice to it was a second notice of deficiency, the first notice being the one to the transferor. The Circuit Court of Appeals for the Ninth Circuit overruled the transferee’s contention on authority of the Michael case.

The respondent’s position in this proceeding is very much the same as was the petitioners’ in the Michael case. Having determined a transferee liability, he now says that in the proceeding instituted on the notice of determination we should redetermine both the liability of the taxpayer and of the transferee. The necessary consequence of our holding in the Michael case as to the gap between a taxpayer proceeding and a transferee proceeding is that a redeter-mination of both may not be made in a single proceeding instituted upon a notice of determination of only one of the two liabilities. See also Hulburd v. Commissioner, 296 U. S. 300, holding that a transferee notice to an estate of a decedent will not support a charge of liability on the part of a legatee of the estate.

Emphasis on the holding that the statutes bringing transferee proceedings within the jurisdiction of the Board did not intend to merge such proceedings into those of taxpayers is found in provisions not heretofore mentioned. The statutory period for assessment and collection in the two proceedings is different. If the proceedings were merged, which period would apply? The burden of proof in the two proceedings is different. How would this burden be applied if the proceedings were merged ?

Counsel for the respondent cites a number of cases which he says sustain his right to amend in this case. None of them are in point on the facts or the questions involved. For the most part they involved jurisdictional questions, as where a corporation filed a petition based upon a notice of deficiency addressed to its predecessor, or where a corporation purporting to be the taxpayer and having filed a petition later sought to avoid liability on the ground that it was not the taxpayer. Those decisions are not helpful on the procedural question in this case.

Our holding on the authority of the cases cited above is that the one notice sent to the petitioner herein as transferee can not, by amendment of the respondent’s answer, be made to serve as both a notice of transferee liability and as a notice of deficiency in original tax liability. The motion for leave to amend will be denied.

Reviewed by the Board.

Opper. dissents.

       Conference report to accompany H. R. 1, H. Kept. No. 356, 69th Cong., 1st sess., p. H.

       Similar provisions appear in the 1932, 1934, and 1936 Acts in section 272 (i).

       See sec. 275 (a) and 311 (b) (1) and (2), Revenue Act oí 1934.

         See Exile 32 and sec. 602, Revenue Act of 1928.


author: Oppek:

text:
    John and Pauline Tonningsen Trust, Bank of America National Trust and Savings Association, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99280.
    Promulgated December 10, 1940.

      F. J. Kibnartin, Esq., and J. W. Radii, Esq., for the petitioner.

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

Oppek:

The first question is whether capital gains of the petitioner trust concededly allocable to corpus under California law were so “paid or permanently set aside” for charitable purposes as ta be exempt from income tax under Revenue Act of 1934, section 162 (a).

There is no contention that any amounts were actually paid, and the question arises by reason of provisions in the trust instrument granting to certain individuals such rights to income and possibly to principal as to cause the parties to disagree whether it can be said that the capital gains in question were permanently set aside for the use of the charities, so as to be beyond the reach of distribution to the individual beneficiaries and thus to comply with the requirements of section 162 (a).

A cognate question has arisen from time to time as to exemption from estate tax under Revenue Act of 1926’, section 303 (a) (3), and similar provisions of other acts. See e. g. Ithaca Trust Co. v. United States, 279 U. S. 151. It is suggested that the tendency in considering such cases has been for the courts to ascertain as nearly as may be the extent to which a gift may reasonably be considered as destined for charitable purposes and to permit the exclusion of an estimated value thereof as the nearest approximation that can be made to a necessarily final result. See Boston Safe Deposit & Trust Co. v. Commissioner (C. C. A., 1st Cir.), 66 Fed. (2d) 179, 184; certiorari denied, 290 U. S. 700.

In cases dealing with income, however, where questions identical to that now before us were involved, a more rigorous approach has been adopted on occasion, and the deduction has been denied unless enjoyment by the charitable beneficiaries is shown to be almost certain and virtually inevitable. See e. g. Bank of America National Association, Trustee, 19 B. T. A. 1273; Gertrude Hemler Tracy et al., Trustees, 30 B. T. A. 1156; Guaranty Trust Co. of New York, Executor, 31 B. T. A. 19; Old Colony Trust Co., Trustee, 33 B. T. A. 311. But see Helen G. Bonfils et al., Executors, 40 B. T. A. 1079; affd. (C. C. A., 10th Cir.), 115 Fed. (2d) 788. See also Union Trust Co. of Pittsburgh v. Commissioner (C. C. A., 3d Cir.), 115 Fed. (2d) 86.

Whether or to what extent the two rules are in fact different, however, or which of them is more properly applicable to such a case as this, we find it unnecessary to decide. For even if we adopt the approach suggested by petitioner and endeavor to determine, on the basis of the probabilities as they existed in the years involved, the reasonable likelihood that these capital gains were protected from invasion in favor of the individual beneficiaries, we are forced to conclude that the weight of evidence is contrary to petitioner’s contention. Likelihood that corpus would be devoted to noncharitable purposes appears from the most cogent of circumstances, the compelling logic of actual events. It is shown that in all the relevant years such large payments were made to the individual beneficiary that a substantial amount in each year was taken from the corpus. Anri of course if it happened in one year there is the more reason for expecting a repetition. There is no indication that the years before us were exceptional or that the needs of the individual beneficiary were greater or the trust income less than could be anticipated in any typical period. It follows that petitioner has failed to show that the corpus, of which these capital gains became an indistinguishable part, was so protected from invasion as to enable us to say that they were permanently set aside for the benefit of the charities. The evidence indicates the contrary.

Petitioners contend that since this invasion of corpus had the consent of the remaindermen, the charitable institutions, it is no proof that the life tenant was within her legal rights in demanding the payments from corpus. This may or may not be true, since the consent of the beneficiaries in despite of their financial interest might well proceed from a recognition on their part that a litigated contest would result unfavorably to them. But, be that as it may, our question is “a factual one”, Helen G. Bonils, supra; not what were the legal rights of the parties but what were the actual probabilities. And if the consent of the remaindermen to the invasion of corpus was obtained in one year, there would be no reason to assume that it would not be forthcoming, as in fact it was, in the next. It is unnecessary to add that there were also individual remaindermen for the payment of whose specified shares corpus would have to be used. See Bank of America National Association, Trustee, supra. We conclude that the capital gains which were added to corpus in 1935 can not be said to have been paid or permanently set aside for charitable purposes.

For the year 1936 a different question arises. Payments of estate tax on the estate of the grantor of the trust and of attorneys’ fees were made by petitioner, the former being charged to corpus. An amount equal to the income of the trust was paid as such to the charitable organizations, and is claimed as a deduction in the full amount under section 162 (a). It is respondent’s position in disallowing that deduction that the payments of estate tax and attorneys’ fees were actually payments out of income and to the extent thereof reduced the current income available for distribution to the charities, so that in effect what was paid to them was in reality not income but corpus and hence not deductible.

The deduction which is permitted is of “any part of the gross income, without limitation, which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid” for charitable purposes. If, as respondent contends, the parts of the gross income in question were not, pursuant to the deed creating the trust, paid to the charities, the deduction would not be available. The issue, therefore, narrows to the question whether the trust instrument provided that the payments of estate taxes and attorneys’ fees should be made from income or whether it directed that the income should be used for the payments to charity.

According to the deed of trust the payments to the charitable institutions were to be the net income “not required for any of the purposes aforesaid.” This is provided by article vii (d). Article vii (a) requires the trustee “out of the income of the trust fund and estate, if that be sufficient, or out of the principal thereof, if necessary” to pay “the inheritance tax upon the distributive shares of or interests in the trust fund and estate, if any be due, and any Federal estate tax due upon the whole thereof and the costs and expenses of the trust.”

These provisions appear to be so clear as to offer small room for construction. The income of the trust for the year 1936 was sufficient to pay the estate taxes and attorneys’ fees in question. The trust deed requires that under those circumstances they be paid out of that income. It provides for the distribution to the charities of only the income not so required, thus precluding any distribution to them “pursuant to the terms of the will or deed creating the trust” of income which had already been used pursuant to those terms for other purposes. The deduction in question accordingly finds no support in section 162 (a). See Old Colony Trust Co., Trustee, supra.

It is not entirely clear whether the payment of attorneys’ fees is also claimed as a deduction on the ground of ordinary and necessary business expense. Such a claim, if made, must be denied in the complete absence of any showing that the trust was engaged in a trade or business. Deputy v. Dupont, 308 U. S. 488; White Trust v. Commissioner (C. C. A., 3d Cir.), 119 Fed. (2d) 619.

The final issue involves the proposed imposition of a penalty for petitioner’s failure to file a return. The question raised is whether omission to file Form 1040 covering taxable net income of the trust, although concededly Form 1041, the information return, was duly filed, subjects petitioner to the penalty imposed by section 291 of the Revenue Act of 1936.

The penalty is for failure to file a return “required by this title.” Section 142 entitled “Fiduciary Returns” requires “every fiduciary” to “make under oath a return for * * * (4) every estate or trust the net income of which for the taxable year is $1,000 or over; (5) every estate or trust the gross income of which for the taxable year is $5,000 or over.” Nothing is said as to the form on which the return must be filed and there is no contention here that the respondent was not given all the necessary information on the form which the petitioner filed. Under the respondent’s regulations it is by no means clear that more than one return was required in the present case, nor on which form the income should be returned by the fiduciary. It is clear that a return on Form 1041 would be required if deductions were sought under sections 162 (b) or (c), but the deductions claimed by petitioner were those described in section 162 (a), a situation as to which the regulations are silent. Nor, on the theory of either party to this proceeding, would the case fall within the condition that a portion of the income is retained by the fiduciary and the remainder distributed, since on petitioner’s theory none of the taxable income was retained and, on the respondent’s, all. We are accordingly unable to say that the missing return was required by the specified title of the revenue act, even though its provisions be amplified by reference to respondent’s regulations. That being so, the necessary prerequisite for the application of the penalty provision is absent. See American Circus Joint Venture, 39 B. T. A. 605. We do not purport to pass upon a case disclosing a failure to file a return clearly called for by the statute or even by respondent’s regulations, whether or not that return is an additional return to one otherwise required. See Collateral Mortgage de Investment Co., 37 B. T. A. 630; Lone Pine Lawn Corporation, 41 B. T. A. 638. Questions of that kind must be left open for determination on a record and under circumstances more favorable to respondent’s contention than those appearing here.

Decision will be entered under Rule 50.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      (a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23 (o>) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23 (o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit;
      *******

       SBC. 201. FAILURE TO FILE RETURN.
      In caso of any failure to make and file return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is duo to reasonable cause and not due to willful neglect, there shall be added to the tax: 5 per centum if the failure is for not more than thirty days with an additional 5 per centum for each additional thirty days or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. The amount so added to any tax shall be collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, in which case the amount so added shall be collected in the same manner as the tax. The amount added to the tax under this section shall be in lieu of the 25 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.

       Art. 142-1. Fiduciary returns. — Every fiduciary, or at least one oí joint fiduciaries, must make a -return oí income—
      *******
      (b) Por tbe estate or trust for -which he acts if the net income of such estate or trust is $1,000 or over, or if the gross income of the estate or trust is $5,000 or over, regardless of the amount of the net income, or if any beneficiary of such estate or trust is a nonresident alien.
      The return in case (a) shall be on Form 1040 or 1040A. In case (b) a return is required on Form 1040 with respect to any taxable net income of the estate or trust computed in accordance with section 162 and a return on Form 1041 with respect to any income deducted under section 162 (b) or (c). If a portion of the income of the estate or trust is retained by the fiduciary and the remainder is distributable or distributed to beneficiaries, both Forms 1040 and 1041 will be required-. * * *


author: Opper:

text:
    Center Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82350.
    Promulgated December 10, 1940.

      W. 8. Greathouse, Esq., and D. G. Eggermam,, Esq., for th6 petitioner.

      F. 8. Thompson, Esq., for the respondent.
   OPINION.

Opper:

Petitioner being chargeable as income in the year of forfeiture with the value of the building erected on its land by the tenant, Helvering v. Bruun, supra, the first question to be determined is the measure of the income thus received by it; that is to say, the value at that time of the part of the building on its lot, which is the only portion of the structure as to which respondent contends that the forfeiture created taxable income. The sole evidence of this value was submitted by petitioner at the hearing in the form of testimony of experts as to cost of replacement. Such replacement cost seems to us, particularly in the absence of any contradictory facts, the nearest approach possible to the ascertainment of market value, if indeed it is not exactly that; for our problem is to determine the value of the building as an item separate from the land and it seems fair to assume that the value of the property as a whole would exceed the value of the land alone by the amount which would be required to place upon vacant land a building of the same character.

On the whole record, we have found as a fact that the value in question was $57,600, arrived at by deducting from $60,000, our conclusion as to the value of a new building, depreciation of $2,400 computed for 2 years of a 50-year life. The undepreciated value is based not so much upon the conclusion testified to by either of the petitioner’s witnesses as it is upon figures which each endorsed in the course of his testimony. According to a computation from evidence of one witness the 1932 value would be $64,820 and of the other, $59,141.44. These figures are arrived at by us, as they were by one of the witnesses, by reducing $213,399.50, the stipulated actual cost of the building covering petitioner’s lot and the one next to it, by 25 percent, a decrease which both witnesses agree had occurred in building costs between the date of erection and the date of forfeiture; and then by attributing to that part of the building on petitioner’s lot, the value of which is the issue, the proportion of tlie resulting total which the area of.that lot, as computed by the one witness, or the cubic content of the building thereon, as computed by the other, bore to the total. We are satisfied that this is a reasonably satisfactory method of arriving at the value of the part of the building with which we are here concerned and for this reason have adopted the figure mentioned as approximately equaling the results arrived at by the two witnesses.

In each case, however, the witnesses proceeded to deduct the amount of $18,375 from the value so fixed because in their opinion that would be the cost of a partition separating the part of the building on petitioner’s lot from the remainder. This deduction we do not believe to be justified. There seems no quarrel with the conclusion that the two parts of the building were of greater value and more likely to be economically productive, if operated as a unit. While petitioner did not own the adjoining lot or the building thereon, it was in possession of them under a long-term lease, was itself operating the structure as a unit, and would have been able to dispose of it as such. The expenditure of $18,000 to partition the building, far from increasing the value of the entire property, would therefore have the opposite effect. And no convincing reason is apparent why it was necessary to assume at the time of forfeiture that this would have to be done. True, petitioner was having some difficulty with its landlord under the lease of the adjoining property. But if, as seems conceded, the building as a unit was of greater value than the sum of the two- parts, it was to be expected that there would be, as in fact there was, a method by which such differences could be accommodated. We are accordingly of the opinion that cost of replacement of the building need not be diminished, in order to determine its market value, by the bare possibility that at some time in the future a partition would become necessary.

The further question is whether certain securities originally the property of petitioner’s lessee, which were deposited by the latter as security to cover the cost of possible future construction of such a partition as called for by its lease with petitioner and by petitioner’s lease with its landlord, were income to petitioner to the extent of their value at the time of forfeiture.

It is provided by the forfeited lease: “In case of a forfeiture of this lease the lessor shall have the right * * * to said securities, and lessee’s rights therein shall terminate.” Under these circumstances we may assume that there would be little question as to the necessity of including their value in petitioner’s income for the year of forfeiture, under the principles of Commissioner v. Langwell Beal Estate Corporation (C. C. A., 7th Cir.), 47 Fed. (2d) 841, and, indeed, of Helvermg v. Brwm, supra, were it not for the additional factor that the securities, instead of being delivered to petitioner, were retained under the continuing provisions of its lease of the adjoining property. Petitioner contends that this prevented it from obtaining such rights of ownership and possession as justify regarding the forfeiture of the securities as income to it.

It seems to us, however, that the balance is clearly in favor of respondent’s position. The mere fact that the securities were retained by a third person and that possession was withheld under an agreement-similar to a pledge is insufficient to warrant the conclusion that petitioner’s receipt of title to the securities did not constitute income. Bonham v. Commissioner (C. C. A., 8th Cir.), 89 Fed. (2d) 725; Rodrigues v. Edwards (C. C. A., 2d Cir.), 40 Fed. (2d) 408. Such-cases as Stoner v. Commissioner (C. C. A., 3d Cir.), 79 Fed. (2d) 75; certiorari denied, 296 U. S. 650, are distinguishable on the ground that there the transaction was conditional and that it was impossible to say whether in fact title would ever pass. See Luther Bonham, 33 B. T. A. 1100, 1106; affd., Bonham v. Commissioner, supra; Gwinner v. Heiner, (C. C. A., 3d Cir.), 114 Fed. (2d) 723.

Under the arrangement before us it seems evident that petitioner became entitled as a result of the forfeiture to all of the attributes of ownership of these securities. Not only was title conferred upon it by the terms of the lease when the forfeiture occurred, but the same lease, coupled with petitioner’s lease of the adjoining property, gave it the immediate right thereafter to the interest or dividends thereon. It was permitted to obtain physical possession of the securities at any time upon deposit of substitutes. This renders particularly apt a quotation from Luther Bonham, supra: “Ownership of this stock had passed to the petitioner and he was exactly in the same situation as if other securities had been deposited in the place of the 750 shares * * Or petitioner could have obtained the benefit of a sale of the property subject to the pledge, Rodrigues v. Edwards, supra. And even the fact that these securities were deposited in pledge is of itself suggestive that they were not only petitioner’s property, but constituted its income. For the pled ge was in connection with an obligation which, after the forfeiture, was solely that of the petitioner itself. Warren Service Corporation, 39 B. T. A. 856; affirmed on this issue (C. C. A., 2d Cir.), 110 Fed. (2d) 723. Consequently, the fact that petitioner’s obligation of deposit was discharged by what had previously been the property of another, United States v. Hendler, 303 U. S. 564; Helvering v. Blumenthal, 296 U. S. 552, or, although part of the stipulated consideration for the rental of petitioner’s property did not pass into its hands, United States v. Boston & Maine Railroad, 279 U. S. 732, would not justify us in failing to treat this as petitioner’s income. Since these benefits flowing from the securities came to petitioner as a result of the forfeiture, they must, under the doctrine of Helvering v. Brmrn, supra, be considered income in the year the forfeiture took place.

The suggestion in the Lcrngwell case that petitioner should be permitted to set off against the value of the security any loss it suffered by virtue of its tenant’s default seems to us inapplicable here. For the securities were deposited in the first instance not to secure generally the performance by petitioner’s tenant under the lease, but to guard against a specific contingency, namely, that a partition of the building would' become necessary. In the Lcrngwell case the tenant’s default under the lease, which was itself the event against which the security was deposited, might have furnished an offset to the value to the lessor of the security which he obtained. But see Warren Service Corporation, supra; Walter M. Hort, 39 B. T. A. 922; affd. (C. C. A. 2d Cir.), 112 Fed. (2d) 161. This factor is absent here because no default had yet occurred in the obligation for the performance of which the security was furnished. When and if it became necessary for petitioner to perform that obligation and defray the cost of partitioning it could perhaps claim the loss resulting therefrom. But it is not an.offset to the value of the securities at-the time of forfeiture, because that condition did not follow from it, had not yet occurred, and might never occur. And respondent has already allowed petitioner the benefit of a deduction for the unamortized cost of the lease which is the extent of petitioner’s claimed loss, apart from anticipated profits. Walter M. Hort, supra; H.I. Josey, 38 B. T. A. 497; affd. (C. C. A., 10th Cir.), 104 Fed. (2d) 453. For the reasons we have discussed, we sustain respondent’s action in charging petitioner with income to the extent of the value of the forfeited securities.

Decision will he entered umder Rule 50.


author: HaeROn :

text:
    John J. Seerley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97673.
    Promulgated December 10, 1940.

      James J. Maguer, Esq., and L. S. Davis, C. P. A., for the petitioner.

      E. G. Sievers, Esq., for the respondent.
   OPINION.

HaeROn :

The basic questions are whether petitioner sustained the loss of his investment in his Carroll County lands in the taxable year, and, if so, whether the loss was an ordinary loss deductible in full or a capital loss subject to the limitations of section 117 (d) of the Revenue Act of 1934.

On his income tax return for the taxable year petitioner took a deduction of $168,162.56 as the loss of his investment in his Carroll County lands. Respondent reduced the amount of the deduction to $2,000 on the ground that the loss was a capital loss subject to the limitations of section 117 (d) of the Revenue Act of 1934. In an amended answer respondent alleged that petitioner did not sustain the loss of his investment in his Carroll County lands in the taxable year and asserted a claim for an increased deficiency.

In order to be deductible, losses, in general, must be fixed by identifiable events, United States v. White Dental Manufacturing Co., 274 U. S. 398; and, as a rule, must be evidenced by closed and completed transactions, Ewing-Thomas Converting Co. v. McCaughn, 43 Fed. (2d) 503; certiorari denied, 282 U. S. 897; Louisville Trust Co. v. Glenn, 33 Fed. Supp. 403; John C. Shafer, 28 B. T. A. 1294; and must be sustained during the taxable period for which allowed. Regulations 86, art. 23 (e)-1. Identifiable events have been defined as incidents or occurrences which point to or indicate a loss. Industrial Rayon Corporation v. Commissioner, 94 Fed. (2d) 383. In order to be deductible, losses must be complete either through worthlessness or through a final disposition. United States v. Sentinel Oil Co., 109 Fed. (2d) 854. See Paul & Mertens, Law of Federal Income Taxation, vol. 2, sec. 17.15. In determining whether losses are deductible, substance, and not mere form, governs. North Jersey Title Insurance Co. v. Commissioner, 84 Fed. (2d) 898.

The question of whether petitioner sustained a loss in 1985 or in another year of his investment in his Carroll County lands will be considered first with respect to his investment in the 580 acres of land which he conveyed to the three banks and then with respect to his investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust. Since respondent first raised the question relating to the year in which the loss was sustained in his amended answer, he has the burden of proving that petitioner did not sustain the loss of his invesment in his Carroll County lands in the taxable year. Cf. Berkshire Cotton Manufacturing Co., 5 B. T. A. 1231.

First, with respect to the loss of petitioner’s investment in the 580 acres of land which he conveyed in 1932 to the three banks in satisfaction of his personal indebtedness to the banks, there can be no doubt but that the loss was sustained in 1932, or prior to the taxable year. In his briefs petitioner does not seriously contend otherwise. Since petitioner sustained the loss of his investment in the 580 acres of land, which he conveyed to the three banks, in 1932, he is not entitled to deduct such loss in the taxable year.

With respect to the loss of petitioner’s investment in the 1,871 acres of land which he transferred in 1932 to the trustee of the Carroll Farms trust, respondent argues that such transfer to the trustee constituted a closed and completed transaction, i. e., a final disposition, which fixed petitioner’s loss in 1932, or prior to the taxable year. With respect to the effect to be given to petitioner’s execution and delivery in the taxable year of the order directing the trust managers to issue the certificates of interest to W. W. Speer, respondent contends that that did not constitute a closed and completed transaction which fixed the loss in the taxable year because petitioner executed and delivered the order as a gift to W. W. Speer, and, further, because the certificates of interest actually were not issued to W. W. Speer until 1937, or subsequent to the taxable year. On the other hand, petitioner argues that the transfer of the 1,871 acres of land to the trustee did not constitute a closed and completed transaction which fixed the loss in 1932, or prior to the taxable year, and that petitioner’s execution and delivery in the taxable year of the order directing the trust managers to issue the certificates of interest to W. W. Speer did constitute a final disposition which fixed the loss in the taxable year. The burden of proof is upon respondent with respect to all of the contentions set forth above.

The transfer by petitioner of the title to the 1,871 acres of land to the trustee of the Carroll Farms trust in 1932 did not constitute a closed and completed transaction which fixed the loss of petitioner’s investment in that land in 1932, or prior to the taxable year. The transfer of the title to the 1,871 acres of land to the trustee was not a final disposition. The trustee was to sell the land and to distribute the net proceeds to the beneficiaries of the trust. After the transfer of the title to the land to the trustee, the interests of both petitioner and the bondholders were substantially the same as prior to the transfer, even though under the trust agreement the interests of both petitioner and the bondholders were stated to be in personam and not in rem. Only the form in which the interests were evidenced was different; the bondholders received bonds of the trust in the place of bonds of the drainage district, and petitioner was entitled to receive certificates of interest of the trust in the place of his equity interest in the land. Moreover, petitioner received no consideration whatsoever for the transfer of the title to the land to the trustee. It is true that in connection with the transfer of the title to the land to the trustee, the drainage assessments levied against all of petitioner’s lands were released. However, the release of the drainage assessments was of no benefit to petitioner because he was not personally liable for the drainage assessments. Spring Creek Drainage District v. Elgin, J. & E. Ry. Co., 249 Ill. 260; 94 N. E. 529. In as much as there was in fact no consideration to the petitioner, the transfer of the title to the land to the trustee was not a sale or exchange. In the final analysis, the trustee of the Carroll Farms trust was a mere liquidating agent for the bondholders of the drainage district and petitioner. That both the bondholders of the drainage district and petitioner intended that the trustee was to be a mere liquidating agent is shown clearly by the terms of the proposal which petitioner submitted to the bondholders and which the bondholders accepted. In that proposal petitioner repeatedly referred to the creation of an agency, “corporate, trustee, or otherwise”, to which he would transfer the title to the land. Obviously the transfer of the title to the 1,871 acres of land to a mere liquidating agent did not constitute a closed and completed transaction which fixed petitioner’s loss of his investment in that land in 1932, or prior to the taxable year. Cf. Whitney Realty Co., Ltd., 29 B. T. A. 453; affd., 80 Fed. (2d) 429; certiorari denied, 298 U. S. 668; and see North Jersey Title Insurance Co. v. Commissioner, supra. Even if the Carroll Farms trust were regarded as a separate entity, the trust unquestionably would be a liquidating trust. Helvering v. Washburn, 99 Fed. (2d) 478; Broadway-Brompton Buildings Liquidation Trust, 34 B. T. A. 1089; Dolese & Shepherd Co., 30 B. T. A. 1171; and the transfer of the title to the land to the trustee would not constitute a final disposition which would fix the loss of petitioner’s investment in the land in 1932. Cf. Selma Wertheimer et al., Coexecutors, 31 B. T. A. 407; William J. Snyder, 11 B. T. A. 807; and see G. C. M. 8098, C. B. IX-1, p. 195; Sol. Op. 149, C. B. II-1, p. 20. And even if the Carroll Farms trust were regarded as an association, as distinguished from a liquidating trust, there would be some foundation for holding that any loss sustained by petitioner on the transfer of title to the land to the trustee should not be recognized under section 112 (b) (5) of the Kevenue Act of 1934, the pertinent provisions of which are set forth in the margin, because, after the transfer, petitioner and the bondholders were substantially in control of the association and the interests of petitioner and the bondholders in the association were substantially in proportion to their respective interests in the land prior to the transfer. Cf. Edwin L. Dana, 36 B. T. A. 231. The conclusion that the transfer of the title to the land to the trustee did not constitute a closed and completed transaction is entirely consistent with the conclusion, in a somewhat analogous situation, that a taxpayer whose land has been sold either for taxes or on foreclosure does not sustain a loss of Ms investment in his land until the redemption period has expired. T. J. Bosquett, 39 B. T. A. 763; Derby Realty Corporation, 35 B. T. A. 335; Frederick Krauss, 30 B. T. A. 62; J. C. Hawkins, 34 B. T. A. 918; and see Nickoll v. Commissioner, 103 Fed. (2d) 619.

It should be emphasized that the record clearly shows that the purpose of creating the Carroll Farms trust and conveying to it in 1932 the 1,871 acres of land was the sale and liquidation of the land. That the trustee managed and operated the land while attempting to make a sale thereof does not detract from the essential character of the trust as a liquidating trust. Broadway-Brompton Buildings Liquidation Trust, supra. The activities of the trustee were all reasonably necessary to and consistent with the accomplishment of the purpose to sell and liquidate the land. As the Board stated at page 1093 in Broadway-Brompton Buildings Liquidation Trust, “The law does not require that in liquidating a property the owner must abandon all ordinary business judgment and sacrifice the property immediately without regard for conditions of the market or amount of loss.” Without doubt the period from 1932 to 1935 was not a period generally when a sale of the land in question could readily be made except at a great sacrifice.

The execution and delivery by petitioner in the taxable year of the order directing the trust managers to issue the certificates of interest to W. W. Speer constituted a closed and completed transaction which fixed petitioner’s loss of his investment in the 1,871 acres of land in the taxable year. By an order executed and delivered by petitioner on January 29, 1935, petitioner directed the trust managers to issue to Speer a certificate or certifiates “covering the equity interest in the lands owned by Carroll Farms.” The record is not clear as to whether the certificate or certificates to be issued to Speer represented the equity interest of petitioner alone or the equity interest of petitioner and others. However that may be, the only reasonable inference to be drawn from all the evidence is that the execution and delivery of the order constituted, in substance, an abandonment by petitioner of his equity interest in the 1,871 acres of land. Park Chamberlain, 41 B. T. A. 10; Commonwealth, Inc., 36 B. T. A. 850. Petitioner testified that by the execution and delivery of the order he intended to relinquish his equity interest in the 1,871 acres of land. It is true that petitioner did not receive any consideration from W. W. Speer for the execution and delivery of the order. However, the record does not show that petitioner had any intention of making a gift of the certificates of interest to W. W. Speer. The record shows that petitioner executed and delivered the order to Speer only because Speer urged him to do so and only because petitioner thought that it was the “fair thing” to do in view of Speer’s large advances to finance the organization of the bondholders’ committee and the Carroll Farms trust. Thus respondent’s argument that the execution and delivery of the order was a gift to Speer is entirely without foundation. Park Chamberlain, supra. The mere fact that the trust managers did not issue the certificates of interest to Speer until more than two years after petitioner’s execution and’delivery of the order does not make the execution and delivery of the order any less an abandonment by petitioner of his equity interest in the 1,871 acres of land. The abandonment by petitioner of his equity interest in the 1,871 acres of land constituted a final disposition which fixed the loss of his investment in that land in the taxable year. Park Chamberlain, supra; Commonwealth, Inc., supra.

Petitioner originally purchased his Carroll County lands with the hope of realizing a profit on their resale. Thus the loss of his investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust was a loss incurred in a transaction entered into for profit, deductible under section 23 (e) (2), the pertinent provisions of which are set forth in the margin. Park Chamberlain, supra.

While petitioner’s equity interest in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust constituted a capital asset within the meaning of section 117 (b) of the Eevenue Act of 1984, petitioner did not sustain the loss of his investment in that land from a sale or exchange of his equity interest but from the abandonment thereof. Thus the loss of petitioner’s investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust was an ordinary loss, deductible in full, and not a capital loss subject to the limitations of section 117 (d) of the Eevenue Act of 1934, the pertinent provisions of which are set forth in the margin. Park Chamberlain, supra; Commonwealth, Inc., supra.

Section 23 (h) of the Eevenue Act of 1934 provides that the “basis for determining the amount of deduction for losses sustained, to be allowed under subsection (e) * * *, shall be the adjusted basis provided in section 113 (b) for determining the loss from the sale or other disposition of property.” The parties have stipulated in effect that the adjusted basis of petitioner’s entire 2,451 acres of Carroll County land was $168,162.56. The record shows that the cost, i. e., the unadjusted basis, of the 580 acres of land which petitioner conveyed to the three banks was $70,000. However, there is nothing in the record to show either the adjusted basis of the 580 acres of land which petitioner conveyed to the three banks or the adjusted basis of the 1,871 acres of land which petitioner transferred to the trustee of the Carroll Farms trust. While the adjusted basis of the 580 acres of land undoubtedly was less than $70,000, petitioner apparently concedes in his reply brief that for present purposes the adjusted basis of the 580 acres of land was $70,000. On the basis of this concession, the adjusted basis of the 1,871 acres of land which petitioner transferred to the trustee of the Carroll Farms trust was no less than $98,162.56, or $168,162.56 (the adjusted basis of the entire 2,451 acres) less $70,000 (the adjusted basis of the 580 acres). Therefore, petitioner is entitled to deduct in the taxable year $98,162.56 as the loss of his investment in the 1,871 acres of land which he transferred to the trustee of the Carroll Farms trust.

On his income tax return for the taxable year petitioner took a deduction of $168,162.56 as the loss of his investment in the entire 2,451 acres of land. The return showed a net loss of $116,272.62. Thus, after the reduction of the amount of the deduction from $168,-162.56 to $98,162.56, the return will still show a net loss. In this situation recomputation under Eule 50 is unnecessary. There is no deficiency in income tax liability.

Decision will be entered for the petitioner.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      * * * * * * *
      (b) Exchanges Solely in Kind.—
      # * # * * * *
      (5) Transfer to corporation controlled bx transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      * * * . * *. * »
      (e) Losses by Individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      *******
      (2) If incurred in any transaction. entered into for profit, though not connected with the trade or business.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      * * * ^ * * *
      (d) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * *


author: Disney:

text:
    Elizabeth K. Lamont, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97407.
    Promulgated December 11, 1940.

      Percy W. Crane, Esq., for the petitioner.

      Leonard A. Spalding, Jr., Esq., for the respondent.
   OPINION.

Disney:

We have for consideration here, in substance, one-year trusts containing no power of revocation, with beneficiaries in part of charitable, educational, or religious organizations, and in part of individuals. In one trust the individual is not a relative of the trustor; in the other the individuals were the settlor’s first cousins. However, none of the individuals were members of the settlor’s household, and to none did the settlor owe any obligation of support. All were adults. The trustee was neither a relative of the settlor, nor a member of her household. He was, however, her intimate friend and attorney for many years and had for many years given her financial advice and managed her affairs.

Is the income of such trusts taxable to the settlor? The petitioner takes the view that the whole income was that of the two trusts. The Commissioner in determining the deficiency held that the trust income was that of the petitioner as settlor, “in accordance with the provisions of section 166 of the Revenue Act of 1934”, and the regulations based thereon. Upon brief, he does not rely on section 166, his position being, first, that the trust income is taxable to the settlor under section 22 (a) of the Revenue Act of 1934; second, that there was in effect a mere assignment of future income by the petitioner; and, third, that certain capital gain reported by one of the trusts is taxable to the settlor under section 167 (a) (1) of the Revenue Act of 1934.

The petitioner admits that the trusts were set up for tax-saving reasons. That is immaterial, under authority too well settled to require citation.

Do the principles announced in Helvering v. Clifford, 309 U. S. 331, principally relied upon by the respondent, apply to the facts here involved? The petitioner contends in sum that the doctrine of family solidarity is there controlling, but is absent herein, while the respondent argues that, though not parallel in fact, the case in principle is determinative here, where the trusts are for the short period of one year and the trustee, though not a member of the family group, is a long-time intimate friend and attorney and because of such relation is subject to the influence of the settlor in a manner and to an extent analogous to that of a member of the family in the Clifford case. In his view, the settlor in substance did not alter her position of control of the income, under section 22 (a) of the Revenue Act of 1934.

After review of the Clifford case and others touching this subject, we come to the conclusion that there is not evident in the trusts such retention of control by the settlor as to cause taxation of the trust income to her. The trusts were for a short period, but during that period they were irrevocable. Neither trustee nor beneficiaries were members of the settlor’s family group, though in one trust three individual beneficiaries were her first cousins. She had no legal duty to support them. In the case of one trust, practically all of the income of the taxable year went to an educational corporation; in the other, approximately two-thirds of the income went to individuals and about one-third was accumulated for future distribution. The petitioner-settlor retained no discretion or power, save that of substitution of securities of equal value for those in trust. The respondent suggests that she might have destroyed the income of the trusts by substituting non-income-producing securities. We see no materiality in such a possibility. The trustee had full and complete discretion as to management and disposition of trust corpus, and of distribution among the beneficiaries. The respondent urges that she did make suggestions as to distribution of the income and that the trustee-attorney was in no position, in effect, to oppose her wishes. In fact, distributions were made in her absence and without her advice or consent, though it is plain that in general she knew what was being done, for the matters were discussed by her and the trustee. He would have felt free, he said, to disregard her wishes had he at any time considered her unwise. Though in fact such never occurred, it is not to be denied that the trust instrument gave him full freedom from control by the settlor. Though no doubt the fact of the relation of attorney and client and fees to be earned by the attorney or his firm in the settlor’s affairs would have effect upon his mind, and we do not blind ourselves to such realities, nevertheless, we think the same may be said, in some degree, of almost any trustee which serves for hire. Disagreement with a settlor would, no doubt, in general be avoided, if reasonably possible. If the idea of family relationship and influence as involved in the Clifford case is to be extended, we see no line of demarcation, and the ordinary commercial trustee, such as a trust company, might be said to be under the influence of its client-settlor. We think the Supreme Court in Helvering v. Clifford, supra, indicated a fair limit to consideration of influence upon the trustee in the absence of legal control in the trust instrument. “Where the grantor is the trustee and the beneficiaries are members of his family group, special scrutiny of the arrangement is necessary * * We can not believe that the Court -intended to disregard the trust where neither of these circumstances is present and where, instead of the broad powers in the trustee-trustor there considered, the trustor has no discretion or power whatever, except to substitute securities of equal value. The respondent, however, relies also upon the shortness of the trust term, much shorter here than in the Clifford case, and urges that such element alone is sufficient to sustain his position here. The fact of short term is to be considered, under the Clifford case, but also under that case “no one fact is normally decisive,” so we can and do consider it only as cumulative. We think the addition does not reasonably cause treatment of the income as that of the settlor. In Helvering v. Achelis, 112 Fed. (2d) 929, the court considered a trust of about five years, with an educational corporation as beneficiary, and no power over the property left in the trustor. Discussing the effect of the Clifford case, the court said in part:

* * * The rationale of that decision was that the nexus of powers reserved by the settlor so nearly approached full dominion as to be its equivalent; the court did not suggest that the settlor of a trust could not so completely sever himself from the income of property, for a period — even a short period — as to make it no longer his. We should hesitate to assume that the contrary was intended. Probably it is true that this lady sought this means of enlarging the exemption of fifteen per cent which the statute allowed her for educational gifts. By stripping herself for the period in question of all command whatever over the income, she succeeded; for it has been held again and again that the motive in such situations is irrelevant. Kraft v. Commissioner, supra.

Tbe respondent cites, with other cases found less parallel to this one, Graham, Sumner, 40 B. T. A. 811, wherein was involved a one-year trust. But, as emphasized in the headnote to that proceeding, the settlor was trustee and the family group idea was present, since the trustor-trustee’s wife was beneficiary. We said: “* * * here we have the minimum indicia of a separation of individual and trustee ownership.” The case does not turn upon the thought of one-year trust. In United States v. First National Bank of Birmingham, 74 Fed. (2d) 360, a one-year trust was involved, with an educational foundation as beneficiary, and the income was held not to be that of the grantor, though it was contended that the grantor exercised power to possess and use the net income for his own purposes. In Benjamin F. Wollman, 31 B. T. A. 37, the trust was for one year and the income was held to be that of the trustor, but the trustor was trustee, his wife was beneficiary, and broad powers were exercised by the trustor. In Dunlevy Milbank, 41 B. T. A. 1014, we held that two short term trusts, one of three years and one of five years, with grantor’s sister-in-law and uncle as beneficiaries, respectively, and his wife as trustee, were not within the scope of the Clifford, case, distinguishing it with respect to control retained by the grantor’s relationship of beneficiaries and identity of the trustee. We pointed out that the beneficiaries were not of the grantor’s immediate family circle, and there was no duty on the part of grantor to support them; also that the grantor was not trustee and retained no control over trust principal.

We conclude and hold, upon consideration of the term of trust, and relationship of trustor, trustees, and beneficiaries and the powers remaining in the trustor, that such elements of ownership did not remain in the trustor as to require taxation of the income to her under the broad terms of section 22 (a) of the Bevenue Act of 1934.

We next consider whether the trusts here involved constituted mere assignments of income. The respondent relies chiefly upon Lucas v. Earl, 281 U. S. 111, and Burnet v. Leininger, 285 U. S. 136. The petitioner points out that they involve true assignments of future earnings, and not property from which income is derived, as here placed in trust. He cites Nelson v. Ferguson, 56 Fed. (2d) 121, and comments upon Blair v. Commissioner, 300 U. S. 5, as indicative that an assignment by a beneficiary under a trust was one of a property right in the trust corpus, and not merely of income. Here there was also assignment of property, to wit, stock and bonds, in trust, in due form of law, and the income involved is derived therefrom. We conclude and hold that there was no mere assignment of income, and that the petitioner is not taxable with the income upon such theory.

Lastly, we have for consideration the position of $1,293.45 capital gain reported by the second or “T. W. C. A.” trust. The respondent takes the position that such capital gain must be treated as principal and returned to the petitioner at the termination of the trust, and that therefore under section 167 (a) (1) of the Bevenue Act of 1934, the income is taxable to the grantor-petitioner. The trustee’s income tax report for the year 1935 included $1,293.45 as taxable gain "retained by Trustee as income accumulated for future distribution and reported by tbe Trustee as taxable to liim.” The petitioner was a resident of New York. The law of that state is that capital gains received by a trust constitute corpus, in the absence of provision in the trust instrument. No provision of the trust instrument indicates otherwise. The evidence shows that the parties to the trust instrument interpreted it as providing that capital gains should be corpus. The capital gains were not actually distributed to the beneficiaries. We conclude therefore that such capital gains were, within the purview of section 167 (a) (1) of the Revenue Act of 1934, “held or accumulated for future distribution to the grantor,” who took the principal of the trust upon termination thereof; and that therefore the amount of such capital gain was properly included in computing the petitioner’s net income.

Decision will be entered wid&r Buie 50.

       SEC. 167. INCOME FOE, 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;
      *******
      then such part of the income of the trust shall be included in computing the net income of the grantor.


author: Leech :

text:
    Lady Marian Bateman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98766.
    Promulgated December 11, 1940.

      Qlaude B. Branch, Esq., Charles Byan, Esq., and Abbot P. Mills, Esq., for the petitioner.

      Davis Haskin, Esq., for the respondent.
   OPINION.

Leech :

Petitioner and respondent are at issue here solely in regard to the 5 percent of the trust income which, by the indenture, was to be added to corpus, there being no question, of course, that the balance of the income is taxable to petitioner. Concisely stated, respondent’s position is that petitioner’s reservation of the power to appoint the corpus makes her taxable on the entire income arising therefrom. From his brief it would appear that he is relying mainly on section 22 (a) of the Revenue Acts of 1934 and 1936, and Helvering v. Clifford, 309 U. S. 331. He points specifically to petitioner’s ability, as demonstrated by her borrowings from the trust in 1932 and preceding years, to secure full economic benefits from the trust corpus merely by obtaining loans from the trustees and appointing sufficient of the trust corpus to the trustees to secure them.

We first consider the fact that petitioner borrowed from the trust and pledged the appointment of trust property for security, as bearing on the taxability to her of the entire trust income. The trust was created long prior to the passage of the first Federal income tax law, and no scheme for tax avoidance is shown. This borrowing transaction was certainly vested with, all the outward formalities of an ordinary borrowing. Petitioner paid 5 percent on the loan and collateralized it with stock. In our opinion, the fact that petitioner borrowed from the trust and appointed corpus tanto quanto to secure these loans, is of no moment so far as her taxability on the income of the trust is concerned. Petitioner, as settlor, did not reseiwe any power whatever in the trust instrument to borrow any or all of the corpus from the trustee. On a similar state of facts we recently refused to sustain a tax proposed against a settlor under section 22 (a), although in that case the taxpayer had borrowed from the trusts he created and subsequently collateralized the notes given therefor, and, in addition, had reserved in the trust deeds the power to approve the trustee’s investments. Frank E. Wolcott, 42 B. T. A. 1151. See also Estate of Lorenzo W. Swope, 41 B. T. A. 218. The present situation is a fortiori, a stronger one for the taxpayer, for she relinquished all powers of management, including' those of investment and reinvestment, to the trustees, reserved no powers save a revocable power of appointment, and put up outside collateral for the one loan she did make and paid interest thereon. Cf. William J. Garland, 42 B. T. A. 324, where the grantor was held taxable because of his reservation of a power to borrow of the trustee on unsecured notes.

Moreover, we are not impressed with respondent’s contention that petitioner, by reserving a power to appoint the reversionary interest in the trust estate, retained such dominion over the corpus as to make her taxable under section 22 (a). The facts that the trust was co-terminus with the grantor’s life and that the third-party trustees were given no power to name petitioner as a successor trustee, taken in conjunction with the considerations mentioned in the preceding paragraph, prevent application of that section here. Cf. Frank G. Hoover, 42 B. T. A. 786.

There remains to be considered the effect of the reserved power under sections 166 and 167 of the Bevenue Acts of 1934 and 1936. Petitioner relies on Sarah, A. W. Coursey, 33 B. T. A. 1068, which held that a power of appointment did not make a settlor taxable under section 166 of the Bevenue Act of 1928. The reason given by the Board was, however, that until the power was exercised, those who would take in default of appointment had an interest adverse to the revesting of the corpus in the settlor. That type of interest has been held not to be “substantially adverse” under the change in the statute effected by the Revenue Act of 1932. Mary A. Cushing, 38 B. T. A. 948. Nevertheless, we think petitioner must prevail for other reasons.

The trust deed provides that petitioner can not secure title to the corpus or any part thereof during her life. Even if she exercised the power in favor of her estate after the creation of the trust and failed to revoke that act, she could never, herself, acquire the trust estate. Such action would merely create a remainder interest in her heirs. A reversionary interest in the grantor has been held not to constitute a power to revest the corpus in the grantor under section 166. Blanche G. Penn, 39 B. T. A. 787; William E. Boeing, 37 B. T. A. 178; reversed on another point, 106 Fed. (2d) 305; certiorari denied, 308 U. S. 619; John Edward Rovensky, 37 B. T. A. 702; Helvering v. Wood, 309 U. S. 344. A fortiori, a remainder interest enjoyable only by the grantor’s heirs would not come within that section.

It is true that petitioner might have borrowed from the trustees or from some -other creditor an amount equal to the value of the corpus, secured the loan by an appointment of the remainder interest in the corpus to the lender, and thus have enabled the lender to present a claim as a general creditor of her estate after her death. By controlling Massachusetts law, if the power of appointment were exercised, the estate would then have included the corpus of the trust. Vinton v. Pratt, 228 Mass. 468; 117 N. E. 919; Shattuck v. Burrage, 229 Mass. 448; 118 N. E. 889. Cf. Crawford v. Langmaid, 171 Mass. 309; 50 N. E. 606. Whether a prospective lender would advance credit on the sole security of a revocable appointment and lend himself to litigation with petitioner’s heirs, as a practical matter would seem, at least, very doubtful. It is noted here that the trustees required petitioner not only to exercise her reserved power in their favor, but also to put up outside collateral for the one loan she did contract. However, decisive of the case, in our opinion, is that section 166 requires, if the grantor is to be held taxable on the income of his trust, that there be vested in the grantor a present power to revest “in the grantor1'1 title to any part of the corpus. Corning v. Commissioner, 104 Fed. (2d) 329; Henry A. B. Dunning, 41 B. T. A. 1101. The power here to appoint the remainder in the corpus, revocable prior to the termination of the trust by the grantor’s death, does not fall within the definitely expressed meaning of the statute. Since Congress has not yet covered the instant situation, it is beyond our power to do so. Minnie M. Fay Trust “A”, 42 B. T. A. 765. There is no ground, we conclude, for taxing this petitioner under section 166.

It would not be contended, we think, that the 5 percent of the trust income here in dispute was being accumulated for the grantor within section 167. The accumulation became part of the corpus and could never come into the hands of petitioner. We have been cited to no authority and we find none for the proposition that an accumulation of trust income which may at most redound to the benfit of the grantor’s heirs requires taxation of the grantor under section 167. In fact, the contrary has just been held in Antoinette K. Brown, 42 B. T. A. 693.

We hold, therefore, that petitioner is not taxable on the entire income of the trust, but only on the 95 percent of net trust income distributed to her. The capital gains here involved were credited to corpus and do not constitute distributable income under controlling Massachusetts law. Williams v. Inhabitants of Milton, 215 Mass. 1; 102 N. E. 355; Chase v. Union National Bank of Lowell, 275 Mass. 503; 176 N. E. 508. Respondent does not contend that the gains are taxable to petitioner for any reasons other than those given for taxing the entire trust income to petitioner.

Petitioner is sustained on the principal issue. It follows that decision of the remaining questions, requisite only if petitioner were held taxable in respect of the entire trust income, will not be necessary.

Decision will be entered for the petitioner.