author: Black::

text:
    American Utilization Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90527.
    Promulgated August 11, 1938.

      B. G. Cherry, Esq., for the petitioner.

      D. D. Smith, Esq., for the respondent.
   OPINION.

Black::

We shall first take up respondent’s contention that petitioner in 1934 sold to two of its stockholders, Frank and Robert Goldberg, its entire holdings of stock in American Cotton Mills Number Two, and that by reason thereof petitioner did not own any stock in the corporation during the year 1935 and therefore is not entitled to the deduction of any loss by reason of the stock becoming worthless in that year. This was the reason given by respondent in his deficiency notice for his disallowance of the claimed loss and if petitioner has not overcome the correctness of this determination, it loses.

We think petitioner has sustained its burden of proof on this issue. Petitioner introduced the testimony of three witnesses who testified that although entries on petitioner’s books made in December 1934, showed a sale by petitioner to two of its stockholders, Frank and Robert Goldberg, of all its shares in American Cotton Mills Number Two for the sum of $2,000, that nevertheless the purported sale was only conditional and that it was understood and agreed by all parties to the transaction that unless a loan was obtained from the Reconstruction Finance Corporation, which was to be used in effecting a merger between American Cotton Mills Number Two and other cotton mills owned by Frank and Robert Goldberg, then the sale should not be consummated. The testimony was that the Reconstruction Finance Corporation definitely refused the loan in 1935, and the whole deal fell through and the sale of the stock to Frank and Robert Goldberg was not consummated. The stock book of American Cotton Mills Number Two was introduced in evidence to show that there was never any transfer on the books of that company of the shares of stock from petitioner to Frank and Robert Goldberg. The stock certificates themselves were introduced in evidence and show that the stock still stands in the name of petitioner and that the certificates were never endorsed in blank and do not bear any assignment of any kind to any one.

The testimony was further to the effect that these shares of stock were never delivered by petitioner to Frank and Robert Goldberg, and that there was no agreement to deliver them unless the loan from the Reconstruction Finance Corporation was granted.

The testimony further showed that, after the Eeconstruction Finance Corporation declined the proposed loan, the book entries which were made in 1934 were reversed. It is true that this reversal of book entries seems to have been made after a revenue agent had audited petitioner’s income tax return for the year 1934, and had informed petitioner that its claimed loss of $98,000 by reason of the alleged sale of the stock by petitioner to Frank and Robert Goldberg would be disallowed, in which action petitioner acquiesced. Inasmuch, however, as the evidence shows that the reversal of entries on petitioner’s books was in accordance with the facts as they existed, we do not think that the fact that these reversing entries were made after the revenue agent’s audit is of any controlling significance. Book entries are evidential, but not conclusive. Doyle v. Mitchell Bros. Co., 247 U. S. 179. We find from all the evidence in the case that petitioner was the owner of all the stock of American Cotton Mills Number Two on the basic date in question.

Respondent contends in the alternative that even if it be held that petitioner was the owner of the stock in question on the basic date, nevertheless the stock did not become worthless in 1935, but became worthless in some prior year and by reason thereof petitioner is not entitled to deduct the claimed loss. While respondent did not determine in his deficiency notice that the stock became worthless in a prior year, he did make this contention at the hearing. At any rate when a taxpayer is claiming a deduction of a loss and the Commissioner has disallowed it, it is the burden of the taxpayer to show that the loss was sustained in the taxable year. Where one is claiming a loss because of the worthlessness of stock, it is not enough to prove that the stock was worthless in that year, but it must be proved that the stock became worthless in that year. Alfred Hofner, 31 B. T. A. 338. Has petitioner met its burden of proof in this respect? We think it has. True enough, the facts show that American Cotton Mills Number Two was in bad financial condition in 1934, but it was still actively operating its plant and we doubt if petitioner would have been justified in contending that the stock was worthless in 1934. Undoubtedly it had a very small value in 1934. That fact is not only conceded by petitioner, but is evidenced by petitioner’s willingness to sell it to Frank and Robert Goldberg for $2,000. But mere depreciation in the value of stock, even to almost the vanishing point, does not entitle a taxpayer to take a deduction of his investment therein. This is permissible only when the stock has become entirely worthless and usually some identifiable event should occur in the taxable year to determine such worthlessness. It is true that where a corporation is insolvent and ceases business, and it is clear that the liabilities exceed the value of the assets, and there will be nothing to distribute to stockholders, that is such an identifiable event and the stock becomes worthless in that year, and the taxpayer who owns stock in such a corporation should take a loss in that year rather than wait for a later year when the affairs of the corporation are wound up by liquidation. Cf. Charles W. Deeds, 14 B. T. A. 1140; Henry W. Cushman, 13 B. T. A. 41; Edward J. Slater, 12 B. T. A. 60; Mark D. Eagleton, 35 B. T. A. 551; affd., 97 Fed. (2d) 62. But the situation is different where the corporation continues actively in business. The court in Mark D. Eagleton, swpra, pointed out the difference in the following language: “This conclusion is not opposed to Burnet v. Imperial Elevator Co., 66 Fed. (2d) 643, this court. There the company was to and did continue in operation thereafter (P. 645) while here there was no showing of any intention to operate after September 1931, and there was no business of any kind continued thereafter.”

We do not wish to be understood as holding that in no case should the stock of a corporation be held to be worthless while it continues in active operation. There are situations where the contrary is true, such for example as in Claude D. Cass, 32 B. T. A. 713; affd., 83 Fed. (2d) 841, where a railroad company had been operated by a bondholder’s protective committee for nearly ten years prior to the taxable year in question and there was an ever mounting deficit, and during the period the corporation’s unpaid and defaulted interest had more than doubled. On such facts we held that petitioner had failed to overcome the correctness of respondent’s determination in disallowing the claimed loss. In the instant case, the facts are more like those in Olds & Whipple, Inc. v. Commissioner, 75 Fed. (2d) 272, in which the court reversed the Board’s action in affirming the Commissioner’s disallowance of the claimed loss on worthless stock. In that case, the court, among other things, said:

The fact that the assets were insufficient to meet the operating liabilities may properly be taken as evidence of worthlessness of stock, but it is not conclusive. Actual worthlessness should be the test, and if those in charge of the operations of the corporation, acting in good faith, believe that they might work out of their business conditions wherein losses were sustained, and did so, realizing some profit and reducing the deficit, it may not be said that the stock was actually worthless. A real loss is sustained when all chances or possibilities of collection have been effectively destroyed.

In the instant case all chances or possibilities of petitioner ever realizing anything out of its investment in the stock of American Cotton Mills Number Two was effectively destroyed by the foreclosure which took place in 1935. By this foreclosure all property of American Cotton Mills Number Two was sold and the price received from the sale was less than sufficient to pay the company’s creditors and there was nothing left for disbursement to the stockholders. This was the identifiable event which clearly and unmistakably fixed petitioner’s loss. Cf. Burnet v. Imperial Elevator Co., 66 Fed. (2d) 643; Charles Heiss, 36 B. T. A. 833.

But, although we hold that the stock of American Cotton Mills Number Two became worthless in 1935, we can allow only the loss which petitioner actually sustained. Petitioner paid $100,000 for the stock and would be entitled to deduct that entire amount were it not for the fact that the two corporations filed consolidated returns for some of the years, in which returns petitioner has had the benefit of having its net income reduced by the losses of the American Cotton Mills Number Two, Inc., for those years. As we said in Jordahl & Co., 35 B. T. A. 1136, 1139, “It is now well settled that the loss on the sale of the stock or liquidation of a subsidiary company must be reduced by the amount of the subsidiary’s operating losses which were availed of to reduce the taxable income of the affiliated group. Ilfeld Co. v. Hernandez, 292 U. S. 62; McLaughlm v. Pacific Lumber Co., 293 U. S. 351; Commissioner v. National Casket Co., 78 Fed. (2d) 940; Greif Cooperage Corporation v. Commissioner, 85 Fed. (2d) 365.” See also United States v. Lakewood Engineering Co., 70 Fed. (2d) 887; American Tobacco Co. v. Bowers, 94 Fed. (2d) 1010; certiorari applied for May 14,1938.

Although the cases cited above involved either the sale or liquidation by a parent company of the stock of its subsidiary and did not involve the situation where the stock of the subsidiary became worthless during the taxable year, the controlling principle of law involved is nevertheless the same in the latter situation as in the former. Cf. H. Liebes & Co., 23 B. T. A. 787, 791. In so holding we are not unmindful of our decision in Manatee Crate Co., 22 B. T. A. 996, wherein we allowed the parent company to deduct the full cost of the stock of its subsidiary in 1924, the year in which the stock of the subsidiary became worthless, without making any inquiry into the extent to which the consolidated group had had the benefit of the losses of the subsidiary for the years 1921, 1922, and 1923. Our holding there was, however, promulgated several years before the decisions of the Supreme Court cited above, and must be regarded as in effect modified to conform therewith. Cf. Prosperity Co., 27 B. T. A. 28.

The record shows that for two of the years, 1925 and 1933, petitioner availed itself, in a consolidated return, of operating losses of its subsidiary to the extent of $9,683.01 and $28,434.23, respectively, or a total for both years of $38,117.24. Petitioner’s claimed loss of $100,000 would, in view of the above decisions, have to be reduced by this amount. For the years 1926, 1930, and 1931, petitioner itself sustained operating losses and therefore for those three years did not avail itself of any deduction of its subsidiary’s losses. For the year 1927 petitioner had a net taxable income and its subsidiary also had a small net income, which was wiped out by bringing forward its net loss for 1926. The evidence shows, however, that none of this net loss of the subsidiary brought forward from 1926 was used as a deduction from petitioner’s net income. For the year 1929, the subsidiary had a net income and therefore petitioner had no deduction for that year of any loss by its subsidiary. The foregoing accounts for all the taxable years in which consolidated returns were filed. The net result of this evidence is that petitioner’s net taxable income during the years in which it filed consolidated returns with its subsidiary, American Cotton Mills Number Two, was reduced $38,117.24 by the operating losses of the subsidiary. In a recomputation under Eule 50, petitioner’s loss of $100,000 by reason of the stock of American Cotton Mills Number Two becoming worthless in 1935 should be reduced by $38,117.24.

Decision will he entered under Rule 50.


source: Caselaw Access Project

author: Disney:

license: Public Domain

text:
    General Securities Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82188.
    Promulgated August 16, 1938.

      Stephen E. Hart, Esq., and Richard M. Davis, Esq., for the petitioner.

      Thomas R. Oharshee, Esq., John D. Kiley, Esq., and Leslie H. RushhrooTc, Esq., for the respondent.
   OPINION.

Disney:

The Commissioner determined a deficiency in income tax against the petitioner for the year 1932, in the amount of $9,101.58, all of which is in controversy.

The errors assigned ares that the Commissioner, respondent herein, “erroneously disallowed losses amounting to $103,320, sustained by the petitioner during the. calendar year 1932 by reason of sales of various securities made by this petitioner to Boettcher Realty Company”, and that the respondent erroneously held that “since Boettcher Realty Company is controlled by the same stockholders as General Securities Company, the transfer of assets resulted in no change of beneficial interest, and no loss is allowable.”

In the petition there are two sales of stock mentioned on which deductible losses are claimed. One was for a loss on a sale January 18, 1932, of 2,500 shares of American Beet Sugar Co. 7 percent preferred stock. However, only 1,400 shares of the stock had been held by petitioner for more than two years prior to the date of the sale and the petitioner now claims only the right to deduct the loss on the 1,400 shares, which loss is alleged to be $67,870. The other losa for which claim was made in the petition was on a sale of 900 shares of the capital stock of the Traylor Vibrator Co. No evidence, at the hearing, was offered as to this latter loss and no claim therefor is now made, since the claimed loss on the aforesaid 1,400 shares, if sustained, is sufficient in itself to wipe out the alleged deficiency in tax.

The questions for our determination, therefore, are whether or not there was a bona fide sale of the aforesaid 1,400 shares of stock to the Boettcher Realty Co. by the petitioner on January 18, 1932, and, if so, what the fair market value of said shares was at the date of the sale.

Both the General Securities Co., petitioner, and the Boettcher Realty Co. are Colorado corporations and are holding corporations for the Boettcher family. The stockholders of both corporations were substantially the same in 1932 and both then had the same president and vice president.

On January 18, 1932, the petitioner sold to the Boettcher Realty Co. 2,500 shares of 7 percent preferred stock of the American Beet Sugar Co., now known as the American Crystal Sugar Co. The stock was not sold nor offered for sale on the New York Stock Exchange, the only exchange where listed, but was privately sold at $1.50 a share to the Boettcher Realty Co. The payment of the purchase price, $3,750, was made on January 18, 1932, by a check of the Boettcher Realty Co., with attached voucher, in the sum of $7,260.63, which check included payment for certain other shares of stock sold at the same time, but not the subject of the present inquiry.

An original memorandum of tlie sale was made on the date thereof by petitioner. The memorandum identified the shares sold by stating the dates of issuance of the stock certificates, their numbers and the names in which the certificates were held. The reverse side of the memorandum shows acknowledgment of receipt of the stock by the Boettcher Bealty Co., the purchaser, on January 18, 1932, and shows canceled revenue stamps in the sum of $50. Delivery of the stock certificates was made by transferring the certificates from the safety deposit box of the petitioner to that of the Boettcher Bealty Co.

At the time of of the sale and delivery of the stock certificates by petitioner, on January 18, 1932, the certificates stood in the names of various firms, companies, or individuals in the brokerage business, only a few of them being in the name of the General Securities Co. The certificates remained in the names in which they stood on January 18, 1932, until April 2, 1935, when they were exchanged for new certificates, issued in the name of the Boettcher Bealty Co. The change then was made for the reason that it was learned that proxies would be necessary for the purpose of voting at a stockholders’ meeting which was to be held early in June 1935. Dividend action was expected at that time and the necessary proxies could not be obtained unless the stock certificates were in the name of the owner, the Boettcher Bealty Co.

It was the custom of both of the corporations to allow certificates to remain in the names in which they stood when! acquired until a change in the name or names was necessary or was desired for proxy purposes or dividend action.

Of the 2,500 shares sold by petitioner to the Boettcher Bealty Co. on January 18, 1932, 1,400 shares had been acquired on January 1, 1930, or more than two years prior to the sale. The cost of these 1,400 shares (the only ones on which, as before stated, loss is now claimed) to petitioner was $69,970. The sale price to the Boettcher Bealty Co. was $2,100 and the alleged loss to the petitioner was, as heretofore stated, $67,870, which, it claimed as a deduction in its income tax return for the calendar year 1932. The claim was disallowed by the respondent.

Due to the fact that the petitioner and the Boettcher Bealty Co. had substantially the same stockholders, the respondent in his notice of deficiency determined there was no change of beneficial interest and hence no loss sustained nor any allowable by reason of the sale of said shares.

In our opinion, such determination, in the circumstances of the instant case, is not justified under the law, as decided in numerous cases by the Federal courts and by this Board. The record shows that the petitioner and the Boettcher Bealty Co. are separate and distinct corporations and between them as such the sale involved herein took place. The corporations are separate taxable entities, distinct from their stockholders, and only under exceptional circumstances could their corporate entities be disregarded. Burnet v. Clark, 287 U. S. 410; Burnet v. Commonwealth Improvement Co., 287 U. S. 415; Eisner v. Macomber, 252 U. S. 189.

Such exceptional circumstances as justify disregard of corporate entities are limited, and mere stock ownership or virtual identity of stockholders between buyer and seller does not justify it. Edwards Securities Corporation, 30 B. T. A. 918; affd., 83 Fed. (2d) 1007; Romie C. Jacks, 19 B. T. A. 559.

The fact that the petitioner and the Boettcher Bealty Co. in 1932 were owned by substantially the same interests or stockholders and had the same president and vice president did not, considered in connection with all other facts, circumstances, and testimony touching the subject, in our opinion, render the transaction ineffective or invalid as a bona fide sale by petitioner of the aforesaid 1,400 shares of American Beet Sugar Co. 7 percent preferred stock to the Boettcher Bealty Co. The record does not indicate that the sale by petitioner was made solely for the purpose of avoiding or reducing its tax liability and there is evidence to the contrary. However, it is now definitely and firmly established that a taxpayer may resort to any legal method available to him to diminish the amount of his tax liability. Gregory v. Helvering, 293 U. S. 465; Helvering v. Brown, 85 Fed. (2d) 926; Sawtell v. Commissioner, 82 Fed. (2d) 221; A. S. Eldridge, 30 B. T. A. 1322; affd., 79 Fed. (2d) 629; Edwards Securities Corporation, supra; Lammot du Pont, 36 B. T. A. 223.

There is evidence, of perhaps doubtful value because not coming from one of the parties to the transaction, to the effect that there was no intent or agreement that the stock sold should be repurchased later. There was, in fact, no repurchase of identically the same stock, but almost two years later the vendor repurchased from the vendee the same class of stock in the same corporation, to the extent of 700 shares. This stock was definitely identified, however, by certificate numbers, as being stock purchased at another time. It was, nevertheless, in our opinion, substantially identical with the stock sold on January 18,1932. We are not required to follow the mere denial of intent or agreement to repurchase, but only to consider it with other evidence on the subject. Here, however, we think that the long lapse of time before any repurchase and the fact of only partial repurchase of substantially identical stocks even after such lapse of time indicate that there was no bad faith inhering in agreement or intent to repurchase the stock sold, or a substantial equivalent thereof.

After careful consideration of the entire record, we are of the opinion and hold that the sale of the 1,400 shares of stock in question by the petitioner to the Boettcher Realty Co. was a bona fide transaction and sale.

The next issue for our determination is: Was the sale made at their fair market value?

Starting November 28, 1981, it was about 38 weeks or until in August 1932, before sales of American Beet Sugar Co. shares of stock on the New York Stock Exchange totaled as much as 2,500 shares, the number sold January 18, 1932, to the Boettcher Realty Co. by petitioner. During the 38 weeks mentioned there was no week when the volume of shares of said stock sold on the stock exchange approached 600 shares.

The aforesaid 2,500 shares of American Beet Sugar Co. 7 percent preferred stock, of which the 1,400 shares in question were a part, were not offered for sale on the New York Stock Exchange, nor to anyone except the Boettcher Realty Co., to which they were sold at a price ($1.50 per share) designated by the president of both the seller and the purchaser. At the date of the sale in question sugar stocks were weak and there was a bear market on, the bottom of which was not reached until July 1932. No sales of American Beet Sugar Co. 7 percent preferred stock were made on the New York Stock Exchange on January 18, 1932, though then the stock was quoted at $2.50 bid and offered for sale at $2⅞ per share. During the week starting December 27,1931, 600 shares of the stock were sold, the highest sale price being $3 per share and the lowest $1.50 per share, but how much was sold at each price and on what days the record does not disclose. The price at which shares were sold declined from $3 on Monday, December 28, 1931, to $1.50 on Wednesday, December 30. On December 31 there were no sales of the stock on the stock exchange. During the entire week beginning January 19, 1932, there were 40 shares of the stock sold, the evidence indicating the sales were at $2.50 per share.

The evidence shows that the sale of 600 shares of said stock on the stock market during the week starting December 27,1931, covered the largest number of said shares sold on the stock market within a week in a period of 38 weeks and that in the week in which the 600 shares were sold, the price declined to $1.50 per share.

Under the conditions existing on the stock exchange market shortly prior to January 18, 1932, and on that date, the petitioner herein did not offer for sale on the said stock exchange the 2,500 shares of stock aforesaid (of which the 1,400 shares in question were a part), but by or through its president directed its sale to the Boettcher Realty Co. at $1.50 per share, as the fair market value of the same.

In the absence of any sales of said stock on the stock exchange on January 18,1932, the testimony of experts as to the fair market value of the block of stock sold to the Boettcher Realty Co. was offered and admitted in evidence at the hearing, such, in the circumstances of the cáse then being deemed proper and now so held. Heiner v. Crosby, 24 Fed. (2d) 191; Houghton v. Commissioner, 71 Fed. (2d) 656, 658; Laird v. Commissioner, 85 Fed. (2d) 598, 599; Jenkins v. Smith, 21 Fed. Supp. 251.

The testimony of the expert witnesses was uncontradicted and was to the effect that $1.50 per share was on January 18, 1932, the fair market value of the 1,400 shares of stock here involved. Their testimony indicated that the fair market value of the stock was affected and reduced by the quantity offered and that, if the 2,500 shares sold to the Boettcher Realty Co. had been offered on the stock exchange for sale, the price bid for such stock would have been very substantially lowered.

As was said by the court in Jenkins v. Smith, supra:

It may seem theoretically that a large number of shares in a block should have a value equal to the number of shares times the market value of each share, but here theory is not in accord with actual fact. The explanation may be in the fact that market value does not necessarily reflect true value. But the value designated by the statute is market value, and however illogical that value may be, it is the value which must be ascertained. Intrinsic value may be a more accurate index to use for tax purposes, but, whether it is or not, Congress has chosen to use market value as the base.

After giving due consideration to sales of the stock on tbe stock exchange and to the prices bid for the stock thereon on dates both prior and subsequent to January 18, 1932, and to the uncontradicted testimony of expert witnesses familiar with and competent to judge of the fair market value of the stock in question (see Helvering v. Kimberly, 97 Fed. (2d) 433; Helvering v. Safe Deposit & Trust Co. of Baltimore, 95 Fed. (2d) 806; and Commissioner v. Shattuck, 97 Fed. (2d) 790 — all taken in connection with other facts shown by the record — we are of the opinion, find, and hold that $1.50 per share for the 1,400 shares of the American Beet Sugar Co. 7 percent preferred stock was the fair market value of that stock on January 18, 1932, when it was sold to the Boettcher Realty Co. at that price as aforesaid.

Decision will be entered under Rule SO.


text:
    The M. D. Thatcher Estate Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87974.
    Promulgated August 16, 1938.

      Leon E. Williams, G. P. A., Egbert Robertson, Esq., Henry L. McIntyre, Esq., Montgomery Dorsey, Esq., and W. Clayton Carpenter, Esq., for the petitioner.

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

Disney:

The assignment of errors herein raises issues the determination of which involves the consideration of sections 319 and 321 (a) (2) of the Kevenue Act of 1924. Section 319 imposes a tax upon the transfer by a resident by gift, during the calendar year 1924, of any property wherever situated, whether made directly or indirectly. Section 321 provides that, in computing the amount of the gifts subject to the tax imposed by section 319, there shall be allowed as deductions:

(a) In the case of a resident—
⅜ * * * * * *
(2) The amount of all gifts or contributions made within the calendar year to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees * * * but only if such gifts or contributions are to be used by such trustee or trustees * * * ex_ clusively for religious, charitable, scientific, literary, or educational purposes, * * * and the amount of all gifts or contributions made within the calendar year by such corporation, trustee * * * or association for a religious, charitable, scientific, literary or educational purpose * * *.

In the consideration and determination of the issues in the instant case, we must bear in mind that charitable bequests are favorites of the law, St. Louis Union Trust Co. v. Burnet, 59 Fed. (2d) 922, are expressly encouraged by statute, and should be broadly construed. Edwards v. Slocum, 264 U. S. 61; John Markle et al., Executors, 28 B. T. A. 201, 204; Ould v. Washington Hospital, 95 U. S. 303; and Helvering v. Bliss, 293 U. S. 144, 151.

The deductibility of a gift to charity under section 321 (a) (2), supra, must be determined as of the date the gift was made.

In the instant case, the question is whether on December 30, 1924, the date of the execution and delivery of the trust instrument and the securities described therein to the trustees designated by the M. D. Thatcher Estate Co., the remainder interest in the trust fund here involved was so transferred and vested in the three trustees named in the trust instrument as to render the transfer of the remainder interest subject to tax in 1924, as claimed by the respondent, or whether the petitioner is entitled to a deduction of the amount of said remainder interest from the total amount of gifts, as claimed by petitioner under section 321 (a) (2), supra.

The trust instrument does not use the exact language employed in the statute, section 321 (a) (2), which, in applicable instances, authorizes the allowance of deductions such as claimed by the petitioner. Paragraph five of the trust deed directed that after the death of Luna A. Thatcher the trustees “shall transfer and pay all trust funds and property to any benevolent corporation or one not for profit that may have been formed for this purpose by Luna A. Thatcher during her lifetime, or that may be formed by her executors pursuant to her testamentary direction, it being anticipated that she will cause to be formed for this purpose a corporation to be known as The Mahlon D. and Luna A. Thatcher Memorial Association.”

Mrs. Thatcher died December 31, 1935, and by her last will and testament, executed December 6,1935, provided in paragraph twenty-six, as set forth in our foregoing findings of fact, in effect that she had organized Charities, Inc., a corporation not for pecuniary profit, but for charitable and educational uses, and that in order to bring comfort and happiness to some who otherwise would lack it, she gave one-half of her property to Charities, Inc.

The record shows that the alleged “charitable corporation” which Mrs. Thatcher “caused to be formed” was “Charities, Inc.”, the organization of which was completed on December 19, 1924. The second article of its certificate of incorporation states:

The objects of this corporation shall be to receive gifts and grants of money and property of every kind and to administer the same for charitable, educational, civic and philanthropic uses and to do anything necessary or proper for the accomplishment of these purposes. [Italics supplied.]

There is therein no requirement in exact terms that the gifts and grants of money and property received by it should be administered “exclusively” for the uses enumerated therein nor are the uses for which the gifts and grants therein were to be administered identical with those set out in section 321 (a) (2), supra, which in applicable instances entitles the donor to deductions as indicated therein.

Not until November 1,1934, approximately ten years after the trust instrument was executed and the securities were transferred and delivered to the trustees, was there an amendment to the second article of the certificate of incorporation of “Charities, Inc.” That amendment required that the administration of the gifts and grants of money and property to it should be “exclusively for charitable, educational, scientific, and philanthropic uses.” The word “civic” was eliminated from said article as amended.

On November 21, 1935, shortly before the execution (December 6, 1935) by Mrs. Thatcher of her last will and testament, the second article of the certificate of incorporation of Charities, Inc., was again amended as shown in our findings of fact, the word “legacies” being added and also a provision that “no funds or property of the corporation shall ever in any way inure to be used for the benefit of any member, officer or employee of the corporation * * *.”

Our question is, therefore, whether the language used in the trust deed and in the original unamended certificate of incorporation of Charities, Inc., authorizes the exemption claimed under section 321 (a) (2) of the Revenue Act of 1924. Considering the conclusions to which we have come, we find it unnecessary to decide whether the trust deed or the certificate of incorporation controls. In our opinion, the language of both instruments satisfies the requirements of the statute. In both instruments it is obvious that the purposes therein set forth are exclusive for the reason that in the trust instrument “all” trust funds and property are to be devoted to the purposes named, and the purposes named in the certificate of incorporation are by law exclusive, the objects of the corporation being named and any other objects or action outside of the named objects being ultra vires. We think the expressions “benevolent corporation or one not for profit” in the trust instrument, and “charitable, educational, civic and philanthropic uses” in the original certificate of incorporation, when construed with the breadth and liberality required of us, fairly and plainly conform to and come within the purview and intendment of the statute. In our opinion, the statute uses the word “charitable” in its broad sense, connoting selflessness as contradistinguished from selfishness, and that it was the intent of the statute to exclude from the provisions of the gift tax those gifts or conveyances made for an unselfish, and not a private and selfish purpose. “Caritas”, the etymological origin of “charitable”, undoubtedly embraced broadly a meaning of regard or love for mankind. Bok v. McCaughn, 42 Fed. (2d) 616. We think the expression as used today covers and includes “civic and philanthropic”, as well as “benevolent” and “not for profit” — the various expressions used in the two instruments being-considered here. Each of these expressions is an attribute of charity; each negatives the idea of personal or selfish purposes. This is particularly true of the words “civic and philanthropic” when they are used in the same phrase with the statutory expression “charitable.” Saltonstall v. Sanders, 11 Allen (Mass.), 446; In re Cunningham's Will, 136 N. Y. S. 922; and In re Murphy's Estate, 184 Pa. 310; 39 Atl. 70. The word “charitable” does not appear in the trust instrument, the language there being “benevolent” and “not for profit.” Inasmuch, however, as the corporation had already been formed at the date of the trust instrument, by the same parties and through the same attorney and as a part of a “single unified plan” with the execution of the trust instrument, we think the two instruments should be read together, and that the purposes of the already formed corporation are inserted into the trust instrument, and that it can not be said that the expression “charitable” is not in effect a part thereof. Independently, however, of that consideration, we consider and hold that charitable covers and includes the expressions used in both instruments. It has been said that charity covers a multitude of sins; we think it may well be considered to cover a few virtues of a character kindred to charity. In Ould v. Washington Hospital, supra, a charitable use is defined as follows:

A charitable use, where neither law nor public policy forbids, may be applied to almost anything that tends to promote the well-doing and well-being of social mean.

See also Rotch v. Emerson, 105 Mass. 431; St. Louis Union Trust Co. v. Burnet, supra; 48 C. J. 1054; Fox v. Gibbs, 86 Me. 87; 29 Atl. 940; Gossett v. Swinney, 53 Fed. (2d) 772, 777; and Union & New Haven Trust Co. v. Eaton, 20 Fed. (2d) 419.

The word “civic” has been included within the meaning of charitable upon consideration of a charitable deduction for income tax purposes, where the expression used was “either civic, charitable or benevolent” purposes. Johnson v. United States, 8 Fed. Supp. 842. The word “public,” considered in Michigan Trust Co. v. United States, 21 Fed. Supp. 482, and Jackson v. Phillips, 14 Allen (Mass.), 539, 556. includes among charities the erection or maintenance of public buildings or works or otherwise lessening the burdens of government. Webster v. Wiggins, 19 R. I. 73; 31 Atl. 824, characterizes as charitable funds those from private gift, for any legal or public purpose. In re Estate of Graves, 242 Ill. 23; 89 N. E. 672, considered as charitable a gift to erect a public drinking fountain for horses. Benjamin Franklin’s will, providing a fund to be expended in building or procuring public works to promote the convenience and comfort of the people of Boston, was held a valid charitable gift. City of Boston v. Doyle, 68 N. E. 851.

Furthermore, though under the above authorities we do not think it is necessary to this opinion, we believe that the use of the word “civic” comes within that portion of the language of the statute exempting gifts to or for the use of a state or political subdivision thereof. In its origin, the word “civic” means that which has to do with the state (civis, meaning citizen; civitas, meaning state). It seems plain, therefore, that any civic matter has to do with a “state or a * * * subdivision thereof”, within the language of the statute, and we do not think this view is inconsistent with the not uncommon use of the word “civic” in connection with matters of a city or town. Although under some jurisdiction cities are not political subdivisions of the state in a technical sense, yet obviously within the broad meaning of the term, as indicated by its origin, they are a part of the state. For this additional reason, therefore, we believe that the word “civic” is to be included within the connotation of “charitable.”

In the light of the above conclusions, it is unnecessary to pass upon the question as to whether the intention of the trust instrument may be gathered from circumstances outside of the instrument itself, or to decide whether, if the trust instrument did not provide for charitable use, it was void for indefiniteness and, therefore, as a resulting trust was not subject to gift tax; although under primary principles of interpretation of instruments it would appear that the trust instrument would be subject to explanation by evidence dehors the instrument itself, and although the Colorado statute under which the validity of the trust would be determined apparently provides, by section 5161.1, Compiled Laws of 1932, that indefiniteness or uncertainty of beneficiary does not invalidate a gift for such charitable purposes as herein involved.

In our opinion, the respondent’s contention, that to include within the intendment of the statute the expressions involved in the instruments here being considered would be beyond proper bounds of judicial interpretation, is not well founded, nor do the cases cited control. We have here for interpretation words of general import, and we consider it wholly within the bounds of proper principles of interpretation to ascertain whether the general expressions of the statute cover and include those of the instruments here involved.

After full consideration of the record herein and briefs of counsel citing numerous authorities, examined though all not discussed, we are of the opinion and hold that the value of the remainder interest of the aforesaid trust in the securities transferred and delivered by petitioner to, and accepted by, the trustees of Charities, Inc., on December 30,1924, is allowable as a deduction from the total amount of the gifts involved herein. The action of the respondent in disallowing the claimed deduction of said remainder interest, $397,513.06, is accordingly disapproved.

The parties have stipulated that if the Board should determine that the gift (so far as concerned the remainder of the life estate in the property transferred in trust) constitutes an allowable deduction from, the total gifts made by the petitioner in the year 1924, then the deficiency in gift tax is $372.81. We therefore hold and determine that there is a deficiency in gift tax in this proceeding in the sum of $372.81.

Decision will be entered redetermining the deficiency in gift tax to be the amoimt of $372.81.


author: Black:

text:
    Leo A. Balzereit and Rosa Ida Schweiker, Guardians of the Estate of George H. Balzereit, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82386.
    Promulgated August 16, 1938.

      Isadore Stern, Esq., for the petitioners.

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

Black:

The Commissioner has determined a deficiency against petitioners for the year 1932 of $4,240.31. The deficiency results from including in the taxable income of petitioners the amount of $29,-776.15 dividends received from the estate of Leo G. Balzereit. The petitioners attack this action of the Commissioner in the following assignment of error:

(a) The Commissioner erred in adding to the income returned by your petitioners the income received by the trustees for George H. Balzereit under the will of Leo G. Balzereit, deceased.

The facts were stipulated and we adopt the stipulation of facts, together with the exhibits attached thereto, as our findings of fact. We shall incorporate in this report such parts of the facts as seem necessary to an understanding of the issue to be decided.

George Henry Balzereit was declared incompetent by reason of weakness of mind on October 10, 1925, by the Court of Common Pleas No. 3, Philadelphia County. His father, Leo G. Balzereit, was appointed guardian of his estate at that time and continued in that capacity until his death on July 9, 1929. Thereafter, on August 8, 1929, Leo A. Balzereit and Bosa Ida Sehweiker, children of Leo G. Balzereit and brother and sister, respectively, of George Henry Balzereit, were substituted as guardians of said estate.

By his will, Leo G. Balzereit created a testamentary trust or trusts in favor of George Henry Balzereit, to which he bequeathed certain shares of the capital stock in certain corporations, together with other property, for the uses and purposes set forth in paragraphs 11 and 12 therein.

During the year 1932, the executors of the estate of Leo G. Bal-zereit made the following disbursements by checks drawn as indicated, which represented amounts received as dividends on the shares of capital stock in certain corporations which were included in the corpus of the aforesaid trusts:

The foregoing amount of $29,716.15 was shown on the income tax return filed by the executors of the estate of Leo G. Balzereit, for the year 1932, as representing distributions to George Henry Balzereit.

The Integrity Trust Co., one of the trustees and depository of the funds of both the trust or trusts, as aforesaid, and of the funds of the guardian of the estate of George Henry Balzereit, credited the aggregate amount of $29,776.15 to the trustee account and not to the guardian account of George Henry Balzereit.

The Integrity Trust Co., Rosa Ida Sehweiker, and Leo A. Balzereit filed an income tax return as trustees for George Henry Balzereit u/w Leo G. Balzereit, deceased, for the year 1932, in which the foregoing amount of $29,776.15 was reported as income.

An income tax return was filed for the year 1932 by the “Integrity Trust Company, Agent for Rosa Ida Sehweiker and Leo A. Balzereit, Guardians of the Estate of George Henry Balzereit.” No part of the foregoing amount of $29,776.15 was included in the return.

The pertinent parts of paragraphs 11 and 12 of the will of Leo G. Balzereit, deceased, which created the testamentary trust in favor of George Henry Balzereit, read as follows:

Eleventh. I give and bequeath two thousand (2,000) shares of the National Dairy Products Corporation common stock owned by me at the time of my death unto the Trustees hereinafter named, in trust, nevertheless, to hold the same, sell the same whenever such Trustees shall deem advisable, hold the proceeds thereof, invest and reinvest the same, and keep the same invested, collect the income from said stock or the proceeds thereof, and, after deducting the expenses of the trust, pay the net income to, or, in the discretion of the Trustees, apply the said net income to the maintenance and support of, my son George Henry Balzereit for and during the term of his natural life.
* ⅜ * * * ⅜ *
All dividends received on said stock payable after my death shall pass to the said George Henry Balzereit as income.
Twelfth. All the rest, residue and remainder of the property and estate, of every kind and wheresoever situate, real, personal and mixed, of which I shall die seized or possessed, and all of the property and estate, of every kind and wheresoever situate, real, personal, and mixed, as to which I shall have any power of appointment, whether by deed, will or otherwise, I dispose of as follows:
(a) As to one-third thereof I provide:
(1) Two thousand (2,000) shares of the National Dairy Products Corporation common stock owned by me at the time of my death I give and bequeath unto the Trustees hereinafter named, in trust, nevertheless, to hold the same, sell the same whenever such Trustees shall deem advisable, hold the proceeds thereof, invest and reinvest the same, and keep the same invested, collect the income from said stock or the proceeds thereof, and, after deducting the expenses of the trust, pay the net income to, or, in the discretion of the Trustees, apply the said net income to the maintenance and support of, my son George Henry Balzereit for and during the term of his natural life.
* ⅜ * * * * *
All dividends received on said stock payable after my death shall pass to the said George Henry Balzereit as income.

Paragraph 19 of the will reads as follows:

Nineteenth. Wherever herein I have provided by this my will for the payment or delivery of income or principal to any beneficiary, I direct that the same shall not be subject to attachment, execution, sequestration or to any order of the Court, and that the said beneficiary shall have no power to alienate or anticipate said payments or deliveries or encumber the same, nor shall said income or principal be liable for the contracts, debts and engagements of such beneficiary, but the same shall be paid and delivered by my Executors or Trustees to such beneficiary free and clear of all assignments, attachments, anticipations, levies, executions, decrees and sequestrations and shall only become the property of said beneficiary when actually received by him or her.

In a statement attached to the deficiency notice the Commissioner, after referring to certain provisions in the will of decedent, Leo G. Balzereit, states, among other things, as follows:

In each instance the will provides for the income to be paid to George H. Balzereit or, in the discretion of the trustees, to be applied to his maintenance and support. Nowhere in the will is there any provision for the trustees to accumulate the net income of the trust, it is either to be paid to George H. Balzereit, or to be applied to his maintenance and support.
After careful reading of the will it is apparent that there was no intent on the part of the testator to treat this individual different from the other heirs. He was the preferred beneficiary and it is apparent that the testator’s reason for making this distinction was on account of his illness. The will definitely provides that “all dividends received on said stock (4,000 shares National Dairy Products stock) payable after my death shall pass to said George Henry Balzereit as income'.” This statement seems to clearly show that it was not the testator’s intention to permit the trustees, who were also the guardians, to accumulate the income in the trust.
In view of these facts the adjustments in the income as outlined in the revenue agent’s report and Bureau letter dated February 14, 1935, are sustained.

From the foregoing statement of facts it will be seen that there is no question raised but that the $29,776.15 dividends in question were taxable income. The only question is, To whom were they taxable? Petitioners contend that the dividends were taxable to the testamentary trust; that the trust had discretion under the will to distribute the income or not as it, within its discretion, saw fit; and that in the taxable year the trust made no distribution of income to the guardians of the beneficiary, George Henry Balzereit.

The trust, in harmony with the foregoing contentions, filed a return for the year 1932 and rendered the $29,776.15 for taxation. We do not have that tax return before us for consideration.

The Commissioner contends (1) that the income of the testamentary trust was actually distributed in 1932 to the guardians of the beneficiary, George Henry Balzereit, (2) that even if the income was not actually distributed to petitioners as the guardians of George Henry Balzereit, nevertheless it was mandatorily distributable and is therefore taxable to petitioners, rather than to the testamentary trust.

The applicable statutes are printed in the margin.

We agree with, the view of respondent that the facts as stipulated show that the dividends were actually paid to petitioners as guardians in the taxable year. Three of the checks were made out to “Integrity Trust Company, Agent for Guardians of George H. Balzereit,” and the other one was made out simply to “Estate of George H. Balzereit.” It seems reasonable to assume, in the absence of any showing to the contrary, that this latter check was also intended for the estate of George H. Balzereit which was in the hands of his guardians. Therefore all these payments made in 1932 were made to the guardians of the estate of George H. Balzereit and were taxable to them as guardians of the estate of George H. Balzereit and not to the fiduciaries of the trust estate which was created by Leo G. Balzereit for the benefit of George H. Balzereit. It is true that the stipulation shows that “The Integrity Trust Company, one of the trustees and depositary of the funds of both the trust or trusts, as aforesaid, and of the funds of the Guardians of the Estate of George Henry Balzereit, credited the aggregate amount of $29,-116.15 to the trustee account and not to the guardian account of George Henry Balzereit.” We think this fact is without controlling significance. If the $29,776.15 was actually distributed to the guardians of George H. Balzereit within the taxable year, we think they would be taxable with it, even though they permitted the checks to be credited to the account of the trustees. But even if we are wrong in concluding from the facts that the $29,776.15 was actually distributed to the guardians within the taxable year, nevertheless we think respondent’s second contention must be sustained. This second contention is that under the terms of the testamentary trust, the income was currently distributable and therefore taxable to the beneficiary, whether actually distributed to him or not. Under the provisions of the statutes which we have printed in the margin, it is of course clear that where under the terms of the trust the income is currently distributable it is taxable to the beneficiary, whether distributed or not. Estate of Henry Mayer, 16 B. T. A. 1164; Luke W. McCrory, Trustee, 25 B. T. A. 994; affd., 69 Fed. (2d) 688; Guitar Trust Estate, 25 B. T. A. 1213; affirmed on this point, 72 Fed. (2d) 544; Jack M. Franks, 32 B. T. A. 260.

The petitioners contend, however, that the trustees were not man-datorily required to distribute the income of the trust, but had it within their discretion to distribute whatever part of the income they saw fit and to retain whatever of the income they saw fit and add it to the corpus of the trust estate. In support of this contention they rely principally upon that part of the language of the will which we have italicized in the following passage:

* * * collect the income from said stock or the proceeds thereof, and, after deducting the expenses of the trust, pay the net income to, or in the discretion of the Trustees, apply the said net income to the maintenance and support of my son, George Henry Balzereit, for and during the term of his natural life.

It will be noted that by the language above italicized the trustees were not vested with, any such broad discretion as was present in the trust involved in State Savings Loan & Trust Co. v. Commissioner, 63 Fed. (2d) 482, affirming 25 B. T. A. 228. In that case both the Board and the court held that the trustee was given discretion as to the distribution of income because of the following provision in the trust indenture:

* * * Said trustees shall pay all or part of the net income on the trust created for the education, comfort and support of said grandchildren whenever in the judgment of said trustees it is for the best interest of said grandchildren or any of them so to do. [Italics supplied.]

Under such a provision it was clear that the trustees in that trust were vested with the sole discretion to either accumulate or distribute income as they saw fit. Not so in the instant case. The trust instrument which we have here for consideration contains no provisions for the accumulation of income. On the contrary, the last sentence of paragraph 11 of the will reads as follows: “All dividends received on said stock payable after my death shall pass to the said George Henry Balzereit as income.”

The effect of the provisions of the will of Leo G. Balzereit relating to income of the testamentary trust, when read together, is that the trustees might either pay the money over to the beneficiary (guardians) and let them spend it as they saw fit, subject of course to supervision of the court, or they (the trustees) might themselves spend it for his benefit, but this discretion did not give the trustees any right to accumulate the income either as a part of the trust estate or otherwise. The income was, under the terms of the trust, that of the beneficiary and was distributable to him either in cash or in the form of maintenance currently. Of course, inasmuch as George H. Balzereit had been declared mentally incompetent to manage Ms estate and guardians had been appointed for his estate, the trustees had no power to pay the income directly to him but payment to his guardians has the same tax effect as if paid directly to him. Petitioners lay emphasis on the statement in paragraph 19 of the will, which we have quoted above, wherein it is said that the income “shall only become the property of said beneficiary when actually received by him or her.”

The provisions contained in paragraph 19 apply, not only to the testamentary trust set up for George Henry Balzereit, mentally incompetent son of decedent, but also to decedent’s other two children, Leo A. Balzereit and Kosa Ida Schweiker, as well. It certainly is clear that, under the terms of the testamentary trusts set up in the will for the benefit of Leo A. Balzereit and Bosa Ida Schweiker, the income was currently distributable and the trustees were given no power to accumulate income. The purpose of the provision in paragraph 19 to which we have just referred was to prevent the beneficiaries from encumbering their distributable shares of the net income from the trust estates. It confers no power in the trustees to accumulate income or to hold it for future distribution. The provisions of decedent’s will required the trustees to distribute the income of the testamentary trusts currently. In such a case the net income of the trust is taxable to the beneficiary to whom distributable, and not to the trust itself, whether) distributed within the taxable year or not.

Decision will be entered for the respondent.

       Section 161 (a), Revenue Act of 1932, reads, in part:
      “(a) Application op Tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any hind of property held in trust, including—
      *******
      “(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
      *******
      “(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.”
      Section 162 (b) and (c) of the Revenue Act of 1932 read as follows:
      “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—
      “(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.
      “(c) In the case of income received by estates of deceased persons during the period of administration of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.”


author: ToRNER:

text:
    Charles E. Lambeth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77989.
    Promulgated August 16, 1938.

      Richard E. Thigpen, Esq., for the petitioner.

      Irving M. TuTlar, Esq., for the respondent.
   OPINION.

ToRNER:

The only question involved in this proceeding is whether or not the proceeds of the life insurance policy paid to petitioner by reason of the death of Eskridge are to be included in petitioner’s gross income. In section 22 (b) (1) of the Revenue Act of 1928 it is provided that “Amounts received under a life insurance contract paid by reason of the death of the insured” shall not be included in gross income and shall be exempt from Federal income tax. In section 22 (b) (2), however, the effect of section 22 (b) (1) is modified in cases where the life insurance contract under which the amounts above referred to are paid has been acquired by “transfer for a valuable consideration”, and in that event the excess, if any, of the amount received, over the “actual value” of such consideration and the amount of premiums thereafter paid by the transferee, is to be included in gross income. The terms of section 22 (b) (1) are plain and there can be no question that the amount here in question is to be excluded from petitioner’s gross income unless section 22 (b) (2) applies.

The respondent contends that the petitioner did give valuable consideration for the contract in 1930 and that the consideration so given was the $75,000 paid by him in 1927 for his stock in the Lambeth-Eskridge Motor Co. The respondent further contends that the stock became worthless in 1930, prior to the taxable year, and that petitioner was then entitled to a loss deduction of the entire amount paid by him for the stock, and for that reason and the further reason that the insurance contract had no cash surrender value in 1930, when acquired, its basis for income tax purposes is zero and the full amount received less the one premium paid by petitioner is income to him. The petitioner, on the other hand, claims that he gave no consideration, valuable or otherwise, in acquiring the insurance contract and for that reason section 22 (b) (2), supra, is not operative and the proceeds of the insurance contract are excluded from gross income under section 22 (b) (1).

While it is true that the petitioner, in purchasing the stock in the Lambeth-Eskridge Motor Co., did not contract specifically for the insurance policy on the life of Eskridge and most likely had no thought of acquiring such a policy when he paid for his stock, it is nevertheless true that the consideration paid by him for the stock constituted consideration not only for the stock but also for any distributions to which he might become entitled as a stockholder. Accordingly, we can reach no other conclusion than that the petitioner received the insurance policy by reason of his ownership of stock in the corporation, and, if so, the $75,000 paid for the stock and the rights flowing therefrom constituted consideration for the insurance contract here in question. But even so, this conclusion does not benefit the respondent, for while section 22 (b) (2), supra, does definitely provide that the proceeds of a life insurance contract acquired for a valuable consideration are not unqualifiedly to be excluded from gross income, it also and as definitely provides that where the contract is acquired for valuable consideration the actual value of such consideration is to be excluded in determining the amount of the proceeds which is to be included in gross income. Accordingly, if the valuable consideration given for the transfer of the life insurance contract was the $75,000 in cash paid by the petitioner for the stock of the corporation, as the respondent himself claims, the exclusion of the actual value of such consideration as the statute requires leaves no amount to be included in petitioner’s gross income. According to the record the petitioner has received nothing from the corporation for the $75,000 so paid except the bare stock certificates and the insurance policies and by the end of the taxable year it was known that he would never receive anything more. The fact that the petitioner might be permitted a deduction in some year by reason of the worthlessness of the corporate stock does not change the situation, for Congress has seen fit to deal specifically with the proceeds of life insurance contracts and we must apply the statute as it is enacted. It is also true that in the case of property acquired by a stockholder as a distribution from a corporation, other than a dividend, the basis of that property in the hands of the stockholder for the purpose of determining subsequent gain or loss is its fair market value at the time of distribution, and if the distribution of the life insurance contracts in question was subject to the ordinary rule fixing the basis for property so distributed, the conclusion of the respondent that the basis is zero might be correct. Here, however, as we have indicated, we are not dealing with the ordinary case, but with the proceeds of life insurance contracts in respect of which Congress has seen fit to legislate specifically. The language of the statute is pointed and clear. It is obvious that if valuable consideration was given that consideration was the $15,000 paid by the petitioner for the stock of Lambeth-Eskridge Motor Co. and further that the exclusion of the actual value of that consideration, under the provisions of section 22 (b) (2), supra, leaves no part of the proceeds of the life insurance contract which may be included in petitioner’s gross income.

Decision will he entered for the petitioner.

       SEC. 22. GROSS INCOME.
      *******
      (b) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
      (1) Life insurance. — Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or in installments (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income).

       (2) Annuities, etc. — * * *. In the case of a transfer for valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual, value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph.


text:
    Wilbert Mineral Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76529.
    Promulgated August 23, 1938.

      P. G. Borron, Esq., and H. A. Mihills, O. P. A., for the petitioner.

      R. P. Hertzog, Esq., for the respondent.
   OPINION.

Black:

The principal question in this proceeding is whether the income earned by way of leases and royalties from the mineral rights in and under the lands conveyed to petitioner by the Lumber Co. and the Planting Co., respectively, is taxable to petitioner, as the respondent contends, or to the Lumber Co., as petitioner contends. There is no issue as to the correctness of respondent’s determination of the amount of income. It is fundamental that the owner of the income is the proper party to tax. Poe v. Seaborn, 282 U. S. 101. The determination of the ownership of the income here involved turns on whether, under the agreements, resolutions, and acts of transfer referred to in our findings, the Lumber Co. and the Planting Co. in their acts of transfer of the mineral lands in question on February 26,1929, reserved an “economic interest” in the lands to the extent of the first $400,000 to be “earned or received, either by way of lease, royalties or otherwise from the oil, gas and other mineral rights in and under the said lands conveyed”, or whether, under such agreements, resolutions, and acts of transfer, no such economic interest was reserved. If, under the agreements, resolutions, and acts of transfer, such an economic interest in the lands was reserved, the proceeding would be controlled by Thomas v. Perkins, 301 U. S. 655, and petitioner would not be taxable on the income in question. If, however, no such economic interest was reserved by the grantors, and the agreements, resolutions, and acts of transfer be construed as having transferred to petitioner, with no reservation of income to the grantors, the entire economic interests in and to the lands conveyed in consideration for petitioner’s capital stock and a purchase money debt and mortgage of $400,000, payable at all events at petitioner’s convenience and from any source that might be available, then it would follow that all of the income earned from the mineral rights in and under the lands would belong to and be owned by and taxed to the petitioner and the payment of such income direct to the Lumber Co., as one of the grantors, and the assignee of the other, would, under those circumstances, be regarded simply as a liquidation fro tanto of the mortgage. Reynolds v. McMurray, 60 Fed. (2d) 843. Cf. Helvering v. Bankline Oil Co., 303 U. S. 362; Helvering v. O'Donnell, 303 U. S. 370; and Helvering v. Elbe Oil Land Development Co., 303 U. S. 372, in which cases an economic interest was distinguished from a mere economic advantage.

The respondent places considerable emphasis upon the giving of the mortgage and the pledging of petitioner’s capital stock. In his brief he says:

The best evidence that ownership of lands had passed to petitioner and that the Lumber Company did not consider seriously that any reservations in said transfer had been made with respect to the $400,000, is shown by the fact that petitioner was required to give the Lumber Company a mortgage, of the lands, and to turn over all its capital stock as security for the payment of the $400,000.

We do not regard the giving of the mortgage and the pledging of petitioner’s capital stock as controlling. We think effect must be given to all of the agreements, resolutions, and acts of transfer taken as a whole, and when this is done it is our opinion that the agreements, resolutions, and acts of transfer, collectively construed, reserved to the grantors such an economic interest in the lands conveyed to the extent of the first $400,000 to be earned or received, either by way of lease, royalties, or otherwise from the oil, gas, and other mineral rights in and under the lands conveyed, as would entitle the Lumber Co. to depletion on the oil and royalty payments received during the taxable years, under Palmer v. Bender, 287 U. S. 551, and, as the Fifth Circuit said in Perkins v. Thomas, 86 Fed. (2d) 954 (affd., Thomas v. Perkins, supra): “The broad and general view of local transactions which has been held proper in determining whose are the depletion deductions under the federal tax statutes must for consistency’s sake be applied to questions of whose is the income.” We do not think that the $400,000 represents in any way a part of the purchase price of the lands. The acts of transfer provide specifically that “The consideration of this transfer is the issuance as fully paid stock of Five thousand forty shares (5040), of no par value of the capital stock of Wilbert Mineral Corporation * * We think that the mortgage and pledge should be regarded merely as precautionary measures to guarantee the carrying out of the intention of all the parties concerned, namely, that petitioner was not to enjoy any of the revenues from the mineral rights until the Lumber Co. had received the first $400,000 from that source. Cf. Ortiz Oil Co., 37 B. T. A. 656. In other words, we think the controlling fact is that every precaution was taken to make sure that the first $400,000 of “revenues earned or received, either by way of lease, royalties or otherwise from the oil, gas and other mineral rights in and under the said lands” would go to the Lumber Co., to be used in paying its debts and the debts of the Planting Co., which it took over in April 1929. It was a reservation of income to the grantors out of the lands conveyed and was not purchase money. PerMns v. Thomas, supra. While we do not have the Lumber Co. before us, there seems to be no doubt but that the amounts received should be included in its return, not as the receipt of a capital item, but as taxable income received.

In a statement attached to the deficiency notice the respondent explained his determination of the deficiencies in part as follows:

Any payments to the lumber company would be a payment on the mortgage and, therefore, a capital transaction to the lumber company. The income from the mineral rights owned by the mineral company is income to the mineral company even though by order of the mineral company, paid directly to the lumber company by the oil companies operating the leases. * * *
The amount is held to be your income in accordance with the decision of the Tenth Circuit Court of Appeals rendered April 17, 1933 in the case of Comar Oil Company v. Burnet (64 F. (2d) 965) and with the decision of the United States Board of Tax Appeals in the case of J. C. Pugh, et al., 17 B. T. A., page 429. This latter decision was affirmed by the Circuit Court 49 Fed. (2d) 76.

In his brief the respondent still relies upon the Comar Oil Co. and the Pugh cases as authority for his determination. These cases no doubt support tlie respondent’s determination but are no longer regarded as valid authority for the question here presented. See Commissioner v. Fleming, 82 Fed. (2d) 324; Perkins v. Thomas, supra; Thomas v. Perkins, supra; Holly Development Co. v. Commissioner, 93 Fed. (2d) 148; Rooky Mountain Oil Co., 36 B. T. A. 365; petition for review dismissed April 22, 1938; I. Rudman (first issue therein), 36 B. T. A. 803, 806; and Ortiz Oil Co., supra.

The respondent in his brief says that “while the Pugh and Comar Oil cases may have been overruled in principle in the Perkins case and by Palmer v. Bender, (1932), 287 U. S. 551, in so far as the question of depletion was involved we submit that it still declares valid law as to the questions of title and the construction of the contracts.” As far as title is concerned, the Supreme Court, in the Perkins case, said: “We need not decide whether technical title to the oil while in the ground was in assignors, or in assignee.” As far as the construction of the contracts here involved are concerned, we hold that there was reserved to the grantors of the land an economic interest as distinguished from an economic advantage in the several transfers to petitioner to the extent of the first $400,000 earned or received either by way of lease, royalties, or otherwise from the oil, gas, and other mineral rights in and under the lands conveyed to petitioner by the Lumber Co. and the Planting Co., and that under Thomas v. Perkins, supra, the ownership of the income involved in this proceeding was in the Lumber Co., and it was not, therefore, taxable to petitioner. The respondent’s determination on this issue is reversed.

The facts, as disclosed in our findings, with reference to filing income tax returns for each of the taxable years before us show that petitioner did not file a return for either of the taxable years. Under the Commissioner’s regulations petitioner was required to file a return, whether it had any income or not. See art. 391, Begulations 74 and Begulations 77. Failure to file a required return subjects a taxpayer to penalties, even though he offers a plausible and reasonable excuse. The penalties are mandatory where no return is filed. Paul L. Case, 37 B. T. A. 365; Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519; certiorari denied, 297 U. S. 723. But there are no penalties unless there is a tax. See supplement M, section 291, Bevenue Acts of 1928 and 1932.

Inasmuch as petitioner had no income other than the income which we have held belonged to and was owned by the Lumber Co., it follows that there is no tax liability or deficiency or penalty for any of the taxable years involved.

Decision will be entered for the petitioner.


author: HaReon :

text:
    Kenneth Walsh and Eleanor S. Walsh, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86014.
    Promulgated August 23, 1938.

      Philip 8. Mathews, Esq., and L. 8. Ackerman, Esq., for the petitioners.

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

HaReon :

Kenneth Walsh, petitioner, alleges that the new partnership suffered a partial bad debt loss in 1933 when a compromise settlement of the Bachman debt was executed. It is alleged that a debt was ascertained to be partially worthless and charged off by the new partnership in accordance with the requirements of section 23 (j) of the Revenue Act of 1932. It is alleged in the petition that the Bach-man debt amounted to $100,366.19 in 1932 (amount of a note of Bach-man, $94,462.34, due November 30, 1933, plus accrued interest not proved). It is alleged in the petition that the partnership realized, under a compromise settlement agreement dated December 22, 1933, an aggregate amount of $23,476.05 (the amount of a new note, $14,850, plus the fair market values of Universal Consolidated Oil stock and a piece of real estate). It is then alleged that the loss to the partnership in 1933 was $76,891.15 and it is alleged that petitioner’s share in this loss should be computed at not less than 24.75 percent and that his share in the loss is $19,032.16. We think all the allegations are in error. One error is as to what was realized from the settlement in 1933. Only $8,625.67 was realized. The $14,850 was a continuation of the debt.

The evidence in this proceeding suffers from the loss of the general ledger of the new partnership in which the capital accounts of the partners were kept. It is apparent that the adjustments referred to in paragraph 7 of the articles of partnership were not made until October 1931, ten months after the new partnership was formed. Whether or not the adjustments made then in the capital of the partnership constituted such reorganization as is referred to in article 604 of Regulations 77 is not a question before us. Whether those adjustments determined the value of contributions of accounts to the partnership is not proved. However, we are satisfied that $70,410.51 of the Bachman debt was charged against the capital shares of the Barneson partners in 1931 when the Bachman accounts were written down to $27,641.

The Bachman accounts were transferred to the new partnership in 1930 and we believe that any loss from these accounts would be a loss to the new partnership. The questions presented here are, first, whether petitioner participated in any loss in the Bachman accounts under the terms of the partnership agreement, particularly under paragraph 12 thereof; and, second, what the amount of the loss to the partnership was in the taxable year in the event any part of that loss fell on petitioner. There is also the question whether there was ascertainment and charge-off of the alleged loss in 1933 under the provisions of section 23 (j) of the Revenue Act of 1932. It is our opinion that no part of the Bachman loss was such partnership loss as petitioner could participate in under paragraph 12. Arriving at this conclusion, it is unnecessary to consider the other questions. However, so far as petitioner is concerned, his petition to this Board raised a claim that the partnership suffered a loss in an amount of $76,891.15 in 1933, part of which he claims as a deduction in his individual return. The burden of proof on petitioner is to prove that the partnership suffered a loss in the amount claimed in the pleadings and that the loss is within the provisions of section 23 (j) of the Revenue Act of 1932. We shall therefore consider the second question. .

The basis for gain or loss to the new partnership on the Bachman debt is the value thereof at the date of contribution to the partnership. Helvering v. Walbridge, 70 Fed. (2d) 683; Edward B. Archbald, 27 B. T. A. 837. What was the basic value? The value of this account in December 1930 may have been less than the debit balance shown in the, account. Petitioner leaves us in doubt as to what was the value of the Bachman account as a contribution to partnership capital. In one argument petitioner contends that the October 1931 adjustments in capital were made pursuant to paragraph 7 of the partnership agreement. It would follow that the Bachman accounts were contributed to partnership capital at a value of $27,641. However, this is a value as of August 31,1931, and not December 15,1930. Petitioner passes over any recognition that under this argument the basis to the partnership for gain or loss on the Bachman accounts would be $27,641. The difficulty with this argument is that the write-downs in October 1931 were as of August 31, 1931, whereas the date of contribution to capital of accounts from old partnerships is December 15, 1930. Even so, the value arrived at as of August 31,1931, is indicative that the Bachman accounts were contributed to the partnership at a value of less than the debit balances on December 15,1930.

Petitioner takes as the basis for gain or loss to the partnership the amount of the November 1931 note of Bachman, $94,462. He claims a loss on that basis. He appears to believe that the charge-off of approximately $70,000 in 1931 has no bearing on the matter of what is the basis for gain or loss on the debt in question, and passes over the question of value at the date of contribution. In the last analysis the petitioner makes only arguments and has failed to offer proof as to what the basis to the partnership is for the alleged loss. We hold that petitioner has failed to sustain the burden of proof upon him on this point.

It becomes unnecessary to consider another subsidiary question, namely, whether the Bachman debt was ascertained to be partially worthless and charged off in 1933 under the requirements of section 23 (j). We can not reach this point without proof of the basis for the alleged loss.

Not only is there failure of proof on the point of basis for loss to the partnership, but the evidence we do have indicates that the basis would be around $27,641 and not $94,462. It is a fair inference (although we believe it should not be necessary for us to make inferences) from the record, that the Bachman account was worth no more in December 1930 than it was in October 1931. The Bach-mans did not furnish extra security for their debts in either October or November 1931. Prior to November 1931 the new partnership had already charged off on its books against the capital shares of the Barneson partners a loss of $70,410.51. Thereafter, in the agreement of November 30, 1931, the partnership agreed to accept, at any time within two years, one-half of $94,462, the debit balance of the account in the doubtful accounts ledger, in full payment of all claims. Finally, in December 1933 the partnership agreed with the Bachmans to cancel its claim to at least $70,986.67 of the debit balance of the memorandum account, approximately the same amount as had been charged off the general ledger in 1931. These debit balances in the ledger of doubtful accounts are not material. As far as we can judge, that ledger was a customer’s ledger and the partnership for its own reasons had not told the Bachmans of the charge-off of about $70,000 of the debt in 1931 on the firm’s general ledger. There appears to have been some trouble with the Bachmans as it appears that, even though the Bachman accounts had been taken out of the firm’s assets in 1931 at least to the extent of about $70,000, the partnership still did not inform the Bachmans of this action. There is no evidence contrary to the above. Cf. Hammerschmidt & Franzen Co., 12 B. T. A. 811.

We do not know how the Barneson partners reported in their returns in 1931, if they did, the charge-offs made against their capital in 1931. Their loss may have been one related to their capital contributions that could not have been determined until final liquidation of the new partnership, cf. Helvering v. Walbridge, supra, or they may have been entitled to a loss deduction in 1931. Cf. Augustine M. Lloyd, 15 B. T. A. 82. In any event, these questions are not before us for determination and, lacking better evidence, we can not find as a fact what the basic value of the Bachman accounts for the purpose of gain or loss is. We do believe it evident, however, that petitioner’s claim that a loss of about $76,800 was ascertained in 1983 involves a claim that would result in a double deduction, which may not be taken. See Lederer v. Parrish, 16 Fed. (2d) 928; Ilfeld v. Hernandez, 292 U. S. 62. We believe that the alleged loss in 1933 to the partnership could not be more than $4,165.33 ($27,641 less $14,850, new note, less payments on account of $8,625.67) although we do not decide the question whether a debt was ascertained to be partially worthless and charged off in 1933.

The chief question, whether Kenneth Walsh is entitled to deduct any part of the alleged Bachman debt loss, turns upon construction of paragraph 12 of the partnership agreement. The Bachman account was one covered by the indemnity of the Barneson partners to the partnership, Kenneth Walsh, and others. Counsel for petitioner argues that the indemnities in paragraph 12 were .limited to adjustments in partners’ capital contributions which might be made in accordance with paragraph 7 of the partnership agreement. There is nothing in the terms of the partnership agreement before us to support this argument. Whatever the capital contributions of each partner may have been under paragraph 7 (which we do not know), the terms of paragraph 12, which is not amended or changed, clearly cover any and all losses which the partnership might suffer from the described accounts contributed to the new partnership. If there was any loss in 1933 from the Bachman debt it was a loss to be borne by the Barneson partners under the terms of the indemnity set forth in paragraph 12.

The adjustments in capital made in 1931 may have been made pursuant to paragraph 7. They may have been made pursuant to paragraph 12. But we do think they could have been made under both paragraphs. Paragraph 7 relates to the capital contribution of each partner. Contributed capital consisted in part, at least, of accounts transferred from the old partnerships. Whatever was determined to be capital contribution under paragraph 7 would affect basis for gain or loss and therefore would affect the extent of losses to be borne by the respective partners under the indemnity provisions in paragraph 12. We believe paragraph 12 relates to losses from accounts after contribution and on the basis of contribution. We conclude that any loss that may have been sustained in 1933 from the Bachman accounts that were covered by the indemnity provision would fall on the Barneson partners and not on Kenneth Walsh, petitioner, to whom the indemnity ran. Petitioner has not introduced any evidence to show that, in spite of the indemnity provisions, any of the alleged loss would fall on him; i. e., he has not shown that the Barneson partners were insolvent or that their capital shares in the partnership had been exhausted.

In the matter of sharing in profits and losses of a partnership, the partnership agreement is controlling. We are not referred to any local law to the contrary. See Augustine M. Lloyd, supra. Petitioner’s counsel contend that petitioner is entitled to share in the alleged Bachman loss to the extent of 26.28 percent. That rate may be his share of losses from accounts not covered by the indemnity provision. But, under the terms of paragraph 12, petitioner was not entitled to deduct any part of the losses on the Bachman accounts, since he would never have to pay any part of those losses. See Charles C. Hood, 19 B. T. A. 962. We hold that petitioner is not entitled to the partial bad debt deduction claimed in the petition to this Board.

Decision will he entered for the respondent.

      Art. 604. Readjustment of !partnership interests. — * * * Whenever a new partner is admitted to a partnership, or any existing partnership is reorganized, the facts as to such change or reorganization should be fully set forth in the next return of income, in order that the Commissioner may determine whether any gain or loss has been realized by any partner.