author: Smith :

text:
    Newark Morning Ledger Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86355.
    Promulgated March 28, 1939.

      Jacob Schapiro, Esq., and Harold Wisan, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   opinion.

Smith :

The only question before the Board in this proceeding is whether the assessment and collection of the deficiency agreed upon for the fiscal year ended April 30, 1933, is barred by the statute of limitations. The respondent admits that the deficiency is barred unless the waiver executed by L. T. Russell as president of the corporation is a valid waiver (sec. 275 (a), Revenue Act of 1932), and the petitioner agrees that if the waiver is valid the assessment and collection of the deficiency are not barred by the statute of limitations.

Section 276 of the Revenue Acts of 1932 and 1934 provides in part as follows:

(b) Waivers. — Where before the expiration of the time prescribed in section 275 for the assessment of the tax, both the Gommissioner and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. * * *

Petitioner’s contentions are that the waiver under consideration is invalid because not properly executed; that L. T. Russell, who signed the waiver as petitioner’s president, had been relieved of the duties of that office prior to the time the waiver was signed and was without power or authority to bind the petitioner; that under the laws of the State of New Jersey authorization for L. T. Russell to sign the waiver was required from both of the trustees and that, since only one of the trustees gave such authorization, the waiver is not binding upon the corporation.

The petitioner does not dispute the fact that the signature of L. T. Russell and the corporate seal appearing upon the waiver are genuine. It is contended that the waiver is invalid because L. T. Russell was not president at the time of the execution of the document and that he was without power to act for the corporation since he did not have the authority from both trustees to sign the waiver.

The evidence is clear that the respondent and the revenue agent who secured the waiver had no knowledge at the time that it was not properly executed by L. T. Bussell, president of the corporation. The respondent acted upon the belief that the waiver was valid.

The contentions made here against the validity of the waiver are very similar to those made in T. H. Symington & Son, Inc., 35 B. T. A. 711, 740, which were stated by the Board as follows:

The petitioner contends that Magothy [the taxpayer corporation], upon dissolution on March 15, 1928, ceased to exist and could thereafter exercise no corporate function; that its officers became functus officio, without authority to perform any act in the name of the corporation, and that therefore the purported waivers executed by the former vice president and treasurer of the corporation were invalid and void. It is further contended that none but the directors, as trustees in dissolution and liquidation, were empowered to act for or on behalf of Magothy; that the trustee powers of the directors could only be exercised in concert and not individually; that the former vice president and treasurer of the corporation, who was also a director and trustee, had no authority from his eotrustees to execute the waivers; and that, therefore, the waivers executed by him are invalid and void and not binding upon the corporation.

The Board upheld the validity of the waiver, saying :

In the instant case L. A. Townsend, who executed the waiver in behalf of the dissolved corporation, was its vice president and treasurer at the time the corporation was dissolved, and he was also a director. At no time did he notify the Commissioner or claim that he was not acting within the scope of his authority in signing the waiver. On the contrary the evidence shows that the waiver in question was presented to the Commissioner in the regular way to secure a postponement of an assessment against the corporation while the Commissioner continued to examine the question of the corporation’s tax liability for the year in question. As said by the court In Monarch Mills v. Jones, supra, “The execution of the waivers was merely an incidental transaction in the liquidation of the corporate affairs, well within the powers conferred by law.”

In Carey Manufacturing Co. v. Dean (C. C. A., 6th Cir.), 58 Fed. (2d) 737; certiorari denied, 287 U. S. 623, the validity of a waiver which had been signed on behalf of the corporation by its secretary was disputed because of the limited power of the secretary under the corporation’s bylaws and regulations. In the course of its opinion the court said:

Appellant cannot be heard to say that its president and comptroller were unauthorized to execute the waiver. They were in charge of the whole tax matter. Independent Ice & Cold Storage Co. v. Com’r. 50 F. (2d) 31, 33 (C. C. A. 5). The waiver involved no more than giving the consent of the taxpayer in writing to the extension of the limitation period. These officers were represented by counsel who were with them at the conference and no doubt advised them (if we can assume that they needed such advice) of the pressing necessity of such consent. The urgent necessity of the matter creates an inference that it was not overlooked. See Greer v. U. S., 245 U. S. 559, 561, 38 S. Ct. 209, 62 L. Ed. 469. Haring authority to act, they had the authority to direct the secretary to act for them [see Trustees for O. & B. S. Coal Co. v. Com’r., 43 F. (2d) 782, 784 (C. C. A. 4); L. J. Christopher Co. v. Com’r., 60 App. D. C. 370, 55 F. (2d) 530, 631], and there is room for the inference that they did. The statute did not require them to sign the waiver personally. It required the taxpayer to sign it (section 250 (d) of the Revenue Act of 1921, 42 Stat. 227; section 278 (c) of the Revenue Act of 1924, 43 Stat. 253 (26 USCA § 1060), and it is not unreasonable to conclude that the secretary signed for the taxpayer at their instance or that of some authorized agent. * * *

The court further stated:

* * * The seal upon the waiver of December 20, 1924, is prima facie evidence that it was placed there by the secretary with the authority of appellant. Maryland Finance Corp. v. Duvall, 284 F. 764, 770 (C. C. A. 5) Bliss v. Harris, 88 Colo. 72, 87 P. 1076.

In Independent Ice & Cold Storage Co. v. Commissioner (C. C. A., 5th Cir.), 50 Fed. (2d) 31, the court upheld the validity of a waiver signed for the taxpayer, its secretary-treasurer, who, it was contended, was without authority or power to bind the corporation. In its opinion the court said:

“Taxation, as it many times has been said, is eminently practical.” Tyler v. U. S., 281 U. S. 503, 50 S. Ct. 356, 359, 74 L. Ed. 991, 69 A. L. R. 758.
It has to do with matters the great majority of which ought to be, and usually are, disposed of informally, and, where rights are substantially preserved, defects in form may not defeat them. Florsheim Bros. Co. v. U. S., 280 U. S. 453, 50 S. Ct. 215, 74 L. Ed. 542; Stange v. United States, 282 U. S. 270, 51 S. Ct. 145, 75 L. Ed. -, and courts will not permit a “sticking in the bark” to defeat a waiver voluntarily executed within the scope of the implied powers of him who executed it, and which was acted upon by the officer of the United States to whom it was addressed. Florsheim Bros. Co. v. U. S., 280 U. S. 453, 50 S. Ct. 215, 74 L. Ed. 542; Stange v. U. S., 282 U. S. 271, 51 S. Ct. 145, 75 L. Ed. -; Lucas v. Hunt (C. C. A.) 45 F. (2d) 781, for a waiver is not a contract; it is just what its name implies, a waiver voluntarily and unilaterally of a defense by the taxpayer. Aiken v. Burnet, 282 U. S. 277, 51 S. Ct. 148, 75 L. Ed. -; Brown v. Burnet, 282 U. S. 283, 51 S. Ct. 140, 75 L. Ed. -; Burnet v. Railway Equipment Co., 282 U. S. 295, 51 S. Ct. 137, 75 L. Ed. -. * * *

Weatherford, Crump & Co. v. Bass, 63 Fed. (2d) 465, involved the question of the validity of a waiver signed and executed by the president and director of a dissolved Texas corporation. Under the laws of the State of Texas the directors of the dissolved corporation became trustees of the creditors and stockholders, in the absence of appointment of a trustee by the court. In holding the waiver valid, the court said:

* * * It appeared that the above-mentioned instrument dated March 10,1925, was signed in the name and behalf of the taxpayer at the instance or direction of Mr. E. G. Ainslie, who was empowered to act for the taxpayer in executing that instrument or in authorizing the execution of it by another person for and in the name of the taxpayer. In the circumstances attending the writing and transmission of the above-mentioned letter of Mr. Ainslie the above set out part of it amounted to a statement or representation that the above-mentioned instrument dated March 10, 1925, was the act of the taxpayer. That statement or representation, being made on behalf of the taxpayer by its lawfully authorized representative, in legal effect was the same as if it had been made by the taxpayer itself. * * *

The waiver here was signed by the president of the petitioner corporation under the direction of Henry S. Puder, one of the two acting trustees. No disclosure was made by Puder or any representative of the taxpayer that the taxpayer was being operated under a trusteeship or that the taxpayer’s president who signed the waiver did not have authority to do so.

Lucas v. Hunt, 45 Fed. (2d) 781, is a case in point. There, also, a waiver was signed by the president of a dissolved corporation, who was also one of the liquidators, after the expiration of the statutory three-year liquidation period. Holding the waiver valid, the court said:

If the waiver was valid, then it is rightly conceded by counsel for Hunt that the assessment was not barred; but it is contended on his behalf that, the time within which he was authorized to act as liquidator having expired, the waiver had no binding force or effect. We are of opinion that Hunt, by signing the waiver estopped himself to question its validity, with the result that he was bound to respond to the assessment to the extent of funds in his hands which belonged to the dissolved corporation taxpayer. The circumstances all show that the commissioner relied on the waiver and is therefore entitled to claim the equitable estoppel asserted by counsel in his behalf.

In Jaffee v. Commissioner, 45 Fed. (2d) 679; certiorari denied, 283 U. S. 853, it was held that the liquidators of a corporation had authority to appoint others to execute a waiver on behalf of the corporation.

It has been held in a number of cases that waivers are not invalid because signed by only one of several executors, James S. Darcy et al., Executors, 26 B. T. A. 841; aff'd., 66 Fed. (2d) 581; certiorari denied, 290 U. S. 705; Philip C. K. Bartlett et al., Executors, 16 B. T. A. 510; or by only one. of several liquidating trustees, Commissioner v. Godfrey, 50 Fed. (2d) 79; certiorari denied, 284 U. S. 653; Commissioner v. Angier Corporation, 50 Fed. (2d) 887; certiorari denied, 284 U. S. 673; Helvering v. South Penn Oil Co., 68 Fed. (2d) 420; Wells-Elkhorn Coal Co., 27 B. T. A. 198.

Since the waiver here under consideration was regular upon its face and the Commissioner accepted it as valid and relied upon it without any knowledge of its possible defects, the taxpayer should not now be permitted to attack its validity on the ground that the taxpayer itself failed to execute it properly. “Taxpayers cannot repudiate waivers of the statute of limitations upon which the Government relied.” Commissioner v. New York Trust Co., 54 Fed. (2d) 463; certiorari denied, 285 U. S. 556. See also Aiken v. Burnet, 282 U. S. 277; Loewer Realty Co. v. Anderson, 31 Fed. (2d) 268.

In our opinion the waiver under consideration in this proceeding is a valid waiver and we therefore hold that the deficiency is not barred.

Judgment will be entered for the respondent for the deficiencies agreed upon for the fiscal years ended April 30,1933, a/nd April 30, 1934, and for no deficiency for the fiscal year ended April 30, 1935.


source: Caselaw Access Project

author: Sternhagen:

license: Public Domain

text:
    Chicago and North Western Railway Company and Charles P. Megan, Trustee of the Property of the Chicago and North Western Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61703.
    Promulgated March 30, 1939.

      Nelson Trottman, Rsg., for the petitioner.

      Edner C. Adgire, Esq., and Earl C. Morison, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner determined the deficiencies in question for 1927 and 1928 by making numerous adjustments in the petitioner’s income as shown upon its returns. These items (except the Sioux City land item) have all been settled to the satisfaction of the parties.

The petitioner, in order to overcome the full effect of the deficiencies thus determined by the Commissioner, complains that deductions should have been taken by it and allowed by the Commissioner for depreciation and obsolescence upon the specific elevators and docks enumerated in the findings, the largest and most important of which is the South Chicago elevator. No deduction for depreciation has been taken by the petitioner on its returns because as to these properties its general accounting method, applicable to all of its properties, was what in Central Railroad, Co. of New Jersey, 35 B. T. A. 501, was called the retirement method, fully described in that opinion.

The petitioner has made a vigorous attempt to secure a different result in this proceeding from that in the Jersey Central case. After a trial of 10 days, including the testimony of numerous witnesses and voluminous exhibits, it has submitted a 200-page printed brief, undertaking by an analysis of the Jersey Central opinion to support a criticism of its soundness, an exposition of its extent and limitations, and a demonstration of its inapplicability in several asserted respects to the case at bar. These have required and received the most careful study, but have failed to provide any grounds either for modifying the views expressed in that opinion or for distinguishing between that case and this. Indeed, the decision here should rest categorically upon a reaffirmance of the reasoning in that opinion.

The elaborate and detailed argument which the petitioner has made fails to obscure or overcome the primary considerations, that it has voluntarily elected to adopt and consistently to adhere to the retirement system of accounting in respect of depreciable assets; that it has omitted to seek and has failed to secure the approval of the Commissioner to change or depart from its system of accounting; that the system thus adopted is reasonably adapted to a fair and clear determination of annual income; and that the proposed exceptional treatment of the particular items in question through the use of annual depreciation allowances for the years in question would be an unwarranted exception resulting in a distortion rather than a clear reflection of income.

This conclusion follows a full study of the evidence and the briefs; but it was also intimated at a very early stage of the trial, in view of the Jersey Central opinion, then already promulgated, in order to forestall what seemed then to be an unnecessary, wasteful, and burdensome proceeding for all concerned. Petitioner, however, insisted upon proceeding, in order that there might be a complete record in the event an appeal should be taken. At that time, the Jersey Cenrtral proceeding was pending on appeal in the Circuit Court of Appeals for the Third Circuit, and it seemed wiser to the presiding Member to permit the record to be made as full as the petitioner demanded. We are, however, in view of our reasoned conclusion as to the law of the case, constrained, as was the Board in the Jersey Central case, to omit, as unnecessary to a proper decision, the detailed findings of facts upon which deductions for depreciation and obsolescence, if allowed, could be computed. The respondent’s brief, with commendable thoroughness, has demonstrated the fallacy of the petitioner’s contention, and, since the law has been fully expounded in the Board’s opinion in the Jersey Central case, we feel more content to rest upon that opinion than to restate it here or to deal with the petitioner’s attempted distinctions, none of which is substantial enough to affect the result. The petition for review of that decision was dismissed by order of the Circuit Court of Appeals of December 6, 1937, thus making the Board’s decision final.

It may be accepted, as petitioner elaborately demonstrates, that the accounting regulations of the Interstate Commerce Commission are not controlling for Federal tax purposes. But the proposition is beside the point. The force here given to the petitioner’s accounting system is not derived from the fact that the Interstate Commerce Commission has prescribed the classification of accounts, but is derived from the fact that the petitioner, for whatever reason, has adopted and consistently adhered to the system and that the system has for long been treated by the Commissioner of Internal Eevenue as clearly reflecting its income.

We hold, therefore, that as to the petitioner’s elevators and docks it has no right, in view of the method of accounting which it has adopted, to any deduction for exhaustion, wear and tear, or obsolescence. This is true likewise as to its office building in Chicago, and the respondent’s affirmative assignment of error in allowing such a deduction in respect of that building is sustained.

Of several donations made by the petitioner to different cities of lands to be used for streets, only one remains in controversy, the rest having been adjusted by stipulations of the parties. The question is whether petitioner is entitled, as it claims, to a deduction for $61,000, being the stipulated value on March 1,1913, of the land which it conveyed to Sioux City in 1927 with the conditions and reversion as shown in the findings. There is no dispute that, if entitled to any deduction, the amount thereof is $61,000, but the question is whether the circumstances are a proper foundation for any deduction. The conveyance resulted in no expansion to the petitioner of its annual income. It was not the occasion for yielding to the petitioner new traffic. Its beneficial effect to the petitioner was analogous to that of a capital investment because, as shown by the evidence, it resulted in a permanent protection of the petitioner’s nearby property against the dangers of flood, greater accessibility to city streets, and a diminution in the possible cost of crossing protection. Thus the situation is similar to that considered in Kauai Terminal, Ltd., 36 B. T. A. 893, where the taxpayer conveyed a breakwater to the United States for the sake of the general benefit of a better harbor for an indefinite time. The question here does not involve any consideration of a charitable contribution, for corporations are entitled to no such deductions. By article 262 of Regulations 74 they are, however, permitted to deduct such contributions as have the characteristics of ordinary and necessary expenses of carrying on a trade or business. The regulations do not permit the deduction of what are essentially capital investments merely because in some way or another the conveying taxpayer can be said to derive a benefit from the conveyance.

The Commissioner’s disallowance of the deduction is therefore sustained.

Decision will be entered imder Rule 50.


author: Hill:

text:
    Louise Pepper McClung, Administratrix of Estate of Georgia Anna Pepper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89903.
    Promulgated March 30, 1939.

      O. W. Tillett, Esq., for the petitioner.

      R. N. McMillan, Esq., for the respondent.
   OPINION.

Hill:

The petitioner is executrix of the estate of Georgia Anna Pepper and brings this action to review respondent’s determination of an estate tax deficiency against that estate in the amount of $16,120.10. The issues are whether decedent during her lifetime transferred certain real estate in contemplation of death or intended to take effect in possession or enjoyment at or after her death, or, if not so transferred, whether the transfer was void and ineffective to pass title because of noncompliance with state registration laws.

The decedent, Georgia Anna Pepper, a resident of Winston-Salem, North Carolina, died September 17, 1935, at the age of 71 years. She was survived by a husband, Thomas R. Pepper, two sons, two daughters, and a number of grandchildren. On February 23, 1924, the decedent owned in fee simple an improved city business block in Winston-Salem, North Carolina, which title on that date she irrevocably conveyed to H. L. Taylor as trustee, upon certain uses and trusts set out in the trust deed. In addition to vesting in the trustee full powers of control and management of the trust estate, the trust instrument provided that the trustee should pay the net income of the trust to the grantor, Georgia Anna Pepper, for the term of her natural life, and upon her death to her children in certain fixed minimum amounts, and further additional sums as might best subserve their welfare, subject to the conditions:

* * * that in no event shall any such rents and profits coming Into the hands of said trustee be liable for or charged with any debt or obligation of either of said children, and in the event that either of said children shall suffer any assignment, lien, judgment, attachment or legal process whereby a possibility might arise of divesting any of said rents and profits from the sole and separate use of said beneficiaries, in any such event, said trustee may in his discretion terminate the payment to any such child of any sum in excess of said clear annual sum of Five Hundred Dollars, for such period of time as he may elect * * *.

The trust deed provided for continuation of distribution of the trust income, after the manner therein laid down, among decedent’s children and grandchildren or their survivors during the life of the survivor of her children. Upon the death of the survivor of decedent’s children, the trust was to terminate and the lands to vest in fee simple inj the issue of the children of said Georgia- A. Pepper living at the time of the death of such survivor of children of Georgia A. Pepper.

The trustee accepted the trust and ever since execution of the deed has been engaged in carrying out its terms. Although the trust deed was delivered to the trustee on the date of its execution, it was not filed for record until June 14, 1926. On that date the deed was recorded in the office of the register of deeds for Forsyth County, North Carolina.

The respondent has held that the aforesaid conveyance was executed by the decedent in contemplation of death or to take effect in possession or enjoyment at or after her death, within contemplation of section 302 (c) of the Revenue Act of 1924. He also contends that under the laws of North Carolina the deed is void because not filed for record within two years after its execution. Respondent, therefore, included the value of the trust estate to the amount of $125,000 in the taxable assets of decedent’s estate. This value is not disputed by the petitioner.

The respondent relies upon the provision of section 302, swpra, which reads as follows:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for a fair consideration in money or money’s worth. * * *

We think the respondent erred in his application of the law to the facts at bar. It is obvious from the record that considerations having to do with life, and not death, dominated the mind of the decedent in the transfer here involved. On this question the evidence is all one way and undisputed. Of first prominence is the fact that the deed was executed more tiran eleven years before decedent’s death and at a time when she was in good mental condition and physical health. This condition of decedent’s mental and physical health is vouched for in the testimony of all witnesses, including that of the family physician. On the other hand, the record clearly establishes the dominant motive for the transfer in question. That motive was generated by decedent’s deep concern for her property and determination to save it for herself and children from the hazards of her husband’s speculative ventures. The decedent had suffered many losses through financial assistance given to her husband in helping him out of bad business transactions. The husband was known as easy prey for his friends and was continually involved in transactions which resulted in loss of his investment, and often left him in debt. As a result of these disastrous business adventures decedent’s husband was persistent in his demands that she mortgage her property to help him out and bolster up his credit. The decedent found it more and more difficult to refuse financial aid to her husband, and was constantly giving him money and endorsing his notes. So far she had stood out against mortgaging her property, except to the extent of $6,400, to help him, but feared that she might ultimately be induced to yield. She was compelled to mortgage the property for $6,400 for her husband’s use and benefit to induce him to join in executing the trust deed.

Decedent desired the income for herself during her lifetime, and also earnestly desired to preserve a sufficient amount of her property to guarantee the education and support of her grandchildren. These considerations dominated decedent in making this transfer. They formed the impelling motive which caused her to execute the trust deed. Since she was prompted by concerns and matters of life and the living in executing the trust deed, it follows that respondent’s finding that the transfer was made in contemplation of death was erroneous and can not be sustained. Wells v. United States, 283 U. S. 102; Colorado National Bank v. Commissioner, 95 Fed. (2d) 160; Off v. United States, 35 Fed. (2d) 222; Smart v. United States, 21 Fed. (2d) 188; Fidelity-Philadelphia Trust Co., Executor, 17 B. T. A. 910; John K. Broderick, Executor, 38 B. T. A. 1421.

On the further question whether, notwithstanding the purpose of its execution, the transfer here is testamentary in character, as being “intended to take effect in possession or enjoyment at or after” death, we find in favor of the petitioner. The decedent reserved no powers to revoke or change any terms of the trust, and reserved no reversionary interest, contingent or otherwise. Therefore, the property conveyed in the trust did not pass at settlor’s death, but at the date of the execution and delivery of the deed of trust. Reinecke v. Northern Trust Co., 278 U. S. 339; May v. Heiner, 281 U. S. 238; H. Seldon Taylor, Jr., et al., Executors, 27 B. T. A. 220; Thomas C. Boswell et al., Executors, 37 B. T. A. 970.

The remaining issue concerns the validity of the trust deed as affected by its recording on June 14,1926, more than two years after its execution. On February 23, 1924, when the deed was executed, the laws of North Carolina (sec. 3315, Consolidated Statutes) required all such deeds to be registered within two years after making, in order to be valid. On August 20, 1924, the registration law was amended so as to extend the time for recording of like deeds until September 1, 1926. Inasmuch as the two-year period after execution of the deed in question had not expired on August 20, 1924, when the time for registration was enlarged by amendment, and the deed was registered within the period as extended, we hold the registration was timely, and therefore legally valid and effective to transfer title as of the date of the execution of the deed. Booth v. Hairston, 193 N. C. 278; 136 S. E. 879.

Decision of no deficiency will he entered.


author: Leech :

text:
    Herbert G. Goulder, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87188.
    Promulgated March 30, 1939.

      Isador Grossman, Esq., for the petitioner.

      W. H. Payne, Esq., for the respondent.
   OPINION.

Leech :

The respondent determined the disputed deficiency by taxing the income received but not distributed by the trust, in 1934, to the petitioner, settlor. He supports this action on three grounds: (1) The trust constituted a mere assignment of future income, which left such income taxable to the grantor under the doctrine of Lucas v. Earl, 281 U. S. 111; (2) the trust is in the nature of a maintenance trust, the income of which is taxable to petitioner under the principle announced in Douglas v. Willcuts, 296 U. S. 1; and (3) the income of the trust is taxable to petitioner under the provisions of section 166 of the Revenue Act of 1934, and the regulations construing the same.

One purpose for the creation of the trust was admittedly to reduce the petitioner’s income taxes. This fact, though justifying a careful scrutiny in the premises, does not, itself, vitiate the legal consequences of the creation of the trust. Gregory v. Helvering, 293 U. S. 465. See James Nicholson, 32 B. T. A. 977; aff'd., 90 Fed. (2d) 978. The disputed income here was not compensation, past or future, for personal services of the petitioner. See Gerald A. Eubank, 39 B. T. A. 583. It was “the net income of the property held in trust,” to which the beneficiary was entitled, under the trust, either during or at the termination thereof. The beneficiary “thus became the owner of an equitable interest in the corpus of the property.” See Blair v. Commissioner, 300 U. S. 5. Upon the authority of that case, we think respondent’s first position is unsound. See also Commissioner v. Field, 42 Fed. (2d) 820; Anna S. Whitcomb, 37 B. T. A. 806-

The validity of respondent’s second position must rest upon the fact that the trust required the use of the contested income in the maintenance and support of the petitioner’s wife, the beneficiary. Jay C. Hormel, 39 B. T. A. 244. Whether the trust was thus mandatory depends, of course, upon the intention of the settlor, which is to be gleaned, alone, from the trust instrument, as a whole, if unambiguous. Mississippi Valley Trust Co. et al., Executors, 28 B. T. A. 387; aff'd., 72 Fed. (2d) 197; certiorari denied, 293 U. S. 604; rehearing denied, 293 U. S. 631, and cases cited therein.

Except in the preamble or recital of the present trust, the respondent points to nothing, nor are we able to find anything in the entire trust instrument which indicates any restriction upon the use to which the beneficiary, Edna G. Goulder, shall put the funds she receives from the trust. The contracting clauses contain no obligation whatever limiting her use of these funds. The applicable rule of construction in such cases has been stated in Williams v. Barkley, 165 N. Y. 48; 58 N. E. 765, thus:

Where the recital in an agreement is so inconsistent with the covenant or promise that they cannot be harmonized, the latter, if unambiguous, must prevail, because it is the most important. The promise is what the parties agreed to do, and hence is the operative part of the instrument, while the recital states what led up to the promise and gives the inducement for making it. When the explanation of the reason for the promise is at variance with the promise itself, the latter, if clear and unambiguous, must prevail, as it is the transaction between the parties. The rule governing the subject is well stated in a late English case as follows: “If the recitals are clear and the operative part is ambiguous, the recitals govern the construction. If the recitals are ambiguous and the operative part is clear, the operative part must prevail. If both the recitals and the operative part are clear, but they are inconsistent with each other, the operative part is to be preferred.” Ex parte Dawes, 17 Q. B. 275, 286. See, also, Young v. Smith, L. R. 1 Eq. 180, 183; Bailey v. Lloyd, 5 Buss. 330, 344.

Moreover, the reference in the recital here was not limited to maintenance and support. The “welfare” of the beneficiary was added. That word is not synonomous with support or maintenance. It is broader. Lord v. Roberts, 84 N. H. 517; 153 Atl. 1.

Under such circumstances, “desirous”, as used in this preamble, is scarcely indicative of a command. Its use here rather seems merely precatory. Cooper v. United States, 19 Fed. Supp. 752; Brown v. Commissioner, 50 Fed. (2d) 842; Brubaker v. Lauver, 322 Pa. 461; 185 Atl. 848.

Thus, it would seem, the most that can be said for the position of the respondent now under discussion is that the trust instrument is ambiguous in conveying the intention of the settlor. Such ambiguity as exists, if any, is cleared up by the record. See Baird v. United States, 3 Fed. Supp. 947; aff'd., 65 Fed. (2d) 911; certiorari denied, 290 U. S. 690. The settlor, trustee, and the beneficiary agreed, orally, when the trust was created that the gift of the income of the trust to her was to be absolute and that its use was to be unrestricted in her hands. With the consistent knowledge of the settlor, no part of the funds the beneficiary received from the trust was used for her maintenance and support, but, with his advice, these funds were invested in property and securities for her separate estate, while the settlor continued afterward, as before the creation of the trust, to support and maintain his wife, the beneficiary, with other funds.

The conclusion is thus inescapable that this trust did not require the beneficiary, Edna Gk Goulder, the wife of the settlor, to use the funds she received therefrom for her maintenance and support. It follows that the rule of the Douglas v. Willcuts case, supra, does not apply. Jay C. Hormel, supra.

Respondent’s third position is likewise untenable.

Since, during the term of the trust — under the trust instrument— the only power to revoke and thus revest any part of the corpus in the petitioner, grantor’, was jointly vested in him with the beneficiary, who had a substantial adverse interest in the disposition of that corpus, no part of the contested income therefrom was taxable to petitioner under section 166 of the Revenue Act of 1934. The provision that, upon termination of the trust by its terms, its corpus should revert to petitioner, has been held by the Board not to be a vested right in the corpus of the trust but a mere reversion therein. Meredith Wood, 37 B. T. A. 1065 (on appeal, C. C. A., 2d Cir.); John Edward Rovensky, 37 B. T. A. 702; Phebe Warren McKean Downs, 36 B. T. A. 1129. See also I. T. 3238, 1938 Internal Revenue Bulletin No. 50. Cf. Warren H. Corning, 36 B. T. A. 301 (on appeal C. C. A., 6th Cir.).

The contention of the respondent that the petitioner retained such control over the corpus of the trust aside from a vested power to revoke so as to render the income therefrom taxable to him under Regulations 86, article 166-1, and its amendments, is likewise without merit.

Respondent admits the validity of this trust. The Corning case, supra, and other cases upon which respondent relies, are clearly distinguishable upon their facts. It is true the settlor was also the trustee of the trust involved here. But that, in itself, is not controlling. Becker v. St. Louis Union Trust Co., 296 U. S. 48; Reinecke v. Northern Trust Co., 278 U. S. 339; Helvering v. Bowen, 85 Fed. (2d) 926; Henry A. B. Dunning, 36 B. T. A. 1222; Robert Allerton, 13 B. T. A. 1383; Frances Marshall Canfield et al., Executors, 31 B. T. A. 724; Rose v. Commissioner, 65 Fed. (2d) 616; Preston R. Bassett, 33 B. T. A. 182. Under no circumstances here could the income of the trust ever go to the petitioner or his estate. Nothing in the trust instrument relieved the petitioner as trustee from full responsibility to the beneficiary for his proper administration of the trust estate. The trust instrument did not permit the trustee to deal with himself individually and such dealings, if not expressly authorized by the deed of trust, are prohibited in Ohio expressly by statute. Page’s Annotated Ohio General Code, §§ 10506-49. The authority of the trustee to borrow money was limited, in its exercise, for the improvement, protection or preservation of the estate. The securities composing the trust corpus were registered in the name of the petitioner, as trustee, and not as an individual. In short, we think no such control as is necessary to support the argument now being discussed was retained by the settlor here. Henry A. B. Dunning, supra; Carson Estate Co., 31 B. T. A. 607; aff'd., 80 Fed. (2d) 1007.

Decision will be entered under Rule SO.


text:
    Delia B. Golden, Executrix of the Estate of Elizabeth B. Golden, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fidelity Trust Company, Co-Executor of the Estate of Charles E. Golden, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clayton W. Anderson and Melford J. Anderson, Executors of the Estate of E. V. Anderson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Estate of Charles E. Golden, Deceased, Fidelity Trust Company, Co-Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 91451, 91452, 91453, 92621.
    Promulgated April 5, 1939.

      A. G. Wallerstedt, G. P. A., and Robert L. Kirkpatrick, Esq., for the petitioners.

      Loren P. Oakes, Esq., for the respondent.
   OPINION.

Hill:

The petitioners plead the benefits of subdivision (b) (1) of section 22 of the Revenue Act of 1934, which excludes from a taxpayer’s gross income amounts received under a life insurance contract paid by reason of the death of the insured. They claim that the payments here in dispute were amounts received by these recipients within such exemption provisions.

It is respondent’s contention that the disputed disbursements were made from corporation surplus accumulated, in part, from investments of corporate earnings in life insurance policies. That the corporation made such investments from its surplus in the first instance can not be disputed. The parties also agree that the corporation, at all times here material, had ample earnings from which it could have distributed dividends, equal to the sums here involved, to its stockholders had it seen fit to do so. In the absence of any showing as to what part, if any, of such surplus was earned before March 1, 1913, the admitted facts would make these distributions dividends, if they belonged to the corporation’s surplus when disbursed. Isaac May, 20 B. T. A. 282.

The petitioners contend that the funds here did not belong to the corporation when distributed, but that they belonged to the corporation’s stockholders by virtue of an irrevocable trust. The same claim was made in Edwin Lindsey Cummings, 28 B. T. A. 1045, where it was contended that a corporation collected and distributed the proceeds of life insurance to its stockholders as their trustee and not as owner of the funds. There, the distribution was made pursuant to a prearranged plan, as in this case, which had been agreed to by the stockholders and ratified by the board of directors in a resolution which committed the board to the duty of distributing the proceeds “if and when” collected as “dividends” to the stockholders of record. The petitioners claimed that the effect there was to divest the corporation of all interest in the policies and create a trust in favor of the stockholders, and that the board’s resolution committing it to the single duty of collecting and distributing the insurance among the stockholders made the corporation a bare trustee for that sole function. We found against that contention and our decision was affirmed in Cummings v. Commissioner, 73 Fed. (2d) 477. The petitioners do not question the correctness of that decision, but contend that certain language in the court’s opinion in the Cummings case supports the view that in the instant case the distributions in question are exempt from tax in the hands of the stockholders. The language referred to is as follows:

* * * This intention could have been fulfilled in two ways: (1) By talcing out the policies im, the name of the company as trustee for such stockholders, in which case there would he no question hut the amounts received hy the petitioners were received under the life insurance contracts; or (2) by a contract or undertaking on tbe part of the company that these proceeds should be paid to them, not by reason of their interests in the life insurance contracts, but by reason of their interests in the company as stockholders and as a distribution of a part of its surplus, in which case the amounts so distributed would be taxable to the receivers thereof. [Italics supplied.]

The petitioners contend that the corporation’s acts in transferring beneficial rights in these policies to the trustee herein meet the condition or plan first stated in the above quotation and bring their distributions under the tax exempt classification suggested by the court.

We are unable to see the parallel the petitioners suggest. Here all policies were taken out in behalf of the corporation, and paid for by it out of earnings. The investment in the policies was a corporation asset which it could not gratuitously dispose of, or legally distribute to, its stockholders except by the process of dividends. Cook on Corporations, sec. 534; Gibbons v. Mahon, 186 U. S. 549; Sabre v. Union Traction & Electric Co., 225 Fed. 601. The naming of a trustee for the policies in this case did not dispose of the corporation’s interests in them, as the specific reservations set out in the so-called “trust agreement” clearly show. Old Point National Bank, Executor, 39 B. T. A. 343. It is also obvious that the endorsements affixed to the policies fall far short of vesting their titles in the trustee, much less as trustee for the stockholders. True, the two Penn Mutual policies were assigned outright to “Fidelity Title and Trust Company, Trustee,” but without words creating any trust, or designating any beneficiaries. Under such conveyances, the title of the trustee is held merely in a custodial capacity for the transferor. Prudential Insurance Co. of America v. Bloomfield Trust Co., 104 N. J. Eq. 372; 145 Atl. 735; Sanford v. Van Pelt, 314 Mo. 175; 282 S. W. 1022. Endorsements on the remaining policies make no pretense of intending a transfer of the policies themselves to the trustee. The one policy issued by the National Life Insurance Co. carries that company’s “rider” announcing that the proceeds will be paid to the trustee, subject, however, to the corporation’s right to change beneficiaries from time to time by notice to it. To the same effect and import are the insurance company’s “riders” on all policies issued by the Prudential Insurance Co.

The reservation by the corporation of valuable property rights in all of these policies negatives petitioners’ claims that they were irrevocably assigned to the trustee. A completed assignment of choses in action leaves no interest or control, however small, in the assignor which could prejudice or defeat the right of the assignee. 5 C. J. 959; Welch v. Mandeville, 1 Wheat. 233; Chase & Baker Co. v. National Trust & Credit Co., 215 Fed. 633; Greenville Savings Bank v. Lawrence, 76 Fed. 545. Nor do we think the parties to these transactions intended a transfer of the corporation’s interests in these policies. The fact that the corporation continued payments of the premiums until the insured died is inconsistent with such theory. We are convinced that the mechanics here employed were only intended to make certain an immediate distribution upon the death of the insured of the proceeds of the policies among such stockholders as might exist at the time of such distribution, in lieu of leaving it to the discretion of a future board of directors. In other words, the so-called “trust agreement” was, in effect, an agreement committing the corporation to distribute dividends in the future. The naming of the trustee was a mere convenience to make more certain the carrying into effect of the agreement.

In Chase National Bank v. United States, 278 U. S. 327, it was held that the right to borrow upon an insurance policy alone was an incident of ownership which prevented title to it passing while the insured lived. To the same effect was our holding in Old Point National Bank, Executor, supra. On authority of these decisions, and for the other reasons indicated above, we sustain the respondent on this issue.

Our holding on the issue just disposed of makes unnecessary a consideration of respondent’s plea in estoppel, alternatively urged against petitioners’ right to claim exemptions for the income items involved.

The remaining issue is common to Docket Nos. 91452 and 92621 only, and requires a determination of whether the taxable period to which the proceeds from the insurance policies distributed to the estate of Charles E. Golden should be attributed for income tax purposes is the period from January 1 to April 9,1934, or from April 9 to December 31,1934. The respondent in determining the deficiencies herein included the item in both periods, but concedes that it is properly includible in only one. Section 42 of the Eevenue Act of 1934 provides:

* * * In the case of tlie death of a taxpayer there shall be included in computing net income for the taxable period m which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. [Italics supplied.]

The petitioners contend that the distribution accrued to the estate coincident with Golden’s death and therefore, is includible in the first period. The respondent agrees with the petitioners. We hold that the item belongs to the latter period and not to the former. The distribution of money which Golden’s estate received was not received as proceeds of insurance, but as a dividend from the corporation. Such dividend had not accrued up to the date of his death. The “trust agreement” provided that the distribution to the stockholders of the corporation should he made out of moneys derived from the proceeds of insurance and necessarily contemplated that such dividend dis-i ribution should be made only after such proceeds should be collected. The distribution in question was made on May 18, 1984.

Reviewed by the Board.

Decision in Docket No. 9145% will be entered, u/nder Rule 50. Decisions sustaining deficiencies in Docket Nos. 91451, 91453, and 9%6%1 will be entered.


author: ÑERN:

text:
    C. A. Munroe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76999.
    Promulgated April 6, 1939.

      J. G. Komer, Jr., Esq.. Frank J. Widemam,, Esq., and Richard S. Doyle, Esq., for the petitioner.

      J. E. Marshall, Esq., and L. O. Mitchell, Esq., for the respondent.
   OPINION.

ÑERN:

The Commissioner has determined a deficiency in the petitioner’s income tax for the year 1980 of $2,950,592.22, which result from the respondent’s inclusion in the petitioner’s gross income of $11,947,331.44, said to have been realized on the distribution to the petitioner in that year of two-thirds of the stock of the Corporate Investment Co. of Delaware and of one-third of its stock to the Inverness Corporation, Ltd., of which the petitioner was the sole shareholder. The total sum represents earned surplus of the Corporate Investment Co. of Illinois on October 6, 1930, $8,454,159.34, plus the liability of that company to the petitioner on certain contracts on the same day, $3,493,172.10; both of which were converted into stock of Investment of Delaware by certain intercompany transactions. The value of the stock of the several corporations on the dates of the corporate exchanges and the value of the contracts on the critical dates have been stipulated and are not in question here.

The principal question is whether the corporate exchanges in 1930 constituted a “reorganization” within the ambit of section 112 (i) of the Revenue Act of 1928, set out in the margin, and were thus tax-free. The Commissioner raises two additional questions, whether there was a liquidation of the Corporate Investment of Illinois in 1930, and whether in that year the petitioner realized gain on cancellation of the two contracts executed by petitioner and that company whereby Investment of Illinois was obligated to make certain payments to petitioner in 1932.

We have set out the facts fully in our findings and resume them here only for the sake of clarity in discussion of the legal questions.

In 1922 the petitioner organized Corporate Investment Co. of Illinois to buy installment paper. For $6,000 he became sole beneficial owner of its stock. He furnished additional capital to it under a contract of September 13, 1922, and its supplement of March 5, 1923, whereby he transferred to the corporation certain securities which were to be returned to him ten years later together with interest or dividends received thereon plus one-fifth of such interest or dividends. After 1924 Investment of Illinois was used only as an investment company. In 1927 it earned a profit of around $8,000,000.

Petitioner’s counsel as early as 1924 had suggested the reorganization of Investment of Illinois in another state in order to effect a recapitalization of that company under the laws of a state having a more favorable tax policy than Illinois, but it was not until the fall of 1929 that three new corporations, the Manistee Corporation, Cam-row Corporation and Inverness Corporation, were organized in Delaware. The petitioner had removed to New York and his business there, complicated by the depression of 1929, occupied his mind to the exclusion of other affairs until 1930, when he was visiting the Bahamas and conceived the idea of organizing a corporation there which would engage in the business of buying and selling foreign securities with a minimum tax burden. He advised with counsel, who again suggested the reorganization of Investment of Illinois in connection with the formation of the Bahamian Corporation, and as a result a new plan was devised, new corporations were created, and the corporate exchanges in question took place.

The first step was to revive the dormant Delaware Corporation, Manistee, which was begun by changing its name on September 18, 1930, to Corporate Investment Co. of Delaware. Next came the creation of two corporations in the Bahamas, on September 25, the Inverness Corporation, Ltd., and Camrow Corporation, Ltd. The several exchanges followed. (1) On October 6, the petitioner transferred property, including his beneficial interest in the contracts of 1922 and 1923 with Investment of Illinois, to Inverness in exchange for all its stock. (2) On the next day, October 7, Investment of Illinois transferred all its assets subject to its liabilities to Camrow for 1,000 shares of the latter’s stock, and distributed Camrow’s stock to its own sole shareholder, the petitioner. Its liabilities included its obligations to petitioner under the two contracts. (3) On the same day, October 7, Inverness, holder of the petitioner’s beneficial interest in the two contracts since two days before, canceled the contracts in exchange for 500 shares of Camrow’s stock, thus vesting the full accrued proceeds of the contracts in Camrow free of any liabilities. The petitioner upon the completion of these acts owned immediately 1,000 shares or two-thirds of the total capital stock of Camrow, and mediately, as sole shareholder of Inverness, the beneficial interest in the remaining one-third of Camrow’s stock, 500 shares. (4) An interval of a1 week was allowed to elapse before the final act which consummated the transaction. On October 14 Camrow transferred its assets, subject to its liabilities to Corporate Investment Co. of Delaware (the old revived Manistee Corporation of 1929) in exchange for all the latter’s stock, 10,000 shares, which was at once distributed, 6,667 shares to the petitioner and 3,333 to Inverness, in the same proportion as that in which the petitioner and Inverness held Camrow’s stock. Camrow thereafter was only an empty shell, having no assets, but its formal dissolution was postponed until February 9,1931. The ultimate result was that the petitioner, from being sole shareholder of Investment of Illinois, was now a shareholder of two-thirds of the stock of Investment of Delaware and controlled, as sole shareholder of Inverness, the remaining one-third of that company’s stock. The assets of Investment of Delaware were the same as the assets of Investment of Illinois but freed of any liabilities to petitioner on his contracts with the latter.

On this state of facts, the Commissioner earnestly contends that the case falls within the rule of Gregory v. Helvering, 293 U. S. 465. The rule of that case is that where a transfer of assets is made by one corporation to another not “in pursuance of a plan of reorganization” but in pursuance of a plan having no relation to the business of either, the purpose of which is not to reorganize a business or part of a business but being solely to consummate a plan to transfer property to a taxpayer in such a way as to decrease or avoid taxes, then such a transaction will not be considered as a “reorganization” within the meaning of section 112 (i) of the Revenue Act-of 1928. To state the rule conversely: Where such a transfer of assets is made in pursuance of a plan of reorganization which has a definite relation to the business of both corporations, the primary purpose being to reorganize a business and not solely to effect a transfer of property to a taxpayer in such a way as to decrease or avoid taxes, the transaction will be considered as a “reorganization” within the meaning of the act, even though one of the purposes and results of the transaction is to minimize taxes. The holding of that case was that under the facts presented there had not been a reorganization within the meaning of the act.

However, the facts of that case are clearly different from those here. There the new corporation, Averill, was brought into existence solely for the purpose of acquiring the Monitor shares and distributing them to the petitioner. It was kept alive only three days, within which this purpose was accomplished. It was not an “enduring” corporation, cf. Chisholm v. Commissioner, 79 Fed. (2d) 14, but one created solely to evade taxes. Here, on the other hand, petitioner intended to dissolve the Illinois corporation and transfer its assets to a corporation organized in a state having less onerous corporate taxes. Investment of Delaware served that purpose. As the evidence shows, the Delaware Corporation was created before the scheme of the Bahamian corporations was thought of. It was created as the Manistee Corporation of Delaware in the fall of 1929 and, when the reorganization scheme was worked out and carried into execution in the fall of 1930, its name was changed and it was used, as originally intended, to receive the assets of Investment of Illinois. The fact that certain intermediate corporate exchanges took place does not affect or vitiate the ultimate purpose to transfer to a Delaware corporation assets previously held in an Illinois corporation. Here also, Inverness, the Bahamian corporation called into existence for the purpose, among others, of effecting the transfer of the petitioner’s beneficial interest in the contracts through Camrow to Investment of Delaware, remained in existence, holding one-third of Investment of Delaware’s stock. It also held other stock and an option transferred to it by petitioner, and not conveyed by it to Camrow. Its existence would have been none the less real if the plan had provided that Inverness be only a holding company. Chester A. Souther, 39 B. T. A. 197. Nor is it material that Camrow was only a conduit for assets going to Investment of Delaware, for in doing so, it served a business purpose vital to the reorganization and inherent in the plan; and it is not necessary that the “business purpose” of every corporation shall be strictly commercial. Chester A. Souther, supra. The assets of Investment of Illinois, including the proceeds of the contracts, ultimately were transferred to Investment of Delaware, freed of the contract burden, and petitioner after the transfer held the stock of Investment of Delaware, which partially represented the chose in action under the contracts it had previously held against Investment of Illinois. A reorganization of Investment of Illinois had taken place, but petitioner’s interests still remained in solution. Nothing was cut off and distributed to him which could be said to be a realized gain, the withdrawal for his separate use of any asset formerly in the original company. He had stock in Investment of Delaware representing the same assets as those held by Investment of Illinois.

We think that the series of transactions should be viewed as a whole, embodying merely steps in the execution of a single plan. That this was intended is obvious, and although no written plan was put in evidence, it is obvious that there was a plan of reorganization and what that plan was, One of its purposes was to defer realization of income on the contracts, with two years still to run at the time of the plan’s execution, until some future date. However, there were other purposes of the plan. Looking at the transactions as a whole, as steps in a single plan, we must conclude that the ultimate purpose was the reorganization of Investment of Illinois and the transfer of its assets to a Delaware corporation and a Bahamian corporation, with the assets freed of the contractual obligation to Mnnroe,

We áre of the opinion that the new corporations, Inverness and Investment of Delaware, were real and organized for a legitimate business purpose, and that the principle of Gregory v. Helvering, supra, therefore, has no application. What was sought to be accomplished by the plan was carried out aS a reorganization within the intent of section 112 (i).

We have Set out fully in our findings the fact of Inverness’s dividends from which respondent infers that that corporation did not have a profitable business and hence was a mere sham device which would enable the petitioner as sole shareholder to “siphon off” at will its accumulated gains. A like argument on similar grounds is made in respect to Investment of Delaware. It is not disputed that both Inverness and Delaware Were going and operating companies since 1930. The fact that during some years subsequent to 1930 these companies did not have a profitable business and the fact that one of them paid dividends out of earnings in spite of the presence of a corporate deficit are not so unusual as to cause an inference that these corporations were shams. It has never been suggested that reorganizations must be profitable in order to be considered as reorganizations within the meaning of the revenue act.

We turn now to respondent’s argument that there was a liquidation of Investment of Illinois, which rests, apparently, Upon the theory that petitioner contributed the assets in 1922 to Investment, not under contract to return them or their proceeds within ten years, but as a capital contribution; and that Investment transferred in 1930 all its assets to Camrow in exchange for all of Camrow’s stock and then distributed the stock to its sole shareholder, the petitioner, without the surrender by petitioner of any of his shares in Investment. We find this argument irrelevant in the light of our conclusion that the Investment-Camrow exchange WaS part of a reorganization. Such it was under section 112 (g), and it is immaterial whether or not Investment of Illinois was liquidated in the course of this general transformation. George Whittell & Co., 34 B. T. A. 1070; Helvering v. Schoellkopf, 100 Fed. (2d) 415, affirming 35 B. T. A. 855.

Nor do we find more in point respondent’s final contention that the cancellation of the contracts resulted in taxable income of $3,493,172.10 to the petitioner. This appears to be alternative and contradictory to the second contention, just noticed, since it assumes the validity of the contracts. The beneficial interest in the contracts Was a chose in action, “property”, which petitioner might transfer to Inverness solely for stock without recognition of gain or loss, under section 112 (b) (5), as we have already pointed out. Inverness in turn transferred this asset to Camrow for stock, which, as we have said, might properly be done. We are unable to find any similarity between this situation and that in Groves v. Commissioner, 99 Fed. (2d) 179, affirming 36 B. T. A. 14, to which respondent likens it. There personal service contracts were involved; here the contracts were for the earnings from property, from the securities which petitioner had transferred to Investment of Illinois. The distinction is elemental in tax law. As we have already said, the transfer of In-verness’s chose in action to Camrow in exchange for stock, an act which freed the contract proceeds in Camrow’s hands from liabilities, resulted in no income to Camrow, for Camrow parted with its capital stock to obtain its release; and, obviously, to no income to Inverness, which acquired Camrow’s stock in exchange for the property represented by its contract; nor to petitioner, whose interest in the contracts still remained in solution through the substitution therefor of Camrow’s stock and of Inverness’s stock. We are unable here again to find any income realized by petitioner through the “cancellation” of the contracts.

Reviewed by the Board.

Judgment will be entered wider Rule 50.

       (i) Definition of reorganisation. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
      (2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of aU other classes of stock of another corporation.


author: Opper :

text:
    Irene W. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91721.
    Promulgated April 6, 1939.

      Stanley S. Waite, Esq., Abraham Lowenhaupt, Esg., H. M. Stolar, Esq., and Henry C. Lowenhaupt, Esq., for the petitioner.

      Frank B. Schlosser, Esq., Thomas R. Charshee, Esq., and V. F. Weekley, Esq., for the respondent.
   OPINION.

Opper :

The actual issue is whether petitioner is entitled to deduct as “interest paid on indebtedness” payments to her sisters as the result of an agreement pursuant to which she undertook “to pay the trust the sum of $2,625 per year as long as you live as interest upon said money.” The “trust” referred to was an arrangement whereby the dividends on certain stock or the income from the proceeds thereof were to be paid to the respective sisters for their lives; and the “said money” was the proceeds of the redemption of such stock which petitioner used for the satisfaction of her own indebtedness, acknowledging that she and her legal representatives were indebted to herself as trustee “for money borrowed.”

Both parties discuss the question from two points of view. The first is whether the “trusts” were such that in fact they were ineffectual to pass from the grantor sufficient interest and control over the income-producing property to permit her to escape taxation npon the income under the doctrine of William C. Rands, 34 B. T. A. 1107, and similar cases. Although not expressed, this discussion inferentially proceeds, presumably, on the theory that, if petitioner is taxable on the income of the trusts, respondent must be sustained because any interest paid by her individually to herself, as trustee, must then be regarded as income to the trust which, if added to her other taxable income, would offset any deduction allowed for interest paid. The other contention is that the payments in question were not in any event interest upon indebtedness since there was no principal obligation of petitioner to which they could attach. Colston v. Burnet, 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640,

Rather than to treat these two contentions separately it seems to us preferable to regard them as the several aspects of a single question. In such a situation as this the issue “is not to be decided by attenuated subtleties. It turns on the import and reasonable construction of the taxing act.” Lucas v. Earl, 281 U. S. 111, 114. “We are not concerned with the refinements of title”, Corliss v. Bowers, 281 U. S. 376, 378, but rather with “the actual benefit for which the tax is paid”, ibid. From this standpoint the “trusts” and the “indebtedness” can be looked at together. The reality or artificiality of the one will illuminate the true nature of the other.

We may begin by considering what appears to be the first step in these transactions, by which petitioner, having provided for the registration of certain stock in the names of her respective sisters, arranged contemporaneously and as an integral part of the transaction that the certificate would be endorsed in blank and redelivered into her hand. While there was no overt qualification of the registered interest of each sister, and as far presumably as the records of the corporation’s transfer agent showed the title held was complete and unconditional, the fact is that petitioner’s possession of the stock certificate endorsed in blank placed it within her power at any time to alter that apparent ownership and obliterate completely the sisters’ superficial interest. Butler v. Montgomery Grain Co., 85 Mo. App. 50. There was then no declaration of trust, no legal or equitable assignment of the certificate itself, no statement express or implied on the part of petitioner that she was purporting to transfer any interest whatever in the property represented by the stock certificate. So far as the record shows, the sole statement made by petitioner at the time — which in our view precludes any such conclusion — is that it was petitioner’s “intention to give to you * * * the income from this stock.” The intention to retain dominion and control over the property itself, as opposed to the future income to be derived therefrom, appears to us to be too clear to require further demonstration. See Hoag v. Commissioner, 101 Fed. (2d) 489.

It may be observed that the question before us does not revolve around the enforceability of such rights as may thereby have been conferred. Passing such questions as the nature of the transaction, whether it was a legal or an equitable assignment, whether there was consideration therefor, whether it was a promise or a mere statement of intention, or whether it operated in praesenti or merely in futuro, as to all of which there may be serious doubt, the true issue is whether the assignment of future income severed from its source can have the effect upon petitioner’s tax liability for which she contends. “If”, as Mr. Justice Holmes suggests in Corliss v. Bowers, supra, “a man directed liis bank to pay over income as received to a servant or friend, until further orders, no one would doubt that he could be taxed upon the amounts so paid.” We are unable to perceive that the transaction before us was more than this. The effort to separate the fruits from the tree on which they grow must always be unavailing in the solution of problems of taxation. This is so whether the “tree” be the personal services of the assignor, Lucas v. Earl, supra, a combination of those services with invested capital, Burnet v. Leininger, 285 U. S. 136, or the capital alone, J. V. Leydig, 15 B. T. A. 124, 132; aff'd., 43 Fed. (2d) 494. The second ground for the decision in William, C. Rands, supra, is precisely in point. It goes farther than is required on the present facts but clearly embraces them.

We there said (p. 1115) :

As an alternative to the view that there were no trusts whatever, we think that at most the instruments established only an obligation upon Rands to hold the income in trust for these beneficiaries after it was derived by him from the securities, and that the securities themselves were at all times his own. Thus the legal effect was only as an assignment of future income, and as such did not operate to exclude it from his taxable income. It is only when the income-producing property is itself transferred that the income therefrom is no longer attributable to the transferor. McCauley v. Commissioner, 44 Fed. (2d) 919. Here it seems that at most Rands attempted to transfer the property itself to himself as trustee for himself and his estate as beneficiary, and the present ownership of the principal was still in him. Upon this view, if not upon the other, the petitioner has failed to establish that the income should, as a matter of law, be excluded from his return.

This posture of petitioner’s liability to tax was in no respect altered by the execution of the so-called trust agreement three years later, by the conversion of the principal, first, in part, into other preferred stock and thereafter entirely into cash, or by the use of that cash by petitioner. The trust agreement purported to be no more according to the stipulation than a procedure whereby “the agreements were reduced to writing.” The implication at least is that the certificate of stock is held by petitioner as an individual and in her own right. She “is hereby made and constituted a trustee” but the trust res is not there nor at any other place defined as being the stock certificate. If no more than a written record of the arrangement theretofore existing, it must be assumed as in the Rands case, supra, that the trust, at most, covered only the income. This would be confirmed by the provisions in the trust agreement that the petitioner in her own right was to obtain all stock dividends, all rights to subscribe, and particularly the right to have the stock voted as she should direct.

When the stock was converted into cash a different situation arose. By the terms of the “trust agreement” the proceeds were constituted a “trust fund”, the trustee having full power and authority to invest and reinvest, and the income to be paid to the sister in each case during her natural life. Here we must look to what was done by the parties for the true construction of that provision. It was, of course, no present conveyance of any trust estate because at the time it was executed the securities were still in the form of preferred stock and there were no “proceeds” capable of being set apart. Meek v. Republic National Bank & Trust Co., 9 Fed. Supp. 651, 655. When, two years later, the first installment of the preferred stock was converted into cash we find it credited by some mysterious process to the petitioner, as trustee, although the facts indicate that the stock redeemed had not been so carried upon the corporation’s books and appeared on its face to be solely in the names of the respective sisters. Be that as it may, the ultimate result was a fund held by the corporation in the name of petitioner, as trustee. It does not, however, appear that it was ever so. collected by her. For all that may be seen, it was paid by the corporation only after the petitioner had “conceived the idea of individually borrowing said $157,500 and paying 5% interest thereon.” We are thus brought to the situation as it existed during the tax years when there was a purported obligation of some sort still remaining to be performed by petitioner.

For the scope and meaning, for our purposes, of that obligation we must look to the documentary evidence. This consists of a letter and an acknowledgment of an indebtedness in each case. Their purport is substantially identical. The letter says: “I shall borrow such money and will undertake to pay the trust the sum of $2,625 per year as long as you live as interest upon said money.” Referring to the agreement the letter says further: “I propose to execute an agreement of which I am enclosing a copy under which I shall obligate myself and in the event of my death my personal representatives and my heirs to pay this $2,625 per year to the said trust as long as you live.” The “agreement” acknowledges that the petitioner and her personal representatives are indebted to herself as trustee “in the sum of $52,500 for money borrowed,” and continues:

I do hereby promise and agree for myself, my heirs, executors, administrators and assigns to pay to the said Irene W. Johnson, as trustee, and her successor in interest, the sum of $2,625 per year interest upon said borrowed money for and during the natural life of [the sister concerned].

The feature which strikes the reader at once is the absence of any promise to pay the principal. Emil Weitzner, 12 B. T. A. 724. Yet the existence of a principal debt, not merely an obligation to pay “interest”, is a prerequisite of the deduction. Edwin M. Klein, 31

B. T. A. 910, 918, 919. In both the letter and the acknowledgment there is a significant failure to include any promise to repay principal, not to mention the complete absence of a time for payment. The agreement to pay interest stands alone with no accompanying promise to repay the amount “borrowed.” That these omissions are not inadvertent, and that promises sometimes implied to repay a debt, and to do so upon demand, may not here be resorted to, appear from a consideration of the instruments as a whole and the purpose they were to serve. Hegeman v. Moon, 131 N. Y. 462; 30 N. E. 487. The stipulation to pay “interest” was for the entire fife of the donee. It is clear there was no intention to confer upon her any concern whatever with the principal. A right in her or in the trustee for her account to collect the principal would not have served, but would have defeated, the petitioner’s object. So long as petitioner continued to perform her agreement to pay the periodic amounts which are designated as interest, which for present purposes we shall assume to have been enforceable, the purpose to provide an income to petitioner’s sisters would best be accomplished in that way. And, on the other hand, petitioner could not on her part, even if she wished, repay the principal and thereby relieve herself of her obligation to make the periodic payments of income. For the agreement is to pay the sum mentioned annually during the entire life of each sister. It follows that the payments, despite their designation, see Kidd v. Puritana Cereal Food Co., 145 Mo. App. 502; 122 S. W. 784, 788, were not in reality “interest” but were fixed sums agreed to be paid throughout a given life and in any event; and that beyond this there was no “indebtedness” upon which it can be said that the interest was being paid so as to bring into operation the provisions granting the deduction claimed. There was no debt because there was no promise to pay the principal amount; because, at the only time when payment of the principal could conceivably have been made by petitioner or demanded on behalf of the donee, the sole right to the principal rested in petitioner and her legal representatives; and because the accepted definition of a debt as being payable presently or at some future time is inapplicable since that time, the death of the donee, is precisely the time when nothing would be due.

From the standpoint of both of the considerations applicable to the decision of this proceeding we regard the case of Gilman v. Commissioner, 53 Fed. (2d) 47, as conclusive. Although slightly different, the facts there are in most respects more favorable to the taxpayer. There, as here, there was an assignment of what pur* ported to be certain interests connected with income-producing personal property; but there these assignments were not limited to the income, they appeared on their face to be complete. In consideration of the relinquishment of this property the taxpayer purported to execute promissory notes; but there the notes on their face were concededly payable to the holders in a certain contingency. Here the principal of the debt could never be paid. There the promisees were also members of the taxpayer’s family, although somewhat closer in degree of relationship. The court found “that petitioner used the above means in providing what he conceived to be the proper allowance for the members of his family.” We see no basis upon which a different result could be arrived at on the present facts. We can not do better than to phrase our conclusion in the words of the court in that case: “To permit petitioner to put his obligation in this form, classifying it as indebtedness and treat the funds furnished his family, as interest, would be to grant him deductions not authorized by the statute.”

Reviewed by the Board.

Decision will he entered for the respondent.

VaN FossaN concurs only in the result.

Aeundell, Leech, and Tyson dissent.

       Sec. 23 (b), Revenue Act of 1934.

       See Benjamin F. Wollman, 31 B. T. A. 37; Warren H. Corning, 36 B. T. A. 301; Estate of A. C. O’Laughlin, 38 B. T. A. 1120.

       “In order to create an indebtedness there must be an actual liability at the time, either to pay then, or at some future time.” Bouvier Law Dictionary, vol. II, p. 1531. See also Kidd v. Puritana Cereal Food Co., supra.


author: Turner :

text:
    The Borin Corporation, Formerly Zero Ice Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90136.
    Promulgated April 6, 1939.

      Buyre Levin, Esq., for the petitioner.

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Turner :

The petitioner contends that the basis for computing the depreciation deduction on its plant and the profit realized upon the sale thereof is $146,800, the purchase price recited in the contract of October 10,1980, and that the contract of November 7,1932, contrary to its expressed terms, was not a contract of sale but was a supplemental contract entered into for the purpose of effecting the payment of damages to petitioner and the crediting of the damages so paid on the purchase price of the plant, which remained and continued to be $146,800 as originally agreed. In support of its claim the petitioner has offered various documents and the testimony of witnesses for the purpose of showing that the warranties in the contract of October 10, 1930, were breached through the failure of the plant to produce dry ice of the quantity and quality prescribed, that substantial damages were thereby sustained, the amount of which was negotiated, determined, and agreed upon by the petitioner and the York Corporation, and that the contract of November 7, 1932, did nothing more than state the balance due between them, the amount so stated being the purchase price of the plant as shown by the contract of October 10, 1930, less the damages agreed upon and plus $10,467 representing the amount of a loan and the interest thereon then due and owing by the petitioner to the York Corporation.

The respondent, on the other hand, claims that the contract of November 7, 1932, expressly rescinded the contract of October 10, 1930, and effected the sale of the plant to petitioner at a price and on l ernes entirely different from those expressed in the earlier agreement and accordingly the basis to the petitioner for computing the depreciation deduction and the profit upon the subsequent sale of the plant is the purchase price finally agreed upon and reflected by the contract of November 7, 1932. With respect to the contention of the petitioner, the respondent, calling attention to the description of the items composing the sum of $84,800, the amount by which the purchase price of the plant was adjusted, advances the proposition that the said sum may not properly be termed damages under the contract of October 10,1930, since that contract provided for direct damages only and consequential damages were expressly excluded, the obvious inference being that the York Corporation, though not liable for damages, but realizing and recognizing the difficulties which had been encountered by its first purchaser of dry ice machinery, had agreed in the contract of November 7, 1932, to a reduced purchase price for the plant.

The record discloses certain facts which give color to the proposition as stated. Under the contract of October 10,1930, the contractor, the York Corporation, guaranteed workmanship and materials for one year provided the machinery was operated in accordance with its instructions. It also guaranteed that the machinery so furnished would “under test”, when operated in accordance with its instructions, be capable of producing ten tons of solid carbon dioxide per day of 24 hours. It was further stated that the “test” contemplated by the agreement was to be made under the direction of the contractor and that no breach of the guaranty, except with respect to workmanship and materials, could be shown other than by such “test.” If the purchaser failed to notify the contractor in writing within a period of thirty days of any claim that the plant did not fulfill the terms and requirements of the contract, such failure was to constitute a complete acceptance thereof. It was expressly provided that the guaranties and warranties were not to be treated as conditional “but as collateral undertakings entitling the purchaser to all direct legal damages but not to consequential damages for their breach.” The petitioner not only filed no notice within thirty days that the plant did not fulfill the terms and requirements of the contract, but, to the contrary, accepted the plant and, while there were numerous complaints thereafter, it also appears that upon operation “under test” by the York Corporation using its own employees the plant did, with minor adjustments and replacements, produce dry ice of the quantity and quality guaranteed and its performance in that respect was accepted and acknowledged by the petitioner. It also appears that even though the sum of $84,800 as damages was agreed to by the York Corporation, many of the items making up that sum may not reasonably be classified as direct damages as contrasted with consequential damages. To illustrate: $7,639.40 is described as interest on the investment of petitioner in buildings and equipment for the period of unsatisfactory operation; $1,390.77 is designated as interest on amounts previously paid to the York Corporation, presumably toward the purchase price of the plant; $33,030 is classified as depreciation; while $10,060.79 is described as an amount agreed upon to compensate for loss of profits. It is difficult to see how these items, under the circumstances, might be classified as direct damages provided for by the contract of October 10, 1930, instead of consequential damages which were expressly excluded.

In the view we take of the case, however, that question is not present. Williston on Contracts, vol. Ill, par. 1826, states:

Also, “A subsequent contract completely covering the subject matter, and made by the same parties, as an earlier agreement, but containing terms inconsistent with the former contract, so that the two contracts cannot stand together, rescinds, substitutes, and is substituted for the earlier contract and becomes the only agreement of the parties on the subject.” Housekeeper Pub. Co. v. Swift et al, 97 Fed. 290.

In United States ex rel. International Contracting Co. v, Lamont, 155 U. S. 303, the Court quoted, from Gilbert v, United States, 8 Wall. 358, to the effect that:

If the claimants had any objection to the provisions of the contract they signed, they should have refused to make it. Having made it and executed it, their mouths are closed against any denial that it superseded all previous arrangements.

In Joseph v. Rottschafer, 248 Mich. 606; 227 N. W. 786, the court quoted from Black on Rescission and Cancellation (2d Ed.) § 8, as follows:

Since it is always in the power of the parties to a contract to rescind or abrogate it by their mutual consent, they may accomplish this result by the substitution of a new contract, implying a mutual discharge from reciprocal obligations under the original contract and the restoration of the status quo or compensation for altered conditions, provided that the new contract shall be complete and binding in itself, and shall embrace each and all of the parties to the original contract.

Furthermore, it is legally possible to have mutual cancellation of an executory contract notwithstanding the contract has been partially performed. Denler & Denler Land Co. v. Eby, 277 Mich. 360; 269 N. W. 203; McBee Binder Co. v. Robinson Lumber Co., 267 Mich. 637; 255 N, W. 329.

In the instant case the contract of November 7, 1932, contained the expressed provision that the contract “executed under date of October 10, 1930, is hereby rescinded, and the rights of the parties under the said contract or arising out of the same are hereby mutually can-celled.” It also contains a provision whereunder the York Corporation agreed to sell and did sell the plant to the petitioner at a price and under terms which were entirely different from those fixed by the contract of October 10, 1930. Furthermore there appears to be no question that the amount actually paid by petitioner to the York Corporation in respect of the purchase of the said plant was the amount fixed by the contract of November 7, 1932. In the light of the authorities referred to we conclude and hold that the basis to the petitioner for the computation of its depreciation deductions herein and the profit derived from the sale of the plant is to be determined under the new contract. Of the amount of $72,467 therein stated, $10,467 admittedly represented a loan by the York Corporation to petitioner and the interest thereon. There is no contention that these items of loan and interest represented part of the purchase price of the plant. On these facts it must be concluded that the York Corporation sold the plant in question to the petitioner for the sum of $62,000 and that amount is its basis for determining its depreciation allowance and gain or loss upon sale,

In the alternative the petitioner claims that the allowance of a credit in the amount of the claimed overpayment made on its amended return for 1932 should be directed against any deficiency determined herein. The amount paid on the basis of that return resulted from the inclusion in income for 1932 of a certain amount as gain realized by petitioner in connection with the adjustment agreed upon by it and the York Corporation on the purchase price of the dry ice plant. Congress has dealt with such claims in section 820 of the Revenue Act of 1938 and relief with respect thereto must rest on the applicability of that section.

Decision will be entered wnder Bule 50.