author: Smith :

text:
    David Barclay Nevius, Petitioner (Representing the Estate of Charlotte Jane Jones), v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68204.
    Promulgated March 13, 1934.

      Charles Caldwell, Esq., for the petitioner.

      Ea/rtford Allen, Esq., and Eugene G. Smith, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of a deficiency in estate tax of $2,228.32. The petition alleges that:

The deficiency determined by the Commissioner is based upon the erroneous inclusion in the gross estate of one-eighth of the value of shares of stock of domestic corporations. Such inclusion by the Commissioner is erroneous for the following reasons:
(a) Such shares of stock were not owned and held by the nonresident decedent, alone, or severally or jointly with others.
(b) Although the nonresident decedent exercised a general power of appointment in respect of the principal of a trust which included such shares, neither the shares nor any undivided interest therein passed under such general power.
(c) Regardless of the legal situs of the shares, the nonresident decedent had no property rights or interest in them. She had merely an intangible, personal right against the trustee-owners and the situs of this intangible, personal right was in England and beyond the jurisdiction of the taxing power of the United States.
(d) The legal situs of the shares was, however, in England and beyond the jurisdiction of the taxing power of the United States.

The petitioner is the custodian in the United States in actual possession of the property in respect of which the deficiency has been determined.

Benjamin William Jones, a resident and citizen of England, died January 20, 1917, leaving a last will and testament probated in England. By article fifteenth his residuary estate was devised and bequeathed to his executors in trust upon the following provision, among others:

I direct my said executors to pay over the net income of one of said shares to my dear wife Charlotte Jane Jones for and during her life, with power to my said wife to dispose of said share by a last will and testament. In case my wife should not dispose of said share by her last will and testament, then I direct my executors, or the survivor of them, upon the death of my widow, Charlotte Jane Jones, to pay over said share to my grandchildren equally per stirpes and not per capita.

The executors of the estate of Benjamin William Jones and trustees under the trust created by article fifteenth of his will (hereinafter called the trustees) were all residents and citizens of England. Subsequent to the death of Benjamin William Jones, on January 20, 1917, the trustees acquired the following shares of domestic corporations:

Sitares U.S. Steel Corporation preferred stock_5,302 Atchison Topeka & Santa Pe Ry. Co. common stock-1, 000 Southern Pacific Co. common stock_ 500

The certificates for these shares, after their acquisition and continuously up to September 29, 1930, were held in England by the trustees.

Charlotte Jeme Jones, the widow of Benjamin William Jones and the decedent whose estate is concerned in this proceeding, died a resident and citizen of England on September 29, 1930.

At the date of death of Charlotte Jane' Jones, the trustees held the shares of domestic corporations referred to above and other securities which were not shares or bonds of domestic corporations.

The last will and testament of Charlotte Jane Jones was duly probated in England and contained the following provision:

7. And whereas under the terms of the will of my late husband dated the 17th day of April, Nineteen hundred and eleven, I have a life interest in one-eighth of his estate, with power to dispose of said one-eighth share by a last will and testament Now, therefore, in exercise of such power I make the bequests hereinafter contained and direct the same to take effect out of the said one-eighth share and out of my private estate as a blended fund.

The persons to whom the decedent, Charlotte Jane Jones, bequeathed and devised her property and in favor of whom she exercised the power of appointment under the will of her husband, Benjamin William Jones, were all residents and citizens of England.

The respondent has determined that the value of the decedent’s one-eighth interest in the trust fund created by the will of Benjamin William Jones, over which she exercised a power of appointment, included one eighth of the value of the shares of stock of domestic corporations and is subject to estate tax. He has included in the gross estate $132,717.34 as the value of the one-eighth interest in such shares.

The issue presented by the pleadings as to whether or not the shares of stock in a domestic corporation have a taxable situs in the United States when owned by a nonresident alien decedent has been abandoned by the petitioner, in view of the decision by the Supreme Court in Burnet v. Brooks, 288 U.S. 378. The petitioner contends, however, that:

* * * the shares of domestic corporations recommended for inclusion in the gross estate did not pass under the power exercised by the decedent, nor were they owned and held by the decedent, and I think that under a reasonable interpretation of this will this power should be considered a limited and not a general.power. It is the wife’s estate with which we are concerned here, and we contend that as to the beneficiary of an express [trust] it is a right in per-sonam against the trustee.

The applicable provisions of the taxing statute, the Revenue Act of 1926, are as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for an adaquate and full consideration in money or money’s worth; * * *
*******
Skc. 303. For the purpose of the tax the value of the net estate shall be determined—
*******
(d) For the purpose of this title, stock in a domestic corporation owned and held by a nonresident decedent shall be deemed property within the United States, and any property of which the decedent has made a transfer, by trust or otherwise, within the meaning of subdivision (c) or (d) of section 302, shall be deemed to be situated in the United States, if so situated either at the time of the transfer, or at the time of the decedent’s death.

We are of the opinion that there is no merit in the contention of the petitioner that the power of appointment exercised by the decedent, Charlotte J ane J ones, was a limited power of appointment rather than a general power of appointment. The power of appointment is general when it is exercisable in favor of any person the donee may select, and special or limited when it is exercisable only in favor of certain persons or a class of persons designated in the instrument creating the power. Fidelity-Philadelphia, Trust Co. v. McCaughn, 34 Fed. (2d) 600; certiorari denied, 280 U.S. 602; Farmers Loan & Trust Co. v. Bowers, 29 Fed. (2d) 14. From the evidence of record it would appear that the decedent was in no wise restricted as to the naming of appointees to receive the estate over which she had a power of appointment.

A more serious question is presented, however, by the contention of the petitioner that the decedent did not own or hold the shares of domestic corporations which the respondent seeks to include in the gross estate. Clearly those shares were held by the trustees provided for by the fifteenth article of the will of Benjamin William Jones. All that the petitioner had in her lifetime was a right to receive a portion of the income of the trust fund and a right to dispose of a portion of the corpus of such fund by will. So far as anything appears to the contrary, the trustees could have sold the shares of domestic corporations held by them at any time either before or after the death of the donee of the power. Furthermore, so far as anything appears to the contrary, the trustees could have set aside for distribution to the persons named by the decedent as the recipients of the appointive estate other assets of the trust fund without having disposed of any of the shares in the domestic corporations.

In Young Men’s Christian Association of Columbus, Ohio v. Davis, 264 U.S. 47, the Supreme Court said: “What this law taxes is * * * the interest which ceased by reason of the death.” In the proceeding at bar the nonresident alien decedent had no direct interest in the shares of the domestic corporations held by the trustees. Hence no interest in such shares ceased by reason of the death. The shares were owned by the foreign trustee after her death the same as before. The contention of the petitioner upon this point is sustained.

Reviewed by the Board.

Judgment will be entered under Bule 50.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Holmes & Janes, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58436.
    Promulgated March 13, 1934.

      Henry Jacobs, Esq., SLndJ.E.Hanmnond, C.P.A., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has determined that the bonuses paid to the officers of the petitioner in the years 1927, 1928, and 1929 in the guise of additional compensation for services rendered in such years were, in fact, distributions of profit. The petitioner contends that the bonuses were authorized by proper corporate action, that the full amounts were actually paid in the respective years in which authorized, and that, added to stated salaries paid to its several officers, such bonuses were reasonable compensation for services rendered.

The record supports petitioner’s contention as to the form of the bonus payments. It also discloses that the amount thereof when included in petitioner’s ordinary expenses reduced tax liability for each year to a nominal sum and left- a very small surplus available for distribution as dividends and that no dividends as such were paid in 1928 or 1929. Petitioner admits that after the bonuses were paid in 1927 and 1928 the recipients redistributed the amounts thereof among themselves ratably as to their stockholdings. Its counsel argues, however, that such adjustments were wholly outside the corporation and without any bearing on the issues here. He bases this argument on an understanding between Holmes and Janes at the time of the purchase of stock by the latter in April 1927. The alleged understanding was that such principal stockholders, so long as they remained associated in the business, should share in the property and profits in proportions of 60 and 40 percent. This agreement supports the determination of the respondent. If the payments in question were in fact compensation for services rendered, they were without the terms of the agreement and not subject to any adjustment. If they represented profits they were within such terms and adjustments were necessary. The fact that adjustments were made to conform the amounts received to the terms of the agreement indicates very clearly that Holmes and Janes regarded the alleged compensation payments as distributions of profit. We are of the opinion that the bonus payments in 1927, 1928, and 1929 were in fact distributions of profits and therefore not deductible from petitioner’s gross income in each of the respective years. Universal Milking Machine Co., 4 B.T.A. 506; Heflin, Inc. v. United States, 58 Fed. (2d) 482; certiorari denied, 287 U.S. 631; L. Schepp Co., 25 B.T.A. 419. On this issue the determinations of the respondent are affirmed.

^Respondent has added to petitioner’s gross income for 1928 the amount of $3,500 as profit realized from the sale of a lease on certain business premises in San Francisco. Such amount was not accounted for as received by the petitioner but was paid over to Holmes, who included it in his gross income in his personal income tax return for that year. Petitioner contends that the lease was never assigned to it and so was the property of Holmes when sold. The only proof in support of petitioner’s contention is the testimony of Holmes that he personally acquired the lease, always considered it as his individual property, and regarded and reported the profit from the sale thereof as his own income. The contrary evidence is that the petitioner used the premises for the purpose^ of its business and paid the rents thereon. Neither the lease nor any assignment thereof is in the record. In our opinion the evidence is not sufficient to overcome the presumption of correctness that attaches to the determination of the respondent.

Petitioner also contends that its tax liability for 1928 has. been finally determined and settled under a closing agreement in conformity with section 606 of the Revenue Act of 1928. Subsequent to the execution of the closing agreement the respondent transmitted to the petitioner the following memorandum:

Reference is made to the agreement executed by Holmes and Janes, Incorporated, San Francisco, California, under the provisions of Section 606 of the Revenue Act of 1928 with respect to its income tax liability for the year 1928, which was listed on Schedule #3793 and approved by the Secretary of the Treasury on February 1, 1930.
The net income disclosed on the return for this year was $3,955.55. The Revenue Agent who made the original investigation determined a deficiency in the amount of $15.94. The deficiency was assessed and the return closed in accordance with the provisions of Section 606 of the Revenue Act of 1928. Subsequently information was received to the effect that the taxpayer fraudulently understated income for this year. Consequently a reinvestigation was conducted of the taxpayer’s books of account and records, which investigation disclosed understatements of income for the years 1927 to 1929, inclusive. For the year 1928 the taxpayer deducted a bonus as having been paid to officers in the amount of $16,650 which, in fact, was a distribution of profits and should not have been deducted from gross income and failed to report the profit on the sale of a lease in the amount of $3,500.00.
At the time of the original investigation, this information was not disclosed to the Revenue Agents. It was not known that the principal stockholder received the benefit of almost the entire amount of the bonus. The information was only discovered after a suit had been filed by one of the stockholders for an accounting.
The General Counsel for the Bureau of Internal Revenue has reviewed the evidence and in a memorandum of February 28, 1931, indicates that there is a sufficient showing of fraud or misrepresentation of a material fact to warrant the setting aside of the agreement.
In view of the fact that the failure of the Bureau to assess and collect the correct amount of tax for the year 1928 was evidently caused by the taxpayer’s fraud or misrepresentation of a material fact, the closing agreement above referred to will be disregarded and you are accordingly authorized and directed to eliminate from Schedule #3793 approved by the Secretary of the Treasury on February 1, 1930, the agreement listed thereon in the name of Holmes and Janes, Incorporated, covering the year 1928 and to take such further action to adjust the tax liability for this year as may be in order.
[Signed] David Burnet,
Commissioner.
Approved: Mar. 7, 1931.
Ogden L. Mills,
Secretary of the Treasury.

Counsel for respondent argues at length that the act of the Commissioner, approved by the Secretary, abrogating the closing agreement was an exercise of discretionary authority that is not subject to review by the Board, and that such a conclusion is necessary in order to establish our jurisdiction over the tax controversy herein for the year 1928. We are unable to accept this view. If the Commissioner, upon a mere showing that in his opinion indicates fraud, has authority to eliminate a closing agreement, it is obvious that section 606 provides no protection for a taxpayer who has signed such an agreement in good faith. The memorandum abrogating the closing agreement is no more than an allegation of fraud which must be proved before the respondent can recover any additional taxes for the year 1928. The deficiency notice establishes the jurisdiction of the Board to hear and determine all the issues joined in an appeal therefrom.

The respondent has asserted a deficiency for the year 1928. As an affirmative defense the petitioner has produced the closing agreement which automatically establishes on its face that there is no tax liability. The respondent contends that such agreement has been abrogated on a showing of fraud. In our opinion this is not enough. He must prove by convincing evidence that fraud was actually committed. If he successfully carries his burden it then follows that the closing agreement must be set aside and the petitioner’s tax liability for the year covered thereby must be redetermined on merits by the Board.

The respondent alleges fraud as to petitioner’s return for 1928 in two particulars — (1) that petitioner with intent to evade taxes deducted certain amounts from its income as ordinary and necessary expenses that were in fact distributions of profits and that its book entries relating thereto were intended to cover up the real nature of the payments to the officers; and (2) in failing to include in its gross income on its income tax return the profit of $3,500 realized from the sale of a leasehold. In our opinion the petitioner’s attempt to secure deductions from taxable income in the guise of payments for services rendered, where in fact the amounts thereof were distributions of profit, was a willful understatement of income, deliberately made for the purpose of evading taxes. On the allegation of fraud the respondent has sustained the burden of proof. We therefore affirm his action in eliminating the closing agreement from the tax controversy. The deficiency for 1928 will be determined in the amount asserted by the respondent, and the fraud penalties added to the deficiencies for 1927 and 1928 are affirmed. See Cooper v. United States, 9 Fed. (2d) 216; D. C. Clarke, 22 B.T.A. 314; E. A. Wickham Estate, 22 B.T.A. 1393; L. Schepp & Son, supra.

Reviewed by the Board.

Decision wild be entered for the respondent.


author: Murdock :

text:
    Elizabeth Bruce, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67862.
    Promulgated March 13, 1934.

      William EL. MondeTl, Esq., for the petitioner.

      ELartford Allen, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $4,696.32 in the petitioner’s income taxes for the year 1928. A number of errors were assigned, but all have been waived except one, wherein the petitioner contends that she exchanged 500 shares of capital stock of E. E. Bruce & Co., pursuant to a plan of reorganization, solely for stock of another corporation, the Churchill Drug Co., a party to the reorganization, from which exchange no gain or loss should be recognized, and consequently the Commissioner erred in including any amount in her income as gain from this transaction.

On January 27,1928, at a special meeting of the board of directors of the Churchill Drug Co., “ called for the purpose of considering the purchase of the Capital Stock of E. E. Bruce and Company, Omaha,” a resolution in the following form was adopted:

That the Board of Directors authorize the purchase of the Capital Stock of E. E. Bruce and Company of Omaha, Nebraska on such terms and conditions as may in their judgment seem advisable and that the President and Secretary be given authority to complete the purchase on these terms and conditions.

The outstanding capital stock of E. E. Bruce & Co. consisted of about 2,380 shares. It was all common stock. The petitioner and her sister each owned 700 shares and employees or former employees of the company owned about 980 shares. The petitioner and her sister desired to sell a part of their Bruce stock in order to reduce the investment in that company and bring it more in line as to amount with their other investments.

The president and the secretary of the Churchill Drug Co. on January 28, 1928, offered to purchase on behalf of the Churchill Drug Co. from the petitioner and her sister 400 shares of the capital stock of E. E. Bruce & Co. for $96,000. Each sister accepted the offer for 200 shares. Immediately after that sale had been agreed upon the president stated to the two sisters that the Churchill Drug Co. desired and intended to obtain all the outstanding stock of E. E. Bruce & Co. in order to merge the two corporations and offered on behalf of the Churchill Drug Co. to exchange 2,400 shares of its preferred stock for 1,000 shares of Bruce stock then owned by the two sisters. The sisters had never before received such an offer, but, after considering it for a part of that day, they accepted it. Within a few days new certificates were issued and payment of $48,000 was made to the petitioner to carry out the agreements of the parties made on January 28,1928.

After January 28, 1928, and prior to April 19, 1928, the Churchill Drug Co. acquired the remaining outstanding shares of E. E. Bruce & Co.

The board of directors of E. E. Bruce & Co. met on April 18, 1928, and adopted a resolution “ That a dividend of $183,096.23 dollars, as shown by auditor’s final report, be declared as a dividend payable in merchandise to stockholders of record as their interest may appear as of April 18, 1928.” And the officers were authoi’ized “ to transfer all assets of whatsoever kind and description, subject to liabilities to Churchill Drug Company of Omaha, Neb.” Immediately following this meeting the corporation of E. E. Bruce & Co. was dissolved.

The Commissioner held that the 700 shares of stock of E. E. Bruce & Co. in the petitioner’s hands had a basis for gain of $104,-580.64 and the profit from the disposition of the 700 shares was $63,419.36. He further held that the petitioner disposed of 700 shares in one transaction and recognized the gain from that transaction to the extent of the cash received, $48,000. The petitioner does not question the correctness of the figures used by the Commissioner representing basis, amount realized, or total gain from the disposition of 700 shares of E. E. Bruce & Co. stock. She concedes that she realized a sain from-the sale of 200 shares of her Bruce stock. but contends that no part of her gain from the disposition of the 500 shares is recognized for tax purposes in 1928. The Commissioner has deliberately refrained from asserting a claim for an increased deficiency in accordance with section 274 (e) of the Revenue Act of 1926. Thus we are not concerned with figures and the only issue before the Board is whether or not the petitioner has shown by the evidence that no part of her gain from the disposition of the 500 shares is recognized as income for 1928. The general rule is that the gain upon the exchange of property shall be recognized. Section 112. The petitioner contends that the exchange by her of the 500 shares comes under section 112 (b) (8), is an exception to the general rule, and none of her gain from this exchange is recognized. The Commissioner’s determination is to the contrary and the presumption is that his determination is correct.

The parties agree that there was a reorganization and the petitioner gave up her 500 shares of Bruce stock and received the 1,200 shares of Churchill stock pursuant to the plan of reorganization. The petitioner contends that she disposed of her 700 shares of Bruce stock in two transactions. In this connection she relies upon the fact that she had entered into a binding agreement relating to the sale of 200 shares before she had heard of the plan of reorganization, whereas she began to negotiate for the exchange of 500 shares after she had heard of that plan. However, her tax liability in no way depends upon her knowledge or lack of knowledge of the plan of reorganization. Knowledge of the plan of reorganization and intent to act pursuant to it on the part of stockholders are not necessarily material factors in many cases coming under the reorganization provisions of the statute. The difficulty of administration, were this not so, is apparent. The plan of reorganization was not this taxpayer’s plan, but that of the Churchill Drug Co. Despite the fact that she had entered into a binding agreement of sale or for the sale of 200 shares of her stock before she negotiated for the exchange of 500 shares, still both transactions were made pursuant to the same plan of reorganization. Although these two transactions may have been separate for many purposes, the disposition made of stock under the plan is to be looked at as a whole and the statute applied accordingly. Section 112. (b) (3) must be read with the other provisions of 112 relating to reorganizations. The provisions disclose an intent upon the part of Congress to ignore the gain to a stockholder at the time of a reorganization only in the event that that stockholder disposes of old stock solely for new stock. If, under the same plan, that stockholder receives any cash for old stock, then section 112 (b) (3) does not apply. Here the petitioner, pursuant to the plan of reorganization, gave up her rights to 700 shares of the stock of E. E. Bruce & Co. and received not only stock of the Churchill Drug Co., but also cash. Thus section 112 (b) (3) does not apply, but the exchange which she made of the 100 shares would have been within the provisions of section (b) (3) if it were not for the fact that the property received in the exchange consisted not only of property permitted by such paragraph to be received without the recognition of gain, but also of money. Under section 112 (c) (1) her gain shall be recognized, but in an amount not in excess of the sum of such money. The Commissioner correctly applied this section.

Decision will be entered, for the respondent.


author: Matthews:

text:
    Myer Dana, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50248.
    Promulgated March 14, 1934.

      Francis G. Stetson, Esq., and Francis R. Lash, Esq., for the petitioner.

      T. F. Callahan, Esq., for the respondent.
   OPINION.

Matthews:

With the exception of the fair market value of the new building, there is no controversy with respect to the material facts of this case, which are comparatively simple. The petitioner owned a building in the Boston suburb of Woburn, Massachusetts, which he leased in 1926 to the Eoss Stores, Inc., for 20 years. The lessee operated chain stores and desired to have a building which would conform to a certain type used by it for all its stores. After considering remodeling the petitioner’s old building at a cost of approximately $18,000, the lessee learned that a new building with the same requirements would cost around $30,000, and a proposition, was made to the petitioner, which he accepted, that he should erect a new building. The petitioner, as lessor, and the Eoss Stores, Inc., as lessee, agreed in 1927 to cancel the old lease, to tear down the old building, and to build a new building to be occupied by the lessee under a new 20-year lease at an increased rental, title to the new building to vest immediately in the petitioner. The lessee agreed to pay one half of the cost of demolishing the old building and erecting a new building, provided the total cost did not exceed $30,000, any excess over this amount to be paid by the petitioner. The old budding was accordingly torn down in 1927 and the petitioner is claiming herein that he sustained a loss in that year in the amount of $12,634.67, which sum represents the depreciated value of the old building at the time of its demolition. It is the respondent’s position that the unextinguished cost of the old building should be treated as a part of the petitioner’s capital investment, to be exhausted over the 20-year term of the lease, and the respondent has allowed a deduction in the taxable year of only $631.73, or one twentieth of $12,634.67.

The second issue presented is closely related to the first and grows out of the same transaction. The respondent has treated one half of the cost of the new building, $14,816.14, which was that part borne by the lessee, as income to the petitioner to be apportioned over the term of the lease, thereby increasing the petitioner’s income for 1927 by $740.80. The petitioner is contending that the new building had a fair market value in 1927 of not more than $15,000, and insists that his income should be increased by only $183.86, which is the difference between $15,000 and the sum paid by the lessee as its share of the cost of the new building.

We cannot agree with the petitioner’s contention that he has sustained a deductible loss, within the meaning of section 214 (a) (4) of the Eevenue Act of 1926. It is provided in section 215 (a) (2) that in computing net income no deduction shall in any case be allowed in respect of any amount paid out for new buildings or for permanent improvements or betterments to increase the value of any property or estate. The facts of the instant case present a situation where there was a substitution of assets, a new building advantageously leased for an old building demolished, so that the demolition of the old building did not give rise to any deductible expense in 1927. Its unextinguished cost should be exhausted over the life of the lease. In other words, the value of the old building was to be paid for in the annual rental to be paid under the terms of the new lease. This case is not distinguishable in principle from many cases decided by this Board and by the courts, and is governed by those decisions. Charles N. Manning, 7 B.T.A. 286; William Ward, 7 B.T.A. 1107; Oscar K. Eysenbach, 10 B.T.A. 716; Anahma Realty Corp., 16 B.T.A. 749; aff'd., 42 Fed. (2d) 128; certiorari denied, 282 U.S. 854; Mary C. Young., 20 B.T.A. 692; aff'd., 59 Fed. (2d) 691; certiorari denied, 287 U.S. 652; Spinks Realty Co., 21 B.T.A. 674; aff'd., 62 Fed. (2d) 860; certiorari denied, 290 U.S. 636; Evangeline C. Harper, 27 B.T.A. 293. It is recognized that there are certain differences in the particular facts of the cases cited, but these differences are not of such a character as to make inapplicable to tíre instant case the principle applied in these decisions. In this case the old building was not torn down until after the petitioner had owned the property for seven years, and it was demolished in full contemplation of the new lease. This was not an ordinary business replacement, for the evidence clearly shows that the moving cause of the destruction of the old building at that particular time in 1927 was the advantageous terms of the new lease.

We do not need to inquire as to the exact degree of advantage, as petitioner urges, which he gained by the new building and the substituted lease. By the investment of new capital in the sum of $14,816.14, his share of the cost of the new building, the petitioner acquired legal title to a building which had been erected at a cost of $29,682.28 and which replaced an old building of the depreciated value of $12,634.67. Under these circumstances it is obvious that no real loss was sustained. Nor do we consider it significant that the special requirements of the Boss Stores, Inc., resulted in a building of special design which cost more than it might reasonably be worth for general rental purposes, for we must regard the value of the new building in the light of the 20-year lease to a satisfied tenant. So far as we know, petitioner had every reason to believe when the new lease was made in 1927 that-he had made a profitable investment in the 20-year lease, and the subsequent history of the lease, with its assignment by the Ross Stores, Inc., to the A. A. Adams Stores, Inc., and the failure of the latter company in March 1930, cannot be taken into account in considering the transaction as of 1927. As was pointed out by the Supreme Court of the United States in Ithaca Trust Co. v. United States, 279 U.S. 151, value must be determined as of a certain time on the basis of a more or less certain prophecy as to the future, and the subsequent failure of such a prophecy or prospect to be realized in fact cannot affect the determination as of the earlier date. Accordingly, we hold that the petitioner is not entitled to a deduction for a loss on account of the demolition of the old building in 1927, and the respondent did not err in exhausting its unextinguished value of $12,634.67 over the 20-year term of lease.

It remains to determine whether the respondent erred in treating as income to the petitioner over the life of the new lease the lessee’s share of the cost of the new building, which amounted to $14,816.14. The petitioner does not deny that the entire new building became the petitioner’s property under the lease when it was erected. Under the provisions of article 48 of Regulations 69 the petitioner, as lessor, has the option of reporting as income when completed the fair market value of the improvements made by the lessee subject to the lease, or he may spread over the life of the lease the estimated depreciated value of such improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof. The petitioner earnestly contends that the fair market value of the new building in 1921 was not more than $15,000 and that he should report only the amount of $183.66, instead of $14,816.14, as income growing out of improvements made by the lessee. For the reasons stated above we sustain the respondent’s determination that the fair market value of the new building in 1921 was its total cost, which was $29,632.28. But it is the estimated depreciated value of the improvements at the termination of the lease which may be spread over the life of the lease, under article 48 of Regulations 69, supra, and the respondent has added to the petitioner’s income an aliquot part of the fair market value of the improvements without any allowance for depreciation over the life of the lease. The parties have stipulated that the amount paid by the lessee covered the cost of the special construction and the special features necessary to erect the type of building required by the lessee. The record discloses that the value of these special features would be exhausted when the lease was ended, for they were required by the lessee and added nothing to the value of the building after the expiration of the lease. We are, therefore, of the opinion that the depreciated value of these improvements at the termination of the lease should be taken to be zero. In these circumstances we hold that the respondent erred in adding to the petitioner’s income for 1927 the sum of $740.80 on account of the improvements by the lessee. The proposed deficiency should be reduced accordingly.

. Judgment will be entered wider Bule 50.

       Ah. 48. Improvements 6y lessees. — When buildings are erected or improvements made by a lessee in pursuance of an agreement with the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefrom upon either of the following bases:
      (а) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease.
      (б) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease an aliquot part thereof.


author: TRAmmell:

text:
    Michael W. Thompson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Thomas H. Sankey, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles F. Beech, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71905, 71943, 72722.
    Promulgated March 14, 1934.

      Thomas Watson, Esq., and D. G. Sisterson, O.P.A., for the petitioners.

      Dean P. Kimball, Esq., and Edward G. Ada/ms, Esq., for the respondent.
   OPINION.

TRAmmell:

The petitioners contend that the Hillman Co. acted as the fiscal agent of the Trust Co. in exchanging shares of stock in the Trust Co. for shares of stock in the Birmingham Bank; that as the Trust Co. acquired a majority of all the shares of stock in the Birmingham Bank pursuant to the offer made by the stockholders of the bank under date of June 20, 1930, both the Trust Co. and the bank were “ parties to a reorganization ” as that term is used in the Revenue Act of 1928; and that the exchange of their stock in the Birmingham Bank for stock in the Trust Co. was a nontaxable transaction under the provisions of the act. The respondent denies that the Hillman Co. was acting as the agent of the Trust Co. in the acquisition of shares of stock in the bank, and contends that, if it be conceded that the Hillman Co. was acting as agent of the Trust Co., there was no reorganization within the meaning of the statute, since the holders of 76.3 percent of the stock in the bank were paid cash for their stock, while only the holders of the remaining 23.7 percent exchanged their stock for stock in the Trust Co. and small amounts of cash to provide for fractional shares.

With respect to the contentions of the parties as to whether the Hillman Co. was acting as agent for the Trust Co. in paying cash for 76.3 percent of the stock in the Birmingham Bank and exchanging stock in the Trust Co. and paying small amounts of money for the remaining 23.7 percent, the evidence shows that prior to June 20, 1930, and during the time the negotiations were being carried on between the officers of the bank and of the Trust Co. it was intended that the Trust Co. would absorb the bank by acquiring its stock and liquidating it. After the negotiations had resulted in the stockholders of the bank submitting under date of June 20, 1930, to the Trust Co. the proposal set out in our findings, the officials of the Trust Co. began a consideration of the legal phases that would be involved in an acceptance of the proposal by the Trust Co. Due to a requirement of the Federal Reserve Board that its permission was necessary before one bank could absorb another and also due to the fact that the Trust Co. was negotiating with respect to the acquisition of another bank, as well as other considerations, the directors took no final action respecting the acceptance of the proposal submitted by the stockholders of the Birmingham Bank. Such acceptance of the proposal would have resulted in a commitment of the Trust Co. which would have been in direct violation of the rule of the Federal Reserve Board, a matter that they sought to avoid. The executive officers of the Trust Co., without disclosing to the stockholders of the bank the position in which they found themselves, arranged with Hillman, chairman of the board of directors of the Trust Co. and a participant in the negotiations, to carry out through the Hillman Co. and Bankshares, Inc., of both of which he was president, a compliance with the proposal submitted by the stockholders of the bank. Among other things the arrangement contemplated that the Hillman Co. would acquire the stock in the bank for the account of the Trust Co., but in the name of Bankshares, Inc., and that that corporation, in order to finance .the transaction, would borrow from the Trust Co. $180,000 on its collateral note and $53,750 on its note endorsed by another corporation known as Pennsylvania Bankshares, and would borrow from the First National Bank at Pittsburgh, an affiliate of the Trust Co., $180,000 on its collateral note and $53,750 on its note endorsed by Pennsylvania Bankshares. So far as the record discloses the directors of the Trust Co. prior to January 13, 1931, took no formal action binding upon the Trust Co. or otherwise respecting, the acquisition either of the stock or of the assets of the Birmingham Bank. Such evidence as there is in the record bearing on the point indicates that prior to January 13, 1931, it was the intention at least of the executive officers of the Trust Co. that that company would acquire the business of the bank through an acquisition of its stock and a distribution in liquidation of its assets and business. However, instead of carrying through that plan the Trust Co., pursuant to a resolution of the executive committee of its board of directors adopted January 13, 1931, purchased the property and assets of the Birmingham Bank for $550,000 in cash and an assumption of its liabilities. The amount of $550,000 was credited to the Birmingham Bank in a deposit account on the books of the Trust Co. Against this deposit the Birmingham Bank, upon liquidation, issued its check for the full amount to A. B. Sheets, vice president of Bankshares, Inc., and the record holder of the stock of the Birmingham Bank. Sheets thereupon caused the stock to be canceled and turned over the $550,000 to Bankshares, Inc.

There is some testimony by two of the officials of the Trust Co. to the effect that, in acquiring the stock of the Birmingham Bank, the Hillman Co. and Bankshares, Inc., were acting as the agent of the Trust Co. and that it was not intended that those companies should acquire an interest therein antagonistic to the Trust Co. On the other hand we find that the directors of the Trust Co. specifically refrained from authorizing the purchase of the stock by the Trust Co. and when the assets and business of the Birmingham Bank were finally acquired it was not as a result of the Trust Co. acquiring the stock of the Birmingham Bank and liquidating the bank, but was by a direct purchase for cash and an assumption of liabilities. When it came to financing the acquisition of the stock of the bank by the Hillman Co. and Bankshares, Inc., the arrangement, instead of providing for the Trust Co. to advance the money to those corporations and take over the stock when it had been acquired, provided for Bankshares, Inc., borrowing the money from the Trust Co. and its affiliates. For such borrowings Bankshares, Inc., was to give four notes, the larger two of which were to be secured by collateral and the smaller two were to be secured by the endorsement of another corporation, which, so far as the record shows, was otherwise a stranger to the parties and to the transaction. From a consideration of the record it is clear that prior to January 13,1931, the directors of the Trust Co. did not intend to nor did they take any action binding on the Trust Co. respecting the acquisition of the stock or the assets of the Birmingham Bank. The most that can be said of the arrangement between the executive officers of the Trust Co. and Hillman is that it was a gentleman’s agreement, entered into by the officers in their individual capacity. So far as the record shows it was never ratified or adopted either by the directors of the Trust Co. or by its stockholders. In fact, so far as the record shows the agreement as made was never carried out, for instead of the Trust Co. taking over the stock of the Birmingham Bank from Bankshares, Inc., after its acquisition, it purchased the assets of the Birmingham Bank, which upon dissolution issued its check to the stockholder of record, who paid the amount thereof over to Bankshares, Inc. Giving due consideration to all the evidence in the case, we are unable to find tit at either the Hillman Co. or Bankshares, Inc., or both, were acting as the agent of the Trust Co. in acquiring the stock of the Birmingham Bank. In order to constitute the agency relationship it must appear that these corporations or at least one of them was acting upon authority from the Trust Co. or that the Trust Co. ratified the action taken. Clearly the Trust Co. did not authorize the action to be taken in its behalf, nor did it expressly or impliedly ratify it. Accordingly the contention of the petitioner on this point is denied.

The Trust Co. not having been, either by authorization or by ratification, a party to the arrangement whereby the Hillman Co. and Bankshares, Inc., acquired the stock of the Birmingham Bank, we fail to see how such acquisition constituted a reorganization of the Birmingham Bank and the Trust Co. or constituted them parties to a reorganization. So far as the record discloses the Trust Co. never at any time acquired any stock in the Birmingham Bank. It was not until after January 13, 1931, that it acquired the assets of the bank, and then for cash and an assumption of liabilities. A transaction of that character does not constitute a reorganization, Pinellas Ice & Cold Storage Co., 21 B.T.A. 425; aff'd., 287 U.S. 462; Cortland Specialty Co., 22 B.T.A. 808; aff'd., 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599, and of course the parties thereto are not parties to a reorganization. The petitioners, however, had disposed of their stock in the Birmingham Bank several months before and in the year preceding this transaction.

As the acquisition by the Hillman Co. of the stock of the petitioners in the Birmingham Bank did not constitute a reorganization of the bank and the Trust Co., nor make them parties to a reorganization, we think the respondent properly included in the taxable income of the petitioners for the year in controversy the profit resulting to them from the disposition of their stock in the Birmingham Bank.

Reviewed by the Board.

Judgment will he entered for the respondent.


author: Tkammell :

text:
    Edward Jackson Holmes and Norton Wigglesworth, Executors of the Will of Henrietta Goddard Fitz, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66888.
    Promulgated March 15, 1934.

      Allison E. H. Newton, Esq., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Tkammell :

This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $130,048.93. The sole error assigned by the petitioners and submitted for decision is “ The inclusion in gross estate of the value at the date of death, to wit, $471,-610.28, of property transferred by the decedent under declaration of trust dated May 1, 1906 as amended September 25, 1918 and October 31,1928.”

The decedent died on September 28, 1929, and the question here presented is governed by the Revenue Act of 1926, the pertinent provisions of which are set out in the margin.

The parties stipulated that neither the trust instrument nor any of the amendments thereto was made in contemplation of death; that the credit for state estate, inheritance, legacy or succession taxes should be determined in connection with the computation of the tax under Rule 50; and that the value of the property held by the trustees, as of the date of decedent’s death, was $471,610.28, as determined by the respondent.

Under date of May 1, 1906, the decedent executed the declaration of trust in question and transferred to the two trustees certain personal property referred to therein, upon the terms and conditions and for the purposes stated. The provisions of the trust instrument material here may be summarized as follows: (1) After payment of expenses, the trustees were required to pay out of the net income remaining the sum of $3,000 per year to one Lizzie R. Doherty during her lifetime, and $10 per month to one John A. Nye, during his lifetime, all the net income remaining, after satisfying the foregoing payments, to be paid to the decedent during her lifetime; (2) upon the death of decedent securities were to be set aside sufficient to provide an income adequate to make such, if any, of the payments above mentioned as might remain payable, and the balance of the principal of the trust fund distributed in the same manner as if the entire fund was then to be distributed under the subsequent provisions of the instrument; (3) upon the death of the decedent, the trustees were required to pay to designated beneficiaries stated amounts from the principal of the trust fund not set aside for the payment of annuities; and (4) to distribute the balance of the principal to other persons in the amounts or percentages specified.

It was further provided that if any of the beneficiaries named died prior to distribution, their issue should take by right of representation, and if all of the beneficiaries named were dead at the date of distribution, leaving no issue then living, all the principal of the trust fund should be distributed to and among the persons who, by the laws of Massachusetts then in force, would have been entitled thereto if Walter Scot Fitz' (deceased husband of the decedent) had then died intestate possessed thereof, in the same shares provided by said laws.

Article seventh of the trust instrument provided as follows:

The trustees for the time being under this declaration of trust shall have authority, with the concurrence of said Henrietta Goddard Fitz by instrument in writing and under seal, to alter and amend this declaration of trust in any respect, by instrument in writing and under seal duly executed by them and by her. * * *

By an instrument in writing executed September 25, 1918, by decedent and the two trustees, the trust instrument was amended to provide that:

The Trustee or Trustees for the time being shall have authority to pay over and transfer from time to time to said Henrietta Goddard Fitz, free and discharged from all trusts, such portions of the principal as she may from time to time by instrument in writing request.

The quoted amendment to the seventh paragraph of the declaration of trust was amended under date of October 31, 1928, by an instrument executed by the decedent and the trustee for the time being, by inserting after the quoted language the words “but not to the extent of revoking the same.”

From the foregoing it appears that after October 31, 1928, the decedent had authority, with the consent of the trustee, “ to alter and amend this declaration of trust in any respect,” subject only to the limitation that such alteration or amendment should not go “to the extent of revoking the same.”

Where such a reserved power can be exercised only with the consent of the beneficiary, whose interest is adverse, the grantor is unable at will to alter the trust, and the transfer is effective when made, not at death. Hence, the decedent’s gross estate does not include the value of the trust corpus, subject to tax. Reinecke v. Northern Trust Co., 278 U.S. 339. But obviously the instant case does not come within the rule just stated, unless a trustee is an adverse party in interest, because here the reserved power could be exercised with the consent of the trustee and without consulting the beneficiaries, or any of them.

In Reinecke v. Smith, 289 U.S. 172, the Court held that the income of the trust for the period during which the grantor had reserved the power to modify or revoke the trust instrument in conjunction with either of the other two trustees, was taxable to the grantor as if he had reserved such power to himself alone, and the basis upon which the Court reached its conclusion was in substance that a trustee is not a beneficiary and, therefore, not an adverse party in interest in relation to the grantor. In its opinion the Court said:

A contrary decision would make evasion of the tax a simple matter. There being no legally significant distinction between the trustee and a stranger to the trust as joint holder with the grantor of a power to revoke, if the contention of the respondents were accepted, it would be easy to select a friend or relative as co-holder of such a power and so place large amounts of principal and income accruing therefrom beyond the reach of taxation upon the grantor while he rétained to all intents and purposes control of both.

The cited decision dealt with income tax liability, but the Court clearly indicated its view that the same principle is applicable in a case involving estate tax, saying:

As pointed out in Burnet v. Guggenheim [288 U.S. 280] the same considerations as to ownership and control affect the power to impose a tax on the transfer of the corpus and upon the income.

See also on this point William B. Stewart et al., Executors, 28 B.T.A. 256.

On authority of the above cited decisions, we must view the power reserved by the present decedent, in conjunction with the trustee, so far as concerns the issue before us, as substantially the same as if she had retained the power alone to alter or amend the trust instrument. Under the plain and unambiguous provisions of the instrument, the decedent, even after the amendment of 1928, had the power to change the interests of the beneficiaries or to designate other persons as beneficiaries, and this power was terminated only at her death. What, then, is the effect of such a reserved power ?

In Porter v. Commissioner, 288 U.S. 436, trusts were created with powers reserved in the grantor alone to alter or modify the instruments otherwise than in favor of himself or his estate. In holding that the transfers came within section 302 (d) of the Revenue Act of 1926, the Court said:

Tbe net estate upon the transfer of which the tax is imposed, is not limited to property that passes from decedent at death. Subdivision (d) requires to be included in the calculation all property previously transferred by decedent, the enjoyment of which remains at the time of his death subject to any change by the exertion of a power by himself alone or in conjunction with another. * * * Here the donor retained until his death power enough to enable him to make a complete revision of all that he had done in respect of the creation of the trusts even to the extent of taking the property from the trustees and beneficiaries named and transferring it absolutely or in trust for the benefit of others. So far as concerns the tax here involved, there is no difference in principle between a transfer subject to such changes and one which is revocable.

In Hoblitzelle v. United States (Ct. Cls.), 3 Fed. Supp. 331, the decedent created a trust for the benefit of her two daughters during their lives, and provided for appointees and remaindermen after their deaths. The instrument contained the following provision: “ The donor hereby reserves the right to change, alter, or amend the terms of this indenture at any time during her life, * * * Provided, however, The donor shall not have the right to revoke and vacate this trust by any such amendment or alteration thereof.” The court held on authority of Porter v. Commissioner, supra, that the value of the trust property was properly includable in decedent’s gross estate subject to tax, under section 802 of the Revenue Act of 1926.

The petitioners argue on brief in the present case that the amendment of October 31,1928, whereby the power reserved by the decedent under the seventh paragraph of the trust instrument “ to alter and amend,” as restricted by the provision, “ but not to the extent of revoking the same,” meant and was intended to mean that the decedent, was thereafter precluded from making any change in the beneficial dispositions then existing under the instrument either by withdrawal of principal or amendment of the trust.

We are unable to concur in the construction of the amendment urged by the petitioners. If such had been the effect intended by the decedent, it would have been a simple matter to indicate clearly her intention by unconditionally renouncing the right reserved “ to alter and amend this trust instrument ” by eliminating the provisions of the seventh paragraph; but decedent did not do this; she very clearly retained all the power originally reserved, subject only to the limitation that its exercise should not go to the extent of revoking the trust instrument.

Petitioners offered evidence to show that decedent acquired the trust property in question from her deceased husband; that she created the trust to carry out his wishes relative to the eventual disposition of the property; and that in making the final amendment to the trust instrument she intended thereby to make the dispositions of beneficial interests in the trust final and conclusive. Petitioners further argue in their brief that for these reasons the last amendment to the instrument should be construed as making the beneficial interests irrevocable.

The evidence referred to, we think, is as immaterial as the inference suggested is unsound. The decedent did in fact reserve the power in conjunction with the trustee, to alter and amend the trust instrument “ in any respect,” except that she could not revoke the instrument, and this power she retained to the date of her death. It is, therefore, irrelevant that she might have intended, at the time of executing the last amendment, not to exercise such reserved power. However, there was no -provision in the instrument which would legally have prevented her from changing such intention at any time.

Respondent’s action in including the stipulated value of the trust property at decedent’s death in determining the value of the gross estate is approved. David J. Lit et al., Executors, 28 B.T.A. 853; William R. Stewart et al., Executors, supra; cf. Chase Natl. Bank v. United States, 278 U.S. 327.

Judgment will be entered v/nder Rule 50.

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


author: Seawell :

text:
    Richard L. McCann, Administrator De Bonis Non with Will Annexed of the Estate of Lucy C. Shartle, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49312.
    Promulgated March 20, 1934.

      Laurence Graves, Esq., and Alfred G. Allen, Esq., for the petitioner.

      Ralph F. Sta/dbly, Esq., for the respondent.
   OPINION.

Seawell :

Consideration of the evidence offered in this proceeding at the hearing had in 1932 developed some doubt as to whether the check for $1,070,086.11 had been transferred by the decedent to her husband by way of gift or otherwise in any manner sufficient to transfer title thereto to the husband. Memorandum briefs submitted by the parties in respect thereof, pursuant to a request of the Division, disclose a difference of opinion as to the issue involving the item. The petitioner maintains that the issue is not whether the check was transferred in contemplation of death, involving two points — transfer, and cause of transfer — but only whether contemplation of death, within the meaning of the statute, is present. In other words, the petitioner says that the pleadings remove the question of transfer, leaving for decision only whether it was made in contemplation of death. The respondent’s position is that the issue is not limited to the reasons assigned in his deficiency notice for including the property in the gross estate and, accordingly, we should sustain his action if we find that no completed gift inter vivos was made by the decedent, or if for any other reason the amount belongs in the gross estate.

The proceeds of the check were not included in the estate tax return as taxable income, on the ground, as stated by Charles W. Shartle, the executor, that the alleged transfer was made to terminate a trust. In a 30-day letter issued September 16,1929, the respondent informed the executor that he had tentatively determined to include the amount of the check in the gross estate on the theory that “ such transfers are taxable under Section 302 (c) of the Revenue Act of 1926.” In the deficiency notice it is set forth that “ the evidence in the record does not warrant any changes in the tentative findings as set forth in Bureau letter of September 16, 1929.” From this notice there was filed with this Board a petition in which the petitioner alleged that the determination was based upon certain errors, including the following:

(e) A determination by the respondent that the following items should be included in the decedent’s gross estate as transfers made by the decedent within two years prior to her death and taxable under Section 302 (e) of the Revenue Act of 1926.

This allegation of error is followed by a list of items, including the check for $1,070,086.11, and dividends, aggregating $108,000, paid in 1925 and 1926 on the decedent’s stock of the Machine Co. In his answer the respondent denied the errors alleged and admitted the allegation of fact that he had “ determined that said $1,070,086.11 was property of the decedent and that the delivery thereof to said Charles W. Shartle constituted a transfer within the meaning of Section 302 (c) of the Revenue Act of 1926.”

Without amendment of the pleadings the proceeding came to trial. The petitioner introduced evidence in an effort to prove that the decedent received the check in payment of stock as trustee for her husband and that death was not contemplated at the time when she endorsed it. On November 27, 1933, pursuant to an order therefor, a further hearing was had, limited, however, to the introduction of evidence on the question of whether the check had been transferred to the husband by gift or otherwise.

Generally parties to proceedings before this Board may narrow the issues, John I. Chipley, 25 B.T.A. 1103, and in a proper case the Board will confine its decision to the questions so raised. Here the respondent’s answer admits only his method of determination and he has not otherwise agreed upon a limitation of the issue. Under the circumstances, we do not think the issue is as narrow as that claimed by the petitioner, but is whether the proceeds of the check constitute a part of the gross estate. Cf. Edgar M. Carnrick, 21 B.T.A. 12; Alexander Sprunt & Son, Inc., 24 B.T.A. 599; James W. Pennock, Jr., 25 B.T.A. 1331; and James P. Gossett, 22 B.T.A. 1279, in which we said:

* * * The Board has consistently held that the subject matter of the proceeding before it is the tax liability of the petitioner. When a deficiency is determined, the reasons given do not constitute or confine the issues. Edgar M. Carnich, 21 B.T.A. 12, 21. The petitioner may in his petition assail the deficiency for reasons not theretofore suggested and may go so far as thereby to convert the deficiency into an overpayment, and the respondent may, on the other hand, defend on new grounds, and the Board has jurisdiction to increase the deficiency. Altschul Tobacco Co. v. Commissioner, 42 Fed. (2d) 609; Francisco Sugar Co. v. Commissioner, 47 Fed. (2d) 555. The primary issue is the correctness of the ultimate determination of deficiency, and the ordinary presumption is not destroyed by the reason given, even if it be unsound or badly expressed.

The petitioner contends first that the 1,800 shares of stock of the Machine Co. owned by the decedent were issued to her under circumstances creating a resulting trust in favor of her husband and for that reason no part of the proceeds of the check for $1,070,086.11, the dividends aggregating $108,000 paid on the stock in 1925 and 1926, and further payments of $78,205 made to the husband after the death of his wife on account of said stock should be included in the gross estate.

It appears to be well settled, as the petitioner contends, that where a husband pays the consideration for property and has title taken in the name of his wife, the presumption is that a gift was intended and that this presumption of fact may be overcome by evidence that the transfer was intended as a trust. See Smithsonian Institution v. Meech, 169 U.S. 398; Perry on Trusts and Trustees, sec. 224.

Having alleged the existence of a trust relationship as to the stock involved here, it is the duty of the petitioner to overcome the presumption against it. The evidence here is against the establishment of a resulting trust with the beneficial interest in Charles W. Shartle.

It is firmly established that where a conveyance of property is voluntarily made for some fraudulent purpose, such as to hinder, delay, or defraud creditors, no resulting trust arises in favor of the grantor. Perry on Trusts and Trustees, secs. 164-165; Schultz v. Schultz, 274 Ill. 341; 113 N.E. 638; Surye v. Lemberger, 92 N.J. 656; 114 Atl. 454; Faris v. Faris, 250 Mich. 659; 230 N.W. 945. The rule was stated by the court in the case of Saint v. Saint (Cal.), 7 Pac. (2d) 374, in language as follows:

No rule is more strictly adhered to than the rule that equity will not lend its aid to establish a trust or enforce a contract which is tainted with fraud. * * *

It is equally as firmly established that where property is conveyed for the purpose of hindering, delaying, or defrauding creditors, neither the grantor nor persons claiming under him can recover the property by an action in equity. Burgett v. Burgett, 1 Ohio, 469; Barth v. Severson, 191 Iowa, 770; 183 N.W. 617; Jamison v. Wells (Texas), 236 S.W. 806; Spaulding v. Spaulding, 87 W.Va. 326; 104 S.E. 604; Rentoul v. Sweeney (Del.), 137 Atl. 74; McRae v. MacRae (Ariz.), 294 Pac. 280; Penland v. Wells, 201 N.C. 173; 159 S.E. 423. In the last case cited the court said:

In New York v. Merritt, supra [77 N.C. 213; Id., 80 N.C. 285], the court said: “ Where both parties have united in a transaction to defraud another, or others, or the public, or the due administration of the law, or which is against public policy, or contra bonos mores, the Courts will not enforce it in favor of either party.” The entire doctrine is based upon the “ clean hands ” concept of equity. The plaintiff alleges “ that prompt action was necessary in order to defeat such litigation and thereby preserve his property for his own use and benefit.” While the plaintiff denies that there was any merit in the threatened litigation, it is quite obvious that he was attempting to get his fodder out of the field before the storm brote.

The petition alleges that in 1911 Charles W. Shartle “became heavily indebted ” by reason of expenditures made for the enlargement of his plant and that he might become involved in patent infringement litigation over the patents he held and used in the business he was then conducting as a sole proprietor. This liability, the petition alleges, seriously impaired Shartle’s credit and made it difficult for him to obtain bank loans to conduct his expanding business.

Shartle testified that he organized the Machine Co., the corporation, “ to relieve me from any reponsibility from any suit for infringements on patents developing — which I was developing,” and to avoid personal liability “ for any personal debt which I might contract.” Upon being asked in direct examination what he said to his wife concerning the issuance of most of the stock of the Machine Co. to her, he testified: “ I explained to her that the reason was to protect the company through her, and to protect me from damage in a lawsuit.” H. D. Martindale, the only other witness who gave any testimony on the question, testified on behalf of the petitioner that Shartle became “ very heavily financially involved ” by reason of the paper mill project and that Shartle had the stock issued to his wife “for his own protection.” In reply to a question on direct examination as to why Shartle had the stock issued to his wife, Martindale testified: “ He said to put it in her name for the simple reason that if these endorsements for the purposes of the settlement of the overdraft of the National Paper Mill was [sic] enforced against him he would be in a terribly difficult situation, and that he wanted these stockholdings put in her name, at least, until the National situation [paper mill project] was cleared up.”

We do not think it is important that we know the amount of Shartle’s indebtedness to the bank for overdrafts or the seriousness of prospective litigation growing out of the patents Shartle held. The amount involved was doubtless l'arge, otherwise it would not have caused him so much concern. He determined to have title to the stock about to be issued in exchange for his property taken in the name of another, believing that such a course of procedure would place the property beyond the reach of his creditors, present and future. In an effort to accomplish his purpose, he caused stock issued by the Machine Co. and the Continuous Beater Co. for his property to be made out in favor of his wife, and advised her of the reason for his action. Under the circumstances, we do not think that if its aid were invoked a court of equity would decree a resulting trust of the stock in favor of the grantor, but would leave the grantor and grantee where it found them.

Upon the consolidation of the Continuous Beater Co. with the Machine Co., the decedent received additional shares of stock of the latter corporation for her stock of the former corporation. Thereafter in 1924, when the corporation declared a stock dividend, the decedent delivered her stock to the corporation, and in lieu thereof received a new certificate for 1,800 shares. The canceled stock certificates bear blank endorsements of the decedent. The new certificate remained in the name of the decedent until the sale of the stock in 1926. Dividends paid on the old certificates in 1918, 1922, and 1923 were reported in income tax returns filed by the decedent for those years. The dividends paid on the new certificate in 1926, together with the profit realized from the sale of the stock, were shown in the income tax return filed for the decedent for that year.

Little evidence was offered as to the circumstances of the stock dividend declared in 1924. All we know is that Shartle requested the stockholders to turn in their stock certificates and issued instructions concerning the issuance of new certificates. It does not appear that the decedent expressly relinquished any of the absolute title she had in the old certificates in favor of her husband and it is noi shown that Shartle, acting in his individual capacity, and his wife had any understanding concerning the transaction. Nothing appears contrary to the assumption that the decedent and other stockholders merely surrendered their stock to the corporation for the purpose oí receiving additional shares under the stock dividend declared. The circumstances connected with the issuance of the new stock certificate are not sufficient to raise a resulting trust of the stock in favor of the decedent’s husband. Our opinion is, and we so hold, that the stock was owned by the decedent until its sale in 1926.

Having held that there was no trust of the stock in favor of Charles W. Shartle, and that the stock was the property of the decedent, it follows that the payments aggregating $78,205 made after the decedent died, in liquidation of the corporation and on account of the sale of the stock and a portion of the corporation’s assets, constitute a part of the decedent’s gross estate.

The decedent having been the legal owner of the stock until it was sold by her, the presumption is that the check received as part of the purchase price of the stock was hers until title thereto was disposed of by gift or otherwise. If it was, in fact, transferred to Charles W. Shartle for tire purpose of conveying absolute title, we do not think it was transferred in contemplation of death, for we think the dominant motive was other than the thought of death. The petitioner insists that the evidence establishes a completed gift inter vivos to Charles W. Shartle.

We have frequently said that to constitute a gift there must be (1) an intention on the part of the donor to give; (2) an acceptance of the gift by the donee; and (3) a transfer to title accompanied by delivery of the property. J. T. Hedrick, 24 B.T.A. 444, and cases cited therein, and J. D. Varnell, 28 B.T.A. 231. See also Allen-West Commission Co. v. Grumbles, 129 Fed. 287; Edson v. Lucas, 40 Fed. (2d) 398. The essential elements of a gift from a wife to her husband are the same, In re Remmerde, 206 Fed. 826, and clear evidence is required to establish such gifts. Stickney v. Stickney, 131 U.S. 227; In re Carpenter, 179 Fed. 743; MacDade v. Reilly (N.J.), 129 Atl. 408. It has been held that where a husband acquires possession of the separate property of his wife, as here, with or without her consent, without direct evidence of intention to make a gift of it to him, the husband will be deemed to hold the property in trust for her. Stickney v. Stickney, supra; Parrett v. Palmer, 8 Ind. App. 356; 35 N.E. 713; In re Carpenter, supra; Perry on Trusts, sec. 666.

We find no reason to question the sufficiency of the endorsement to transfer title to the check, or the delivery of the- paper. What is lacking is proof of an intention on the part of the decedent to give and an acceptance of the check by her husband as a gift.

The husband testified on direct examination that the decedent endorsed the check in his presence at his request in the offices of the First & Merchants National Bank and that without saying anything to her he took the check to the cashier’s desk for deposit to his account. On cross-examination he testified that he did not give the cashier any instructions as to whose account to credit the check and that subsequently he learned that the proceeds had been credited to his bank account. E. F. Shirely, executive vice president of the bank, testified that Charles W. Shartle requested him to place the check in his account. Whether this request, if .made, was made in the presence of the decedent, does not appear. The • petitioner places considerable reliance upon the testimony of Charles W. Shartle, Jr., a son, who was present at the bank when the check was endorsed. Upon being asked whether his mother said anything to his father when handing the- endorsed check to him, he testified:

Xes, she remarked, as it stands out in my mind, that she hoped he would enjoy the money as he had his work, and she handed the check back to him and he handed it over to Mr. Shirely, along with his check.

Shirely was present when the transaction occurred and although he was asked what transpired at that time, testified to no remark made- by the decedent to her husband when returning the check to him. Assuming that the remark was made, it contains nothing to prove intention to make a gift of the check. The same language could have been used to express the same thought in connection with the delivery of money for an entirely different purpose.

Prior to the time the sale was closed the decedent and her husband considered forms of investment of the proceeds of the sale, but the testimony relating to the discussion throws no light on the question of her intent to make a gift. Charles W. Shartle used approximately $1,000,000 of the proceeds of the check to buy United States Government coupon bonds and upon their delivery to him on November 13, 1926, placed them in a money box in the bank vault. It does not appear whether the bonds were purchased in his or her name.

It does not appear that the decedent was indebted to her husband for any sum of money or that any consideration passed to her from him for the check. In the estate tax return he filed as executor for the estate he excluded the amount of the check from the gross estate on the ground that it was delivered to him to terminate a trust in his favor. In his petition he alleged that his wife held the stock as trustee for his sole benefit and at the first hearing his counsel presented the same view. He testified that he regarded the stock as his and we have no doubt, as the petitioner claims, that in passing the check to her husband, the decedent believed she was merely giving him what she thought actually belonged to him. Obviously, the decedent could not transfer the check both as a trustee and a donor and her husband could not accept it in the double capacity of a beneficiary of a trust and a donee. This evidence is directly opposed to the idea that a gift was intended or that the check was accepted as a gift.

From all the evidence we find that the petitioner has failed to prove intention on the part of the decedent to make a gift of the check or its proceeds, or that the decedent’s husband accepted the check as a gift. It follows that the amount of the check constitutes a part of the gross estate.

. The same conclusion must be reached with respect to the dividends of $18,000 and $90,000 paid on the stock in 1925 and 1926, respectively. The Machine Co. credited these dividends to the decedent’s account on the corporate books and then immediately transferred them to the personal account of Charles W. Shartle. The proof is that the decedent never knew when the dividends were declared. It does not appear that the decedent ever received any consideration from her husband for the dividends paid on her stock or that she ever authorized the corporation to transfer the credits she received for them to her husband’s account. On this issue we sustain the respondent for lack of proof that the decedent ever transferred title to the dividends to her husband or any other person.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Arundell :

text:
    Olympia Harbor Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64272.
    Promulgated March 20, 1934.

      Thomas N. Fowler, Esq., and Robert T. Knight, C.P.A., for the petitioner.

      Willis R. Lansford, Esq., for the respondent.
   OPINION.

Arundell :

The evidence establishes to our satisfaction that of the sum of $7,900 paid to the Rockway Mill Wood Co. at least $5,400 was in fact paid to get rid o.f an unsatisfactory contract and not more than $2,500 was paid for the assets taken over. Even assuming that petitioner was warranted in abrogating the contract because of the breach by the Rockway Mill Wood Co., it is not to be denied the loss it actually suffered because it sought the more amicable course and thus avoided almost certain litigation. The fact that petitioner may have hastened matters because of a proposed plan of various mill owners to join in an operation for the handling of their waste material does not change or affect the transaction between petitioner and the Rockway Mill Wood Co. On this issue the respondent is reversed.

The evidence does not convince us that the advances made to the Tumwater Lumber Mill Co. should be allowed as a bad debt deduction in 1929. Undoubtedly a large portion of the sum was not advanced until that year and the entire sum was loaned for frankly experimental purposes and could be repaid only • through income from the operations of the Tumwater Co. At the end of 1929 it was in regular operation, although it had experienced the pinch of the depression, as had business generally. Its balance sheet showed it entirely solvent. It is true that its liquid assets were limited, but that was known when the advances were made by petitioner and was the occasion for its action. By placing a liquidating value on its assets, including the new gang-saw mill which had recently been completed, a value was reached of $142,523.30, and as the outstanding liabilities, including the sum due petitioner and various mortgages on the property, equaled $186,894.92, claim is made that the Tumwater Co. was insolvent and that petitioner was warranted in making the charge-off that it did. Petitioner’s president testified that in the light of subsequent events the entire account should have been charged off, but the testimony goes no further than this, and no facts are given to support the general statement.

In deducting 40 percent of the indebtedness due by the Tumwater Lumber Mill Co. petitioner evidently did not consider it was dealing at arm’s length with that company, for, even on its own calculation of the assets and liabilities of the Tumwater Co., it would have recovered more than 60 percent of the amount due. Petitioner’s answer is that the Anderson brothers did not intend that the outside creditors of the Tumwater Co. should lose anything. However commendable such a course may be, it does not follow that petitioner may at one and the same time treat itself as a true creditor and also as ready to relinquish its right to payment and by so doing charge off the item as a bad debt against its income. Except for the close relationship that existed between the two corporations, it is not likely that the Tumwater Co. would have borrowed such a large sum as it did from petitioner, which sum was payable on demand. The two corporations had in earlier years been in the habit of filing consolidated returns, but that was not permitted under the revenue act in force in 1929. If it had been the accounts could not have reflected under any guise the sum now sought to be deducted. The evidence is far from satisfactory that there was a charge-off within the year 1929, but, passing that matter over unanswered, we are of the opinion that the debt due to the petitioner by the Tumwater Lumber Mill Co. was not ascertained to be worthless to the amount of $83,594.65 and that the charge-off should not be allowed as a deduction from petitioner’s 1929 income.

Decision will be entered under Rule SO.


author: Akundell :

text:
    William Venning Couchman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67729, 70957.
    Promulgated March 20, 1934.

      Theodore B. Benson, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Akundell :

As we understand respondent’s position in this matter, it is that petitioner and his brother had a joint interest in whatever profit was to he realized on the sale of petitioner’s seat on the New York Stock Exchange, and that until the seat was actually sold at a profit Carl had no claim on petitioner and there was no indebtedness due him by petitioner. Respondent cites as authority for his position various cases which hold that interest on a promise to make a gift is not deductible. Simon Benson, 9 B.T.A. 279; Gilman v. Commissioner, 53 Fed. (2d) 47. This does not appear to us to be the situation. There came a time between the two brothers when it was desirable to reach a more definite agreement than they had. Petitioner did not want to sell his seat on the exchange, around which he had built a substantial business. He and his brother wanted to know, however, how they stood, and to that end it was agreed between them that petitioner was definitely indebted to the extent of $208,000, and the written contract of January 1, 1929, definitely acknowledged that this sum was due Carl, which sum was due at January 1, 1934, with interest at the rate of 6 percent per annum. Petitioner had been able to obtain the funds with which to purchase the stock exchange seat only with the consent of his brother Carl, who imposed the condition of the profit-sharing arrangement. When the time came that petitioner wanted to have his liability more- definitely fixed than under the arrangement theretofore existing, seat prices were on the way up and Carl was in a position where, as far as events could then be foreseen, he would receive substantially more than $208,000 if he insisted on standing on the original agreement. Had he done so, petitioner would have been unable to determine the amount of his liability at January 1, 1929, when it became desirable for petitioner to have it more definitely fixed. The agreement whereby Carl was to have 10 percent of the amount by which the last sale exceeded $600,000 was thus inserted as a consideration for his waiving claim to a further share on a 50-50 basis. The original loan and the waiver of claim to additional profits were adequate consideration for petitioner’s agreement to pay $208,000. The fact that interest has been regularly paid and that the principal of the indebtedness has been substantially curtailed indicates only too clearly that the agreement was genuine and existing. There is nothing in the record that we can find that would warrant the disallowance of the deduction as interest on an indebtedness. On this point the respondent .is reversed.

No evidence was offered on the deductibility of the $6,000 paid by petitioner to his mother, and on the record we find no reason for disturbing the respondent’s action in disallowing the deduction.

Decision will be entered umder Bule 50.


author: Smith:

text:
    Philip Rhinelander, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54512.
    Promulgated March 20, 1934.

      Spotswood D. Bowers, Esq., for the petitioner.

      Jolm H. Pigg, Esq., Clay G. Holmes, Esq., and L. H. Bushbrook, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1928 in the amount of $6,992.77.

The petition alleges that in the determination of the deficiency the respondent—

(1) * * * erroneously ruled that the amount of $25,806.23, allowed by the field agent as a statutory net loss of 1927 should not be carried over and the deduction in 1928 was improper, and that said deduction should not be allowed from the taxpayer’s income.
(2) * * * erroneously ruled and decided that the loss of $163,560.81, sustained in 1927 was not sustained from a trade or business regularly carried on.
(3) * * * erred in ruling and deciding that the loss sustained by petitioner in his business as Treasurer of the Atlantic Mortgage Corporation in the year 1927, could not be carried forward into the year 1928 beyond the amount of his income for the year 1927.

The petitioner was a man of leisure until 1909, when his mother-in-law, Cornelia B. Kip, died, leaving him and her husband as executors and trustees under her will. The decedent’s husband died in 1911 and since then the petitioner has been the sole executor and trustee and has maintained an office for the conduct of the business of the Kip estate, first at 20 Nassau Street, New York City, and since the spring of 1918 at 27 William Street, New York City, in the office of Miller & Hartcorn, attorneys for the Kip estate, the name of the estate appearing on the door of the office, and in the lease for the office.

On April 18, 1912, the Atlantic Mortgage Corporation was incorporated, and the petitioner, as executor and trustee of the estate of Cornelia B. Kip, subscribed for 1,000 shares of the preferred stock of the corporation. Hartcorn owned a controlling interest in the stock of the corporation, which was organized—

* * * to loan money, to be secured by mortgage on personal property or real estate, to buy, sell, or otherwise acquire notes, bonds, or other evidences of debt, secured by mortgages on personal or real estate, and also to purchase, lease, hire, or otherwise acquire, real or personal property, improved or unimproved, of every kind and description, and to sell, disxrose of, or lease, convey and mortgage said property, or any part thereof.

From the incorporation of the company until December 81, 1917, the petitioner advanced funds on open account to the Atlantic Mortgage Corporation and certain other corporations in which Albert E. Hartcorn, a member of the firm of Miller & Hartcorn, was interested. These advances were made on open account with funds of the Kip estate and by the petitioner as administrator of the estate of his wife, Adelaide Kip Rhinelander, in his capacity as agent, and also individually. Up to December 31, 1917, the advances made to the Atlantic Mortgage Corporation were as follows:

From the Kip estate--- $778, 622. 50
From the estate of Adelaide Kip Rhinelander_ 18,600.00
By the petitioner as agent- 1,250.00
By the petitioner, individually_ 245,341.12
Total_ 1,280,813.62

On May 1,1918, the petitioner, having obtained information from which he claimed that Albert E. Hartcorn was largely indebted to the corporations to which advances had been made and that he had received the benefits of some of the advances, entered into an agreement with Albert E. Hartcorn by which he took over the stock and management of the corporations to which advances had been made, under which agreement he was to manage and liquidate the corporations, pay the advances made by the Kip estate and by his wife’s estate, and by himself as agent and by himself, individually, and return to Hartcorn the surplus, if any, which there might be.

After this agreement was signed the liquidation of the properties of the corporations was undertaken by the petitioner. He elected his attorneys and brother as officers of the several corporations.

The properties were gradually liquidated and the debts paid off until there had been paid to the petitioner on account of his advances of $245,341.12 a sum sufficient to bring the amount due the petitioner down to $163,585.61.

At this time all the property had been disposed of except a parcel of property owned by the Atlantic Mortgage Corporation, known as the Lenox Theatre. To this property the corporation had a deed, but when it undertook to sell the property an old defeasance agreement was recorded, making the deed nothing but a mortgage.

Thereupon the Atlantic Mortgage Corporation brought a suit on the mortgage and was met with the defense that there was no consideration for the mortgage, and the trial court held that the plaintiff was unable to show that it had advanced the money required to be advanced and directed that the deed to the property be executed to the defendant, Kramer Construction Co. This decision was affirmed on appeal in 1927.

In 1927 the petitioner ascertained that he would definitely lose $163,585.61 on his personal advances to the Atlantic Mortgage Corporation.

Petitioner’s income for the year 1927, before the deduction of any portion of the alleged loss of $163,585.61, was $142,759.38, and the excess of the loss from advances on open account to the Atlantic Mortgage Corporation over the income for the year 1927 was $20,826.23.

In this proceeding the petitioner submits that “ during the period from 1912 to the end of the year 1917 the taxpayer was regularly engaged in the business of advancing money on open account to the Atlantic Mortgage Corporation and some 20 other corporations wholly owned or controlled by Albert E. Hartcorn”; that in the year 1927 the petitioner definitely ascertained that his loss from such advances on open account amounted to $163,585.61; and that, after applying this loss against the income for the year 1927, which amounted to $142,759.38, there was left the sum of $20,826.23, which the petitioner, under the provisions of section 117 (b) of the Eevenue Act of 1928, was entitled to carry over into the year 1928 in computing his taxable income for that year.

The petitioner asks the Board to make the following finding of fact:

The sizes of the advances and the number of corporations to which same were made, both by the taxpayer individually and as executor and trustee of the Kip Estate, and as administrator of his wife’s estate, and as agent, are such that they constituted a considerable part of the occupation or business of the taxpayer, and were not merely occasional and isolated, but were continuous over a long period of time and were a part and parcel of the taxpayer’s methods of conducting his own business and that of the Kip Estate during these years.

We are of the opinion that the evidence of record does not warrant the making of the finding requested. Alexander B. Neill, a certified public accountant who checked up the accounts of the petitioner for the purpose of determining the amount of advances which the petitioner had made to the Atlantic Mortgage Corporation; testified as follows:

Q. Had Mr. Philip Rhinelander himself made advances?
A. Yes.
Q. In what amount?
A. $245,341.12.
Q. And how was that built up?
A. On account of advances, $165,341.12, mortgages, personal, mortgages of his own, one-half interest, $80,000.
Q. That is, the mortgage was $160,000?
A. Yes.
Q. And his half interest was $80,000?
A. Yes.
* * * * * ‡ - ‡
The Member. Mr. Neill, on December 31, 1917, who was indebted to Philip Rhinelander in the amount of $245,000 odd?
The Witness. The Atlantic Mortgage Corporation.
The Member. How was that indebtedness evidenced?
The Witness. By cash advances made to Atlantic Mortgage Corporation of $165,341.12, a half interest in the mortgage of $160,000, which he owned, and which he assigned to the Atlantic Mortgage Corporation, which it used probably as collateral for loans.

From the evidence of record no finding can be made that the petitioner was engaged in a business of making loans of his own funds to the Atlantic Mortgage Corporation and other corporations. The evidence does indicate that he did make some loans of his own funds both to the Atlantic Mortgage Corporation and to another corporation. But it does not appear that the loaning of the petitioner’s own money was anything more than incidental.

The respondent does not question the right of the petitioner to deduct from gross income of 1927 the amount of the loss sustained by him in 1927, viz., $163,585.61. He does contend, however, that this was not a net loss “ attributable to the operation of a trade or business regularly carried on by the taxpayer.” Sec. 117 (a) (1), Bevenue Act of 1928. We sustain the respondent’s contention.

In Burnet v. Clark, 287 U.S. 410, the Supreme Court had before it the question of whether an officer of a corporation which had sustained a loss by endorsement of the corporation’s obligations and by selling the corporation’s securities had sustained a net loss under the provisions of the Revenue Act of 1921. In the course of its opinion the Court stated:

The respondent was employed as an officer of the corporation; the business which he conducted for it was not his own. There were other stockholders. And in no sense can the corporation be regarded as his alter ego, or agent. He treated it as a separate entity for taxation; made his own personal return; and claimed losses through dealings with it. * * *

To the same effect see Dalton v. Bowers, 281 U.S. 404; Eli Strouse, 24 B.T.A. 748; aff'd., 59 Fed. (2d) 600. We are of the opinion that the petitioner does not stand in any better position than the petitioners in the above cited cases.

Reviewed by the Board.

Judgment will be entered for the respondent.