author: Mellott:

text:
    Mathilde B. Hooper, Administratrix of the Estate of James P. Hooper, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85776.
    Promulgated January 19, 1940.

      J. Warren Brook, Esq., and George B. Clothier, Esq., for the petitioner.

      A. W. Carnduff, Esq., for the respondent.
   OPINION.

Mellott:

The following schedule shows the respondent’s method of computing the net estate under the 1932 Act:

Gross Estate Returned_$50,680.00 Add:
(a) Property as to which there is no controversy over value_ 3,142.37
(b) Proceeds of life insurance policies_ 132,639.31
(e) Value of 3,613 shares of William E. Hooper & Sons Co. stock at $100 per share_ 361,300.00
Total gross estate- 547,761. 68
Deductions allowable_ 279,131.92
Taxable Net Estate- 268,629.76

Petitioner contends that none of the property added by the respondent is includable in gross estate; that in any event the value of the 3,613 shares of stock is so much less than that determined by him that there is no taxable net estate; that the proceeds of the life insurance policies are not includable, since the trust was the beneficiary and received the proceeds; and that, even if the insurance proceeds are includable, $40,000 of the amount received should nevertheless be excluded from gross estate under section 302 (g) of the Revenue Act of 1926'.

It has been found as a fact that the stock had a value of $45 per share ($162,585). The evidence upon which this finding is based will be discussed later. It is apparent that there will be a small deficiency in tax if the property in issue be included in gross estate, so it is necessary that all of petitioner’s contentions and alternative contentions be considered.

We shall first consider whether or not the assets of the trust estate are includable in the gross estate of decedent. The applicable statute is section 302 (c) of the Eevenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, shown in the margin. The portion shown in italics was added by the joint resolution.

A history of the legislation is shown in Hassett v. Welch, 303 U. S. 303. In Helvering v. Bullard, 303 U. S. 297, decided the same day, the Supreme Court approved the inclusion, in the gross estate of the decedent, of property which she had conveyed to a trust, reserving to herself a life interest in the income. (See Sellar Bullard, Executor, 34 B. T. A. 243, for a further statement of the facts.) A similar holding was made by this Board in E. Pennington Pearson, Executor, 36 B. T. A. 5.

The cited cases point the way to a solution of the question before us, though the facts are not identical with those of the instant proceeding. The transfer by the decedent was not made “in contemplation of death” as such phrase was construed by the Supreme Court in United States v. Wells, 283 U. S. 102. At the conclusion of the evidence counsel for the respondent conceded as much and the question is not discussed upon brief. He relies upon the first portion added to the statute by the Joint Resolution of March 3, 1931 — that the transfer was one “under which the transferor has retained for his life or any period not ending before his death, the possession or enjoyment of, or the income from, the property.” In this connection he says: “It is unquestionably true that the income of this trust was intended to, and did in fact, inure to the benefit of the grantor.”

Petitioner, inferentially conceding that the income did inure to the benefit of the grantor, argues that during his life the benefits were “indirect”; that he did not retain “the possession or enjoyment of, or the income from, the property”; that a holding to the effect such rights were retained can only be reached by applying the rationale of Douglas v. Willcuts, 296 U. S. 1, and kindred cases; that it is an artificial rule to be applied only in income tax cases; and that this Board has previously taken the position, in Estate of Paul F. Donnelly, 38 B. T. A. 1234 (appeal pending C. C. A., 8th Cir.), that it can not, and will not, be applied, in estate tax cases.

In the case relied upon by petitioner it was pointed out that an estate tax controversy “must be decided under the specific provisions of section 302 (c) as amended, rather than upon any analogy from income tax cases [and that] the language of the statute does not clearly indicate that it was intended to apply to a situation like” the one then before the Board. Holding that the settlor had “retained no right to receive the income, and any enjoyment of the property or right to the income from the property came to him in a very indirect manner, if at all”, it was stated: '■'■The use of the meóme was not limited to the discharge of his legal obligations.”

In the instant proceeding, however, the use of the income of the trust was, for all practical purposes, limited to the discharge of the settlor’s legal obligations. He had a legal and moral obligation to provide for the support of his family, including the maintenance, education, and support of his children. This obligation was cast upon the trust. The trust instrument directed that 36' percent of the gross income of the trust, but not to exceed $16,000 nor to be less than $14,000 per annum, be paid over to the wife “for the upkeep and maintenance of the property” owned and occupied by her and the settlor and that “the entire cost of maintaining, educating and supporting” their children, “together with all household and living expenses” be paid by her. The next obligation of the trust was to give effect to the settlor’s expressed wish that sufficient insurance upon his life be kept in force so that “the ultimate payment of the principal of the debts listed on Schedules A and B shall be protected so far as possible.” The third obligation of the trust was to pay “from time to time pro rata on account of the principal of the indebtedness due” by the settlor.

The income of the trust was applied as directed. The settlor’s salary from William E. Hooper & Sons Co., which was apparently $45,000 per annum, was paid to the trustee in the aggregate amount of $49,563. (Cf. Lucas v. Earl, 281 U. S. 111). Other income of the trust was nominal, amounting to less than $1,800. However, it withdrew the cash surrender value of certain insurance policies, amounting to $23,692.47, so that its receipts, during the time which elapsed between its creation and the death of the decedent, amounted to approximately $78,000. During the same period it distributed to the wife $22,275, which she used as directed, paid $48,093.30 to the settlor’s creditors, used $2,934.09 for “other payments” (not otherwise identified in the evidence), and paid $5,190.65 as premiums upon his life insurance.

After the death of the decedent the trustee paid the creditors listed in the schedules attached to the trust instrument the aggregate amount of $118,255.44. The obligation so liquidated constituted part of the deductions claimed by petitioner in schedules I and J of the estate tax return and have been allowed by the respondent. Summarizing, we think it can not be gainsaid that the income of the trust created by this decedent was used for the discharge of his legal obligations; and a practical interpretation of the terms of the trust instrument leads to the conclusion that no other application could have been made of such income, at least until the full amount of the indebtedness had been paid. The Donnelly case, supra, is therefore distinguishable upon its facts.

The transfer by the decedent seems to have been, and we hold that it was, one under which he “retained for his life or any period not ending before his death, the possession or enjoyment of, or the income from, the property.” It follows that the respondent did not err in including the value of the property transferred in his gross estate.

Petitioner argues that even if the value of the stock must be included in gross estate the proceeds of the life insurance policies need not be. She cites section 302 (g) of the Revenue Act of 1926, as supporting not only this contention but her alternative one that, in any event, she is entitled to the $40,000 exclusion referred to in the last sentence of the section.

Respondent relies upon the same section and upon his regulation (art. 26, Regulations 80) interpreting it. He quotes from the Board’s decision in Marmaduke B. Morton, Administrator, 28 B. T. A. 236, as follows:

* * * It, therefore, seems clear to us that Congress, in enacting section 302 of the Revenue Act of 1924, intended that there should he included in the gross estate of a decedent the full amount of his life insurance which after his death is subject to the payment of charges against his estate * * *, and that it was not the intention of Congress in enacting subdivision (g) of that section to exempt from taxation life insurance meeting such tests, although in terms payable to someone other than the executor. * * *

Since the filing of briefs we have had occasion to consider somewhat the same question as that now before us in Pacific National Bank of Seattle, Executor, 40 B. T. A. 128, and Estate of Waldo Rohnert, 40 B. T. A. 1319. In the former case we held that proceeds of insurance, though payable to a trustee, to the extent that they were required to be used in liquidating debts or obligations of the estate, must be included in gross estate under 302 (g) and that the $40,000 exclusion could not be applied against the amount so used. In the latter case we held that, notwithstanding the fact all of the proceeds of insurance could have been used, if necessary, to pay charges against the estate, there should be included in gross estate only the amount actually used, the $40,000 exclusion to be applied to the remainder. Upon the authority of these cases we therefore hold that $118,255.44 of the proceeds of the life insurance policies should be included in gross estate. The remainder of the amount received ($132,636.31-$118,255.44), being less than $40,000, may not be included.

In arriving at a value of $45 per share for the William E. Hooper & Sons Co. stock, we have considered the stipulated facts, the testimony of three witnesses presented as experts by petitioner, and a,ll other evidence bearing upon the question. ISTo witnesses testified as experts in behalf of respondent.

All of the witnesses for petitioner were qualified to express opinions as to the value of the stock on the basic date, i. e., August 3, 1933. One testified that it was not in excess of $20 per share; another testified to a value of between $10 and $20 a share, “nearer ten than twenty”; while the third arrived at a value of between $15 and $25, and stated “it would work out under twenty.” From their testimony it appears that they considered, among other things, the record of earnings, not only of the company itself, but also of its selling agent, the Hooper Sons Manufacturing Co., for the years 1926 to 1931, inclusive, prior to the merger of these companies, and for the years 1932 and 1933, after the merger; the book value of the stock; the cash dividend record of the two companies; the impairment of the surplus account by losses of the business, and the maintenance of this account by transfers from depreciation reserves; the ratio of current assets to current liabilities; absence of any regular or established market for the stock; the fact that 3,613 shares constituted a minority interest; unsettled business conditions owing to the depression and other factors, and the availability of other more desirable stocks at low prices.

In support of his contention that the stock had a fair market value of $100 per share on August 3, 1933, respondent points to its book value of approximately $145 per share; earnings of $11 per share in 1933 and approximately $10 per share in 1934; a definite upswing in the industry at the end of the month preceding the date of valuation; an entry on the books of the corporation of $8,570 as the “excess of par value over cost of 306 shares of the corporate capital stock cancelled during 1932”; the issuance by the corporation in 1932 of 340 shares at par; and evidence indicating that there were several interfamily transactions in the stock prior and subsequent to the decedent’s death.

The only evidence of interfamily transactions in the stock is contained in the testimony of petitioner’s witnesses. Two of the witnesses, who' were called by the petitioner as experts, were asked by respondent’s counsel on cross-examination if they knew of sales made by the decedent to members of his family prior to his death of small amounts of the stock for $90 and $100 per share. Neither of them had any personal knowledge of such sales, although one testified he had been told that sales at $65 and $90 per share had been made. The secretary and assistant treasurer of the company, who is also the trustee under the trust, testified that some time prior to 1926 decedent had borrowed money from his two sisters and had given each of them 70 shares of the stock as collateral, based on $90 a share, with a privilege of buying it back from them at that price. Subsequently there was a stock dividend and the two sisters each received a certificate for 97 shares for the 70 shares so that they then had in the place of 70 shares at $90 a share, 97 shares at $65 a share. When on January 26, 1932, decedent’s brother, Robert, acquired an option to purchase for $65 a share 150 shares of the Hooper Co. stock from the trustee, the price he agreed to pay was based upon that used in the previous transaction between the decedent and his sisters. No effort was made to base the option price on the fair market value of the stock as of the date of the option agreement. Robert Hooper testified that he never exercised the option prior to the decedent’s death because he did not consider that the stock was worth $65 a share. After the decedent’s death the trustee was in financial difficulties and asked Robert to purchase 20 shares at $65 so that he might have some funds to run the estate. Robert did so, but he testified that it was only as an accommodation to the trustee. Inter-family transactions, such as those described above, are entitled to little, if any, weight in determining the fair market value of the stock on the basic date.

While it is true that two of petitioner’s exhibits indicate that 340 shares of the stock were issued at par in 1932 and that an entry was made in that year indicating that the company had acquired 306 shares of its stock at $71 per share, or $8,570 less than the par value of these shares, the facts and circumstances surrounding these transactions are not disclosed. In our opinion, however, they are not indicative of the price a willing buyer and seller would agree upon for 3,613 shares on August 3, 1933, but were bookkeeping adjustments in connection with, the merger of the parent company and its subsidiary selling agent.

A study of all of the evidence convinces us that there were no actual sales of the stock to serve as a basis for determining what a willing buyer and a willing seller would agree upon as a fair price. In the absence of sales, the material factors to be considered in determining the fair market value of the stock of a close corporation, such as we are now dealing with, are: earning capacity and anticipated profits; book value; dividend yields; and such other facts and circumstances surrounding the corporation and its business as would be considered by a prospective buyer and seller. A prospective buyer would give some consideration to the book value of $145 a share. He would realize, however, that the company was a going concern, and that, even if it be assumed that the book value could be realized upon the liquidation of the corporation, there was no indication that it was to be liquidated. Moreover, he would also realize that “minority stock interests in a ‘closed’ corporation are usually worth much less than the proportionate share of the assets to which they attach.” Cravens v. Welch, 10 Fed. Supp. 94. In our opinion, the factor which he would consider as the most important would be what the stock would earn. See Borg v. International Silver Co., 11 Fed. (2d) 147.

The evidence discloses that the company had a poor earnings record. In 1932 it operated at a loss of $165,404, and its total net loss for the period 1926 to 1932 (including the profit and loss of its selling agent prior to January 1, 1932, the effective date of the merger) was $59,683, or a loss of $5.77 per share. In March 1933, after the bank holiday, its business increased; and on August 3,1933, it could reasonably have been anticipated that it would realize, and it did realize, a substantial profit for the year. The testimony of petitioner’s witnesses convinces us, however, that the increase in business and profits following the bank holiday in 1933 was largely due to fear of a violent sudden inflation, and to the rise in the prices of raw materials when the country went off the gold standard. It therefore was not a true indication of what might be expected in the future.

The cash dividend record of the company and its subsidiary combined for the period 1926 to 1932, inclusive, was $143,250, or only about $2 per share per annum; but even this rate was not justified by the earnings of the seven year period, in view of the net loss referred to above. The company’s surplus account, which had been impaired by the losses of the business, was maintained by the transfer from its depreciation reserve of $138,870 in 1926, $117,348 in 1928, and $350,000 in 1932. At the end of the year 1932 the company’s current assets amounted to $587,792 and its current liabilities, which consisted almost entirely of notes payable to banks, amounted to $437,205.

The witnesses who expressed opinions as to the value of the stock on the basic date testified that they had considered all of the facts to which reference has just been made. They concluded that the value was between $15 and $25 per share. This estimate seems to us to be entirely too low. But the value placed upon it by the Commissioner in his determination is much too high. Our duty— difficult as it is — is to determine a fair market value. We have tried to do so and have determined it to be $45 per share. This figure happens to be the same as that used by the petitioner when she filed the estate return, before any controversy had arisen. We accept it, not because of that fact, but because we believe it to be about what a buyer, willing, but not compelled to buy, would pay and a seller, willing, but not compelled to sell, would accept, both having reasonable knoweldge of all the facts.

We compute the net estate as follows:

Gross estate returned_$50, 680.00 Add:
(a) Property transferred to the trust, no controversy as to value- 3,142.37
(b) Value of 3,613 shares of stock at $45 per share_ 162, 585. 00
(c) Proceeds of life insurance- 118,255.44
Gross estate- 334,662.81
Deductions (1926 Act)_ 329,131.92
Net estate (1926 Act)_ 5,530.89
Net estate (1932 A'ct)_ 55,530.89

Deficiency shall be recomputed in accordance with the views herein expressed and,

Decision will be entered under Bule 50.

       Tlie value oí the gross estate of tlie decedent shall be determined by including the value of the time of his death of all property, real or personal, tangible or intangible, wherever situated * * *
      « *««***
      “(e) 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, including a transfer under which the transferor has retained for his life or any period not ending before Ms death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.” 46 Stat. 1516.

       Sue. 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—
      * ******

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

       Art. 26. Insurance in favor of the estate. — The provisions requiring the inclusion in the gross estate of all insurance receivable by the executor, without any exemption, applies to * * * all insurance which is in fact receivable by, or for the benefit of, the estate. * * *


source: Caselaw Access Project

author: Black :

license: Public Domain

text:
    F. H. E. Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92960.
    Promulgated January 19, 1940.

      Ham/ G. Weehs, Esq., for the petitioner.

      James H. Yeatman, Esq., and M. L. B. Wade, Esq., for the respondent.
   OPINION.

Black :

Issue 1. — We think this issue must be decided for petitioner in so far as the $10,184.04, received by petitioner during the taxable year from the Anderson lease oil payment is concerned. In consideration of petitioner’s drilling an oil well for the owners of the Anderson lease under a turnkey contract, petitioner was to receive $15,500 out of a certain percentage of the oil to be produced from the lease. No assignment or other conveyance was made to petitioner of the fractional oil interests out of which petitioner was to receive its $15,500. This oil payment contract appears to be in all respects the same as were the Sonbar Corporation and Bussa Co. oil payments in Cook Drilling Co., 38 B. T. A. 291. We held in that case as to those two oil payments, as follows:

With respect to petitioner’s income from oil payments under its drilling contracts with the Sonbar Corporation and the Bussa Co., respectively, such contention can not be sustained. The statutory allowance for depletion is predicated upon the receipt of gross income from the operation of oil and gas wells by one who has a capital investment in the oil and gas in place and may not be allowed to one who has no such capital investment but only an income derived from production, through a contractual relation or personal covenant with the owner of the mineral deposit. Helvering v. Bankline Oil Co., 303 U. S. 362; Helvering v. O’Donnell, 303 U. S. 370; Helvering v. Elbe Oil Land Development Co., 303 U. S. 372.

If in the instant case we had the question before us as to whether petitioner was entitled to a deduction for depletion on the $10,184.04 payment received on the Anderson lease oil payment, we would have to answer in the negative on authority of the Cook Drilling Co. case, supra.

As to this Anderson oil payment, petitioner did not acquire a capital asset and had no capital investment therein. What petitioner did do was to expend $8,670.98 in drilling the well for others on the Anderson lease in the course of its business as oil well driller, and it is entitled to have these expenses deducted as ordinary and necessary business expenses and should return as a part of its gross income all receipts during the taxable year from the Anderson oil payment. Cf. Edwards Drilling Co., 35 B. T. A. 341; affd., 95 Fed. (2d) 719. As shown in our findings of fact, petitioner received during the taxable year $10,-184.04 from the Anderson oil payment. By including this $10,184.04 in petitioner’s gross income and allowing as a deduction from gross income $8,670.98 expended in drilling the well, as ordinary and necessary business expenses, the same result is reached as petitioner reached in its income tax return in the treatment of this particular item. However, we wish to make it clear that the result is not to be reached by treating the Anderson oil payment as a capital asset, but is reached by including in gross income the receipts in the taxable year from the oil payment and the allowance of proper deductions for ordinary and necessary business expenses.

The situation is different as to the $11,879.83 which petitioner received on the Fox lease oil payments. As to these oil payments petitioner received a clear assignment of one-half of seven-eighths of the first oil, gas, and casinghead gas produced, saved, and marketed from the well to be so drilled by petitioner. Petitioner thereby became the owner of an economic interest in the oil to be produced and was entitled to recover its cost not by way of deduction of the expenses of drilling, but by way of depletion, and if depletion exceeds cost, nevertheless taxpayer is entitled to the depletion deductions. Cf. Thomas v. Perkins, 301 U. S. 655. These oil payments from the Fox lease were in all essential respects the same as we had before us in Willis R. Dearing, 36 B. T. A. 843; affd., 102 Fed. (2d) 91.

The court (C. C. A., 5th Cir.), in affirming our decision in the Dearing case, laid down the rule which it seems to us governs in these cases, where the owner of an oil payment has either reserved an interest in oil to be produced from a lease which he owns or has acquired an interest in oil in place by a valid assignment from the owner of a lease. The court said:

Tlie partnership thereby acquired a property which was salable and we have no doubt that should it sell that property it could deduct the cost of it in ascertaining- gain, as the taxpayer wishes to do. But the production of oil under the contract is not a sale of the partnership’s interest in the oil in place, but is an enjoyment of that interest. Its interest in the oil reserve is not thereby sold, but only depleted. Neither of them can deduct cost in dealing with the- income so received, but each may reduce his income 27%% on account of the depletion of his capital investment. [Citing cases.]

We should state here that not only is a taxpayer in such a case entitled, as the court says, to percentage depletion of 27% percent, but if depletion based on cost will yield a larger deduction to the taxpayer than percentage depletion, then petitioner is entitled to that instead of percentage depletion.

It seems perfectly clear that in the instant case depletion based on cost will give petitioner a larger deduction than percentage depletion. Percentage depletion on $65,500 to be received under the Fox oil payments would only yield $17,912.50, whereas petitioner’s cost of these payments was $28,426.11.

Petitioner is of course entitled to have its entire cost returned to it by way of depletion, and if production should cease before petitioner finally recovers its entire cost, then, in the year when it becomes certain that it will not recover its entire cost by way of depletion, petitioner will be entitled to take a loss of the remainder of its investment. Cf. Columbia, Oil & Gas Co., 41 B. T. A. 38.

Apparently depletion based on cost in the taxable year will yield petitioner substantially the same deduction as respondent has given petitioner under the heading “Cost of payment applicable to year.” He has determined $5,002.81 to be the “Cost of payment applicable to .year” of the Fox oil lease payments and has excluded that amount from petitioner’s gross income. But whether depletion based on cost yields petitioner a deduction of $5,002.81 or some other figure, whatever figure is correct should he used in allowing petitioner depletion on the $11,879.83 oil payments received from the Fox leases during the taxable year.

Issue 2. — The respondent must be sustained as to this issue under authority of the Supreme Court’s recent decisions in Helvering v. Wilshire Oil Co., 308 U. S. 90, and F. H. E. Oil Co. v. Helvering, 308 U. S. 104. There was no issue as to the facts on this issue, therefore, we made no finding of fact upon it. This issue does not concern the income from the oil payments which we have just been discussing, but concerns depletion deductions from income which petitioner received during the taxable year from other oil properties.

Decision will he entered u/nder Rule 50.


author: ARNOLD:

text:
    Briggs-Darby Construction Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Briggs-Killian Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Briggs-Spence Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. M. Thornton, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90594, 90595, 90596, 90597.
    Promulgated January 19, 1940.

      Robert L. Son-field, Esq., Ira S. Taylor, Esq., and Alwin Adam, O. P. A., for the petitioners.

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

ARNOLD:

In these proceedings R. W. Briggs & Co. exchanged certain depreciable assets for all the capital stock of each of the petitioners, pursuant to certain contracts with four of its superintendents. The depreciable assets had been valued by the contracting parties prior to their exchange for capital stock as having a value in excess of their depreciated value upon the books of R. W. Briggs & Co. The petitioners deducted depreciation based upon this increased valuation. This deduction respondent denied, but permitted a deduction for depreciation upon the same basis as such assets had in the hands of the transferor. The respondent in his deficiency notices justifies his action under section. 113 (a) (7) of the Revenue Acts of 1932 and 1934. In his brief he asserts that his action is supported in any event by sections 113 (a) (8) and 112 (b) (5) of said acts.

Section 113 (a) (7) provides the basis for determining gain or loss, or depreciation, where property is acquired by a corporation “in connection with a reorganization.” Section 113 (a) (8) provides the basis where stock is issued “in connection with a transaction described in section 112 (b) (5).” The latter section prohibits the recognition of gain or “if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation.” This prohibition likewise applies to the recognition of a new depreciable basis. Sec. 114 (a), Eevenue Acts of 1932 and 1934.

Section 113 (a) (7) applies to acquisitions of property in connection with a reorganization. Its application here depends upon whether a reorganization occurred, since in any event “an interest or control in such property of 50 per centum, or more remained” in R. W. Briggs & Co. A reorganization means, inter alia, “a transfer by a corporation of all or part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred.” Sec. 112 (g) (1) (C), Revenue Act of 1934; sec. 112 (i) (1) (B), Revenue Act of 1932. “Control,” as used in section 112 of each act, “means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.”

The bases for depreciation, therefore, depend upon whether immediately after the transfers R. W. Briggs & Co. had the “ownership of at least 80 per centum” of the stock of each petitioner. Under the stipulated facts R. W. Briggs & Co. owned 55 percent of the stock in any event, and it owned 100 percent of the stock unless the contracts transferred 45 percent thereof to the superintendents. It is stipulated that all the stock of each petitioner was issued to R. W. Briggs & Co. and that it was the owner of record on the books of petitioners. To establish new bases for their depreciable assets these petitioners must show that, despite the record ownership of R. W. Briggs & Co., 45 percent of the stock was owned by the superintendents immediately after the transfer of the assets for stock. This, the petitioners have failed to do.

In their broader aspects the Darby, Killian, Spence, and Thornton contracts were employment contracts, coupled with the right to purchase. They provide for small salaries and 45 percent of the operating profits in consideration for services as superintendents of construction. R. W. Briggs & Co., however, required the superintendents to use their portion of the profits in the acquisition of a 45 percent interest in the several corporations. The Killian, Spence, and Thornton contracts contain specific language relating to the purchase of stock by these superintendents from R. W. Briggs & Co. More particularly, their contracts were contracts to purchase, and their ability to purchase was insured by the right to receive 45 percent of the profits from the construction jobs as compensation for their services. We find no provisions in the contracts showing an intention, nor do we find any acts by the parties manifesting an intention, that Killian, Spence, and Thornton -were to become owners of 45 percent of the stock of the respective petitioners, either upon the execution of the contracts, the organization of the petitioners, or the exchange of the assets for the stock. Our analysis of the contracts convinces ns that the parties intended that ownership of the stock should remain in R. W. Briggs & Co. until the stock was paid for and transferred.

The Darby contract differs from the other contracts in that Darby was to and did execute notes for “his pro rata share” of the capital stock of Briggs-Darby Construction Co. If it can be said that such notes were received in 'payment of his stock, he would be the equitable owner thereof even though the stock stood in the name of R. W. Briggs & Co. on the petitioner’s books. Paragraph 3 of the Darby contract provides that Darby’s notes should be “secured by the transfer and deposit of * * * the capital stock in the company owned by” Darby, “the same to be held as collateral.” This language indicates that the stock would be issued to Darby and he would transfer it to and deposit it with R. W. Briggs & Co. as collateral security for his notes.

If the parties intended that Darby should become the owner of the stock at the time the contract was executed, they failed to carry out their intention, because the stipulated facts show that all the stock of Briggs-Darby Construction Co. was issued to R. W. Briggs & Co. The stock certificate record shows that capital stock was first issued to the incorporators on March 24, 1931, and that thereafter, and on the same date, certificate No. 5 was issued to R. W. Briggs & Co. for the full 3,300 shares. This certificate was surrendered by R. W. Briggs & Co. on February 17,1932, at which time the certificate was canceled and shares were issued to Darby for the first time. Had the notes executed by Darby been intended as payment for his stock, the 1,485 shares would have been issued to him then and transferred by him to R. W. Briggs & Co. to hold as collateral as the contract provided. This was not done, however, and the failure to follow the contract procedure convinces us that the notes were not given, or intended to be given, or received, as payment, but as evidence only of the amount of profits to be applied in the purchase of the stock.

The things done under the Darby contract are a strong indication of what the parties intended and further strengthen our opinion that the notes were neither given nor received in payment for the stock. If we are to consider the notes as the equivalent of cash, there should have been some evidence adduced that the notes were so accepted. In the absence of evidence of such understanding or intention, the notes can not be so considered. Stiver v. Commissioner, 90 Fed. (2d) 505, 508, and cases there cited. See also Williston on Contracts, vol. 3, sec. 1922, p. 3265; Guilford v. Mulkin, 85 Hun, 489; 33 N. Y. S. 134; Schlemmer v. United States, 94 Fed. (2d) 77; Dudley T. Humphrey, 32 B. T. A. 280.

Since our analysis of the contracts indicates that R. W. Briggs & Co. had the ownership of 100 percent of the voting stock of each petitioner immediately after the exchanges, the transactions could come within either section 113 (a) (7) or section 113 (a) (8). That is, the transfers as to these petitioners could have been in connection with a reorganization under section 113 (a) (7), or in connection with a transaction described under 112 (b) (5) as provided in section 113 (a) (8). We have considered the issue under section 113 (a) (8), but the application of either section would fix the basis for depreciation as the same as the assets had in the hands of the transferor, American Compress & Warehouse Co. v. Bender, 70 Fed. (2d) 655: certiorari denied, 293 U. S. 607.

We have considered the authorities cited by petitioners, including Groman v. Commissioner, 302 U. S. 82; Helvering v. Bashford, 302 U. S. 454; Bassick v. Commissioner, 85 Fed. (2d) 8; certiorari denied, 299 U. S. 592; Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513, and others, b'ut find them to be distinguishable upon their facts. For the reasons hereinabove set forth we hold that petitioners are not entitled to a “stepped up basis” for depreciation.

Petitioners’ alternative contention that the excess profit tax is invalid has been decided adversely to them in A. J. Crowhurst & Sons, Inc., 38 B. T. A. 1072; W. & K. Holding Corporation, 38 B. T. A. 830; Allied Agents, Inc. v. United States, 26 Fed. Supp. 98; and Del Mar Addition, 40 B. T. A. 833.

Decision will be entered under Rule 50.


author: Tyson :

text:
    Frederic H. Frazier, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91412.
    Promulgated January 19, 1940.

      Elden McFarland, Esq., ElT/wood W. Kemp, Jr., Esq., and William H. West, Jr., Esq., for the petitioner.

      Beniamin M. Brodsky, Esq., for the respondent.
   OPINION.

Tyson :

This proceeding involves income tax deficiencies determined by the respondent in the amounts of $1,860.73 and $3,114.02 for the years 1934 and 1935, respectively.

The only issue is whether the income of a trust for the respective periods of June 28 to December 31, 1934, and the calendar year 1935, is taxable to petitioner, the settlor of the trust.

The petitioner, an individual, is a resident of New York, New York. During the taxable years he was chairman of the board of directors of the General Baking Co., was a large stockholder in that company, and was the recipient of a very substantial income. During that period and also prior and subsequent thereto, Louise DeMocher Frazier, also known as Louise K. Frazier, was the wife of petitioner. The petitioner’s son, Frederic W. Frazier, died on April 24,1933.

There will be set forth here only the pertinent provisions of an original written declaration of trust executed by petitioner in New York on June 17, 1932, as amended by petitioner’s written supplemental declaration executed in New York on June 28, 1934, by which latter instrument the petitioner relinquished the right to revoke the trust which he had retained in the original declaration.

The trust instruments, as operative after June 28, 1934, created an irrevocable trust and provide: that the petitioner, as settlor, “declares that he holds” 20,000 shares of General Baking Co. common stock, evidenced by designated certificates, “as Trustee, and * * * acknowledges the receipt of said property * * * as such Trustee”; that the trustee is to hold, manage, invest, and reinvest such property in trust “during the life of the Settlor,” and to “pay the net income thereof to Louise DeMocher Frazier”; that the trust shall terminate upon the death of petitioner’s wife, or upon the death of petitioner, whichever event first occurs; and that the “principal” of the trust upon its termination shall be paid over to petitioner if living or to his estate if dead.

The trust instruments give the trustee broad powers, in his uncontrolled discretion and without liability except for willful misconduct, to manage, sell, exchange, invest, and reinvest the trust property; to vote all stock held by the trust; to consent to any reorganization and exchange trust property thereunder; and to hold trust property, subject to registration, in his name or in his name as trustee or in the name of his nominee, whichever he may deem most advantageous for the management of the trust, provided that such registration shall neither increase nor decrease the liability of the trustee.

The trust instrument states that the 20,000 shares of stock referred to therein are pledged with certain banks as collateral for certain loans theretofore made to petitioner and provides that the trustee shall not be obligated to pay such loans or to relieve such securities from their liability as collateral.

The trust instrument provides that the trust shall be governed by the laws of New York and, further, that the trustee accepts the trust.

The above mentioned original and supplementary declarations contained the full terms of the trust and there was no other 'written or oral understanding with reference thereto between the petitioner and his wife, who was informed of the execution of the trust instrument. The creation of the trust was in no wise a settlement of property rights as between the petitioner and his wife. The declarations of trust did not require the petitioner’s wife to expend any portion of the trust income for her support or maintenance. The petitioner’s purpose in creating the trust was to provide for the security of Ms family, because of the uncertainty prevailing in industrial and financial conditions in 1932.

The stock certificates refei’red to in the trust instrument have remained registered in the petitioner’s name and have also remained on deposit with certain banks as collateral security for loans made to petitioner personally prior to 1932, but those banks were notified by petitioner as to the creation of the trust. Under the petitioner’s arrangement with the banks as to such collateral, the latter were not entitled to the dividends on such stock. The petitioner’s wife was not an endorser or guarantor on those loans, nor was she in any way interested in them. Subsequent to the creation of the trust the petitioner, individually, has paid the interest on the loans secured by the stocks referred to in the trust instrument and has also made payments on the principal of the loans. He has never borrowed any money from his wife for the purpose of paying interest or principal on the loans and he has never borrowed any money from the trust for any purpose.

The petitioner notified the General Baking Co. of the creation of the trust and, thereafter, the dividends on the 20,000 shares embraced in tlie trust have been paid to petitioner as trustee, and'the dividends on other shares of the same kind of stock owned by petitioner, individually, have been paid to him individually.

The petitioner, as trustee, kept separate accounts of the receipts and disbursements for the trust. He opened a bank account with the Bankers Trust Co. in his name as trustee, deposited therein all receipts from the trust property, and never commingled such receipts with his individual funds. He has disbursed such receipts by checks made payable to his wife and signed by himself as trustee. Petitioner’s wife deposited such checks in her personal bank account with the National City Bank and had the unfettered use of such funds. She did not use any portion of the funds to pay premiums on policies of insurance on petitioner’s life.

During the taxable years and also prior and subsequent thereto the petitioner received a salary of not less than $50,000 per annum. During 1934 and 1935 the petitioner maintained a home for himself and his wife and he personally expended approximately $20,000 in each of those years for household expenses.

During the year 1934 dividends in the amount of $13,000 were paid on the 20,000 shares of stock referred to in the trust instrument, of which amount $5,000 was paid prior to June 28, 1934, and $8,000 was paid subsequent to that date. During the year 1935 dividends in the amount of $12,000 were paid on such stock.

The $5,000 dividends paid prior to June 28, 1934, were paid at a time the trust was revocable, were reported on petitioner’s individual income tax return for 1934, and no question is raised here with respect thereto. The dividends of $8,000 paid between June 28,1934, when the trust by amendment became irrevocable, and December 31, 1934, and the dividends of $12,000 paid during 1935 were reported on the fiduciary returns filed by petitioner for each of those years respectively and, also, were reported on the individual income tax returns filed by petitioner’s wife for each of those years respectively. All income tax returns were filed with the collector of internal revenue in New York.

In determining the deficiencies in controversy, the respondent has increased the petitioner’s gross income as reported for the years 1934 and 1935 by the amounts of $1,999.80 and $12,000, respectively, on account of the last above mentioned dividends.

The petitioner contends that the income in question was that of a valid irrevocable trust; that the net income of such trust was not only distributable to, but was also actually distributed to, petitioner’s wife for her unfettered use and that petitioner is not subject to tax thereon under any of the provisions of the applicable revenue act.

The respondent determined, and now contends, that the income in question is taxable to petitioner under the provisions of sections 166 and 167 of the Revenue Act of 1934, and he further contends that petitioner retained such control over and interest in the securities referred to in the trust instrument that he remained, in substance, the owner thereof and is consequently subject to tax on the income therefrom under the provisions of section 22 (a) of the Revenue Act of 1934.

Since the trust was irrevocable and not subject to any alteration or modification after June 28, 1934, and, further, since no part of the income from the trust corpus was or could be either distributed to, accumulated, or held for future distribution to petitioner, the settlor, this case does not fall within the express provisions of either section 166 or section 167, supra, notwithstanding the petitioner’s reversionary interest in the corpus of the trust upon its termination by the terms of the trust instrument. Phebe Warren McKean Downs, 36 B. T. A. 1129, and Jay C. Hormel, 39 B. T. A. 244, and the authorities cited therein.

Upon the facts herein, and upon authority of the decisions in Carleton H. Palmer, 40 B. T. A. 1002; and Claude R. Branch, 40 B. T. A. 1044, and the cases cited therein, we hold that during the period June 28 to December 31,1934, and all of the year 1935, the petitioner, as trustee, was validly and irrevocably holding the legal title to the 20,000 shares of stock in question for the use and benefit of his wife; that the powers given to petitioner, as trustee, relate only to the management of the trust corpus and do not invest in the petitioner, as settlor, any individual control over the economic benefits or enjoyment of the trust property; that a completed transfer in trust had been consummated prior to the periods here in question; that petitioner 'was not, in substance, the individual owner of the stock in question; and that he was not subject to tax on the income therefrom under section 22 (a), supra.

The only substantial difference between the facts in the cases cited in next preceding paragraph and those here, is that in the cited cases the settlors covenanted in the trust instruments to indemnify and hold harmless the trust estate against any loss occasioned by resort to the trust corpus which had been theretofore pledged as collateral for the payment of settlor’s personal indebtedness, while here there was no such covenant. We do not think that this case is brought within the purview of section 166, supra, because of the possibility that the trust corpus might be resorted to through sale thereof by the pledgee to pay settlor’s personal indebtedness and thus to discharge his personal obligation, without a correlative obligation on his part to indemnify and hold harmless the trust estate in such an event. Cf. Henry A. B. Dunning, 36 B. T. A. 1222, 1224. Should such a sale be made and the proceeds thereof be used in payment of the settlor’s obligations to the banks, it would not be through the exercise of any power vested by the trust instrument in the settlor, or anyone else, to revest in the settlor the corpus of the trust, or any part thereof, but instead would be made under an entirely separate and preexisting agreement executed between the bank with which the corpus was deposited as collateral and the petitioner individually, whose personal indebtedness was thereby secured.

“Every kind of vested right which the law recognizes as valuable may be transferred in trust.” United States Trust Co. v. Commissioner, 296 U. S. 481. What the petitioner here transferred in trust was all of his vested right in 20,000 shares of General Baking Co. common stock, subject to a then existing lien thereon. That this was a substantially valuable vested right is demonstrated by the fact that the stock produced dividends in the respective amounts of $13,000 and $12,000 for the years 1934 and 1935, and these dividends were actually paid to the beneficiary of the trust in accordance with the provisions of the trust instrument.

The respondent erred in his determination of the deficiencies in question.

Decision will be entered for the petitioner.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.
      SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall bo included in computing the net income of the grantor.


author: Aeundell:

text:
    Union Telephone Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99820.
    Promulgated January 23, 1940.

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

Aeundell:

The deficiency notice on which this proceeding is based sets forth deficiencies and an overassessment as follows:

Counsel for the respondent has moved to dismiss in so far as the petition pertains to his determination of normal (income) tax and undistributed profits tax for 1936. He asserts that both taxes, being imposed by Title I of the Revenue Act of 1936, should be considered as income taxes, and when this is done the result of his computation is to show an overassessment and not a deficiency. The pertinent figures in the computation are as follows for 1936:

Deficiency in normal tax (sec. 13)-$8,979.19
Undistributed profits tax (sec. 14)- -
Total_ 3,979.19
Assessed:
Normal tax-$2,850.33
Undistributed profits tax- 1,148.38 3,998.71
Overassessmient. 19. 52

The normal tax on corporations is imposed by section 13 of the Revenue Act of 1936. The surtax on undistributed profits is imposed by section 14. Both sections are part of “Title I — Income Tax.” Section 272 (a), which is also a part of Title I, grants authority for sending notice of deficiency if “the Commissioner determines that there is a deficiency in respect of the tax imposed by this title * * (Italics added.)

From the structure of the statute it appears that the normal tax and the undistributed profits tax are to he considered as hut parts of the income tax imposed by Title I in so far as the determination of deficiencies or overassessments is concerned. Under this view the respondent has determined an overassessment, and not a deficiency, in income tax for 1936. We have no jurisdiction of overassessments. Cornelius Cotton Mills, 4 B. T. A. 255. We are therefore of the opinion that the respondent’s motion is well founded and should be granted.

This case is distinguishable from Will County Title Co., 38 B. T. A. 1396. In that case the respondent determined a deficiency in corporate income tax of $529.25 and an overassessment of excess profits tax of $745.04. We dismissed as to the overassessment of excess profits tax, but held that redetermination of the income tax deficiency was within our jurisdiction. We said:

The fact that the Commissioner’s determinations concerning the two taxes result in a net overassessment does not oust us of Jurisdiction over the petition for redetermination of the income tax deficiency. The two taxes are imposed by entirely separate provisions of the statute. The combination of the two determinations in one mathematical calculation does not change the fact that there has been a determination of a deficiency in, the income tax, and a proper petition for redetermination thereof is within our jurisdiction.

The income tax in the cited case was imposed by section 13 of Title I of the Revenue Act of 1934, and the excess profits tax was imposed by section 702 (a), which is a part of Title Y. In the present case, as pointed out above, both taxes are imposed by provisions of a single title.

Neither the motion herein nor this opinion relates to taxes for years other than 1936, nor to the excess profits tax deficiency determined for 1936.

Order- of dismissed will be entered m so far as the proceeding pertains to normal toss and undistributed profits tax for 1936.


author: Leech :

text:
    Charles J. Bradley, et al., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 95576-95579, 95589.
    Promulgated January 23, 1940.

      John G. Turnbull, Esq., for the petitioners.

      Sidney U. Hihen, Esq., fox* the respondent.

       Proceedings of the following petitioners are consolidated herewith: William L. Wilson, Deceased, by Mary C. Wilson, Executrix of his Estate; John P. Boyle, Deceased, by Marguerite M. Boyle, Administratrix of his Estate; Frank J. Bradley; and Bradwill Corporation.

   OPINION.

Leech :

The first issue is whether the losses sustained by the partnership and the corporation on the sale of non-Government securities may be offset against gains realized on sales of Government securities. It is stipulated that the partnership and the corporation were dealers in Government securities, but were merely traders and not dealers in non-Government securities.

Section 23 (r) (1) of the Eevenue Act of 1932 reads as follows:

(1) Bosses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges * * *.

Subdivision (3) of section 23 (r) states: “This subsection shall not apply to a dealer in securities * *

Stocks and bonds are defined in subsection (t) as follows:

As used in subsections (r) and (s), the term “stocks and bonds” means (1) shares of stock in any corporation, or (2) rights to subscribe for or to receive such shares, or (3) bonds, debentures, notes, or certificates or other evidences of indebtedness, issued by any corporation (other than a government or political subdivision thereof) * * *.

The meaning thus expressed parenthetically by Congress in subsection (t) is clear and unambiguous. No interpretation or construction from legislative history or otherwise is therefore possible. United States v. Graham, 110 U. S. 219; United States v. Alger, 152 U. S. 384; Houghton v. Payne, 194 U. S. 88; Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. It is plain that such parenthetical expression is fatal to petitioners’ contention. The fact that their only gains arose from sales of Government securities leaves no gains, existing, of a type against which their losses may be offset. We hold that petitioners may not offset their losses against gains from sales of Government securities.

The second issue is whether the partnership is entitled to deduct the initiation fee, which it paid to the New York Stock Exchange upon the transfer of the membership, as a business expense. (Eev-enue Act of 1932, sec. 23 (a).) Eespondent disallowed the deduction for the reason, as stated in the deficiency notice, that “the amount paid * * * is a capital expenditure and as such is not deductible.” If this is so, of course, the item is not deductible as an expense.

Petitioners have the burden of establishing the error of which they complain. Particularly is this so here, where the evidence, if there be any, is within their control. See Chicago Railway Equipment Co. v. Commissioner, 39 Fed. (2d) 378; reversed on another ground, 282 U. S. 295; Mammoth Oil Co. v. United States, 275 U. S. 13; Wigmore on Evidence, § 285.

Plere, petitioners have not shown whether they merely bought the use of the membership for a limited period or it was a capital asset and transferred as such to the successor partnership. And, assuming that it was the former, there is nothing in the record indicating that the value of the right to use the membership was totally exhausted on August 30,1933, or continued to be valuable to tbe successor firm— thus rendering impossible any determination of the taxable year or years to •which the expense, even if it were such, is allocable. See Duesenberg, Inc. of Delaware, 31 B. T. A. 922; affd., 84 Fed. (2d) 921. No error in denying the deduction of this item having been established, respondent is affirmed on this issue.

Since the parties have agreed on certain items placed in issue by the pleadings,

Decisions will be entered under Buie 50.


author: Hill:

text:
    Girard Trust Company and W. Nelson L. West, Executors of the Estate of Ida Simpson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87978.
    Promulgated January 24, 1940.

      E. F. Oolladay, Esq., D. 0. Golladay, Esq., and Wilton H. Wallace, Esq., for the petitioners.

      William A. Schmitt, Esq., for the respondent.
   OPINION.

Hill:

Respondent determined a deficiency in the Federal estate tax liability of petitioners in the amount of $17,847.78. The issue is whether or not respondent erred in disallowing as a deduction from the value of the gross estate bequests in the aggregate sum of $131,-507.72 to corporations or other organizations specified in section 303 (a) (3) of the Revenue Act of 1926, which disallowance was based upon respondent’s holding that the Board of Temperance, Prohibition and Public Morals of the Methodist Episcopal Church was not a corporation organized and operated exclusively for religious, educational, or other purposes stated in the cited statute.

Petitioners are executors of the estate of Ida Simpson, deceased, late of the city of Philadelphia, Pennsylvania, who died testate October 29, 1933. In her last will and testament decedent, after making certain special bequests, gave the remainder of her estate to trustees for the purposes and subject to the powers and limitations therein stated. Decedent’s will provided in paragraph III as follows:

A. Should my beloved sister, Sarah Elizabeth Simpson, survive me, I direct that the entire net income from the said residuary trust shall be paid to her during her life.
B. Upon her death, or upon my death, should I survive her, the principal shall be paid over by my Trustees to the following charitable institutions in the following amounts and proportions, provided however, that should my sister, Sarah Elizabeth Simpson, survive me, I direct that she shall have a limited power of appointment to readjust the amounts and/or proportions passing to each charity in such manner as she, by her last Will and Testament, may deem advisable, and subject to her said power I direct that payments shall be made as follows:

The special bequests then set forth in decedent’s will included the following:

Board of Temperance, Prohibition and Public Morals of the Methodist Episcopal Church_$50,000
Simpson Memorial Church at Long Branch, New Jersey- 1,000
Methodist Episcopal Hospital of Philadelphia- 25,000
Arch Street Methodist Episcopal Church, Philadelphia- 5,000
Church of the Covenant, Philadelphia_ 5, 000
Emma L. Simpson Memorial Methodist Episcopal Church, Paoli, Pennsylvania- 5, 000
St. George’s Methodist Episcopal Church, Philadelphia- 5,000
Pennington Seminary, Pennington, New Jersey- 5,000
Monte Mario College, Rome, Italy- 5,000
Women’s Foreign Missionary Society of the Philadelphia Conference of the Methodist Episcopal Church- 5,000
Women’s Home Missionary Society of the Philadelphia Conference of the Methodist Episcopal Church_ 5,000
Methodist Episcopal Orphanage in Philadelphia- 500
Methodist Episcopal Home for the Aged in Philadelphia- 500
$117,000

In' addition to the foregoing bequests decedent in her will gave $5,000 to the retired ministers’ fund or Board of Pensions and Belief of the Methodist Episcopal Church, which item does not appear to be involved in the present controversy and no further reference will be made thereto.

The residue of the trust estate decedent gave in equal portions to Simpson College, Indianola, Iowa, the Board of Temperance, Prohibition and Public Morals of the Methodist Episcopal Church, and American University, Washington, D. C. In the estate tax return a deduction was claimed in the amount of $131,507.72 on account of the foregoing bequests, thus valuing the residue of the estate at $14,507.72.

Bespondent denied the deduction for the reason that, as stated in the notice of deficiency, decedent’s sister was given a power of appointment to readjust the amount or proportion to be given to each organization, and one of such organizations, the Board of Temperance, Prohibition and Public Morals, did not come within the provisions of section 303 (a) (3), supra.

The bequests above mentioned, other than those involving the residue of the estate, have been paid in cash in the sums stated. The parties have stipulated that the residue of the estate will be paid at the termination of the instant proceeding. The parties have further stipulated that each institution above referred to, with the exception of the Board of Temperance, Prohibition and Public Morals of the Methodist Episcopal Church, qualifies under section 303 (a) (3), supra, as a religious, charitable or educational corporation.

Sarah Elizabeth Simpson, the surviving sister of petitioners’ decedent, was born in November 1853 and died February 29, 1936.

Section 303 (c) (3) of the 1926 Act, supra, was amended by section 406 of the Bevenue Act of 1934 by inserting after the word “individual” the following: “and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.” Petitioners argue that, since their decedent died in 1933 prior to enactment of the Bevenue Act of 1934, the quoted amendment to the 1926 Act has no application in this case. They contend, however, that irrespective of the holding on this point, the Board of Temperance, Prohibition and Public Morals of the Methodist Episcopal Church, hereinafter for convenience sometimes called Methodist Board or Board of Temperance, qualified under the statute so that the amount of any bequest in decedent’s will is deductible for purposes of estate tax. Bespondent says the amendment is merely a clarifying provision, interpretative of the earlier statute and intended to give legislative approval to a long continued administrative construction. See G. C. M. 19715, C. B. 1938-1, p. 499.

An extended discussion here is unnecessary. It is clear, we think, that any corporation, a substantial part of whose activities is participating in partisan politics or in carrying- on propaganda or otherwise attempting to influence legislation, does not come within any of the classes described in section 303 (a) (3), supra. Cf. Senate Finance Committee’s Report on the Revenue Bill of 1934, sec. 406. The same view has long been taken by the courts. In Slee v. Commissioner (C. C. A., 2d Cir., 1930), 42 Fed. (2d) 184, which arose under the Revenue Acts of 1924 and 1926 prior to the amendment of the latter, the court said:

Political agitation as such is outside the statute, however innocent the aim, though it adds nothing to dub it “propaganda”, a polemical word used to decry the publicity of the other side. Controversies of that sort must be conducted without public subvention; the Treasury stands aside from them. * * * it is not in our judgment one of those purposes which Congress meant to assist.

To make the bequests to the Methodist Board here in controversy allowable as a deduction, it must appear that the Board not only was organized but also was operated exclusively for one or more of the purposes specified in the statute. Cf. George O. May, 1 B. T. A. 1220; Herbert E. Fales, 9 B. T. A. 828; Joseph M. Price, 12 B. T. A. 1186. And we may add to this statement that if it appears that a substantial part of the Methodist Board’s activities was carrying on propaganda or otherwise attempting to influence legislation, it was not organized and operated exclusively for any of the statutory purposes. Other qualifications provided in the statute are not in question here. What then does the record disclose concerning the purposes of the Methodist Board’s organization and the manner of its operations?

The Board of Temperance was organized pursuant to authorization of the general conference of the Methodist Episcopal Church meeting in Baltimore, Maryland, in 1908. It was subsequently incorporated on April 27, 1917, under the laws of the District of Columbia. The purposes for which it was organized were stated in its certificates of incorporation as follows;

To promote the cause of temperance by every legitimate means; to prevent the improper use of drugs and narcotics; to render aid to such causes as in the judgment of the board of trustees, tend to advance the public wélfare.

The general conference is the law-making body of the Methodist Episcopal Church, and also its “supreme court.” The Board of Temperance exists under and pursuant to the “Discipline” of the church. The general conference meets every four years, one of such meetings having been held in 1932. Paragraph 478 of the “Discipline” of the Methodist Episcopal Church of 1932, under which the Board of Temperance was operating at the date of decedent’s death, provided that the board should “work under the following Constitution”, in article I of which it was stated that:

The object of this Board is to promote voluntary total abstinence from all iutoxicants and narcotics, to promote observance and enforcement of all constitutional provisions and statutory enactments that suppress the liquor traffic and the traffic in narcotic drugs, to promote the speedy enactment of such legislation throughout the world.

Article IY of the board’s constitution provided that it should be the duty of the Board of Managers, among other things, to represent the church officially in every wise movement for the promotion of total abstinence and the securing of legal prohibition of the liquor traffic; to devise such plans and make such advices as would “enable the Church most successfully to compass the overthrow of that great foe of society, the legalized liquor traffic”; and to make such use of the money paid into its treasury as the work might demand.

The Board of Temperance issues a monthly publication called “The Voice”, which has a circulation of about 67,000 copies, largely among ministers, Sunday school superintendents and others engaged in religious work. The board issues another monthly called “The Clip Sheet”, with a circulation of about 7,000. It is sent largely to community and religious papers and to editors of other publications. The board also issues various pamphlets from time to time and has books published and distributed by the Methodist Book Concern, which is owned by the Methodist Episcopal Church.

The Methodist Board of Temperance actively participated in the presidential campaign of 1928, advocating the election of certain political party candidates for president and vice president and opposing the election of the candidates of another political party for the same offices. In the nineteenth annual report of the general secretary of the board at its annual meeting held in Washington, D. C., on December 4,1928, it was stated: “we had to use all the energy and the planning we were capable of in bringing about the election of” (certain candidates named therein for president and vice president).

The May 1936 issue of the Voice contained the following statement:

One of tile most deserving bills now before the House of Representatives is H. R. 9405 introduced by Mr. Dobbins and referred to the Committee on the Post Office and Post Roads * * * Letters in behalf of this bill will serve a most useful purpose.

The following excerpts are from an article by the executive secretary of the board, appearing in the January 1933 issue of the Voice:

Every dry voter who voted for the victorious party should now write or wire his new Congressman: “We voted for you, not for liquor. We want bread not bear, we wa.nt relief not repeal. We were voting for work and wages, not for brewers and bar-tenders.”
If we could have had Mr._head an independent movement early enough to get a swinging start this year, we would have had (he wets divided about equally in the two parties that betrayed us and we would have had a good fighting chance to win, for we would have concentrated the dry votes, easily in the majority, into one party and let the wets divide, * * *
Don’t any one get alarmed. This is not the advocacy of a third party. It advocates making a party that stands for civic righteousness, the restoration of prohibition, the punishment of the speculators who fleeced the American people of their savings and shipped them out of the country, and the rescuing of the poor who are the victims of the rich man’s greed, and the making of such a party number one, instead of third.
* :¡s * * $ $ $
We will organize to canvas our communities to see that both men and women register as a sacred duty. We will tell them that the election to office of a wet nullifier anywhere is the peril of moral reform and of all good government.
* * * * * * *
* * * Mr. Pickett (Research Secretary of the Board) attended the National Democratic convention and succeeded in getting a line on those who were betraying the people of the United States and their record and speeches and we will know the trustworthy from the untrustworthy leaders hereafter. * * *

Also in the January 1933 issue of the Voice, in an article by Pickett discussing proposed legislation by Congress relative to the sale of beer, is the following statement: “This Board was represented in the House hearings and has earnestly opposed the wet program.”

In the Voice of March 1933 appears the following:

Get in touch with your Congressman. If he is a holdover Congressman, commend him if he has been voting right; rebuke him if he has been voting wrong. Whatever you say, say with consideration and charity. Votes are not won by abuse.
Have your congregation pass a resolution and send it to your Congressman. Inspire every personal letter you can to representatives and senators. Let them realize the extent and power of prohibition sentiment. Let’s do it now.

The August 1933 issue of the Voice, discussing the question of repeal of the Prohibition Amendment, contains the following statements :

There is still plenty of time to win this fight, but are we going to do it? Where is the picturesque and inspiring character who will bring those lurking voters to the polls? * * *
* * * # * * *
* * * We urged a dry vote on legislators and Congressmen.

In the November 1933 issue of the Voice, in an article entitled “The Board of Temperance Reorganizes and Moves Forward,” appeal's the following :

The activities of our Board have largely been centered upon government and law but we must now make a new approach to the age-old problem of alcoholism.

The record contains much additional evidence, largely cumulative, which we deem it unnecessary to set forth in detail here. The foregoing is sufficient to demonstrate that a substantial part of the activities of the board, both prior, during, and subsequent to 1933, the year of decedent’s death, consisted of carrying on propaganda to influence legislation.

From this evidence we find that, at the time of the death of the decedent, Ida Simpson, the Board of Temperance, Prohibition and Public Morals of the Methodist Episcopal Church was not operated exclusively for religious, charitable, scientific, literary, or educational purposes within the meaning of section 303 (a) (3) of the Revenue Act of 1926.

The board advocated the enactment of laws to suppress the liquor traffic, and extensively carried on propaganda in opposition to the repeal of such legislation. However commendable its purposes may be regarded — and we here of course intimate no opinion in that connection, we think the board’s activities were such as clearly to prevent its classification as a corporation organized and operated exclusively for religious, charitable, or educational purposes. It is not contended that it comes within any other classification stated in the statute. That a large part, perhaps a major part, of the Methodist board’s activities were admittedly religious, charitable, or educational, does not help petitioners if, as we are impelled in the light of the evidence to hold, it was engaged to a substantial extent in other activities.

The activities of the Methodist Board in advocating the enactment, and opposing the repeal, of prohibition legislation were not exclusively educational, but were essentially within the recognized field of political advocacy; and such activities plainly were not mediate or ancillary to the board’s primary purpose; on the contrary, they constituted one of its primary and apparently most important purposes. Cf. Slee v. Commissioner, supra; Henriette T. Noyes, 31 B. T. A. 121, 123; Leubuscher v. Commissioner, 54 Fed. (2d) 998.

In John H. Watson, Jr., 27 B. T. A. 463, we held that the activities of an organization which made researches and investigations with respect to civic, social, and economic problems and as to the qualification of candidates for office, disseminated the results in bulletins sent to its members and in newspapers, and when considered desirable advocated the amendment of existing laws, went beyond the scope of education and entered the field of advocacy. See also James J. Forstall, 29 B. T. A. 428.

The Noyes case, supra, held that an association which was organized and operated for educational purposes but also participated in urging the appropriation of Government funds for particular purposes, the adoption or rejection of certain bills, including the adoption of a system of prohibition enforcement, was not within the statute exempting donations to it from tax.

In Slee v. Commissioner, supra, the court held that donations to a corporation organized, among other tilings, to enlist the support and cooperation of legislators in effecting the lawful repeal and amendment of state and Federal statutes dealing with the prevention of conception, were not deductible, saying that such associations “are indistinguishable from societies to promote or defeat prohibition, to adhere to the League of Nations, to increase the Navy, or any other of the many causes in which ardent persons engage.”

It is immaterial, we think, that the Board of Temperance involved here was organized by the Methodist Episcopal Church, which, it can not be doubted, is engaged in religious, charitable, or educational work directly and through subsidiary organizations. The question we are called upon to decide is whether or not its Board of Temperance was organized and operated exclusively for religious, charitable, or educational purposes. Under the evidence in the record before us we can reach no other conclusion than that the board’s purpose was not so exclusively restricted.

Respondent’s action in denying the deduction of bequests to the Methodist Board of Temperance is approved.

The remaining question involved in the issue raised by the parties is whether or not respondent erred in denying also so much of the total deduction as was claimed in the estate tax return for bequests made to institutions other than the Methodist Board of Temperance, all of which other institutions the parties have stipulated qualified under the statute as religious, charitable or educational organizations. All of such special bequests have been paid in the sums provided in the will of petitioners’ decedent, except the residuary trust estate, which is to be so paid upon termination of this proceeding.

Respondent denied the deduction for the reason that under the will of decedent her sister was given a limited power of appointment to “readjust” the amounts to be paid to the several named beneficiaries, and hence at decedent’s death it was not known what amounts, if any, would ultimately be received by the tax-exempt donees. In this respect, we think, respondent did not err.

Deductions must be determined as of the date of death, United States v. Provident Trust Co., 291 U. S. 272. It is immaterial, therefore, that decedent’s sister survived her some two years and four months, and died without exercising her power of appointment. The value of the net estate, which is the basis for computing the tax, must be determined in the light of the facts and circumstances existing at decedent’s death, and at that time it could not be known whether or to what extent decedent’s sister would exercise her limited power. “Tempting as it is to correct uncertain probabilities by tbe now certain facts”, it can not be done. Ithaca Trust Co. v. United States, 279 U. S. 151, 155.

Undoubtedy decedent’s sister, under the power given her, could in her will have “readjusted” the amounts of decedent’s bequests so as to give to each of the admittedly religious, charitable, or educational organizations only a nominal amount and the balance of the total bequests to the Methodist Board of Temperance. In this situation, we hold that there existed at decedent’s death no basis, ascertainable with reasonable certainty, for the computation of the value of any bequest deductible under the statute. Francis L. Robbins, Jr., Executor, 39 B. T. A. 599.

The deficiency determined by respondent is approved.

Reviewed by the Board.

Decision will be ente/red for the respondent.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined— (a) In the case of a resident, by deducting from the value of the gross estate—
      *******
      (3) The amount of all bequests, legacies, devises, or transfers, * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual * * *.


author: Steknhagen :

text:
    Percy M. Chandler, Petitioner, v. Commissioner of Internal Revenue, Respondent. Marie Langtry Chandler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93301, 93302.
    Promulgated January 24, 1940.

      Guilford S. Jameson, Esq., and Umiry A. Mulcahy, Esq., for the jietitioners.

      Zalman N. Diamond, Esq., for the respondent.
   OPINION.

Steknhagen :

The Commissioner determined that the 1934 and 1935 income of the trust created by the indenture of February 8, 1930, was taxable to Chandler under the Bevenue Act of 1934, section 166, and he now contends also that it was so taxable under sections 167 and 22 (a).

For this determination, the first reliance is upon article ninth, which provides for the transfer of all the trust property to the grantor and the termination of the trust if Chandler and his wife “shall be separated and cease to cohabit as man and wife for any cause whatsoever and regardless of whomsoever may be at fault.” This, it is argued, has the effect of a reservation of power to revest because the condition is wholly within the grantor’s control. It is said that by voluntarily separating from his wife, even temporarily, and notifying the trustee of the separation, the grantor may terminate the trust and reacquire the property. This is indeed a cynical view to adopt. It can not be said with any assurance that an attempt by the grantor so to terminate the trust by a factitious separation or ceasing of marital relations would withstand attack in an equity court. Such a power would stultify the remaining provisions, including the restrictions of the indenture, such as that requiring the preservation or substantial replacement of the farm and the apartment. Such an interpretation of the instrument should be supported by evidence of some circumstance to compel it or at least to suggest that the article was more than a provision against a conceivable but remote contingency. We reject it.

It is then argued by the Commissioner that the broad control reserved under article seventh is equivalent to a power to revest. The article is entitled “Management of Trust Estate”, but the text goes further than management. The grantor may direct the sale “or other disposition” to himself for such consideration and upon such terms as he may direct. The terms are absolute. But they must be read in the light of the whole instrument and to preserve consistency with more specific provisions. Article third clearly provides for the preservation as trust property of the Park Avenue apartment or a similar habitation, and article fourth, although not free from ambiguity, seems to contemplate the preservation of the Brandywine Farm property and its occupancy by the grantor and his wife. Any direction by the grantor to the trustee that either of those properties should be transferred to himself would in any litigation in equity be limited by those articles. So much of the corpus is therefore beyond the power of the grantor to revest in himself.

But there is nothing else in the trust instrument from which it could be said that the power is narrower than the broad language of article seventh reserves. Thus the grantor may direct the sale to himself of the United Dairy stock, the Ice Co. bonds, or the Chandler & Co. stock, or any securities that have been substituted for them, at his own price and his own terms, and the trustee must comply and is freed from liability for doing so. Whether this unqualified power to fix the price would be read as permitting- the grantor to direct a sale to himself for a nominal price or upon terms so favorable as to amount substantially to a gift it is unnecessary to consider. Cf. Charles T. Fisher, 28 B. T. A. 1164. The purchase of the securities at a substantial but low price would still be fro tanto a power to revest so much of the property as exceeded the purchase price, Charles T. Fisher, supra; and since there is no way in advance of drawing the line between an adequate and an inadequate price, either of which the grantor had the power to fix, the power must be judged by its latent possibilities. Therefore, on this ground, all the trust property, except the apartment shares and lease and the Brandywine shares, is within the terms of section 166 and the income therefrom is for that reason taxable to Chandler. Henry A. B. Dunning, 36 B. T. A. 1222, and Christopher L. Ward, 40 B. T. A. 225, give petitioner no support, for in both the power reserved by the settlor to fix the price at which sales might be made applied only to sales to others and the settlor was not a prospective purchaser.

The respondent argues that the income is taxable to Chandler because it is applicable to the payment of premiums on insurance on the grantor’s life and is therefore within 167 (a) (3). Article second of the indenture provides:

Second: Policies: Grantor agrees to pay to Trustee, from time to time, such sums of money as may be required for the payment of the premiums becoming due on all of the policies in the Trust Fund, after the application to the payment of such premiums of the dividends, if any, allowed by the several companies issuing such policies upon said policies, it being understood and agreed that all such dividends are to be used in the reduction of premiums. Trustee shall pay the premiums which may become due and payable on the policies, or any of them, by the application of such dividends and from the cash furnished from time to time for that particular purpose by the Grantor. If such dividends and such cash as shall be so furnished by the Grantor are at any time insufficient to pay said premiums, or any thereof, Trustee shall, as Beneficiary shall from time to time direct, use for such purpose income from the Trust Fund or shall borrow upon said policies or any of them, or shall exercise any option given in any policy to change the same to paid up insurance, or to extended paid up term insurance, or to surrender the same and receive the cash surrender value thereof. * * *

Dividends received by the trustee on life insurance policies amounted to $118.05 in 1934 and $1,337.61 in 1935, and these were used by the trustee to pay such premiums. In addition, the trustee received from the grantor $7,717.63 in 1934 and $5,045.82 in 1935 to apply to the premiums. The Commissioner would tax all of these amounts.

The dividends received from the insurance company are by section 22 (b) expressly excluded from gross income notwithstanding that the trust indenture, as in article fifth, contains some oblique suggestions that such dividends may have been regarded by the draftsman of the instrument as trust income and so treated for the purpose of the trust. Such an intimation has no power to make taxable what the statute exempts. This is true even though the dividends may be imputed to the grantor.

The indenture clearly states that the insurance premiums should be first reduced by the insurance dividends and then paid with contributions from the grantor. Only if such amounts received are insufficient to pay the premiums may the trustee use trust income at the direction of the beneficiary. There was, however, no need to use any trust income and none was in fact so used. Cf. Genevieve F. Moore, 39 B. T. A. 808; Mott v. Commissioner, 85 Fed. (2d) 315.

The respondent then presses an argument that the amounts contributed by the grantor to the trustee to make up the amount needed to pay insurance premiums is income to the trustee and since it is used to pay such premiums it is taxable to the grantor under section 167 (a) (3). The effect of this circuitous reasoning is to tax the grantor upon amounts expended by him. It is plainly insupportable. The contributions received by a trust from the settlor are not taxable income of the trust. Section 167 (a) (3) does not attempt to label receipts by the trust, but, dealing with income of the trust, imputes it to the grantor to the prescribed extent of its use for the payment of insurance premiums. If any of the trust income were used to pay such premiums, it would to that extent be taxable to Chandler; but since none of it was, there is no support in section 167 (a) (3) for taxing it to him.

There is a clear distinction in Alfred F. Pillsbury, 19 B. T. A. 1229, where the trustee held a note of the grantor the interest on which was, when received from him, applied to insurance premiums. Such interest from a debtor, even though he be the settlor, is deductible by the debtor and income of the trust, and its use by the trust for the payment of premiums on policies insuring the settlor’s life brings it squarely within the statute. But this can not be said of contributions by the settlor which are not deductible by him and, so far as they are paid by him with his income, have already been the subject of tax.

The respondent argues elaborately that the control of the trust property and income is so complete in substance as to amount to unfettered command and that the entire trust lacks substance. This broad conception of the trust as an empty form is not supported by the evidence, as the findings show. As a general proposition, the trust must be recognized as such under the revenue act, even though its terms and operation invite the application of sections 166 and 167.

It is contended that the income of the trust serves to defray the personal expenses of Chandler and hence that Douglas v. Willcuts, 296 U. S. 1, requires this income to be imputed to him. As to the income which in the discretion of the trustee could be used for the support, benefit, maintenance, or education of the wife and children, the evidence shows that no part of the trust income was so used and hence no part may be taxed to the settlor on that ground. E. E. Black, 36 B. T. A. 346; Hudson v. Jones, 22 Fed. Supp., 938; Martin F. Tiernan, Trustee, 37 B. T. A. 1048; dismissed, C. C. A., 3d Cir.; Alfred C. Berolzheimer, 40 B. T. A. 645; cf. Raoul H. Fleischmann, 40 B. T. A. 672, 683.

There was, however, $6,190.06 in 1934 and $5,658.48 in 1935 paid by the trustee for rent and assessments on the Park Avenue apartment, and $10,834.70 in 1934, and $8,686.92 in 1935 paid by the farm corporation for expenses of the Brandywine Farm. Of the latter amounts only $652.06 in 1934, and $711.57 in 1935 were operating expenses of the corporation’s business. The rest may be regarded as expenses of the lodge. Both the apartment and the lodge were occupied by the family and it is fair to regard their expense as Chandler’s “personal, living and family expenses” (Bevenue Act of of 1934, sec. 24 (a) (1)). The payment of them by the trustee and the corporation, except of the small amount of business expenses, had the effect of discharging his family obligations. Thus the amounts are to be treated as his income and taxed to him. Hill v. Commissioner, 88 Fed. (2d) 941.

It is stipulated that the rental value of Brandywine Lodge was $4,000 per annum. Chandler, as president of the farm corporation, performed substantial services for it in directing its business, which to a substantial extent comprised the purchase and sale of securities. It is a fair inference that the occupancy of the lodge was permitted to him rent free as compensation for the services which he rendered. Certainly there is no support in this record for treating the occupancy as a gratuity given to him by the corporation or as essential to the corporation in the conduct of its business. Cf. Arthur Benaglia, 36 B. T. A. 838; dismissed, 97 Fed. (2d) 996. The agreed rental value of the lodge is therefore properly to be included within Chandler’s income.

The correlative effect of this opinion upon the deficiency of Mrs. Chandler will be redetermined under Bule 50.

Decision will be entered under Rule 50.

       See “Rex v. Pratt and Merry. The Tax oh Virtue.” A. P. Herbert, Uncommon Law, p. 233.


author: Van Fossan:

text:
    Emery May Holden Norweb, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92575.
    Promulgated January 25, 1940.

      Herman L. Vail, Esq., for the petitioner.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Van Fossan:

The sole issue for our consideration is whether petitioner’s transfers to a trust, irrevocable without his concurrence during the life of her husband, who was to receive the income for life, are subject to gift tax on their full value or only on the value of her husband’s life interest therein. Petitioner concedes that the trust was irrevocable except with her husband’s concurrence during his life, but contends she retained certain rights which are sufficient to defeat a gift tax on tbe full value of transfers to the trust. Respondent contends that petitioner has only a contingent right of reverter in the trust estate and that gifts to the trust are subject to the gift tax at their full value.

The applicable sections of the law imposing gift tax are section 501 of the Revenue Act of 1932 and section 511 of the Revenue Act of 1934.

The trust, as originally constituted, was fully revocable and clearly no gift tax could have been imposed upon transfers to the trust estate. Burnet v. Guggenheim, 288 U. S. 280. The solution of the present issue, however, turns upon the effect of the modification instrument of July 31,1924. Petitioner maintains that by the modification she merely relinquished the right to revoke, revest in herself, or modify the trust so as to defeat her husband’s life estate, contending that other powers of dominion and control were retained. Respondent asserts that the modification transforms the original revocable trust into an irrevocable trust.

Upon examination of the modifying instrument of July 31, 1924, certain conclusions seem clear. The instrument indicated that it sprang solely from petitioner’s desire that her husband “be assured of the income derived from the trust estate during his life” and she undertook to alter its provisions with this sole end in view. When this prefatory statement of purpose is coupled with the later qualifying and, in our judgment, controlling clauses “during the life of my husband” and “to modify any terms thereof so as to defeat his life estate” all doubt as to the proper interpretation of the instrument is removed. Petitioner released her right to revoke, revest, or modify only to the extent necessary to protect the life estate of her husband. On his death all such rights would be revived and revested in her. The renunciation was not all-embracing and the grantor retained valuable rights as to the disposition of the property.

Subsection (c) of section 501 of the Revenue Act of 1932 (relating to the inapplicability-of gift tax in the case of the transfer of property in trust subject to the power of tbe donor to revest title in himself) is repealed. -

Respondent cites the cases of Becker v. St. Louis Union Trust Co., 296 U. S. 48; and Helvering v. St. Louis Union Trust Co., 296 U. S. 39, in support of his position. Those cases decide that mere possibility of reverter in the donor will not make a gift incomplete. In each case the grantor had no right in, or power over, the trust other than the possibility of reverter. This situation is not parallel to that presented by the instant case.

Although there is here a possibility of reverter conditioned on the death of petitioner’s husband, petitioner, in addition, retained rights in the disposition of the remainder interests of the trust. In our opinion, so long as she does nothing to defeat the life interest of her husband, petitioner is free to modify the trust in any way. Petitioner still retains the right to vary the remainder interests so long as the estate of her husband is not harmed. In fact, petitioner exercised this right and modified the trust again in 1935 by the insertion of a clause relating to a per stirpes distribution to her children and their issue.

A gift to an irrevocable trust is not a completed gift subject to gift tax where the grantor reserves the power to change the beneficiaries. Estate of Sanford v. Commissioner, 308 U. S. 39; Rasquin v. Humphreys, 308 U. S. 54. See Orrin G. Wood, 40 B. T. A. 905.

In Burnet v. Guggenheim, supra, the Supreme Court said that the gift tax “is aimed at transfers that have the quality of a gift, and a gift is not consummate until placed beyond recall.” Here only the life estate of petitioner’s husband had been placed beyond recall.

Accordingly, we hold that the transfers to the trust in the years 1932 to 1934 were subject to gift tax only on the value of the life estate of petitioner’s husband and that there are no deficiencies due.

Decision will be, entered for the petitioner.

       SEC. 501. IMPOSITION OP TAX.
      (a) For the calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift.
      (b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the ease of a nonresident not a citizen of the united States, shall apply to a transfer only if the property is situated within the United States. The tax shall not apply to a transfer made on or before the date of the enactment of this Act.
      (c) The tax shall not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor, either alone or in eon-junction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, but the relinquishment or termination of such power (other than by the donor’s death) shall be considered to be a transfer by the donor by gift of the property subject to such power, and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of such income by gift.

       SEC. 511. GIFTS OF PROPERTY SUBJECT TO POWER.