author: Adams:

text:
    Anna E. Riley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61066.
    Promulgated October 24, 1933.

      F. J. V. Dakin, Esq., for the petitioner.

      F. A. Surine, Esq., for the respondent.
   OPINION.

Adams:

This proceeding involves the redetermination of petitioner’s income tax liability for the year 1929. The respondent has asserted a deficiency in the amount of $4,981.11.

The facts are stipulated as follows:

The petitioner is an individual conducting a business under the name of Ace Art Company with her principal place of business at 12 Gould Street, Reading, Massachusetts. Her Federal income tax return was filed with the Collector of Internal Revenue for the district in which her business is located which is also her place of residence.
The petitioner during the year 1920 began the operation of the business conducted under the name of the Ace Art Company, which business consisted in the manufacture of art mounts for post cards, photographs, etc., and which has been continuously operated by her to and including the year 1929.
There is attached hereto as Exhibit A, a copy of the so-called married woman’s certificate, which was filed by petitioner in 1920 under which petitioner conducted her business, which business at that time was conducted in the name of The Ace Manufacturing Company.
Prior to the year 1920, a business similar in kind to the business conducted by the petitioner, had been conducted as a partnership by petitioner’s husband, Lester S. Riley and another individual. The said Lester S. Riley, early in 1920, sold his interest in the business to the other partner and restricted himself as to again engaging in a similar line of business. During the year 1920, the said Lester S. Riley was involved in litigation relating to the sale of said business, which litigation was terminated in the following year by a settlement in which all restrictions against engaging in business were removed.
Lester S. Riley, the husband of the petitioner, has supervised and managed the said business of the Ace Art Company since 1920.
The said Lester S. Riley invented a machine for making the product of the petitioner which was patented in the United States and foreign countries in the name of Lester S. Riley and which patents were owned by him. The machines made according to said patents were owned and used by the petitioner during the year 1929 as the means of manufacturing the product of the business and petitioner did not pay Lester S. Riley any royalties for the use of the machines, although said machines were very valuable to the business.
During the year 1929, the petitioner paid a salary of $19,800.00 to Lester S. Riley, her husband, which salary was reasonable in amount for the services performed by him during the year 1929. The amount of said salary was claimed as a deduction by the petitioner in her income tax return, for the year 1929.
A revenue agent examined the records of the petitioner and prepared a report, a copy of which is attached hereto as Exhibit B.
The Commissioner of Internal Revenue in determining the deficiency in tax for the year 1929, which is now in controversy, disallowed the salary of $19,-800.00 paid to Lester S. Riley, the husband of the petitioner.
The only issue the Board is called upon to decide is whether the said salary of $19,800.00 is deductible by the petitioner as an ordinary and necessary expense of the business.

The respondent admits the salary paid was reasonable in amount for the services actually performed; but contends it does not represent an ordinary and necessary expense “paid or incurred during the taxable year in carrying on any trade or business,” because the petitioner and her husband were residents of the State of Massachusetts, where a married woman is not authorized to make contracts with her husband, and petitioner was under no legal obligation to pay her husband for his services. We are not impressed by this argument.

Whether the salary would be deductible if it had been incurred but not paid during the taxable year, and there was an executory contract to pay, is not before us and upon this question we express no opinion. The salary in question was paid by petitioner for personal services actually rendered during the taxable year. Her husband was general manager of the business. He had previously engaged in a similar business, was the inventor of the machinery used in the manufacturing process, and was, undoubtedly, a material factor in producing the income realized from the business during the taxable year. The management of a large and active business is certainly an ordinary and necessary function. We do not think it material that the services were performed by petitioner’s husband rather than by a stranger. That fact alone does not change their character and function.

Under Massachusetts laws the wife may own separate property, and petitioner had filed a married woman’s certificate under which she conducted her business during the taxable year as a femme sole trader. The contract with her husband, if there was one, was fully executed and whether it would have been enforcible at law is immaterial. The title to the money passed from petitioner to her husband upon payment. It was not a gift. There was adequate consideration for the payment. The transaction was not illegal nor tainted with fraud, nor was it against public policy.

The disability of the husband and wife to contract with one another is for the protection of the wife. Cf. Frankel v. Frankel, 173 Mass. 214; 53 N.E. 398. The law does not authorize or encourage a contract, which might be inequitable or might result in domestic rift, but the condemnation goes no further than exclusion from legal cognizance, which is effective to place the transaction under the cognizance of the equity courts, where substantial justice between the parties may be done. Cf. Ricker v. Ricker, 24 Mass. 549; 143 N.E. 539; Briggs v. Sanford, 219 Mass. 572; 107 N.E. 436; Ciarlo v. Ciarlo, 244 Mass. 453; 139 N.E. 344; Young v. Young, 251 Mass. 218; 146 N.E. 574; Woodward v. Woodward, 216 Mass. 1; 102 N.E. 921. To put them on a par with contracts tainted with fraud or prohibited by positive law as being morally or economically vicious would be logically indefensible. Certainly the protection afforded the wife by the law was not meant to deprive her of the right of protecting her interest in property or hamper her in the proper conduct of her business. Where contracts of this character have become fully executed and no fraud is apparent, it is the policy of the law not to disturb them. In such cases both this Board and the courts have recognized such contracts and given effect to the rights of the parties which have been fixed thereby. See Hamilton v. Commissioner, 24 Fed. (2d) 668; reversing 7 B.T.A. 362; Pugh v. United States, 48 Fed. (2d) 600; J. W. Brackman, 24 B.T.A. 259; Lewis E. Tifft, 25 B.T.A. 986; Warren MacPherson, 19 B.T.A. 651; Elizabeth M. Coombs, 25 B.T.A. 1320; L. F. Sunlin, 6 B.T.A. 1232.

Being the owner of the business, petitioner was entitled to include the income therefrom in her separate return. Poe v. Seaborn, 282 U.S. 101. Certainly she is entitled to be taxed on her net income, and, in computing such net income, she is entitled to the same deductions from gross income as any other taxpayer who might be conducting the business. We think the expenditure here in question was “ ordinary and necessary ” in connection with petitioner’s business and is properly deductible under the statute. Any other construction would result in an unwarranted distortion of income.

The disallowance by the respondent of certain traveling expenses deducted in the return is acquiesced in by the petitioner.

Decision will be entered under Bule 50.

       Sec. 23, Revenue Act of 1928 :
      SEC. 23 DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall he allowed as deductions:
      (a) JBatpenses — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *

         General Laws of Massachusetts, 1921, ch. 209, secs. 2 and 6:
      Section 2. A married woman may make contracts, oral and written, sealed and unsealed, in the same manner as if she were sole, except that she shall not be authorized hereby to make contracts with her husband.
      * ⅝ * * * * ⅜
      Section 6. A married woman may sue and be sued in the same manner as if she were sole; but this section shall not authorize suits between husband and wife.


source: Caselaw Access Project

author: Goodeich:

license: Public Domain

text:
    H. E. Muchnic, Administrator, Estate of Clive Hastings, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. E. Hastings, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63789, 63790.
    Promulgated October 26, 1933.

      H. O. Anderson, G.P.A., and M. P. Wormhoudt, Esq., for the petitioner.

      O. B. Marshall, Esq., for the respondent.
   OPINION.

Goodeich:

Respondent determined deficiencies in income tax for the year 1929 against E. E. Hastings in the amount of $18,739.26, and against Clive Hastings in the amount of $14,703.23. During that year these taxpayers were husband and wife, and residents of Atchi-son, Kansas. Clive Hastings has since died and his estate is here represented by petitioner Muchnic, as administrator. In these proceedings, which upon motion were consolidated, there is but one issue, namely, whether exchanges of common stock for preferred stock in the same corporation were transactions upon which gain or loss is to be recognized. The evidence was submitted to us by agreement, and as our findings of fact we adopt the stipulation of counsel. To present the issue, only a brief recital of the salient facts is necessary.

For some time prior to 1929 Clive Hastings owned varying amounts of common stock of the Locomotive Finished Material Co., as did also his wife. Prior to 1925 the company had but one class of stock, its entire authorized capital being 20,000 shares of no par value, common, which, however, had a stated value of $25 a share. In that year its charter was amended to permit the issue of 5,500 shares of 7 percent cumulative preferred stock of a par value of $100 a share, redeemable at the option of the company, after notice, at $110 a share. No change was made as to the common stock. The company then offered the preferred stock to its stockholders in exchange for their common stock on the basis of six tenths of a share of preferred for each share of common. Of the sixteen then stockholders of the company, seven accepted the offer, and before the close of the year 9,166 shares of common had been exchanged for 5,499.6 shares of preferred stock. Neither Clive nor E. E. Hastings participated in this exchange. From time to time thereafter the common stock so acquired by the company was reissued through sales or stock dividends. By January 1, 1928, all the preferred stock issued by the company in the exchanges had been redeemed and retired, and by January 1, 1929, the total authorized common stock, 20,000 shares, was again issued and outstanding.

In 1929, without further charter amendment or change in the authorized capital stock, the company again gave opportunity to its stockholders to exchange their common for preferred stock, upon the same basis as before, and gave written notice of the offer. This time the only stockholders who availed themselves of the company’s offer were Clive Hastings and his wife. He owned 4,562 shares; she owned 3,702 shares; and each of them turned in 2,500 shares of the common for 1,500 shares of the preferred stock. Consequently, immediately after these exchanges the company had outstanding 15,000 shares of common stock, instead of 20,000 as before, and 3,000 shares of preferred stock, whereas before it had none outstanding. No cash or property other than the stocks was passed in these exchanges.

Respondent determined that the exchanges made in 1929 were" transactions upon which gain or loss should be recognized, and that each of these stockholders derived a gain, in amount the difference between the cost of the common stock and the fair market value of the preferred stock (which he took to be the par value) received in exchange therefor. This profit he has, in each case, taxed as a capital net gain.

Petitioners do not object to respondent’s method of computing the amount of profit, nor to his determination that such profit should be taxed as a capital net gain. Their position is that the exchanges they made fall within the provisions of section 112 (b) (3), Revenue Act of 1928, as pursuant to a plan of reorganization of the company, and, therefore, no gain or loss thereon may be recognized.

Four inquiries obviously arise in testing the facts under the express terms of the statute. First: Was there an exchange of stock, solely for stock? ^Second: Were both stocks issued by a corporation which was a party to a reorganization? Third: Was there a reorganization? Fourth: Was the exchange made pursuant to the plan or reorganization? The first question has already been answered by the facts. The answer to the second question is conditionally obvious; if there was a reorganization, this company was a party to it, for it was the only corporation involved. (See section 112 (i) (2), Eevenue Act of 1928). First Natl. Bank of Champlain, N.Y., 21 B.T.A. 415. Likewise, if there was a reorganization, the fourth inquiry may be answered in the affirmative, for the resolution of the directors of the company and the notice sent to the stockholders serve to satisfy the requirement as to the existence of and adherence to a plan. National Pipe & Foundry Co., 19 B.T.A. 242; William Hewitt, 19 B.T.A. 771. Consequently, the fundamental point of controversy is, Did the exchange of common stock for preferred stock under the circumstances here effect a reorganization of the company? Bespondent maintains that it did not; that if there was any reorganization of this company, it was in 1925, when by charter amendment its authorized capital was changed; that the reissue of a part of its preferred stock in 1929, even though all that stock previously had been redeemed and was not then outstanding, accompanied by a reduction in the amount of common stock outstanding, was not a reorganization.

In our opinion, the transaction was a- reorganization. That term is defined by statute (section 112 (i) (1), Eevenue Act of 1928) as including “ a recapitalization.” Statutory definition being lacking, we turn to the authorities for the meaning of “recapitalization.” In volume 5 of Cook on Corporations, section 888, is- found the following explanation:

A reorganization of a corporation is a business arrangement whereby the stock and bonds of the company are readjusted as to amount, income or priority * * *. An agreement * * * to scale down the securities is generally held not binding on any stockholder who objects ⅝ * ⅜. This mode of reorganization is but a recapitalization. It is the voluntary agreement of all stockholders and creditors to change and increase- or decrease the capitalization or debts, or both.

That definition has been adopted by respondent. See S.M. 3710, IV-1 C.B. 4; art. 33, Eegulations 40. Other text writers have reached a similar conclusion. Miller in Beorganizations and other Exchanges in Income Taxation ” says at page 127:

Exchanges of entire outstanding issues of bonds for stock and vice versa, and of preferred stock for an outstanding common, or an exchange of common for an outstanding issue of preferred- — all in the same corporation — are examples of recapitalization.

And Sunley and Pinkerton, in their “ Corporation Accounting,” say, at page 351, “ the term ‘ reorganization or recapitalization ’ indicates merely a rearrangement of the capital structure.”

In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937 (affirming 22 B.T.A. 808); certiorari denied, 288 U.S. 599, the court said:

Reorganization, merger and consolidation are words indicating corporate readjustments of existing interests * * *. The words “ a recapitalization ” * * * involve the same idea.

There is ample precedent for regarding the exchange of securities of various classes of the same corporation as effecting a recapitalization of the company, which, in turn, constitutes a statutory reorganization, with the result that, if done according to plan, gain or loss upon the exchanges is not to be recognized. In S.M. 3710, supra, respondent so concluded respecting an exchange of preferred for common stock in the same corporation; and similarly as to the exchange of bonds for preferred stock in Mim. 3156, II-2 C.B. 24, and I.T. 2035, III-1 C.B. 55. See also I.T. 2216, IV-2 C.B. 19; I.T. 2347, VI-1 C.B. 86. In Selene Baldwin Burdick, Executrix, 20 B.T.A. 742, it was suggested that a reduction of outstanding stock of a corporation through exchange by the stockholders of old stock for new was a recapitalization, and a statutory reorganization. This decision was cited with approval in Benjamin W. Fredericks, 21 B.T.A. 433, where the same conclusion was reached respecting an exchange of preferred for common stock — affirmed as Kistler v. Burnet, 58 Fed. (2d) 687. The exchange of bonds for preferred stock was held to be a change in capitalization in 375 Park Avenue Corp., 23 B.T.A. 969. In view of these authorities, it seems clear that the exchanges which here .occurred effected a recapitalization of the company and that gain or loss arising therefrom should not be recognized.

Respondent contends, however, that the instant exchanges fall short"? of effecting a recapitalization for the reason that not all of the stock-1 holders participated. The answer to that is one of fact; two stockholders made the exchange offered by the company to all, and as a result the capitalization of the company was changed. Before the exchanges, it had outstanding 20,000 shares of common stock having a stated value of $500,000. After the exchanges, it had outstanding 15,000 shares of common stock having a stated value of $375,000 and 3,000 shares of preferred stock of a par value of $300,000; thus disclosing an increase in its liability upon stock of $75,000. Moreover, there was a “readjustment of existing interests.” New priorities as to the company’s assets and earnings were assumed upon the issue of the preferred stock, which, together with the reduction in the common stock outstanding, effected a revision of the existing interests of the common stockholders. It cannot be denied that such readjustments affecting the capital of the company constitute a recapitalization.

We conclude that the gain arising from the exchanges here involved should not be recognized, and that respondent was in error in attempting to lay a tax thereon. As the deficiency notices indicate that corrections should be made respecting other items of income, not in controversy,

Reviewed by the Board.

Judgment will be entered’ under Bule 50.

McMahon dissents.

       (3) Stock kor stock on reorganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.


author: MuRdock:

text:
    Edith Page Skewes-Cox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61669, 68335.
    Promulgated October 26, 1933.

      Virgil Y. Moore, Esq., for the petitioner.

      Dean P. KimbaM, Esq., for the respondent.
   OPINION.

MuRdock:

The Commissioner determined deficiencies in the petitioner’s income taxes of $509.22 and $220.21 for the years 1928 and 1980, respectively. The only question is whether or not the Commissioner erred in including in this petitioner’s income one half of her husband’s salary. The facts before us were stipulated.

The petitioner is an individual, residing in San Francisco, California. She was born in Chile and was married there in 1915 to Vernon Skewes-Cox, a British subject then engaged in business in Chile. Just prior to their marriage they entered into an antenuptial agreement in accordance with the laws of Chile. This agreement has never been annulled. The agreement provides:

Both parties declare that it is their wish to be married under the law of separation of properties. Consequently each of the parties will administer with complete independence of the other all the properties which he or she now possesses or which he or she may by any kind of title acquire during the marriage.

The agreement also contains declarations by the parties o,f the property owned by each at the time of its execution, which are, in substance, that the properties of Edith Page Smith consist of certain described real estate in Valparaiso, Chile, acquired from her mother by gift, certain shares of stock in various corporations, and a stated amount of cash; and that those of Vernon Skewes-Cox consist of a stated amount of cash and “ the hereditary rights which correspond to him from the Estate of his deceased father.”

In 1919 the petitioner and her husband moved to San Francisco, where they have since continuously maintained their residence. They have retained their status as British subjects. They each filed separate income tax returns for 1928 and 1930. In 1928 the husband received a salary of $8,336.80 and in 1930 he received a salary of $5,000. He reported all of his salary for each year. The Commissioner transferred one half of the salary for each year to the income of the petitioner for that year.

California is a community property state. In the absence of an effective agreement providing otherwise, one half of the salary of a husband who resided with his wife in California in 1928 and 1930 would be taxable income of his wife. United States v. Malcolm, 282 U.S. 792. A husband and wife could so contract, however, that all of the earnings of one would be taxable to that one as separate property. Howard C. Hickman, 27 B.T.A. 807; Stanley S. Anderson, 28 B.T.A. 179; Earl v. Commissioner, 30 Fed. (2d) 898. The decision in the latter case was reversed on appeal, 281 U.S. 111, but the decision of the Supreme Court is not inconsistent with our holding here. The contract here in question would undoubtedly have made all of the salary of the husband taxable to him if it had been entered into while the parties resided in California. The question is, Does their antenuptial contract entered into in Chile affect the husband’s salary after they moved to California?

Story on Conflict of Laws, sec. 184, says that “where there is a marriage between parties in a foreign country and an express contract respecting their rights and property, present and future, that, as a matter of contract, will be held equally valid everywhere, unless, under the circumstances, it stands prohibited by the laws of the country where it is sought to be enforced.” McKay, in his Community Property, sec. 626, also recognizes this rule and says: “ Whether the contract does not extend to acquisitions made at the new domicile is, of course, a question of construction — a question of intention to be gathered from the terms used, interpreted in the light of the situation of the parties at the time of entering into the contract.” The respondent contends that the contract does not speak to the very point ” so as to cover property later acquired in a new domicile. He cites several cases to support his contention. But, after examining these cases and a number of other cases on the subject, we think that this contract does speak to the point and applies to the salary here in question. It' does not specifically mention that the parties intend it to operate on property acquired outside of Chile. That, however, is not necessary, Kleb v. Kleb, 90 N.J. Eq. 305; 62 Atl. 396. See L. C. Mitchell, 28 B.T.A. 767. It expressly covers all property “ which he or she may by any kind of title acquire during the marriage.” The language is broad enough to include the salary here in question, and tliere is no circumstance known to us which would indicate that the words were not intended to have their natural broad meaning. The husband’s British citizenship is a circumstance favorable rather than unfavorable to the view we have taken. The parties must be presumed to have meant what they said. The decided cases indicate that our interpretation of this contract is correct. Kleb v. Kleb, supra; In re Cole's Estate (Okla.), 205 Pac. 172; Scheferling v. Huffman, 4 Ohio St. 241.

Decision will be entered under Rule 50.


author: Black :

text:
    Jeremiah G. Menihan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47865.
    Promulgated October 26, 1933.

      Jacob Ark, Esq., and Earlton H. Hanes, Esq., for the petitioner.

      G. G. Holmes, Esq., for the respondent.
   OPINION.

Black :

The only question for decision is whether the amounts of $16,469.34 and $68,645.09 paid by petitioner in 1926 and 1927, respectively, on account of his liabilities as endorser or guarantor were deductible losses for those years, or capital expenditures or investments.

Pertinent provisions of the Revenue Act of 1926 are:

Sec. 214. (a) In computing net income there shall be allowed as deductions:
*******
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
(5) Losses sustained during the taxable year and not compensated for by
insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * ⅜ ⅜
*******
(7) Debts ascertained to be worthless and charged off within the taxable year ⅜ * ⅜.

Briefly stated, it is contended by the petitioner that the payments made by him were in liquidation of an individual liability, that he could not legally claim payment from the Menihan Co., and that they were not capital expenditures. Respondent claims that the payments were not losses or bad debts, but were capital expenditures.

Manifestly if the only issue we had to decide was whether or not the $16,469.34 and $68,645.09 in question were debts ascertained to be worthless and charged off within the respective taxable years, we would have to decide that they were not. Respondent in his deficiency notice stated that he was disallowing the items because they were not bad debts. We agree with respondent that these amounts did not represent bad debts at all.

The petitioner was endorser or guarantor on a large amount of the indebtedness of the Menihan Co. If the Menihan Co. had paid as far as it could pay on this indebtedness and thereafter the petitioner had paid the balance under his guaranty, he would have been subro-gated to the rights of the creditors and whatever amounts he might have paid under such circumstances would have immediately become a debt due to him by the Menihan Co., and if thereafter it had been demonstrated that the debt was worthless petitioner could have charged it off and secured a proper deduction from his gross income as provided by statute. But petitioner did not have the right of subrogation against the Menihan Co. because he did not pay the entire remainder of the debt, which is requisite before subrogation is allowable. Moreover he expressly waived his right of subrogation. Charles M. Howell, 22 B.T.A. 140. So whatever deductions, if any, petitioner is entitled to take on account of the payments made must be taken as losses, and not as debts against the Menihan Co. ascertained to be worthless and charged off.

Petitioner recognizes this situation and in his petition makes no claim that the amounts in question represent debts ascertained to he worthless and charged off. He does claim, however, that the amounts represent losses incurred in his trade or business or in transactions entered into for profit and are therefore allowable deductions under the statute.

Did petitioner really sustain any losses from the transactions narrated in our findings of fact? We think none have been satisfactorily proved. Losses to be deductible must be from closed and completed transactions. Undoubtedly petitioner made payments of $16,469.34 in 1926 and $68,645.09 in 1927 in compromise settlement of his guaranty or endorsement of the Menihan Co.’s indebtedness, but we cannot say that these payments resulted in any loss to petitioner. If taken alone and without reference to other facts proved in the proceeding, perhaps we might say that they did result in losses. But all the facts proved, taken together, show that by means of the settlement which the Menihan Co. effected with its creditors and the settlement which petitioner made in respect to his guaranty liability, all of which transactions were intimately connected with each other, the Menihan Co. was financially rehabilitated and petitioner’s stock therein was made valuable.

In 1927, the year in which petitioner claims a $68,645.09 loss by reason of a payment made under his guaranty liability, his stock in the Menihan Co. was returned to him and in that same year the Menihan Co. was reorganized and petitioner received 5,000 shares of preferred stock of a par value of $100 per share and 19,000 shares of common stock of no par value in the reorganized corporation. No evidence was offered as to the fair market value of the preferred stock in the reorganized company, but evidence was given that some of the common stock of the company which was taken by others at the time of the reorganization was sold to them for $10 per share.

What profit, if any, petitioner realized from the reorganization of the Menihan Co. which took place in 1927, after all the indebtedness of the Menihan Co. had either been fully paid or satisfactorily settled and petitioner had been released from his liability as endorser and guarantor and his stock had been returned to him, we do not know. The complete facts with reference to this reorganization are not before us. However from such facts as are before us with reference to all these transactions, we cannot say that petitioner has sustained any loss. Whatever losses were sustained seem to have been sustained by the creditors and not by petitioner.

As we view it, the payments which petitioner made in compromise of his guaranty and endorsement liabilities, under the particular circumstances in this case, were capital payments which yielded him good results, and we know of no provision of law which would entitle him to claim them as deductible losses.

Petitioner urges in support of his contentions our decision in John P. Dillon, 9 B.T.A. 177. We think however that the facts in that case are distinguishable from those in the instant case. In the Dillon case the taxpayer, together with other former stockholders of the Farmers National Bank, a closed bank, had guaranteed $100,000 of the old paper of the closed bank, which had been taken over by a new bank, the Sterling National Bank. In 1921 these guarantors were called upon to make good their guaranty and Dillon paid $28,000 in settlement of his obligation thereunder. The facts further showed that Dillon was never reimbursed in any way for this payment and that moreover the payment did not rehabilitate the bank and make Dillon’s stock in the bank more valuable. On the contrary, the new bank closed its doors the following year.

We do not think therefore that our allowance of the loss in the Dillon case, under the circumstances which existed therein, can be taken as a precedent which would authorize the allowance of the losses which petitioner claims in the instant case.

Reviewed by the Board.

Decision will be entered for respondent.

Tkammell, ARUndell, Seawell, and Adams dissent.


author: Van Fossan:

text:
    Security Savings & Commercial Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59523.
    Promulgated October 31, 1933.

      W. W. Spalding, Esq., and Albert L. Clothier, Esq., for the petitioner.

      W. F. Wattles, Esq., and B. D. Daniels, Esq., for the respondent.
   OPINION.

Van Fossan:

This proceeding involves the redetermination of deficiencies in income tax for the years 1927 and 1928 amounting to $4,364.85 and $85.94, respectively. The issue presented relates to the respondent’s refusal to allow as a deduction from gross income in 1927 the sum of $31,580 claimed by the petitioner as a loss sustained through the purchase and liquidation of 2,000 shares of .Central Savings Bank stock. The petitioner has abandoned all other issues raised by the pleadings. The facts were stipulated and are substantially as follows:

The petitioner is a corporation, incorporated under the laws of the State of West Virginia, and during the year 1927 was engaged in the banking business in Washington, D.C. On June 14, 1927, Julius I. Peyser, petitioner’s president, obtained an option from Francis M. Savage, the then president of the Central Savings Bank, a corporation incorporated April 30, 1925, under the laws of the District of Columbia and engaged in the banking business therein, for the acquisition by purchase of 1,001 shares of the capital stock of the latter named bank at $140 per share. A special meeting of the board of directors of the petitioner was held on June 24, 1927, at the request of its president, for the purpose of considering the question of exercising the option and, subject to the approval of the Comptroller of the Currency, establishing a branch of the petitioner bank on the premises occupied by the Central Savings Bank. The board of directors of the petitioner bank thereupon voted to accept an assignment of the option; to authorize the vice president of the petitioner to apply to the Comptroller of the Currency for authority to establish a branch bank at the address of the Central Savings Bank; to take over, upon the Comptroller’s approval, and convert the assets and liabilities of the Central Savings Bank to the use of the petitioner; to proceed to the operation of a branch bank at the location of the Central Savings Bank. The petitioner’s vice president was authorized to vote the stock of the Central Savings Bank for the purpose of liquidating that bank and canceling its charter. Thereafter authority to establish and operate a branch bank was applied for and granted.

On June 25, 1927, a contract was entered into between the petitioner, on the one hand, and Francis M. Savage and other stockholders of the Central Savings Bank, on the other, by which such stockholders agreed to sell to the petitioner 1,701 shares of the capital stock of the Central Savings Bank at the price of $140 per share. By June 30, 1927, the petitioner had acquired such a number of additional shares of the stock of the Central Savings Bank that on that date it owned 1,839 shares of such stock, for all of which the petitioner paid $140 per share. By the contract of June 25, 1927, between the petitioner and the stockholders of the Central Savings Bank it was agreed, among other things, that before making final payment for the stock, representatives and agents of the petitioner might inspect the books and records of the Central Savings Bank, and such representatives and agents did so inspect them and appraised the Central Savings Bank’s assets and liabilities before the purchase of its stock was completed.

At a meeting of the board of directors of the Central Savings Bank held on June 30,1927, the then acting directors of that bank resigned and were replaced by nominees of the petitioner. The then president, vice president and treasurer of the Central Savings Bank also resigned and the vacancies were filled by the election of representatives and nominees of the petitioner bank. On the same day, with the approval of its stockholders, the Central Savings Bank entered into an agreement with the petitioner by which the former bank sold and delivered to the petitioner all of its “ notes, ledgers and other accounts, choses in action, bills receivable, real estate and any and all other assets, real, personal and mixed of every nature, kind and character whatsoever * * On the same day also, namely, June 30,1927, the stockholders of the Central Savings Bank directed and empowered the newly elected officers to apply to the Supreme Court of the District of Columbia for a decree of dissolution.

On June 30, 1927, the date of the acquisition by the petitioner bank of all of the assets of the Central Savings Bank the balance sheet of the latter bank was as follows:

Central Savings Bank
STATEMENT AT CLOSE OF BUSINESS JUNE 30TH, 1927
Assets
Cash, and Cash Items_ $85, 912. 72
Bonds_ 92,214. 06
Real Estate Loans- 574, 583. 25
Loans and Discounts_ 152, 768.66
Eurniture and Fixtures_ 10', 000. 00
Interest accrued on Bonds- $1, 989. 57
Interest accrued on Real estate loans but not collected- 9, 347. 20
Commissions accrued on Savings life Insurance- 256. 78
Demand Loans Interest- 1, 835.14
- 13, 428.69
$928,907.38
LiamhUes
200, 000'. 00 Capital Stock-
50, 000.00 Surplus_
6.07 Profit and Loss-
Savings Deposits_614, 781. 96
Christmas Savings Club_ 46, 964. po
Time Deposits_ 5, 500. 00
Cashier’s checks- 7,080.35
674,326.31
4, 575. 00 Reserve for Interest-
$928, 907.38

Between July 1 and October 18, 1927, the petitioner acquired the remaining outstanding 161 shares of capital stock of the Central Savings Bank for $140 per share. By such acquisitions the petitioner became the owner of all of the capital stock of the Central Savings Bank, namely, 2,000 shares. On November 9,1927, at a special meeting of the stockholders of the Central Savings Bank, a resolution was adopted authorizing and directing the payment of a final liquidating dividend of $124.21 on each of the 2,000 shares of stock outstanding, or a total dividend of $248,420.

On November 17, 1927, the petitioner bank received the sum of $248,420 as a final liquidating dividend voted by the directors of the Central Savings Bank on November 9, 1927. By this payment the Central Savings Bank divested itself of all its assets and no further distribution to stockholders was ever made by it.

Subsequent to June 80, 1927, no business was transacted by the Central Savings Bank. After that date the petitioner, having taken possession of all the assets of the Central Savings Bank and also of the banking house occupied by that bank located at 710 Fourteenth Street, NW., conducted a branch banking business at that location for a period of 10 months. Thereafter the petitioner moved its branch bank to 1518 K Street, NW.

A consolidated income tax return was never filed on behalf of the petitioner and the Central Savings Bank.

On December 28,1927, in conformity with resolutions duly adopted by its board of directors, the petitioner charged to profit and loss on its books the sum of $31,580, the loss claimed to have been sustained by it through the purchase and liquidation of 2,000 shares of Central Savings Bank stock.

In computing net income for the calendar year 1927 the petitioner claimed as a deduction the sum of $31,580 representing the difference between the cost of the 2,000 shares of the Central Savings Bank stock, purchased at $140 per share, and the amount distributed by the Central Savings Bank as a liquidating dividend, namely, the sum of $248,420. This deduction was disallowed by the respondent.

On the foregoing facts the petitioner contends that since it purchased the 2,000 shares of the Central Savings Bank’s capital stock at a cost of $280,000 and received as a final liquidating dividend only the sum of $248,420, it is entitled, under the statute, to deduct the difference from the gross income as a loss sustained during the taxable year. The respondent, on the other hand, contends in effect that the purchase of the stock and the purchase of the assets of the Central Savings Bank were both parts of the same transaction, which was entered into by the petitioner for the purpose of establishing a branch bank on the premises occupied by the Savings Bank, and that the excess of the amount paid for the stock over the.amount received as a final liquidating dividend constitutes a payment by the petitioner for the good will of the Savings Bank. The respondent, therefore, contends that since good will is a capital asset, the sum paid to acquire it is not deductible from income as a loss.

It may be conceded that the petitioner’s purpose was to establish a branch bank and that to that end it purchased the stock and assets of the Central1 Savings Bank. However, the design and intent of a taxpayer are not conclusive of his tax liability. Tax liability must be determined upon what was actually done, Anna M. Harkness, 1 B.T.A. 127; William H. Mullins, 14 B.T.A. 426, and not upon the effect of what was done; B. F. Saul, 4 B.T.A. 639, 647; nor upon the taxpayer’s design and purpose, United States v. Phellis, 257 U.S. 156.

On June 30, 1927, the petitioner owned more than two thirds of the Savings Bank’s stock.' However, there was still an outstanding minority of 161 shares. Therefore, at that time, if the petitioner desired to acquire the assets of the Savings Bank immediately it could do so only by a purchase for cash. On June 30, 1927, the petitioner did so acquire such assets, paying therefor the sum of $250,006.07 and at the same time assuming the Central Savings Bank’s liabilities. At that date the latter bank was a going concern. It had a substantial amount of deposits. Consequently, its good will or “ going concern value ” was a substantial asset. Merchants Natl. Bank, 6 B.T.A. 1167. The good will was not carried on the Savings Bank’s books as an asset but, being an asset, it was included among the assets purchased by the petitioner under its contract with the Savings Bank by which it purchased all of the Savings Bank’s “ assets, real, personal and mixed of every nature, kind and character whatsoever.”

No loss to the petitioner resulting from the purchase of any of the assets referred to, at the price paid under the contract of sale, is shown by the evidence and none is claimed here by the petitioner. So far, therefore, the proceeding is distinguishable from Union Natl. Bank, 18 B.T.A. 468; Bank of Terrebonne & Savings Bank, 19 B.T.A. 1286; Peoples Natl. Bank, 23 B.T.A. 815, and similar proceedings in which we have held that where capital assets were purchased a deduction may not be allowed as an ordinary expense, nor may a resulting loss be deducted from gross income.

The 2,000 shares of the capital stock of the Savings Bank were purchased by the petitioner from the stockholders of the Savings Bank and not from the Savings Bank itself. In this respect this proceeding is similar to Putnam Trust Co., 26 B.T.A. 655, in which we held that the purchase by the Trust Co. of stock of the Greenwich National Bank was an investment and that the excess of cost over the amount received by the Trust Co. on liquidation of the bank was a deductible loss.

Moreover, the parties to the contract for the purchase and sale of the stock were not the same as the parties to the contract for the purchase and sale of the Savings Bank’s assets. In the one case the parties to the contract were the petitioner and the stockholders of the Savings Bank; in the other case the parties to the contract were the petitioner and the Savings Bank itself. A corporation is legally distinct from its shareholders and in the absence of fraud and unfairness its separate transactions will not be disregarded. E. H. Nielsen Co., 26 B.T.A. 223. Nor is there in the two contracts identity of subject matter or of consideration. On the one band, shares of stock were purchased for the sum of $280,000, while on the other hand physical assets and good will were purchased for the sum of $250,006.07. We are, therefore, confronted here with two contracts differing in parties, subject matter and consideration. They are, therefore, separate in substance and in form. In such case we may not consider them as constituting one transaction in order to impose a tax. W. A. Hoult, 23 B.T.A. 804; Georgia Savings Bank & Trust Co., Administrator, 28 B.T.A. 1152.

It is true that at the time the final liquidating dividend was declared and paid by the Savings Bank the petitioner had acquired all that bank’s capital stock and that the Savings Bank’s only asset was the cash paid to it by the petitioner bank for the assets herein-before referred to. But we may not ignore the corporate entities of the two banks, Burnet v. Riggs Natl. Bank, 57 Fed. (2d) 980; affirming 17 B.T.A. 615, nor may we ignore the contract between the petitioner and the stockholders of the Savings Bank pursuant to which the shares of stock here involved were purchased.

We hold that the difference between the cost of the stock to the petitioner and the amount received on liquidation is deductible as a loss from the petitioner’s income for 1927.

Reviewed by the Board.

Decision will Toe entered under Rule 50.

GoodRioh and Leech dissent.


author: Aktjndell :

text:
    Frelmort Realty Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44714, 44965.
    Promulgated October 31, 1933.

      Morris L. Ernst, Esq., David J. Fox, Esq., and Joseph, J. Klein, Esq., for the petitioner.

      W. F. Gibbs, Esq., and Frank M. Thompson, Esq., for the respondent.
   OPINION.

Aktjndell :

The question of affiliation during 1924 and until Roeser and DeMallie surrendered their stock in 1925 requires but little discussion. Section 240 (c) of both the Revenue Acts of 1924 and 1926 provides for affiliation “ if one corporation owns at least 95 per centum of the voting stock of the other.” Here the petitioner owned but 80 percent, which clearly does not bring it within the statute. It has been held that affiliation may exist where the holder of a minority interest of more than 5 percent is but the nominee of the parent and the parent company is in fact the “ real owner ” of all the stock. Dome Co., 26 B.T.A. 967. That is not the situation here, for Roeser and DeMallie had a lively interest in the earnings of the subsidiary and held the stock as evidence of such interest. Consequently, they must be regarded as the “ real owners ” of their 20 percent stock interest. We are unable to follow petitioner’s argument that the minority owners could not exercise the usual stockholders’ rights of attending stockholders’ meetings and voting. The record does not support such claim. It goes no further than to show that they did not do so; not that they could not. Some contention is made as to petitioner’s legally enforceable control of the minority stock. Whatever force such claim may have had under the earlier statutes, it is entirely ineffective under the 1924 Act and later acts, which require “ ownership and not control.” Morris Foundry Co. v. Commissioner, 52 Fed. (2d) 839; affirming 18 B.T.A. 1055.

There is a difference of opinion between the parties as to when Roeser and DeMallie surrendered their stock, thereby vesting entire ownership in petitioner. Counsel for petitioner claims that this occurred coincident with the casting up of accounts between Brown-Rochester and Roeser and DeMallie on April 15, 1925, while respondent contends it was on May 25, 1925. Petitioner’s contention ,- is based on Roeser’s testimony that the computation of profits was made as of April 15, and his affirmative reply to a question as to whether, as near as he could recall, he and DeMallie turned in their certificates “ around April 15.” In support of respondent’s view there is the written stipulation of the parties filed at the hearing, reading as follows: “ (9) Brown-Rochester, on May 25, 1925, acquired the shares of stock held by Roeser and DeMallie * * Thus the oral testimony is in conflict with the written stipulation and, under the terms of the ¿stipulation limiting the evidence that,

may be produced by either side to such as is “ not inconsistent with the facts herein stipulated,” we cannot accept the testimony as establishing the fact that the minority stock was turned in prior to May 25, 1925. We accordingly hold that the two corporations were not affiliated and hence could not properly file a consolidated return for either the year 1924 or for any period in 1925 prior to May 25 in that year.

As to the portion of 1925 after the corporations became affiliated, petitioner’s view is that they were entitled to file a consolidated return for the period to June 2, when the merger became effective. The respondent’s position is, first, that the companies were affiliated for only a part of one day, May 25, between the time the minority interests turned in their stock and the time Brown-Rochester turned its assets over to petitioner, and that no return could be filed for such period; second, that even though they were affiliated from May 25 to June 2, they did not elect to file a consolidated return for that period.

We have held above that there was no statutory affiliation prior to May 25, 1925. On that date they became affiliated. But, as respondent points out, on the same date Brown-Rochester transferred all its assets to petitioner in pursuance of the authority previously granted to Brown to “ work out * * * a plan of reorganization.” The stipulation in regard to the assignment of assets reads as follows:

(9) Brown-Rochester, on May 25, 1925, acquired the shares of stock held by Roeser and DeMallie, and assets equivalent to approximately 20% of its capital stock and surplus were given in payment therefore after this transaction was consummated, Brown-Rochester turned over all of its remaining assets, with a fair market value of $770,686.37, to Prelmort. A list of the assets given to Roeser and DeMallie, and the items absorbed by Frelmort, respectively, is attached to this agreed statement of facts, made a part thereof, and marked “ Exhibit O ”.

In view of the stipulation we fail to perceive upon what ground petitioner contends that the record contains nothing to show that the transfers and assignments were made on May 25, 1925. True the stipulation reads that “ after this transaction ” (the acquisition of the minority stock) the assets were turned over, but inasmuch as both statements are contained in the same sentence, and as the evidence does not establish any other date, a fair construction of the stipulation is that the one date given was intended to apply to both transactions.

However, we do not regard this as material to the decision of either of the issues. If it be held that the transfer took place on May 25, under the formal assignments, Brown-Rochester was thereafter no more than an empty shell, and whether or not it was included in a consolidated return could not affect petitioner’s tax liability. If, as argued by petitioner, Brown-Rochester was possessed of its assets until June 2, 1925, when the merger became effective, the companies would be entitled to file a consolidated return for the period May 25 to June 2, had they made a timely election to .do so. This they failed to do and it can not be done now. We accordingly affirm the respondent in his audit for both years on the basis of separate returns.

The argument of petitioner on the question of liquidation is that Brown-Rochester’s assets were acquired by reason of the merger of Brown-Rochester into petitioner under thqjrtatutes of New York, and that in a merger under those statutes therels noRquidaSon, but merely a coalescence of two^corporations, the effect of which is to crgafe~STsm^ei3intity out of two corporations, which for tax purposes are considered to be a single unit. The merger statutes of/ New York, in so far as material here, are set out in the margin.

At the outset, as indicated above, we think there may be some question as to whether Brown-Rochester’s assets were transferred on May 25, 1925, by private act, or on June 2, 1925, by reason of the statutory merger. But, passing this and accepting petitioner’s view that the execution of assignments and transfers was merely to simplify matters and that the transfer took place by operation of law under the merger statute, we can not agree that the consequences thereof, for Federal tax purposes, are to be adjudged in the ^ light' of the state law. If, in fact, there was a liquidation, the taxis to be determined under the Federal statute and not by a statute of a state which for its own purposes may give the liquidation some other designation, or place in some peculiar status the merged^^ corporation. This has often been decreed by the Supreme Court. See Burnet v. Harmel, 287 U.S. 103, where the Court refused to treat as income from a sale income which under the Federal taxing-act is regarded as income from a lease even though the local law definitely gave the transaction all the attributes of a sale. The opinion reads in part:

Here we are concerned only with the meaning and application oí a statute enacted by Congress, in the exercise of its plenary power under the Constitution, to tax income. The exertion of that power is not subject to state control. It is the will of Congress which controls, and the expression of its will in legislation, in the absence of language evidencing a different purpose, is to be interpreted so as to give a uniform application to a nationwide scheme of taxation. See Weiss v. Wiener, 279 U.S. 333, 337, 49 S.Ct. 337, 73 L.Ed. 720; Burk-Waggoner Oil Ass’n. v. Hopkins, 269 U.S. 110, 46 S.Ct. 48, 70 L.Ed. 183; United States v. Childs, 266 U.S. 304, 309, 45 S.Ct. 110, 69 L.Ed. 299. State law may control only when the operation of the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law. [Cases] s * *
But section 208 neither says nor implies that the determination of “ gain from the sale or exchange of capital assets ” is to be controlled by state law. For the purpose of applying this section to the particular payments now under consideration, the act of Congress has its own criteria, irrespective of any particular characterization of the payments in the local law. See Weiss v. Wiener, supra, page 337 of 279 U.S., 49 S.Ct. 337, 73 L.Ed. 720. The state law creates legal interests, but the federal statute determines when and how they shall be taxed.

In Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110, it was held that Congress had power to tax associations as corporations despite the fact that under the local statute they were regarded as partnerships, the Court saying:

Neither the conception of unincorporated associations prevailing under the local law, nor the relation under that law of the association to its shareholders, nor their relation to each other and to outsiders, is of legal significance as bearing upon the power of Congress to determine how and at what rate the income of the joint enterprise shall be taxed.

In W. E. Guild, 19 B.T.A. 1186, there was a question of whether distributions were in liquidation of a corporation, and it was contended that we were bound by the decisions of the highest court of the state wherein the company was incorporated. We said:

In resolving this question we are not bound by either state laws or the construction placed thereon by state courts, as is illustrated in Burk-Waggoner Oil Association v. Hopkins, 269 U.S. 110, where it was held that a business organization might be a partnership under a state law and yet be considered for purposes of taxation as an association under the Revenue Acts of the United States. Compare also Weiss v. Wiener, 279 U.S. 333.

We have here no question of passing of title which would be controlled by local law. Group No. 1 Oil Corp. v. Bass, 283 U.S. 279. We think it cannot be denied that title passes to the possessor corporation under the merger statute, which provides that upon the filing of the prescribed certificate all property, etc., of the merged corporation “ shall vest in and be held and enjoyed ” by the possessor as fully and without diminution as before held by the merged corporation. Nor can it rightfully be said that in Bowman Hotel Corp., 24 B.T.A. 1193, and Oswego Falls Corp., 26 B.T.A. 60, recognition was given to the local statute to an extent which would make it controlling here. The questions there were procedural and the imposition of the Federal tax was not affected by application of the local law.

It is our conclusion on this phase of the case that we must deter- 'V mine whether the transfer of assets from Brown-Eochester to peti- j, tioner was in liquidation as that term is used in the Federal statute, rather than by the consequences flowing from what the local law de- J nominates a merger. In W. E. Guild, supra, we said: ' '

The word “ liquidation ” when applied to a partnership or company has a general meaning, well recognized by text-writers and courts, as the operation of winding up its affairs by realizing its assets, paying its debts and appropriating the amount of profit or loss.

This is the definition applied by the courts of New York. See Lafayette Trust Co. v. Beggs, 213 N.Y. 280; 107 N.E. 644. See also Holmby Corp., 28 B.T.A. 1091. We further said in the Guild case that:

Liquidation is not a technical status which can be assumed or discharged at will by a corporation by the adoption of a resolution by it» stockholders, but an existing condition brought about by affirmative action, the normal and necessary result of which is the winding up of the corporate business.

The Guild case presented the converse of the situation before us. There it was shown that at the time of adoption of a resolution to liquidate “ as soon as it could be done economically ” the stockholders had agreed upon a program of future active operation, and the corporation continued to function. We held that the distributions were not in liquidation. In the cases we have here, the evidence''1'/ leaves no doubt that it was the intent of the parties interested in Brown-Eochester to wind up its business. It had been formed for a particular purpose — to hold title to certain real estate — and upon disposition of the property there was obviously no further need for the corporation to exist as a separate entity. Consequently those in control decided to liquidate it, and upon distribution of its assets to petitioner the liquidation was an accomplished fact. The fact that petitioner continued to hold the stock of Brown-Eochester and the latter has not been formally dissolved is no obstacle to the transfer being a distribution in liquidation. Wilmington-Steamboat Co. v. Sturgess, 52 Fed. (2d) 210; affd., 55 Fed. (2d) 836. Cf. Rochester Ry. Co. v. Rochester, 205 U.S. 236, holding that “ a corporation without shareholders, without officers to manage its business, without property with which to do business, and without the right lawfully to do business, is dissolved by the operation of the law which brings this condition into existence.”

It is well settled that the transfer, in liquidation, of a subsidiar assets to the parent may result in gain or loss to the parent. Riggs Natl. Bank, 17 B.T.A. 615; affd., 57 Fed. (2d) 980; Canal-Commercial Natl. Bank, 22 B.T.A. 541; affd., 63 Fed. (2d) 619. We hold that petitioner acquired the assets of Brown-Rochester in liquidation, and the tax should be computed accordingly.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Section 85. Merger. Any domestic corporation * * * authorized to do business in this state owning all the stock of any other domestic stock corporation organized for, or engaged in business similar or incidental to that of the possessor corporation * * * may file in the office of the Secretary of State a certificate of such ownership, in its name and under its corporate seal, signed by its president or a vice-president and its secretary or treasurer, and setting forth a copy of the resolution of its board of directors to merge such other corporation, and to assume all of its obligation, and the daté of the adoption thereof. Thereupon all of the estate, property, rights, privileges and franchises of such other corporation, shall vest in and be held and enjoyed by such possessor corporation as fully and entirely and without change or diminution as the same were before held and enjoyed by such other corporation, and be managed and controlled by such' possessor corporation, * * * in its name, but subject to all liabilities and obligations of such other corporation and the rights of all creditors thereof.
      2. The possessor corporation shall be deemed to have assumed all the liabilities and obligations of the merged corporation and shall be liable in the same manner as if it had itself incurred such liabilities and obligations.


author: Smith :

text:
    City Bank Farmers Trust Company, Executor of the Estate of Ambrose H. Burroughs, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59797.
    Promulgated October 31, 1933.

      H. Lewis BroWn, Esq., for the petitioner.

      J. E. Marshall, Esq., and G. R. Marshall, Esq., for the respondent.
   OPINION.

Smith :

Were it not for the fact that the partnership agreement between Burroughs & Brown specifically provided that the death of one of the partners should not effect a dissolution of the partnership, no fair contention could be made by the respondent, we think, that any portion of the $67,701.56 in issue in this proceeding constituted taxable income of the estate during the period of administration or settlement of the estate, as provided by the statute; for the amount received by the estate from June 20 to December 31, 1929, was less than the value of the decedent’s interest in the partnership, which was returned for estate tax purposes at $84,900.27. The last named amount represented the value of the claim of the estate against the business of Burroughs & Brown, and the collection by the estate of a claim owned by it at the date of death of the decedent does not give rise to taxable income — at least until such capital value has been recovered. William G. Frank, Administrator, 6 B.T.A. 1071; Walter R. McCarthy, Executor, 9 B.T.A. 525; William K. Vanderbilt et al., Executors, 11 B.T.A. 291; Nichols v. United States, 64 Ct. Cls. 241; certiorari denied, 277 U.S. 584; J. Howland Auchincloss, Executor, 11 B.T.A. 947; Ella C. Loose, Executrix, 15 B.T.A. 169.

It should be noted that the deficiency with which we are concerned in this proceeding is that of the estate of Burroughs for a period subsequent to Burroughs’ death. The decedent was liable to- income tax upon his pro rata share of the net income of the partnership up to the date of his death. James S. Darcy et al., Executors, 26 B.T.A. 841; affd., 66 Fed. (2d) 581; First Trust Co. of Omaha v. United States (Ct. Cls.), 1 Fed. Supp. 900; Truman v. United States, U.S. Dist. Ct., N. Dist. Ill., E. Div., Sept. 7, 1933. But we have not that period before us.

There remains to be considered the effect upon this case of the provision in the partnership agreement above referred to. The respondent submits that the estate of the deceased partner is subject to income tax for the period from date of death, June 19,1929, to the end of the year 1929 upon profits (a) earned by the partnership during decedent’s lifetime and received by the partnership after decedent’s death and paid to his estate in 1929, and (b) upon gains and. profits earned and received by the “ partnership ” after decedent’s death and paid to his estate before the end of the year 1929, the said gains and profits being paid to the decedent’s estate under the provisions of the partnership agreement expiring, by its terms, six months after death of either party — the partnership, the decedent, and the estate being on a cash receipts and disbursements basis. In elucidation of this claim, the respondent sets forth that under the terms of the partnership agreement the partnership continued for six months after the date of death of Burroughs; that the estate and the surviving partner were in effect a new partnership ”; that section 161 (a) (3) of the Revenue Act of 1928 imposes an income tax upon the income of estates, including “ income received by estates of deceased persons during the period of administration or settlement of the estate ”; and that the act further provides that the executor shall be responsible for making the return of income for the estate, the net income to be computed in the same manner and on the same basis as in the case of individuals, with an exception not here material.

We think it clear that the death of Burroughs put an end to the partnership existing between Burroughs & Brown. It was the rule at common law that the death of a partner always operated to dissolve the partnership. The rule is not different in New York. Section 62 of the Partnership Law of that state (Laws 1919, ch. 408) specifically states that one of the causes of the dissolution of a partnership is the death of one of the partners. In Stewart v. Robinson, 115 N.Y. 328, 333; 22 N.E. 160, 161, it was stated:

It is a general rule that a contract of partnership is dissolved by the death of one of the parties, whether entered into for a fixed time or not, and that after his death the former partner cannot bind the estate of the decedent by new contracts, and, although the partnership be expressly extended to executors, they could not be compelled to carry it on, and would be entitled to a dissolution and an account of the assets, subject to the liabilities of the firm incurred up to the time of dissolution. * ⅜ ⅜

Cf. also Stem v. Warren (1920), 221 N.Y. 538; 125 N.E. 811. It must therefore be held that the partnership of Burroughs & Brown was dissolved on June 19, 1929, by the death of Burroughs.

With respect to the contention of the respondent that immediately upon the death of Burroughs a new partnership was formed between Brown and the executor of the estate of Burroughs and that the estate is liable to income tax in respect of distributions made to the estate by Brown from June 20 to December 31, 1929, there is nothing in the record showing any partnership agreement between the executor and Brown. In Stewart v. Robinson, supra, it appeared that one Colwell was in partnership with one Hepworth. The partnership agreement provided that:

Should either partner die during the term of said copartnership, the firm shall not be deemed dissolved thereupon, but the wife and children of the decedent sliall immediately succeed to his interest in the business, which thenceforward shall be prosecuted for the remainder of the term for the benefit of them and the surviving partner. Either partner may designate by will what interest his wife and children, as between themselves, shall have in his said copartnership interest in the event of his death as aforesaid.

It further provided that:

In the event of the death of either, the business shall be continued by the survivor until the expiration of five years from the 1st day of February next succeeding such death; the estate of the deceased partner to have the same share and interest in the profits, and to bear the same share of the losses of the business, as would have been received and borne by the deceased partner had he lived; ⅜ * *

The surviving partner, Hepworth, continued the business that had theretofore been carried on by the partnership and the partnership became insolvent. Creditors of the partnership sought to hold Colwell’s estate liable for the losses. The Court of Appeals for the State of New York stated:

⅜ * ⅜ There is in fact no partnership, for there are no partners. There is a surviving partner. Under the first article it might be said that, if the wife and children assented, they would have become partners. The executors cannot be deemed partners, for that capacity has not been put upon them, nor have they assumed it directly or indirectly by taking any part of the management of the business. They knew of its continuance, and loaned Hepworth money upon security. Nothing more. A new partnership was not formed; nor can one be implied. But it is said the “ estate ” of the deceased partner is to share in profits or bear a portion of the losses. Of what? Not a partnership, but a business conducted by a surviving partner. An estate cannot be a partner. * * *

We think that the principles laid down by the court in the above cited case are equally applicable to the determination of the issues raised in this proceeding. The estate of Ambrose H. Burroughs is not liable to income tax as a partner in the law business conducted by Brown.

It is apparent from the partnership agreement between Burroughs & Brown that a portion of the profits of the business during the six-month period following the death of a partner which was to be paid over to the deceased partner’s estate was “ payment for the good will of the deceased partner in the practice.” It appears that the petitioner, during the period June 20 to December 31, 1929, received $12,134.25 representing such portion of the profits. In Willard C. Hill, 14 B.T.A. 572, the Board held that a partnership was not entitled to deduct from its gross income as an ordinary and necessary expense of doing business an amount paid to the estate of a deceased partner pursuant to a partnership agreement, but that the amount represented a capital expenditure for the acquisition of the good will of such deceased partner. Our decision was affirmed by the Circuit Court of Appeals for the First Circuit, 38 Fed. (2d) 165, the court saying:

The estate of Soule was not a partner in the new firm and the payments to it out of the firm’s profits were not the receipt of a partner’s distributive share in the net income of the firm. The old firm was dissolved by Soule’s death and his interest in it passed to the petitioners, subject to the payments they were to make under article XIY. The payments contracted for were to be made by the individual petitioners, not by the new firm, and are in no sense an expense of the firm. And as regards the individual petitioners the payments made to the estate are not deductible as ordinary or necessary expenses for they were made by the petitioners in the purchase of a capital asset.

Cf. Pope v. Commissioner, 39 Fed. (2d) 420.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Smith:

text:
    Mary A. B. duPont Laird, Walter J. Laird and Philip D. Laird, Executors of the Estate of William Winder Laird, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51654.
    Promulgated October 31, 1933.

      Franh S. Bright, Esq., Robert H. Richards, Esq., and Aaron Finger, Esq., for the petitioners.

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

Smith:

The first question presented by this proceeding is the correctness of the action of the respondent in including in the gross estate of the decedent the value of a trust fund held by the Wilmington Trust Co. This trust fund was created by an agreement between the decedent and the Wilmington Trust Oo. dated December 27, 1923. Pursuant to this agreement, the decedent transferred to the trust company certain life insurance policies taken out by him upon his life (designated as the Primary Trust Fund), and shares of corporate stock (designated as the Secondary Trust Fund), the net income from the secondary fund to be used to pay premiums on the life insurance, and upon the further trust, after December 27, 1933, or the prior death of the trustor, to pay over the income and/or trust corpus to trustor’s wife and/or children or issue of children then living. The trustor reserved the right to change the beneficiaries of the trust. It is by virtue of this reservation made in the trust instrument that the respondent has included the value of the trust fund in the gross estate. No question is raised as to the value of the trust fund as of the date of death of the decedent. The respondent has included this fund in the gross estate by virtue of section 302 of the Revenue Act of 1926, which, so far as material, is as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
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(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
* * ⅜ * ⅜ * *
(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.

In Saltonstall v. Saltonstall, 276 U.S. 260, the Supreme Court stated.:

So long as the privilege of succession has not been fully exercised it may be reached by the tax. * * * And in determining whether it has been so exercised technical distinctions between vested remainders and other interests are of little avail, for the shifting of the economic benefits and burdens of property, which is the subject of a succession tax, may even in the case of a vested remainder be restricted or suspended by other legal devices. * * * The beneficiary’s acquisition of the property is equally incomplete whether the power be reserved to the donor or another. * * *

To the same effect, see Chase Natl. Bank v. United States, 278 U.S. 327; Reinecke v. Northern Trust Co., 278 U.S. 339; Porter v. Commissioner, 288 U.S. 436. On brief, the petitioners state that they are “ not able successfully to argue that it [Porter v. Commissioner, supra] is not applicable to the first point in this case * * * so the first point need not further be considered.” The action of the Commissioner in including the value of the trust fund in the gross estate is sustained upon the principles of law enunciated in the above cited decisions.

The remaining questions for the determination of the Board relate to the value of certain shares of stock of the Christiana Securities Co., Delaware Realty & Investment Co. and Glenden Land Co. owned by the decedent at date of death. These shares were returned by the petitioners for estate tax purposes at $800, $781.17122 and $340.21 per share, respectively. The respondent in the determination of the deficiency increased the values to $1,760.60 per share, $15,066.51 per share, and $397.31 per share, respectively. The stock of all of these companies was closely held by members of the duPont family. There have never been any sales establishing the market value of them. In the absence of such sales the respondent valued the assets of each company, consisting principally of listed stocks, and divided the net worth of each company by the number of shares outstanding for the purpose of arriving at the value of each share. This is upon the principle that for inheritance tax purposes a determination can and must be made of the value of the shares of stock in a closely held corporation by reference to the value of the physical property of the corporation, its success, earnings, etc. In re Felton’s Estate, 176 Cal. 663; 169 Pac. 392; In re Jones’ Estate, 172 N.Y. 575; 65 N.E. 570; 60 L.R.A. 476; In re Dupignac’s Estate, 123 Misc. Rep. 21; 204 N.Y.S. 273; Tax Commission v. Clark, 20 Ohio App. 166; 151 N.E. 780. Cf. also Langstaff v. Lucas, 13 Fed. (2d) 1022; Marr v. United States, 268 U.S. 536.

In valuing the shares of stock owned by these family corporations, the respondent used the median between the high and low points at which these shares of stock sold on the stock exchanges on the date of death of the decedent; viz., November 19, 1927. The petitioners contend that the closing prices of these shares on November 19,1927, were, in practically all cases, less than the median which was used by the respondent and that the respondent erred in using the median price rather than the closing price. The Board knows of no valid reason for using the closing prices rather than the median prices. The record does not show the hour of death of the decedent, if that were material. The contention of the petitioners upon this point is not sustained.

The decedent, at the date of his death, owned 1,000 common shares of Christiana Securities Co. out of 150,000 shares outstanding. The principal assets of this company consisted of 840,000 shares of common stock of the duPont Co. and 70,571 shares of the common stock of the Atlas Powder Co. The respondent valued the duPont stock at $325.75 per share and the Atlas Powder Co. stock at $65,875 per share for the purpose of making his computation. The petitioners contend that this was in error for the reason that such a block of the duPont Co. stock and of the Atlas Powder Co. stock could not have been sold within any reasonable period after the date of death of the decedent at the quoted prices for these shares. The petitioners introduced the opinion evidence of competent brokers to the effect that an attempt to sell as much as 840,000 shares of the common stock of the duPont Co. in November 1927 would have forced the market price down to such an extent that probably the seller would have received on the average something between $100 and $200 per share and that no market could have been found for as much as 70,571 shares of the common stock of Atlas Powder Co. These witnesses were of opinion that from a syndicate a price of $25 per share might have been realized.

It is to be noted that our problem is not the determination of the fair market value of 840,000 shares of the common stock of the duPont Co. and 70,571 shares of the common stock of the Atlas Powder Co. Our problem is that of determining the value of 1,000 common shares of Christiana Securities Co. out of a total issue of 150,000 shares. Cf. James Couzens, 11 B.T.A. 1040.

Section 302 of the Revenue Act of 1926, quoted above, provides that there shall be included in the gross estate the “ value ” at the time of the decedent’s death of all property, real or personal, tangible or intangible, wherever situated. Upon this point the Commissioner has prescribed article 13 of Regulations 70 (1926 edition), which, so far as material, is as follows:

Art. 13. Valuations. — (1) General. — The value of all property includable in the gross estate is the fair market value thereof at the time of the decedent’s death. The fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. * * *
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(3) Stocks and bonds. — The value of stocks and bonds listed upon a stock exchange should be determined by taking the mean between the highest and lowest quoted selling prices upon the date of death * * *.
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Stock in a close corporation should be valued upon the basis of the company’s net worth, earning and dividend-paying capacity, and all other factors having a bearing upon the value of the stock. Complete financial and other data upon which the estate bases its valuation should be submitted in duplicate with the return.

There is no question here of forcing on the market at the approximate death of the decedent the large block of duPont stock and Atlas Powder Co. stock held by the Christiana Securities Co. Those shares of stock were held as investments by the Christiana Securities Co. So far as anything appears in the record to the contrary, the market quotations for shares of duPont stock on November 19, 1927, represented the market value. The Christiana Securities Co. owned only 31.559 percent of the outstanding common stock of the duPont Co. There is no reason to assume that the quoted price did not represent the market price of the shares which were not held by the Christiana Securities Co. or that that value was an inflated value. It was testified that the lowest price at which duPont common stock sold on the stock exchange in November 1927 was $300.75 per share. The record does not show the prices at which this stock sold immediately after the death of the decedent or in 1928. Furthermore, the record does not show the earnings of the duPont Co. for any year. The same is true of the common stock of the Atlas Powder Co. The petitioners contend that the value used by the respondent in computing the value of the holdings of the Christiana Securities Co. in Atlas Powder Co. common stock of $65,875 per share was too high. But it appears that the Christiana Securities Co. sold its 70,571 shares of common stock of the Atlas Powder Co. at private sale on November 7, 1928, at $66.67 per share.

The respondent found the value of the 1,000 shares of Christiana Securities Co. common stock owned by the decedent at the date of death to be $1,760.60 per share. The Board must assume that the Commissioner’s findings were correct, in the absence of proof on the part of the petitioners that such value was incorrect. Avery v. Commissioner (C.C.A., 5th Cir.), 22 Fed. (2d) 6; Royal Packing Co. v. Commissioner (C.C.A., 9th Cir.), 22 Fed. (2d) 536; Greengard v. Commissioner (C.C.A., 7th Cir.), 29 Fed. (2d) 502; Botany Worsted Mills v. United States, 278 U.S. 282, 290; Wickwire v. Reinecke, 275 U.S. 101, 105. We think that the petitioners have not sustained the burden imposed upon them of establishing the unsoundness of the Commissioner’s determination. His determination is therefore approved.

The decedent owned 250 of the 8,000 shares of the Delaware Realty & Investment Co. stock. These shares were returned by the executors at a value of $781.17122 per share. The respondent determined the value at $15,066.51 per share. The difference between the executors’ and the respondent’s valuation (except as to $4.80 per share) results entirely from the fact that the executors did not. consider or value, and the respondent did consider and value, certain securities, hereinafter called annuity securities, as part of the assets of the Delaware Realty & Investment Co. These securities represent the original securities transferred to this company by Pierre S. duPont and Alice Belin duPont, his wife, pursuant to the annuity contract of May 31,1924, shown in our findings as “Assets of Annuity Fund,” and certain securities acquired by the company and carried in the “Annuity Reserve Fund.” It is the contention of the petitioners (1) that these securities should not he treated as assets of the company in determining the value of the company’s shares of stock; and (2) in the event such securities are regarded as assets of the company, the common shares of stock of the Christiana Securities Co. should not be valued at $1,760.60 per share, as has been done by the respondent, and the common stock of E. I. duPont de Nemours & Co., the common stock of the Hercules Powder Co., and the common stock of the Atlas Powder Co. should not be valued upon the basis at which such stock sold on the New York Stock Exchange at the date of the decedent’s death, because of the large blocks of the stocks held by the company.

In support of their contention that the annuity securities, including both the assets of the annuity fund and of the annuity reserve fund, should not be included as an asset of the Delaware Realty & Investment Co. in valuing its stock, it is submitted that:

* * * it ⅛ clear from the annuity contract that it is intended thereby that the fund at any time represented by the said securities and property shall be liable for the payment of the annuity and that the annuity is an equitable charge on the whole of said fund, and every dollar’s worth thereof, as it exists at every moment of time until the death of the survivor of the two annuitants; that:
» * ⅜ rj^ contract limits the right of Delaware Realty and Investment Company to use any income or earnings from the annuity securities to pay dividends to its stockholders or salaries to its employees or for any purpose other than making the annuity payments unless and until a reserve and guarantee fund shall have been accumulated amounting to 30% of a certain valuation therein fixed * * *;

and that “ the effect of the contract was to charge and encumber the annuity securities with the contract.” It is further .submitted that “the fundamental error of the Commissioner consisted in treating this annuity contract as though it were an ordinary life insurance company annuity ”; that “ under any viewpoint, the Commissioner’s determination of value necessarily contemplates that the annuity contract was redeemable.” It is then contended that the annuity contract is not redeemable and that the annuity securities or the proceeds which may be received upon a conversion of them must be retained by the company for the purpose of carrying out the conditions of the annuity contract; hence, that the company may not distribute them to its stockholders.

Careful consideration has been given to the above and other arguments made by the petitioners for the exclusion from the assets of the Delaware Realty & Investment Co. of the so-called annuity securities for the purpose of arriving at the value of 250 shares of its capital stock. We are of the opinion, however, that the arguments are largely beside the point. Our problem here is to determine the value for estate tax purposes of 250 shares of the stock of this company out of a total of 8,000 shares. The record does not show the earnings of the company or the earnings of companies whose stocks constituted its principal assets. The record does show, however, that this company paid 400 percent dividends upon its stock in 1927 and 795 percent upon its shares of stock in 1928. Whether these dividends exhausted its earnings is not shown by the record. The evidence appears to be clear that at the time the securities constituting substantially all of the assets of the annuity fund were received by the company on May 31, 1924, their value was $13,500,000. They were accepted as having that value. Under the respondent’s method of valuation of these assets, that is, by valuing the shares of stock constituting the principal assets of the annuity fund and the annuity reserve fund, the value of these assets at the date of death of the decedent was $126,743,493.03. The annuity contract has attached thereto a—

Table, referred to in the foregoing indenture, of present values of the annuity thereby granted, based on American Annuitants’ Select Mortality Tables (1920— males and females), and interest rate of approximately 4¾ per annum, birth of male annuitant January 15,1870, and birth of female annuitant July 15, 1871.

The present value of the annuity as of May 29, 1924, is shown as $13,500,000. This value decreases in successive years. At December 31, 1927, the present value of the annuity was $12,631,428. The present value of the annuity at December 31, 1977, is placed at $450,000.

It is apparent that the market value of the securities constituting the assets of the annuity fund increased enormously from April 31, 1924, to the date of the death of the decedent. The earnings of the corporation were likewise greatly in excess of what the officers of the company estimated they would be in 1924; for it is stipulated that at that time the officers of the company were of the opinion that the company would have no earnings available for distribution to its stockholders for a period of at least 10 years. This was owing to the fact that a reserve of 30 percent of the present value of the annuity must be created out of earnings before dividends were paid upon the stock of the company. The date upon which the earnings had accumulated to this extent is not shown by the record, but it is shown that, dividends were being paid upon the stock in 1927 and 1928, as above indicated. We cannot doubt that this annuity contract possessed by the Delaware Realty & Investment Co. was of great value to it and that its value was one of the assets to be taken into consideration in the valuation of the stock on November 19, 1921. We think there is no merit in the petitioner’s contention that the value of the annuity contract to the Delaware Realty & Investment Co. should not be taken into consideration in the valuation of its shares of stock. The annual payment of the $900,000 annuity to the decedent’s widow was for an indefinite term. In any event, the payment of the annuity terminates upon the death of Alice Belin duPont and then the company possesses its assets free and clear of any claim by the annuitants.

In the valuation of the shares of stock of this company, the respondent used the same method as he used in the valuation of the shares of common stock of the Christiana Securities Co. set out above. He valued the shares of stock owned by the company at the prices at which the shares sold on the date of the death of decedent. It was not possible, however, so to value the common shares of the Christiana Securities Co. and the 400 shares of Longwood, Inc. The principal assets of these companies, however, consisted of listed stocks and bonds, the values of which were easily ascertainable. The respondent used the quoted prices for such securities in the determination of the value of 49,000 common shares of the Christiana Securities Co. and 400 shares of Longwood, Inc. The petitioners make the same argument here as was made with respect to the valuation of the 1,000 common shares of Christiana Securities Co. owned outright by the decedent at the date of his death. For the reasons above stated, we are of the opinion that the evidence does not prove the unsoundness of the respondent’s determination. Even though it may be true that the large blocks of stock carried in the annuity and annuity reserve funds could not readily be sold at the prices determined by the respondent, this does not prove that the value of 250 shares of the Delaware Realty & Investment Co. was any less than $15,066.51 per share, the amount determined by the respondent.

It should be noted, however, that in the determination of the value of this stock the respondent considered as a liability of the Delaware Realty & Investment Co. the present worth of an ordinary annuity of $900,000 per annum to two persons of the ages of Pierre S. duPont and his wife, Alice Belin duPont, and to the survivor, as of the date of death of William Winder Laird on November 19, 1927, at $12,-475,139.13. The stipulation is to the effect that on this date such present worth was $12,658,151. In any event, the value of each share of stock of the Delaware Realty & Investment Co. should be recomputed, giving effect to the increased liability shown by the stipulation.

Aside from the error above noted, the determination of the respondent of the value of 250 shares of stock of the Delaware Realty & Investment Co. is sustained.

The final question for determination is the -value of 143 shares of the Glenden Land Co. This stock was returned at a value of $340.21 per share and increased by the respondent to $391.31. The only allegation of error upon this point made by the petitioners is that there were included in the assets of this company certain life insurance policies transferred by the decedent to this company at some time prior to his death. The company collected insurance on these policies in the amount of $1,039,288.37. The petitioners contend that no part of this amount should be included in the assets of the company.

The evidence does not show whether these policies had a surrender value. The contention is simply that they did not constitute an asset of the company which is to be taken into consideration in the determination of the value of the stock. We think that this contention is without merit. We can not doubt that they had some value to the company, even though they had no cash surrender value. In Estate of W. A. Blair, 4 B.T.A. 959, we said:

⅜ * * "We can not as a matter of law say that the valuation of a share of stock must exclude such an asset [life insurance policy]. That the right of the beneficiary under a policy is an asset seems clear. In re Reed’s Estate, 243 N.Y. 199; 153 N.E. 47. Whether at any given time it is worth its face or its surrender value or something between is a matter of fact requiring proof. * * *

To the same effect is Annie S. Kennedy et al., Executors, 4 B.T.A. 330, wherein the Board held that the shares of stock of the Bulger Block Coal Co. were to be valued as of the date of the decedent’s death and that insurance upon the decedent’s life, payable to the company, was to be included! in the company’s assets at its value at the time of decedent’s death, which was its face value. We there cited In re Einstein’s Estate, 186 N.Y.S. 931; affd., 193 N.Y.S. 931.

For lack of proof that the value of the 143 shares of Glenden Land Co. was less than the amount determined by the respondent, the respondent’s determination is sustained.

Reviewed by the Board.

Judgment will be entered xtnder Bule 50.