author: Van Foss an :

text:
    Elizabeth C. McCoy, Administratrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78952.
    Promulgated April 25, 1939.

      Claude I. Parker, Esq., and John Moore Robinson, Esq., for the petitioner.

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

Van Foss an :

The sole question now at issue is whether or not the entire proceeds from insurance policies carried by the decedent upon his life, payable to beneficiaries other than his estate, and aggregating $807,822.55, are includable in the decedent’s estate.

The petitioner relies on Lang v. Commissioner, 304 U. S. 264, in which the Supreme Court held that only one-half of such proportion of the proceeds of policies of life insurance of a decedent domiciled in the State of Washington, in favor of his wife and child, as represents premiums paid out of funds of the marital community is to be reckoned (less the permitted exemption) as a part of the gross estate for Federal estate tax purposes.

The decision in the Lang case is predicated on the principle that the laws of Washington establish a community between spouses which is a separate .entity and that life insurance purchased with its funds is community property, the character of which the husband can not defeat through change of beneficiary. The court cited as supporting this view Poe v. Seaborn, 282 U. S. 101, in which it was held that a wife in the State of Washington was entitled to file a separate income tax return of her one-half interest in the community income because she had a vested interest in the community property and the income therefrom. In the Lang case the Supreme Court expressly placed its stamp of disapproval on the language and holding of the court in Bank of America National Trust & Savings Association v. Commissioner, 90 Fed. (2d) 981. See also United States v. Goodyear, 99 Fed. (2d) 523.

In construing the community property statutes of California the Supreme Court, in United States v. Malcolm, 282 U. S. 792, answered in the affirmative the certified question, “Has the wife, under § 16la of the Civil Code of California, [effective July 29, 1927] such an interest in the community income that she should separately report and pay her tax on one-half of such income?”, and cited Poe v. Seaborn, supra; Goodell v. Koch, 282 U. S. 118 (Ariz.); and Hopkins v. Bacon, 282 U. S. 122 (Texas).

With respect to the basic principle underlying the decisions in both the Lang and Malcolm cases, the Court recognized the essential similarity of the Washington and California community property laws. In B. L. Blaffer, 38 B. T. A. 632, we considered the applicability of the gift tax to a gift, made by the husband, of his right, title, and interest in insurance policies, as affected by the community property laws of Texas, which differ materially from- corresponding-statutes in California and Washington. In that case we said:

* * * Nor is it of consequence that the community property laws of the State of Washington lay down a different rule from those of the courts of the State of Texas, cf. Lang v. Commissioner, 304 U. S. 264, or that the laws of the State of California appear to be like those of Washington. * * *

We believe that the decisions in the Lang and Malcolm cases have laid down the rule which we must follow in the case at bar. Respondent cites no authority in support of his position, nor have we found any. We affirm the position of petitioner. That portion of the proceeds of the life insurance policies in which the wife of George W. McCoy had a community property interest as measured by the amount of premiums paid from community property since July 29, 1927, the effective date of section 161a of the Civil Code of California, must be excluded from the gross estate of the decedent.

Decision will be entered wader Rule 50.


source: Caselaw Access Project

author: Mtjbdock:

license: Public Domain

text:
    The Bon Ami Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84557.
    Promulgated April 25, 1939.

      Charles H. Buckley, Esq., and George Link, Jr., Esq., for the petitioner.

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

Mtjbdock:

The Commissioner determined a deficiency cf $7,108.39 in the income tax of the Bon Ami Co. for the calendar year 1933. The facts were stipulated and are found as stipulated.

The petitioner, a domestic corporation, owned all of the stock of Bon Ami, Limited, of Canada, a foreign corporation. The domestic corporation received from its foreign subsidiary in 1933 a dividend (not deductible under section 23 (p) of the Revenue Act of 1932). The amount of the dividend in Canadian dollars was $750,000. The petitioner included in its gross income for 1933 $624,375, which was the amount of the dividend reduced to American dollars at the rate of exchange prevailing at the date of its declaration. The use of that rate of exchange and the resulting figure is not questioned by the respondent. The dividend was paid from accumulated earnings of the foreign corporation for the years 1926 to 1932, inclusive. The foreign subsidiary had paid income taxes to Canada for the years 1926 through 1932 based upon its earnings for those years. The parties agree that the petitioner is entitled to a credit under section 131 of the Revenue Act of 1932 for taxes paid to a foreign country, Canada. The sole issiie for decision is whether the amount of the credit should be computed by applying to the payments the rate of exchange at the date the dividend was declared, as the respondent contends, or by applying the rates of exchange prevailing at the times when the taxes were actually paid by the foreign subsidiary, as the petitioner contends.

Part III ox the Revenue Act of 1932 is entitled “Credits Against Tax.” It contains section 31, which provides that the amount of income taxes imposed by foreign countries shall be allowed as a credit against the tax to the extent provided in section 131. Supplement C is likewise entitled “Credits Against Tax” and includes section 131. Section 131 is made up of subsections lettered from (a) to (g), inclusive. (a) is entitled “Allowance of Credit” and provides that in ihe case of a domestic corporation the tax imposed by Title I of the Revenue Act of 1932 shall be credited with the amount of any income taxes “paid or accrued during the taxable year to any foreign country.” The statute makes no provision for reducing foreign taxes paid with foreign money to American dollars for the purpose of the credit. However, the Board has held that the amount of the credit is determined by reducing actual payments by a petitioner in foreign money to American dollars at the rate of exchange prevailing at the time of the payments. D. E. Brown, 1 B. T. A. 446; Mead Cycle Co., 10 B. T. A. 887.

Obviously, subsection (a), standing alone, would not allow the present taxpayer any credit, since this petitioner did not pay the taxes to the foreign country. The right of the present taxpayer to any credit whatsoever comes through subsection (f), which is entitled “Taxes of Foreign Subsidiary.” It provides in part:

JTor the purposes of this section a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends (not deductible under section 23 (p)) in any taxable year shall be deemed to have paid the same proportion of any income * * * taxes paid by such foreign corporation to any foreign country * * * upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends hears to the amount of such accumulated profits * * *.

Note that (f) allows no credit but merely provides that the domestic parent shall be deemed to have paid the tax. It is (a) alone which allows credit for taxes paid.

The Commissioner concedes that under subsection (f) the petitioner shall be deemed to have paid a certain amount of taxes on the earnings of its foreign subsidiary for the years 1926 to 1932, inclusive, which were actually paid by the foreign subsidiary. He further concedes (hat by reason of those payments the petitioner is entitled to a credit of $59,389.17, computed by reducing the payment of the Canadian taxes in Canadian dollars to American dollars at the rate of exchange prevailing- on March 16, 1933, the date of the declaration of the dividend. The argument of the petitioner is “the only date on which the taxpayer could have been deemed to have paid the foreign taxes is the date on which such foreign taxes became due and payable and the rate of foreign exchange as of that date is the date on which the rate of foreign exchange should be determined.” This argument goes too far for the petitioner’s own good. The stipulation of facts shows that only a small part of the taxes were paid in 1933 and most of the payments were made prior to 1933. The only allowance of credit is for “taxes paid or accrued during the taxable year to any foreign country.” Subsection (a). Thus, if the domestic corporation is to be deemed to have paid the taxes at the same time that the taxes were actually paid by the foreign corporation, the petitioner would be entitled to credit for only a proper portion of the taxes actually paid during the taxable year 1933. The Commissioner is willing to read subsection (f) as requiring that the taxes be deemed to have been paid by the domestic corporation at the time of the declaration of the dividend. There certainly is nothing in the statute to justify the allowance to this petitioner of a larger credit than that computed by the Commissioner. Consequently, we hold for the Commissioner.

The apparent pui-pose of allowing credit for foreign taxes paid “was to mitigate the evil of double taxation.” Burnet v. Chicago Portrait Co., 285 U. S. 1. The domestic parent is being taxed only on the dividends received in the taxable year reduced to American dollars at the rate of exchange applicable on the date of the declaration. Prior to the declaration of that dividend neither the earnings nor the taxes of that foreign subsidiary had in any way affected the income tax liability of the domestic corporation. There was never any occasion prior to that time to reduce the payment of foreign taxes to American dollars. If those payments are to be deemed to have been paid by the domestic corporation in the taxable year, it seems only reasonable and logical to reduce them to American dollars at some rate of exchange prevailing in the taxable year as opposed to rates of exchange prevailing at some prior times.

Decision will be entered for the respondent.


author: Stekniiagen: Black,

text:
    The First National Bank of Portland, a Corporation, Executor, Estate of L. B. Stearns, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92288.
    Promulgated April 25, 1939.

      Earl S. Nelson, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Stekniiagen:

The Commissioner determined the deficiency for each of the three calendar years 1934, 1935, and 1936, by adding to Stearns’ individual income the amounts set forth in the findings, which he called “income from fiduciary.” He explained his determination as follows:

The contention that L. B. Steams never accepted or received in his individual capacity any income derived from the estate of Mary F. Stearns, deceased, has been denied.
It is noted you state that to constitute constructive receipt “the income must be credited or set apart to the taxpayer without any substantial limitation.”
Under the provisions of article 162-1 (2) of Begulations 86, it is stated:
“Any income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to a beneficiary, whether or not such income is actually distributed.”
The disclaimer executed by L. B. Stearns was not filed until May 6, 1936. The agent is sustained in holding that the residuary income from the fiduciary is taxable income to L. B. Stearns.

The determination is thus based squarely upon section 162 of the Revenue Act of 1934, and upon the postulate that the trust income above $900 a month was “to be distributed currently by the fiduciary to the beneficiary.” The taxpayer contends that Stearns’ disclaimer became effective before the three taxable years in question, and hence that the trust income was not “to be distributed currently” to him. The Commissioner, however, answers that the only cognizable disclaimer is found in the written instrument of May 6, 1936; that until that instrument was executed Stearns was entitled to the distribution according to the will, and that being so entitled he is taxable thereon irrespective of whether he chose as a beneficiary not to receive and as a trustee not to distribute. Thus the question is narrowed to whether there was an effective disclaimer prior to the execution of the written instrument of May 6, 1936.

A beneficial interest under a trust may be disclaimed, Restatement of the Law of Trusts, section 36 (c), and the disclaimer may be expressed in writing, orally, or by conduct, so long as it is unequivocal, Blake v. Blake, 147 Oreg. 43; 31 Pac. (2d) 768. Furthermore, it may operate retroactively so as to obliterate ab initio the rights which it disclaims, Lehr v. Switzer, 213 Iowa, 658; 239 N. W. 564. While a disclaimer is not lightly to be recognized, Chilcoat v. Reid, 140 Atl. 100 (Maryland 1928), recognition of it may not be withheld when the evidence is clear, consistent, and undisputed. If there be any wavering by the beneficiary, and if the renunciation be not clear and definitive, he must accept the burdens of the trust which are incident to the benefits it bestows upon him.

By the evidence in the present case it appears that, shortly after his wife’s death in 1933, Stearns clearly told two officers of the bank that he intended to take none of the income which was provided for him under the will. One testified:

From the beginning Judge Stearns told me in very certain terms that he never would take any part of the income that was coming to him [under the will], didn’t intend to, he had enough of his own, he wanted no part, of her property whatever.
Q. Did he say that to you more than once?
A. Yes, I wouldn’t undertake to say how many times, but many times.

The other testified:

Q. Did Loyal B. Stearns make any statement to you with regard to that particular provision of the will which I have just mentioned and the income thereunder?
A. Yes.
Q. What did he say with reference to accepting any income which might have been available, or might at some time be available under the provisions of this will of Mary F. Stearns, the particular provision I have just mentioned to you?
A. He stated that he would accept none of it.
Q. Did he make this statement to you on more than one occasion ?
A. Yes.

Stearns in fact took none of the income from the trust, and, acting as the fiduciary, he made no distribution thereof to himself as beneficiary. This was the state of affairs throughout the taxable period, and unless we are to be unwarrantably skeptical, it indicates that bj words and conduct there was a disclaimer. Later, on May 6, 1936, Stearns confirmed his renunciation by the written instrument whereby he disclaimed not only his present and future rights but also “all past rights.” Then Stearns died, without having said or done anything in the slightest degree at variance with this renunciation and never having received any of the trust income. Thereafter the successor trustee sought from the state court a decree as to its powers and rights under the trust, and the court, on September 30, 1936, in explicit findings, conclusions, and decree, held that the plaintiff was entitled to administer the trust, the corpus of which then included the accumulated income which under the will might, but for the disclaimer, have gone to Stearns, and that Stearns had no right thereto and had validly disclaimed ail rights to income from the estate. While the decree was entered after default of the defendants, this does not derogate from its authority. It must receive here unstinted respect, Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5.

The Commissioner argues that until the written disclaimer of May 6, 1936, Stearns had the election between acceptance and disclaimer under the trust, and therefore during this period of election the income must be regarded as distributable to him. This view, however, does not accord adequate weight to the evidence of oral disclaimer operative from the beginning, nor does it give due respect to the decree of the state court. Obviously Stearns could have avoided all doubt by executing the formal written disclaimer at once, and his omission to do so involved the risk of failure of evidence to establish the disclaimer. But such credible evidence as there is may not be disregarded or given less than full weight, since it is uncontradicted.

In view of the disclaimer, it must be concluded that Stearns in 1934, 1935, and 1936 had no right to receive the trust income which the Commissioner has attributed to him, cf. Freuler v. Helvering, supra, and that it can not correctly be described in the language of the statute as income of the trust which was to be distributed to bim currently. He was no more the beneficiary after the effective disclaimer than he would have been after an assignment. Cf. Blair v, Commissioner, supra.

Strangely neither party has introduced or made reference to the returns of the fiduciary which under the statute are necessarily correlative with those of the income beneficiary — the beneficiary must return the distributable income which the fiduciary may deduct, Helvering v. Butterworth, 290 U. S. 365; Commissioner v. Dean, 102 Fed. (2d) 699; Old Colony Trust Co. et al., Executors, 38 B. T. A. 828. But since Stearns as beneficiary did not include any trust income in Ms individual returns, it may properly be assumed that as trustee he consistently included such income in his fiduciary returns without deduction, or else that, in view of the prima fade case which petitioner has made, the respondent would have gone forward and produced the inconsistent fiduciary returns which had been filed and which presumably were available to the Government.

The determination is reversed.

Reviewed by the Board.

Decision will he entered wnder Bule 60.

Black,

dissenting: In my opinion, the only effective disclaimer executed by the taxpayer was the one which he executed in writing on May 6, 1936. Moreover, I think such is the effect of the holding of the Circuit Court of Oregon for the County of Multnomah in the proceeding entitled The First National Bank of Portland v. Mary Helen Clair et al.

The court in its decree, following certain findings of fact and conclusions of law, entered September 30, 1936, refers to only one disclaimer and that was the one which petitioner executed May 6, 1936. The court, speaking of tMs disclaimer, said: “And that the said Loyal B. Stearns, by a valid and legal instrument in writing, disclaimed, disowned and renunciated all rights, titles, or interests in or to the estate and/or income from the estate of Mary F. Stearns, deceased.”

It may well be that this disclaimer of May 6, 1936, which was unquestionably valid, divested petitioner of all interest in the income of the estate both retroactively and prospectively, as between the parties interested in the income under the will of Mary F. Stearns. The disclaimer could' not have any effect, however, on petitioner’s income tax liability for 1934 and 1935. The income tax liability of petitioner in those two years was fixed by rights and liabilities which existed in those two years and not by what took place in 1936.

The scheme of the income tax law is to levy income taxes on an annual basis. That proposition is so well established that no citation of authorities on that point seems necessary.

The majority opinion, speaking of the effect of a disclaimer, says: “Furthermore, it may operate retroactively so as to obliterate ab initio the rights which it disclaims.” (Citing authorities.) As already stated, that is doubtless true as between the parties, but not as to income tax liability.

For the reasons stated, I respectfully dissent from the majority opinion.

Smith, Murdock, Arnold, and Disnet agree with this dissent.


author: Van Eossan:

text:
    Collateral Equities Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92360.
    Promulgated April 25, 1939.

      Hugh E. Wall, Jr., Esq., for the petitioner.

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

Van Eossan:

Issue is joined in the case as to whether taxpayer was, in the taxable year, a personal holding company under the provisions of section 351 of the Revenue Act of 1934.

The petitioner concedes that at least 80 percent of its gross income for 1934 was derived from royalties, dividends, interest, annuities, and gains from the sale of stock or securities, but denies that on the crucial date, July 27, 1934, 50 percent in value of its outstanding-stock was owned, directly or indirectly, by or for not more than five individuals. It also denies that it is, or any time during its existence was, a personal holding company.

The respondent’s position is that on July 27, 1934, only 27,000 shares of the petitioner’s “stock” were outstanding and that 13,710 such shares were owned by five individuals.

The petitioner is an association taxable as a corporation. Its certificates of beneficial interest correspond to the stock certificates of a corporation. The principles governing the status and incidents of stock ownership, therefore, are applicable to the issuance and ownership of the shares in the petitioner.

Respondent argues that, since certificates had been issued on July 27, 1934, in exchange for only 27,000 of the 28,605 shares which the New York Trust investors had deposited with Greene & Brock, such 27,000 shares constituted the only “stock” outstanding within the meaning of the statute.

The petitioner contends that the expression “outstanding stock” contained in section 351 (b) (1) (B) must be construed according to the law of the State of Ohio, and cites Erie Railroad Co. v. Tompkins, 304 U. S. 64. It asserts that under the state law stock is “outstanding” when subscribed and paid for, that all the 28,605 shares in the petitioner were subscribed and paid for, and that hence the 13,710 shares owned by five individuals are less than the 50 percent of the outstanding stock required to render the statute operative. We are of the opinion that petitioner’s contention must be sustained.

In Erie Railroad Co. v. Tompkins, supra, the Supreme Court has recently said:

Except in matters governed by tbe Federal Constitution or by Acts of Congress, the law to be applied in any case is the law of the State. And whether the law of the State shall be declared by its Legislature in a statute or by its highest court in a decision is not a matter of federal concern. There is no federal general common law. Congress has no power to declare substantive rules of common law applicable in a State whether they be local in their nature or “general”, be they commercial law or a part of the law of torts. And no clause in the Constitution purports to confer such a power upon the federal courts. * * *

The established rule in Ohio is stated in 10 Ohio Jurisprudence, paragraph 173, page 287, as follows:

There is a marked and obvious distinction between the stock of a corporation and the certificate representing the stock. The certificate of shares of stock in the corporation is not the stock itself, but is a mere evidence of the stockholder’s interest in the corporate property which issues such certificates, representing the interest which the owner and holder of it has in the entire assets of the corporation.

At page 291, paragraph 196 of the same volume the law applicable to the situation before us is further stated as follows:

In the absence of statutory or charter requirements, no certificate of stock is necessary to attest the rights of the shareholders; such certificate, when issued, is merely an evidence or acknowledgment of the owner’s interest in the property of the corporation, but is not property itself. The issuranee thereof is by no means essential to the creation of the relation of stockholder; one may be the owner of stock without any certificate to evidence the fact. The certificate is authentic evidence of title to the stock, but it is not the stock itself, or necessary to its existence; a subscriber becomes a stockholder from the moment he subscribes to the stock. Thus the right to vote, or to make transfers, exists, although no certificate has been issued.

The cases supporting the law thus expressed are: Ball v. Towle Manufacturing Co., 67 O. S. 306; 65 N. E. 1015; Cincinnati, N. O. & C. R. R. Co. v. Third National Bank, 1 O. C. C. 199; Simmons Hardware Co. v. Stokes, 16 O. C. C. 145; Royce v. Tyler, 2 O. C. C. 175.

In Simmons Hardware Co. v. Stokes, supra, the court said:

A man may own an interest in corporate property as a shareholder, he may vote as a member, he may transfer his stock without a certificate, his interest in the assets and his liability for its debts do not appear to depend on his possession of a certificate — all this has often been declared by the courts. The certificate is not the title, the title exists without the certificate and independent of it.

The respondent’s own regulations, article 25, Regulations 71, applicable to stamp taxes, recognize the same principle: “* * * Stock is deemed to be issued when it is subscribed for and the subscription is accepted by the corporation.”

We hold the 28,605 shares in the petitioner, hereinabove mentioned, to be “outstanding” within the requirement of section 351. The agreement of exchange had been consummated; only the manual issuance of a small part of the certificates remained to be done. All rights of ownership had attached. It follows that respondent must be reversed. Less than 50 percent in value of the outstanding stock in petitioner was owned by five individuals and consequently it does not come under the provisions of section 351.

In view of the conclusion we have reached above, it is unnecessary to discuss other contentions of the parties. It likewise follows that petitioner is subject to no penalty.

Decision will be entered for the fetitioner.

       SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES.

      (b) ixmxanom. — As used in this title—
      (1) The term “personal holding company” means any corporation (other than a corporation exempt from taxation under section 101, and other than a bank or trust company incorporated under the laws of the United States or of any State or Territory, a substantial part of whose business is the receipt of deposits, and other than a life-insurance company or surety company) if— (A) at least 80 per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and (except in the ease of regular dealers in stock or securities) gains from the sale of stoek or securities, and (B) at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five Individuals. For the purpose of determining the ownership of stock in a personal holding company — (C) stock owned, directly or indirectly, by a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries; (D) an individual shall be considered as owning, to the exclusion of any other individual, the stock owned, directly or indirectly, by his family, and this rule shall be applied in such manner as to produce the smallest possible number of individuals owning, directly or indirectly, more than 50 per centum in value of the outstanding stock; and (E) the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.

        Ball and the American Exchange Bank, et al. v. The Towle Manufacturing Co., 67 O. S. 306.

        Marble v. Van Wert National Bank, 3 O. C. C. 464, 20 C. D. 265.


author: Smith :

text:
    George S. Silzer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85160.
    Promulgated May 16, 1939.

      George S. Silzer pro se.

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

Smith :

This proceeding is for the redetermination of a deficiency of $1,760.41 in income tax for 1932. It is alleged in the petition that the respondent erred in the determination of the deficiency by disallowing the deduction from gross income of $50,000 claimed as a bad debt. The material facts have been stipulated as follows:

1. The petitioner is an individual with his offices at 744 Broad Street, City of Newark, State of New Jersey.
2. The taxes in controversy are income taxes for the year 1932 and in the amount of $1,760.41; $50,000.00 loss being claimed by George S. Silzer.
3. Notice of deficiency was mailed to the petitioner on May 15, 1936.
4. On September 12, 1927 petitioner sold Broad and Market National Bank & Trust Company stock (such stock having been erroneously described in the petition and deficiency notice herein as New Jersey National Bank and Trust Company stock) to John J. Stamler, who paid part of the purchase price therefor, and gave his interest-bearing note for $127,000.00 to petitioner in payment of the balance due on such sale and accompanied said note with 2800 shares of New Jersey National Bank & Trust Company stock and 142% shares of Improvement Realty Company stock as collateral security for said note. Petitioner was the payee of such note and endeavored to discount it by endorsing it without recourse but was not successful in that endeavor.
5. Consequently, on or about. October 1, 1927, petitioner discounted the above note at the Perth Amboy Trust Company, Perth Amboy, New Jersey, by making a general endorsement of the note whereby the note was negotiated to such bank. Such bank paid petitioner the sum of $127,000.00 less the normal discount to cover 6% interest for the period in question and the above bank thereupon became the owner of the above note.
6. The profit made by petitioner upon the sale of the above stock was duly reported in petitioner’s income tax return for 1927. Such return and all other income tax returns by petitioner, including the income tax return filed by petitioner for the year 1932, were on a cash receipts and disbursements basis.
7. The above note was transferred by the Perth Amboy Trust Company to the New Brunswick Trust Company on April 7, 1031. It was transferred by (he New Brunswick Trust Company to Perth Amboy Trust Company on July 1, 1931. On October 7, 1931, the above note was again transferred by Perth Amboy Trust Company to New Brunswick Trust Company. The said note was at all times accompanied by 2800 shares of New Jersey National Bank & Trust Company stock, and 142% shares of Improvement Realty Company stock. This stock in such companies was in the name of John J. Stamler and was collateral security for the payment of said note. The 2800 shares of New Jersey National Bank & Trust Company which at the time in 1927 when it was given as collateral was worth much more than the $50,000.00 claimed as a deduction on petitioner's 1932 return became worthless when said Bank went into bankruptcy and receivership in 1932.
8. On or about July 11, 1932, the New Brunswick Trust Company as the owner of the above note bearing petitioner’s endorsement called upon petitioner to discharge his liability by reason of such endorsement and petitioner thereupon gave his personal note to the New Brunswick Trust Company to cover the amount of his liability as endorser of the above note. And the bank held as further collateral to the said note the said 2800 shares of the New Jersey National Bank & Trust Company and the 142% shares of the Improvement Realty Company. They also held and now hold the original note which the Perth Amboy Trust Company had delivered to them on October 7, 1931. No part of such personal note signed by petitioner had been paid by the end of the year 1932.
9. On October 14, 1932, the above John J. Stamler filed a voluntary petition in bankruptcy. After the filing of the above bankruptcy petition and prior to December 31, 1932, it resulted that the amount due from Stamler on the above note signed by him in 1927 was uncollectible to the extent of at least $50,000.00. The New Jersey National Bank & Trust Company also in 1932 became bankrupt and said stock is worthless.
10. It is also stipulated and agreed that petitioner’s income tax returns for the years 1927 and 1932 are to be received in evidence.

The petitioner’s income tax return for 1927 shows that in that year he sold 2,715 shares of Broad & Market National Bank & Trust Co., of Newark, New Jersey, for $705,900; that the cost was $462,-560.64; and that the petitioner realized a gain from the sale of $243,339.86, which was included in gross income.

In his income tax return for 1932 the petitioner claimed the deduction from gross income of $50,000 as a bad debt. The $50,000 represents the uncollectible amount of the Stamler note at the end of 1932. The respondent has disallowed the claimed deduction in the determination of the deficiency.

It is the petitioner’s contention that in view of the stipulated fact “that the amount due from Stamler on the above note signed by him in 1927 was uncollectible to the extent of at least $50,000.00” at the end of 1932 he is entitled to deduct from his gross income as a bad debt the $50,000 in question. It is the respondent’s contention, on the other hand, that the petitioner is not entitled to claim the deduction by reason of the fact that by the giving of his own promissory note as additional collateral to the New Brunswick Trust Co. he has not suffered any diminution of his assets; that the petitioner upon the sale of his 2,715 shares of Broad & Market National Bank & Trust Co., of Newark, New Jersey, received the purchase price in cash except to the extent of $127,000 covered by an interest-bearing note; that this note was discounted at a bank and the petitioner received the proceeds of the note; and that the petitioner, not having paid out any cash in 1932, is not entitled to the deduction claimed.

We think that the contention of the respondent is correct in accordance with numerous court and Board decisions. In Eckert v. Burnet, 283 U. S. 140, the facts were that the taxpayer and his partner were joint endorsers of notes issued by a corporation that they had formed. In 1925 the taxpayer and his partner gave a joint note in settlement of their liability as endorsers. The Supreme Court held that where the taxpayer was on a cash basis no deduction was allowable. The Court, speaking through Mr. Justice Holmes, used (he foliowing language:

* * * For the purpose of a return upon a cash basis there was no loss in 1925. As happily stated by the Board of Tax Appeals the petitioner “merely exchanged his note under which he was primarily liable for the corporation’s notes under which he was secondarily liable, without any outlay of cash or property having a cash value.” A deduction may be permissible in the taxable year in which the petitioner pays cash. The petitioner says that it was definitely ascertained in 1925 that the petitioner would sustain the losses in question. So it was, if the petitioner ultimately pays his note. * * *

In Frank Kuhn, 34 B. T. A. 274, this Board said:

Although the petitioner states his familiarity with the rule of Eckert v. Burnet, 283 U. S. 138, and other cases, that a taxpayer on the cash basis may not deduct, either as a sustained loss or a debt ascertained to be worthless, the amount of a note made by him as primary obligor in substitution for a note given by another upon which the taxpayer had theretofore been a secondary obligor, until he pays on the note, he urges that this rule is inapplicable where the new note given by the taxpayer is collaterally secured by his pledge of property. * * *

Edmund A. Hughes, 27 B. T. A. 1022, is another case to the same effect. Likewise, in Max Gross, 36 B. T. A. 759, the Board said:

* * * A taxpayer reporting on a cash receipts and disbursement basis can be allowed only such loss deductions as represent actual outlays of cash or property in the taxable year and the claimed deduction here is not of that character. Eckert v. Burnet, 283 U. S. 140; A. F. Osterloh, 13 B. T. A. 713; aff'd., 37 Fed. (2d) 277; Morris Sass, 17 B. T. A. 261; James Klein Bowen, 27 B. T. A. 824; Edmond A. Hughes, 27 B. T. A. 1022; Frank Kuhn, 34 B. T. A. 274.

The disallowance by the respondent of the claimed deduction of $50,000 is approved.

Judgment will he entered for the respondent.

         S. R. Davis, 9 B. T. A. 755 (reversed on mandate, C. C. A., 7th Cir., without opinion); Morris Sass, 12 B. T. A. 150; 17 B. T. A. 261; Edmond A. Hughes, 27 B. T. A. 1022.


author: ArNolo :

text:
    Belle G. Loewenberg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86698.
    Promulgated May 16, 1939.

      Owen O. Emery, Esq., for the petitioner.

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

ArNolo :

Martin Loewenberg’s resignation automatically determined the period within which petitioner was obliged to sell her stock to Golo. Even without the benefit of the exact selling price of her stock, petitioner knew that a sale directly to Golo would result in a substantial profit to her. Through her husband she attempted to devise a plan which would prevent the taxation of this entire gain in the year of sale. In their search for an efficacious plan petitioner and her husband submitted their problem to counsel and accountants, as well as the president of Golo. The result of their efforts was the formation of Malvina, which petitioner now asserts was organized to accomplish a double purpose, namely, protection of herself and her husband in the event of the death of either with respect to probate expenses and proceedings, and the minimizing of her taxes by virtue of the sale to Malvina on the installment basis.

The plan here conceived, that is, a transfer to an intervening entity, has been used before, and its efficacy has been tested in the courts in numerous cases. The success or failure of the taxpayers in the decided cases has turned upon the particular facts involved so that no all embracing rule or principle can be laid down for testing the efforts of this petitioner. But the decided cases have stressed certain factors, in the light of which we may analyze the things done in the instant proceeding. For example, in Gregory v. Helvering, 298 U. S. 465, the Supreme Court, although recognizing the legal right of a taxpayer to decrease the amount of his taxes by means which the law permits, stressed the fact that the corporation there created had no business or corporate purpose, and was a corporate device, the sole object and accomplishment of which was the transfer of a parcel of corporate shares to the taxpayer.

In Groves v. Commissioner, 99 Fed. (2d) 179, tire Fourth Circuit refused to permit a taxpayer to escape tax upon earnings by organizing two corporations owned and controlled by him in anticipation of diverting to them the income he knew he would earn. The court characterized the contracts there involved as “anticipatory arrangements for the deflection of income to be earned.” “Such arrangements” said the court, “must be disregarded for the purpose of taxation.” To the same effect were the decisions in the following-cases where the courts resolved the issue upon the substance of the transaction and ignored the form: Foster v. United States, 303 U. S. 118; Helvering v. Gordon, 87 Fed. (2d) 663; Steinberger v. United States, 81 Fed. (2d) 1008; Lucas v. Earl, 281 U. S. 111.

The facts in Commissioner v. Griffiths, 108 Fed. (2d) 110, more nearly approximate the facts in this proceeding than any other case brought to our attention. Omitting the facts relative to Griffiths’ transactions prior to the one in question, it appears that in 1933 he sold certain stock and a claim arising out of the stock to a personally owned corporation on the installment basis. The transaction was handled in this manner upon the advice of counsel that such an arrangement might postpone the time of payment as well as limit the amount of his income taxes on the resulting profit. Griffiths had theretofore considered the organization of an investment corporation, and upon his instructions the corporate vendee was organized and perfected within 24 hours, so that it could receive the cash payment from the sale of the stock. At the time Grif-fiths authorized the creation of the corporate vendee he knew that tlie sale of the stock and settlement of the claim would probably be made within the next two or three days. In holding Griffiths liable for tax upon the entire profit the language of the court is peculiarly apt to the present question. The court stated:

* * * Notwithstanding the argument by respondent, not disputed by the petitioner, that the sale of the stock to the corporation was free from fraud; that the transaction was in no way concealed and therefore not illegal, we are presented with a situation in which the taxpayer and his counsel intentionally formulated a contrivance for the sole purpose of enabling the taxpayer to avoid the payment of tax. * * *

After quoting from Gregory v. Helvering, supra, the court continued :

It would be difficult to find language more aptly describing the present situation. Here, as there, the sole object was the consummation of a preconceived plan not to organize a corporation for a business purpose, but merely as a step in the contrivance to escape taxation. It performed, as was intended from Hie beginning, no other function, with the possible exception of the subsequent transaction of some business not inconsistent with the scheme of which it was a part. If speed in perfecting a plan to evade taxation be a commendable attribute, the taxpayer and his counsel would be entitled to great praise. Within 24 hours after respondent had information that his claim against Lay was to be settled for $100,000, the corporation was organized in Delaware, a meeting of the directors hold in Chicago, an agreement made between the corporation and respondent by which the money to he received in conformity with the settlement was to he paid to the corporation, and before the setting of the sun on the following day, the money had actually been received by i-espondent and deposited in the bank to the credit of the corporation, all for the purpose of enabling respondent to escape payment of tax upon the xirofit thus derived and which otherwise would have belonged to the Government * * *

This petitioner, like Griffiths, sold her stock upon the installment basis to a corporation created about 24 liours before the time of sale, with the definite intention and upon the advice of counsel that sue!) an arrangement might postpone or limit the amount of her income taxes. Like the corporation organized by Griffiths, Malvina was created for the stated purpose of an investment company, but this petitioner would further justify the existence of Malvina by attempting to show that other considerations entered into its creation. We are not persuaded by petitioner’s argument, nor by the elaborate minutes of Malvina, that such corporation was anything more than a contrivance intentionally created for the sole purpose of enabling the taxpayer to avoid a tax which would otherwise be due the Government.

In our opinion the real purpose in creating Malvina was to route through it the transfer of stock that petitioner had agreed to sell to Golo, and thus deflect from her the tax upon the income she would have received during the taxable year but for the intervening transfer on the installment basis to Malvina. Malvina’s receipt of the purchase price of the stock from Golo, investment of the proceeds, and payment of the installment obligations as they matured were but incidental to the real purpose for which it was created. To permit a taxpayer thus to circumvent the tax laws and escape a tax which Congress plainly intended to impose would exalt artifice above reality and deprive the statutory provisions of all serious purpose. We, therefore, sustain the respondent’s determination.

Eeviewed by the Board.

Decision will he entered for the respondent.

VaN FossaN, MurdoCk, and Leech dissent.


author: Black :

text:
    Roy F. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Roy F. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 91439, 91440.
    Promulgated May 17, 1939.

      William Earl Sharp, Esq., for the petitioners.

      Garroll Walker, Esq., for the respondent.
   OPINION.

Black :

Under the facts detailed in our findings of fact we hold that petitioner was not an employee of Gregg County, Texas, after July 1, 1935, but was an independent contractor. Prior to July 1,1935, petitioner was county engineer of Gregg County and received a salary for his services of $4,200 per annum, of which he had received $2,100 when he resigned July 1,1935.

The Commissioner has not raised any question as to petitioner being an employee of Gregg County prior to his resignation as county engineer on July 1, 1935. The $2,100 paid to petitioner by Gregg County prior to July 1, 1935, is not involved in this proceeding, but the Commissioner has determined, and rightly so we think, that the $28,054.72, paid to petitioner for his services after July 1, 1935, and during the remainder of the year was paid him not as an employee of Gregg County, but as an independent contractor. Even prior to the Supreme Court’s decision in Graves v. People of State of New York, 306 U. S. 466, the Supreme Court had held that the compensation of an independent contractor paid to him by a state or a political subdivision thereof was not immune from taxation. Metcalf ds Eddy v. Mitchell, 269 U. S. 514. Cf. Joseph Strauss, 35 B. T. A. 673; aff'd., 97 Fed. (2d) 549; certiorari denied, 305 U. S. 639.

Therefore, under the doctrine announced by the Supreme Court in Metcalf & Eddy v. Mitchell, supra, we hold that petitioner’s compensation received in pursuance of the terms of his contract with Gregg County is not immune from taxation.

Petitioners in a reply brief filed with the Board subsequent to the enactment of the “Public Salary Tax Act of 1939”, urge the applicability of that act and that under its terms petitioners are not taxable on the $14,027.36 which the Commissioner has included in the income of each for the year 1937, because such amounts were received by petitioners prior to January 1, 1938. We think the “Public Salary Tax Act of 1939” has no application to the facts of the instant case. That act applies to “officers and employees” of a state or political subdivision thereof. There is no contention that petitioner Roy F. Davis was an officer of the State of Texas and we have held that he was not an “employee” of Gregg County, Texas, after he resigned as county engineer July 1, 1935, and entered upon his work as an independent contractor under the terms of the contract of July 1,1935. We do not regard the decision of the Supreme Court in Graves v. People of State of New York, supra, and in Helvering v. Gerhardt, 304 U. S. 405, as having any especial application to the situation which we have here.

As we have already stated we regard Metcalf & Eddy v. Mitchell, supra, as the controlling authority and the “Public Salary Tax Act of 1939” was not intended to apply to that situation.

Decision will be entered for the respondent.


author: Leech :

text:
    Warren Service Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87533.
    Promulgated May 17, 1939.

      Robert E. Goulson, Esq., James K. Polls, Jr., Esq., and Talbert W. Sprague, Esq., for the petitioner.

      Gomoay N. Kitchen, Esq., for the respondent.
   OPINION.

Leech :

While the payment of $125,000, although received in 1926. could not be considered as income to the petitioner until used to cover a default by the lessee {Executors of Estate of George E. Barker, 13 B. T. A. 562), it was clearly income to petitioner in 1933 when the contingent obligation to pay it back to the lessee was discharged. Commissioner v. Langwell Real Estate Corporation, 47 Fed. (2d) 841; H. I. Josey, 38 B. T. A. 497. See Virginia, Iron Coal & Coke Co. v. Commissioner, 99 Fed. (2d) 919. It was none the less income, although petitioner agreed to hold it for the protection of the holders of petitioner’s 6 percent notes, because those notes evidenced petitioner’s debt. Helvering v. Blumenthal, 296 U. S. 552, reversing 76 Fed. (2d) 507, which reversed 30 B. T. A. 591.

The amount of the income thus received by petitioner in 1933, through the tenant’s surrender of all interest in the deposited sum, was $125,-000, and not the then worth of an obligation to pay $125,000 in 1941. H. I. Josey, supra; Commissioner v. Langwell Real Estate Corporation, supra; Farrelly-Walsh, Inc., 13 B. T. A. 923. Assets worth $125,000 were freed in 1933 for petitioner’s immediate unrestricted use. United States v. Kirby Lumber Co., 284 U. S. 1.

But petitioner urges that it suffered losses by the cancellation of the lease which offset any income thus received in 1933. Specifically, it points to its inability to secure a new tenant who would pay as much rent as the tenant had been paying under the lease which was canceled in that year.

It is well settled that disappointment in expectations of profit and mere lessening of income form no basis for a deductible loss. Henry C. Taylor, 34 B. T. A. 241; John F. Blanchard, 17 B. T. A. 1271: Frank F. Nicola, 1 B. T. A. 487.

Moreover, this Board has consistently held that losses in connection with real estate are not deductible so long as the owner of the property retains the title thereto, for the reason that there is no identifiable event to fix the amount of the loss beyond possibility of recoupment. Greenleaf Textile Corporation, 26 B. T. A. 737; aff'd., 65 Fed. (2d) 1017; A. J. Schwarzler Co., 3 B. T. A. 535; Collateral Mortgage & Investment Co., 37 B. T. A. 630. Cf. Rhodes v. Commissioner, 100 Fed. (2d) 966.

It is difficult to see, on this record, how petitioner suffered any loss other than a reduction of expected profits from an extremely advantageous lease. The property continued to possess the capability of producing income. It was relet on the day of the cancellation for $30,000 a year. That it was now less fruitful than formerly was an economic misfortune which the revenue acts do not palliate through the allowance of a deduction.

We are aware that the court which decided the Langwell case, while holding that a sum deposited to secure the performance of a lease constituted income in the year of forfeiture, held that such income might legally be offset by losses resulting from the cancellation of the lease, and that losses of that character were allowable when established by proof that the landlord could not have negotiated another lease as favorable as the one which had been canceled. However, in our view, this ruling ignores the necessity for a closed transaction, such as a sale, to establish a loss and also the possibility of some recoupment through other leasing arrangements. With all due respect for the tribunal which made that ruling, we find ourselves unable to follow it here. See H. I. Josey, supra.

In its claims for exemption from capital stock tax, petitioner asserted facts to show that it was not doing business within the meaning of section 215 (a) of the National Industrial Recovery Act and within the meaning of section 701 of the Revenue Act of 1934. These claims were for the fiscal years ending June 30,1933 and June 30, 1934. The Commissioner sustained petitioner’s claims for exemption for both years on the ground advanced in the claims. Neither the deficiency letter nor respondent’s answer in this proceeding repudiate those rulings, although both declare that petitioner is liable for excess profits tax. Respondent’s computation of petitioner’s excess profits tax shows, moreover, that the declared value of petitioner’s capital stock was “none.” On this state of the record, we hold that petitioner was exempt from capital stock tax. It follows that there is no liability for excess profits tax, since section 216 (a) of the National Industrial Recovery Act provides that the excess profits tax shall be imposed for “each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 215.” See Colson Co., 37 B. T. A. 1031.

Decision will be entered under Rule 50.


author: ÁRUNdell :

text:
    Mabelle M. Evarts, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank H. Evarts, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89321, 89322.
    Promulgated May 17, 1939.

      A. Colder Machay, Esq., for the petitioner.

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

ÁRUNdell :

The statute under which the respondent has determined the deficiency in this proceeding is section 44 (d) of the Eevenue Act of 1932. As far as material here the statute provides for the recognition of gain on the transmission of installment obligations upon the death of the holder, but that there shall be no such recognition if bond is filed with the respondent to assure the return as income by the recipients of the same amount as the decedent would have returned had he lived and received payment.

The bond permitted to be filed in order to suspend recognition of gain on the transmission is, by statute, to be filed at such time as the respondent may by regulation prescribe. By article 355 of Eegula-tions 77, approved by the Secretary of the Treasury on February 10, 1933, the respondent directs that the bond must be filed at the time of filing the return of the decedent for the year of his death.

Clearly the provisions of the statute and of the regulations support the respondent in his assertion of a tax upon the transmission of the installment obligations owned by the decedent. The petitioner’s view is that, as they have now reported the receipts from the liquidation of the installment obligation, the respondent should be estopped from asserting a tax on the transmission. They say that the bond provision is a relief provision and should be liberally construed in their favor.

Both parties cite the case of F. Harold Johnston, Executor, 33 B. T. A. 551. The petitioners cite it as similar and controlling, and the respondent says it is distinguishable. The Johnston case is strikingly similar except for the matter of the year of death of the holder of the installment obligation and the time of filing a return on behalf of the decedent. This difference in time is important, as will appear. In the Johnston case death occurred in 1932 and the executor filed a return of the decedent’s income on March 15, 1983. At the time of filing the return Eegulations 77 had been released less than three weeks, and the form prescribed by the respondent for filing bond was not available to the public until April 26, 1933. We held on the facts present in that case that the Commissioner’s refusal to accept a bond that the executor offered to file as soon as he learned of the requirements of article 355 of Eegulations 77 was arbitrary and the determination of a deficiency was unwarranted. But in this case Eegulations 77 had been released more than a year before the date of filing a return on behalf of the decedent, and the bond form had been available for nearly 11 months. This state of facts makes the holding of the Jolxmton case inapplicable. With the Bevenue Act of 1932 in force for so long a period, and the regulations and bond form released to the public for such a substantial period, it is difficult to see wherein the petitioners can justly complain that the respondent is acting arbitrarily when he applies the statute and regulations as they are plainly written. To the argument for liberal construction in favor of the petitioners because section 44 (d) is a relief provision, it is enough to say that what the petitioners ask is not a construction of the statute, but a complete disregard of it. That the petitioners were erroneously advised by a deputy collector may well arouse every sympathy for the petitioners, but that is no ground for us to now say that the respondent may not apply the law. John D. Biggers, 39 B. T. A. 480.

In one respect the respondent has erred. The sum of $5,000 was received by the decedent two days before her death, and that payment reduced the balance of the obligation to $20,000. The respondent has treated the sum of $25,000 as being the amount of the installment obligation transmitted at death. Obviously the $5,000 was income of the decedent during her life and should not be included as a part of the obligation transmitted at death. This may be corrected on recomputation.

Decision will he entered under Rule 50.


author: Murdock: Smith,

text:
    Grace M. Barnett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90665.
    Promulgated May 17, 1939.

      Charles F. Byers, Esq., for tire petitioner.

      James H. Yeatman, Esq., for the respondent.
    Briefs were filed as amid curae by Harry C. Weeks, Esq., and R. B. Garmon, Esq.

   OPINION.

Murdock:

The Commissioner determined a deficiency of $341.55 in the income tax liability of the petitioner for the calendar year 1935. The facts in the case have been stipulated and are hereby found as stipulated. The only issue for decision is whether the Commissioner erred in including $6,779.93 in the petitioner’s income for 1935. He explained his action as follows:

In accordance with the provisions of Article 23 (m)-10 of Regulations 80, there was allowed in the year 1934 a deduction of $11,000.00 as statutory depletion on $40,000.00 cash bonus received during the year as part consideration for the granting of an oil and gas lease on 391.1 acres. During the year 1935, 241 acres of the 391.1 acres were, in accordance with provisions of the lease contract released and restored to taxpayer. Held that the portion of the $11,000.00 depletion allowance for the year 1934 applicable to the 241 acres constitutes taxable income in the year 1935. Article 23 (m)-10 (c) and G. O. M. 14448, O. B. XIV-1.

The petitioner owned as her separate property a piece of land in Texas, containing about 391.1 acres. She leased this entire piece of property on May 8, 1934, to the Southwest Oil Co. to permit the latter to drill for and produce any oil, gas, or other mineral which might be found. The lessee paid to the petitioner in 1934 $40,000 in cash as part consideration for the granting of the lease. The Commissioner, in determining the petitioner’s income tax liability for the year 1934, included the $40,000 in her gross income and allowed a deduction for depletion of 27% percent thereof, or $11,000. The parties agree that the Commissioner made no error in his determination for the year 1934. Herring v. Commissioner, 293 U. S. 322.

The lease was to continue for a term of years and the lessor was to receive additional payments out of production. However, the lease was to terminate at the end of the first year unless drilling had been commenced prior to that time or unless the lessee had paid to the lessor a rental fixed at $1,955.50 for the entire acreage. The lessee could deliver a release covering any portion of the premises, relieving itself of all obligations as to the acreage surrendered, and thereafter the rentals payable should be reduced in proportion to the reduction in acreage affected by the release.

The lessee did not commence any drilling operations and nothing was extracted from the acreage during the first year. The lessee “failed to pay the petitioner the sum provided * * * to cover the privilege of deferring for 12 months from May 8, 1935, the commencement of drilling operations on 241 of the 391.1 acres covered by the lease, and as of May 8, 1935, the lease terminated and expired as to said 241 acres without any oil or gas or other mineral substances having been extracted or produced.”

The parties have agreed “that $6,779.93 of the depletion of $11,000 allowed as a deduction on the $40,000 lease bonus in computing petitioner’s net income for [1934] is applicable to the 241 acres as to which the lease expired in 1935.”

The petitioner does not argue that percentage depletion allowed for 1934 on account of the bonus should not be restored to income of the year in which the lease terminates where no oil or gas is ever extracted from the leased premises, but contends that there should be no restoration in 1935 because the lease did not terminate in that year as to all of the land covered by the lease. The respondent points to the stipulation that the lease terminated on May 8, 1935, as to 241 of the 391.1 acres covered by the lease, no oil or gas was extracted from the 241 acres, and $6,779.93 of the percentage depletion allowecl as a deduction in 1934 was applicable to the 241 acres. The respondent then argues that it is entirely immaterial in the light of this stipulation whether or not the lessee forfeited the lease in 1935 as to the remaining acreage. The only argument advanced by the petitioner is not supported by the facts. We perceive no flaw in the respondent’s contention.

Furthermore, there appears to be no sound reason for reversing the determination of the Commissioner. All of the regulations, beginning with Regulations 45, covering the Revenue Act of 1918, have provided that if depletion is allowed with respect to an advance royalty or bonus and no production occurs during the life of the lease, the lessor must restore to his capital account and report as income in the year the lease terminates the amount which he has been allowed to deduct as depletion in connection with the advance payment. See Regulations 45, art. 215, as amended by T. D. 3938, C. B. V-2, p. 117, and corresponding provisions in later regulations. Percentage depletion was first allowed by the Revenue Act of 1926, and the method above described was continued. See Regulations 69, art. 215. The regulations continued the method under the Revenue Act of 1934. See Regulations 86, art. 23 (m)-10. The Supreme Court, in Murphy Oil Co. v. Burnet, 287 U. S. 299, considered and approved this method of allowing and adjusting deductions for depletion, as is shown by the following quotation from the opinion :

We think the Commissioner’s method “reasonable” within the meaning of the statute. The deduction for depletion from the bonus payments, which the statute requires, must either be made after the process of extracting the oil is complete, to the extent that the royalties received have been insufficient to replace invested capital, with the attendant inconvenience of indefinite postponement of the allocation of the bonus to income and return of capital, or a formula must be adopted by which the appropriate allocation may be made as the two classes of gross income, bonus and royalties, are received.
That formula the regulation purports to furnish. Where the estimates are reasonable, the formula affords a fair and convenient method of avoiding the present taxation of the bonus, when received, as income, in the face of the probability that it will ultimately prove not to be such. It will not fail to provide, with reasonable certainty, for the restoration of capital to which the taxpayer is entitled, if the oil extracted equals or exceeds the amount originally estimated. If less than that amount, it does not preclude revision and necessary adjustments, as errors appear probable. In addition, provision is made by subdivisions (c) and (<?,) of the regulation, as amended, for such necessary capital readjustments as may be occasioned by the termination, abandonment or expiration of the lease before all the oil is extracted.

The reasonableness and desirability of such a regulation, whether applied to deductions based upon cost or upon percentage, is adequately shown by the discussion of the Supreme Court in the Murphy Oil Co. case already quoted. The following quotation from Herring v. Commissioner, supra, seems unimportant in view of the statements contained in the Murphy Oil Co. case:

As to income tax liability in the year of termination of the lease, on account of bonus paid at the execution of the lease, if no mineral has then been extracted, we express no opinion.

Likewise unimportant now is the decision in Kittie A. Knapp, 7 B. T. A. 790. The repeated reenactment by Congress of the provisions relating to depletion would seem to give to the long established and uniform regulations of the Commissioner the force and effect of law. Helvering v. Reynolds Tobacco Co., 306 U. S. 110.

Finally, the present case is analogous to a number of others, where, with or without a supporting regulation, an adjustment has been made during the taxable year in which actually no income was received. See Estate of William H. Block, 39 B. T. A. 338, and many cases there cited. See also Houbigant, Inc., 31 B. T. A. 954; aff'd. per curiam, 80 Fed. (2d) 1012. Income tax liability must be determined for annual periods on the basis of facts as they existed in each period. Burnet v. Sanford & Brooks Co., 282 U. S. 359. When some event occurs which is inconsistent with a deduction taken in a prior year, adjustment may have to be made by reporting a balancing item in income for the year in which the change occurs. This petitioner was able to offset a portion of the payment received in 1934 by a deduction for depletion and thus escape income tax on that portion of the payment. The deduction allowed for 1934 was proper but was granted conditionally. The petitioner by accepting the reduction also accepted the condition provided in the regulations. Depletion is an allowance made for exhaustion of the property. The lease was terminated in 1935 without any exhaustion ever haying-taken place. The petitioner thereupon became required under the regulations to restore to income the amount previously allowed as a deduction in respect to the 241 acres. There was no error in the determination of the Commissioner.

Reviewed by the Board.

Decision will he entered for the respondent.

Smith,

dissenting: The Revenue Act of 1934 provides in part as follows:

8EC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions: *******
(m) DEEjusiaoN. — In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in ail cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * *
(n) Basis for Depreciation and Depletion. — The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be as provided in section 114.
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
* * * * # ❖ ♦
(b) Basis for Depletion.—
*******
(3) Percentage depletion fob oil and gas wells.' — In the case of oil and gas wells the allowance for depletion under section 23 (m) shall be 27% per centum of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance under section 23 (m) be less than it would be if computed without reference to this paragraph.
Article 23 (m)-10 of Regulations 86, promulgated under the provisions of the Revenue Act of 1934, provides as follows:
Art. 23 (m)-10. Depletion — Adjustments of accounts based on bonus or advanced royalty. — (a) If a lessor receives a bonus in addition to royalties, there shall be allowed as a depletion deduction in respect of the bonus an amount equal to that proportion of the basis for depletion as provided in section 114 (b) (1) or (2) which the amount of the bonus bears to the sum of the bonus and the royalties expected to be received. Such allowance shall be deducted from the lessor’s basis for depletion, and the remainder is recoverable through depletion deductions on the basis of royalties thereafter received.
(b) If the owner has leased a mineral property for a term of years with a requirement in the lease that the lessee shall extract and pay for, annually, a specified number of tons, or other agreed units of measurement, of such mineral, or shall pay, annually, a specified sum of money which shall be applied in payment of the purchase price or royalty per unit of such mineral whenever the same shall thereafter be extracted and removed from the leased premises, an amount equal to that part of the basis for depletion allocable to the number of units so paid for in advance of extraction will constitute an allowable deduction from the gross income of the year in which such payment or payments shall be made; but no deduction for depletion by the lessor shall be claimed or allowed in any subsequent year on account of the extraction or removal in such year of any mineral so paid for in advance and for which deduction has once been made.
(e) If for any reason any such mineral lease expires or terminates or is abandoned before the mineral which has been paid for in advance has been extracted and removed, the lessor shall adjust his capital account by restoring thereto the depletion deductions made in prior years on account of royalties on mineral paid for but not removed, and a corresponding amount must be returned as income for the year in which the lease expires, terminates, or is abandoned.
(d) In lieu of the treatment provided for in the above paragraphs the lessor of oil and gas wells may take as a depletion deduction in respect of any bonus or advanced royalty from the property for the taxable year 27% per cent of the amount thereof; and the lessors of sulphur mines, metal mines, and coal mines may take as a depletion deduction in respect of any bonus or advanced royalty from the property for the taxable year beginning after December 31, 1933, for which he first makes return in respect of the property (and for subsequent taxable years in case an election to have depletion computed on a percentage basis has been exercised in the proper return) 23 per cent, 15 per cent, and 5 per cent, respectively, of the amount thereof; but the deduction shall not in any case exceed 50 per cent of the net income of the taxpayer (computed without allowance for depletion) from the property.

This regulation is consonant with similar provisions promulgated under the Revenue Act of 1926, the Revenue Act of 1928, and the Revenue Act of 1932. See Regulations 67, art. 216; Regulations 74, art. 236; Regulations 77, art. 230.

It will be noted that paragraphs (a), (5) and (c) of article 23 (m)-10 of Regulations 86 deal with “cost” depletion. They do not deal with “percentage” depletion. Paragraph (d) deals with “percentage” depletion. It states that “In lieu of the treatment provided for in the above paragraphs” etc. Nothing is said in paragraph (d) about restoring to “capital account” any portion of the depletion claimed for earlier years.

Apparently the respondent so construed his regulations until after the decision of the Supreme Court in Herring v. Commissioner, 293 U. S. 322. He then issued General Counsel Memorandum 14448 contained in Cumulative Bulletin XIV-1 (1935), page 98. In that memorandum it is stated:

In its opinion in William E. Herring v. Commissioner, supra, the Supreme Court made the statement that it expresses no opinion as to whether the amount allowed as a depletion deduction from the bonus payment in the year of the execution of the lease may be taxed as income to the lessor in the year of the termination of the lease where there has been no extraction of mineral from the leased premises. * * *

It then states:

* * * Since the “nature and purpose of the allowance is the same,” as the Supreme Court has pointed out, whether the deduction he computed on the cost basis or on a per cent of the gross income from the property it follows that the taxpayer must be deemed to have taken the bonus depletion deduction on the percentage of income basis on the condition that he will restore the amount of such deduction to income as of the year of the termination of the lease where there has been no production from the leased premises.

It was not until 1935 that the respondent construed article 23 (m)-10 of Regulations 86 as it has been construed in the proceeding at bar. In other words, the respondent has accepted the decision in Herring v. Commissioner, supra, as deciding what it expressly says it does not decide.

In the majority opinion the decision of the Supreme Court in Murphy Oil Co. v. Burnet, 287 U. S. 299, is relied upon as warranting the inclusion in the gross income of the lessor of an oil lease, in the year of the termination of the lease, of a part of the depletion allowance which the petitioner was permitted to take in a prior year. I do not think that the opinion of the Supreme Court in the Murphy Oil Go. case supports such view. In that case the Court stated:

* * * The question to be decided is whether the Commissioner correctly calculated the deduction for depletion for the years in question, by treating the bonus previously received by the petitioner, as a return of capital and by reducing pro tanto the depletion allowed on the royalties received in later taxable years. [Italics supplied.]

The Court was dealing there with “cost” depletion and not with “percentage” depletion. Manifestly, “cost” depletion is to be determined on a different basis from “percentage” depletion. In the one case the depletion deduction is to be limited by the cost or value of the depletable property. In the other it is not. This is recognized by the Commissioner’s regulations; for, in article 23(m)-l of Regulations 86 it is stated: “(1) In the case of * * * oil and gas wells the aggregate annual allowable deductions may, because of percentage depletion, ultimately exceed the cost or other basis.”

The depletion allowance under the Revenue Act of 1934 is an amount not exceeding 27yz percent of the gross income from the property during the taxable year and not exceeding 50 percent of the net income. Since it is apparent from the decision of the Supreme Court in Herring v. Commissioner, supra, that the petitioner was entitled to deduct from the gross income of 1934 an allowance for depletion, why should the benefit of that deduction be taken away in part by requiring her to include in her gross income for 1935 a part of the depletion allowance to which she was entitled for 1934? Did the petitioner receive any income in 1935? If the lessee had drilled for oil upon the demised property and found that there was none in it and abandoned the lease in 1935, would the lessor have received income in 1935 from the abandonment of the lease? I do not think so.

The Revenue Act of 1934 permits the deduction of a depletion allowance in the case of oil and gas wells equal to a percentage of the income from the property. It is not limited by cost or value. The right to that deduction is not abridged by the Commissioner’s regulations, as I read them. If there is doubt upon this point I think it should be resolved in favor of the taxpayer.

I do not think there is any merit in the statement in the majority opinion that the regulations of the Commissioner promulgated under the Revenue Acts of 1926 to 1934, inclusive, have the force of law by reason of the successive enactments without change of the revenue acts permitting the deduction from gross income of percentage depletion, since the regulations do not require the adjustment of the capital account in case no oil is found in the land. There is no capital account to be adjusted. The regulations provide for an adjustment of capital accounts only where depletion is taken upon a cost or value basis. No adjustment is provided for where depletion is taken on the percentage basis.

Arundell agrees with this dissent.


author: Van Fossan :

text:
    Old Colony Trust Company, Executor of the Will of Louis E. Flye, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84321.
    Promulgated May 17, 1939.

      Alfred P. Lowell, Esq., for the petitioner.

      Louis 8. Pendleton, Esq., for the respondent.
   OPINION.

Van Fossan :

In the first issue the jietitioner contends that, since there was no obligation on the part of the executor (or any one administering the estate) to apply to debts, taxes, and expenses of the estate the proceeds of the 12 insurance policies which form the corpus of the trust of November 4, 1927, the second clause of section 302 (g) of tbe Revenue Act of 1926 applies and the exemption of $40,000 is allowable.

The respondent argues that the responsibility to pay the debts, taxes, and expenses of the decedent’s estate was imposed by paragraph 6 of the trust agreement and the fact that the trustee could refuse to make such payments if, in its judgment it would be for the best interests of the beneficiary so to do, is immaterial.

Article 26 of Regulations 70 is in part as follows:

Abt. 26. Insurance in favor of the estate. — The provision requiring the inclusion in the gross estate of all insurance receivable by the executor without any deduction, applies to policies made payable to the decedent’s estate or his executor or administrator, and all insurance which is in fact receivable by, or for the benefit of, the estate. It includes insurance taken out to provide funds to meet the estate tax, and any other taxes or charges which are enforceable against the estate. The manner in which the policy is drawn is immaterial so long as there is an obligation, legally binding upon the beneficiary, to use the proceeds in payment of such taxes or charges. * * *

This language, which we think correctly interprets the intent of the statute (see Marmaduke B. Morton, Admmistrator, 23 B. T. A. 236) is plain in its meaning. The proceeds of an insurance policy are includable in the gross estate so long as there is an obligation, legally binding upon the beneficiary, to use them in payment of taxes or other charges enforceable against the estate. In the case at bar, there is no obligation binding on the beneficiaries, or the trustee representing the beneficiaries, to pay such debts of the estate. On the contrary, the trust agreement authorizes and permits but does not direct or require the trustee “if in its judgment it would be for the best interests of the beneficiaries” to “use and apply the principal and accumulated income of the trust estate to such extent as it may deem necessary for the payment of any debt of the Donor or for taxes.”

In the exercise of its discretion — and undoubtedly for the beneficiaries’ best interests which it was the duty of the trustee to conserve and protect — the trustee made no payment to the executor of the estate nor did it ever intend to do so. There is no “legally bind-' ing obligation” which would or could compel the trustee to pay such debts and charges against the estate. Therefore, this petitioner does not come within the inclusive provisions of the regulations and the $40,000 exemption applies.

In Marmaduke B. Morton, Admmistrator, supra, cited and relied upon by the respondent, the situation is quite different. There, under the will of decedent the proceeds of the insurance policies were subject to the payment of the charges against the decedent’s estate and the expenses of administration. The evidence there disclosed that the insurance proceeds were mingled with other assets of the estate and a large part of the commingled funds paid out to satisfy debts and demands. We held that the respondent correctly had held the insurance proceeds to be a part of the gross estate and taxable under section 302.

The proceeds from the Travelers Insurance Co. group policy present a different problem. There the premiums were paid by both the decedent and the corporation to which the¡ policy was issued. Article 25 of Regulations 70 provides in part as follows:

The term “insurance” refers to life insurance of every description, including death benefits paid by fraternal beneficial societies, operating under the lodge system. Insurance is deemed to be taken out by the decedent in all cases where he pays all the premiums, either directly or indirectly, whether or not he makes the application. On the other hand, the insurance is not deemed to be taken out by the decedent, even though the application is made by him, where all the premiums are actually paid by the beneficiary. Where a portion of the premiums were paid by the beneficiary and the remaining portion by the decedent the insurance will be deemed to have been taken out by the latter in the proportion that the premiums paid by him bear to the total of premiums paid.

In Helvering v. Reybine, 83 Fed. (2d) 215, article 25 was held applicable to the facts of that case. The decedent had paid 62 percent of the total premiums on the $30,000 Connecticut Mutual policy and 61.96 percent of the total premiums on the $50,000 policy issue by the same company. The court held that the insured’s estate was liable to pay an estate tax on only that portion of the proceeds attributable to premiums paid directly by the insured. Walker v. United States, 83 Fed. (2d) 103. Cf. Nelson v. Commissioner, 101 Fed. (2d) 568.

The respondent relies on Igleheart v. Commissioner, 77 Fed. (2d) 704, affirming 28 B. T. A. 888, but in that case the decedent purchased the interest of his employer in the policies by the payment of their cash surrender value and paid all subsequent premiums. Thus, the entire proceeds of the policies were acquired by the decedent through expenditures made by him. Here the decedent paid 19150/42215 of the premiums and his estate is taxable with that proportion of the proceeds.

The second issue involves the taxability of the property owned by the decedent and his wife as tenants by the entirety. Under section 302 (e) of the Revenue Act of 1926, property owned by husband and wife as tenants by the entirety is properly included in the gross estate of the deceased spouse, provided no part of such property originally belonged to the survivor. Tyler v. United States, 281 U. S. 497. The petitioner contends that it is obviously a fact that the South Franklin Street property “originally belonged” to Mrs. Flye, since it passed to her under the will of her father Eugene Snell; that she conveyed it to her husband pursuant to their plan to place the title thereto in their joint names; that for various reasons the consummation of that plan was delayed for months and that it was ultimately accomplished by companion deeds of January 17, 1929, to and from Madeleine C. Hourihan.

The respondent narrow's the controversy to an issue of fact when he states that “Annie L. Flye did not convey said property to the decedent as a part of a plan of eventually vesting title in themselves, as tenants by the entirety, even though she testified otherwise.”

The record show's clearly that the original intention of the decedent and his wife was to hold the property as tenants by the entirety, and we have found such to be a fact. The respondent’s position is supported by no contradicting testimony but solely by his argument that inference would lead to his conclusion. However, the petitioner’s explanation of the delay in completing the joint ownership plan is reasonable, and, we think, entirely in harmony with the status of the parties and the circumstances surrounding the transaction. The decedent was a busy lawyer, with a large and exacting practice. He may have deferred attention to his own family affairs for an unusually long time, but intervening events, such as his attempt to sell adjoining property owned by him, the illness and death of his mother-in-law, and his wife’s serious operation, furnish prima facie extenuating circumstances.

At most, the decedent could be charged only with procrastination. The record does not disclose the slightest suggestion that the deeds of January 17, 1829, were executed as the result of a sudden and independent notion to hold the property jointly. The fact that, until the decedent’s death, the taxes and cost of repairs were paid from Mrs. Flye’s own money is in itself strongly persuasive that it was the original and continuing purpose to shift the title to the decedent and his wife as tenants by the entirety. The agreed value of the South Franklin Street property, or $7,100, is not includable in the decedent’s gross estate.

The third issue presents the deductibility of a claim of the Ban-dolph Trust Co. representing the decedent’s liability on two notes by reason of his endorsement thereof, as authorized by section 805 of the Bevenue Act oí 1932. Both notes were endorsed under similar circumstances. The makers were ultimately irresponsible, but the financial condition of Sharp at the time he executed the note is not shown. Hemenway acted as a “straw man.” However, both obligations were secured by collateral as well as by the decedent’s endorsement. At the time of the decedent’s death both notes were overdue and unpaid. The Kandolph Trust Co. filed its claim with the commissioners in insolvency and such claim, covering both liabilities, was allowed. The respondent contends that the decedent’s endorsement was not made for an adequate and full consideration in money or money’s worth and argues that, due to the financial irresponsibility of the makers, such endorsement was the equivalent of making a gift. He relies on Commissioner v. Porter, 92 Fed. (2d) 426, in which the court made the following comments:

* * * Tile purpose of the pliraso under discussion was, in our opinion, to prevent a man from diminishing his taxable estate by creating obligations not meant correspondingly to increase it but intended as gifts or a means of distributing it after his death. See Latty v. Commissioner, 62 F. (2d) 952 (C. C. A. 6). Thus, if a guarantor reserve no recourse over against the principal in the transaction, the guaranty would be in substance a gift; * * *

However, we quote further from that opinion:

* * * But the present record does not disclose a transaction of that character. There is no evidence that the decedent surrendered his right of subrogation to the pledged collateral or his right to seek reimbursement from other property of his son-in-law should the guaranty be called. It is true that in October, 1931, when the guaranty was increased by $30,000, the collateral was $50,000 short of the loans, and that, as stipulated, the right of subrogation at the guarantor’s death and at all times since was valueless. But the stipulation does not say that when the guaranty was given, the son-in-law was insolvent or that the guarantor had no reasonable expectation of reimbursement if he should be called upon to pay. So far as appears, it was an ordinary business transaction by which an accommodation guarantor, if required to pay, would acquire rights equal in value to the obligations he had assumed. The Board rightly held the claim deductible.

The decision in the Porter case is directly applicable to the case at bar. There is nothing in the stipulation or in the record which shows that either Sharp or Hemenway was insolvent at the time the decedent endorsed their notes. If the decedent had been held primarily responsible for the payment of the notes and had paid them at the demand of the payee, he might have had recourse to the collateral to reimburse him, at least in part.

The respondent also cites Latty v. Commissioner, 62 Fed. (2d) 952, and Glaser v. Commissioner, 69 Fed. (2d) 254. In both of those cases, however, the claims were based on the decedent’s promises to make future provisions for beneficiaries, the fulfillment of which would have resulted in gifts. Here the decedent had already obligated himself to pay the trust company the amount secured from it in cash by the maker of the note. The statute does not require that the consideration on which the claim is based should have been received by the decedent. Commissioner v. Porter, supra, and cases there cited; Estate of Hugo Goldsmith, 36 B. T. A. 1201.

The claim of the Randolph Trust Co. based on both the Sharp and Hemenway payments, is properly deductible from the decedent’s gross estate.

Decision will l>e entered under Buie SO.

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

       (e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s worth: * * *

       SEC. 805. DEDuCTIONS.
      Section 303 (a) (1) of the Revenue Act of 1926, as amended, is amended to read as follows:
      “(1) Such amounts—
      “(A) for funeral expenses,
      “(B) for administration expenses,
      “(C) for claims against the estate,


text:
    Laura E. Huffman, Petitioner, v. Commissioner of Internal Revenue, Respondent. M. D. Huffman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Nina H. Terrill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90801, 90802, 90803.
    Promulgated May 17, 1939.

      Thomas B. Dempsey, Esq., and Arthur McGregor, Esq., for the petitioners.

      E. A. fonjes, Esq., for the respondent.

       SEC. 166. REVOCABLE TRUSTS. [Revenue Act of 1932.]
      where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
      SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      * jH * * * * ‡
      then suck part of the income of the trust shall be included in computing the net income of the grantor.
      (b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”

   OPINION.

Van Foss an :

The parties agree that the disposition of the cases at bar turns on the question of whether or not the persons who are vested by the trust agreement with the power to amend, in whole or in part, to revoke, and to terminate the trust, have a substantial adverse interest.

The provisions of the three trust agreements are essentially the same, varying only in the designation of the person or persons who are given the right to amend, revoke, and terminate, and those persons bear a substantially similar family relationship to the grantors. Therefore, we shall confine our discussion to the material provisions of the M. D. Huffman trust and our conclusion will be equally pertinent to the Laura E. Huffman and the Nina H. Terrill trusts.

The M. D. Huffman trust irrevocably transfers a certain interest in an oil and gas lease to a trust company as trustee. The trust grants rather broad powers to the trustee in the management, acquisition, and conversion of the corpus. It prohibits distribution of income during the period of a possible appeal from and final adjudication of a judgment rendered in favor of the grantor and others, defendants, in the Superior Court of Fresno County, California. An appeal was taken and the final adjudication was not made until May 7, 1934. Thus, no distributions provided by the trust were made to the grantors, as hereinafter mentioned.

The trust provided that after the termination of the appeal the trustee should pay certain costs, expenses of management, etc., and (lien distribute to the grantor $500 per month and accumulate the excess as “accumulations of net income” in a fund which might be invaded if the current income of the trust were not sufficient to make the specified monthly payments to the grantor. After the grantor’s death all net income shall be accumulated.

The right and power to amend, in whole or in part, and fully to terminate or revoke were reserved and vested in Milton W. Terrill with the written consent of either Leona H. Hobson or Nina H. Ter-rill or, if they be dead, upon his own direction. After the death of Terrill similar rights and powers were vested in Mrs. Hobson and Mrs. Teirill and the survivor of them with the written consent of C. H. Hartke, or, if he be dead, upon the direction of Mrs. Hobson and Mrs. Terrill or the survivor. The trust instrument provided, however, that no amendment, termination, or revocation relating only to the accumulation of net income should be made prior to the final adjudication of the appeal.

Unless sooner terminated by operation of (.he powers so granted, the trust was to cease upon the death of the last survivor of M. D. Huffman, Laura E. Huffman, Leona H. Hobson, Nina H. Terrill, and Milton W. Terrill; whereupon the entire net trust estate would vest in the grantor’s heirs at law.

The accumulation or distribution of the trust income is not subject to the discretion of the grantor or to anyone not having a substantial adverse interest in its disposition. Therefore, that factor is eliminated from consideration. The distribution of $500 per month to the grantor was held in abeyance pending the settlement of the appeal case. If and when that case were adjudicated (an event which occurred on May 7, 1934), that sum was properly and admittedly distributable and taxable to the grantor. (Sec. 167 (a) (1).)

The power of amendment, termination, and revocation includes the power to revest title to the corpus in the grantor. That power is lodged in Terrill. The question for determination, therefore, is, Did be have a substantial adverse interest in the disposition of the trust corpus or income? On consideration of the trust instrument we have no doubt that he did.

In the first place, Terrill is one of the heirs at law of the grantor. The respondent argues that he has no interest in the grantor’s trust estate because the trust will not terminate until the death of all five of the persons mentioned, including himself, and, therefore, he can not be the recipient of the trust property. The respondent states that the only other method of terminating the trust is by revocation. If revoked during the trustor’s life, the trustor would reacquire the corpus; if revoked after trustor’s death the corpus would go to the heirs, who during 1932 were Terrill, his mother, and his aunt. The respondent asserts that the “remote possibility” of Terrill receiving the trust property does not constitute a substantial adverse interest within the meaning of the statute.

The vital defect in the respondent’s argument is that he has overlooked the power to amend, vested in Terrill by the trust instrument. Assuming, for the sake of argument, that the termination or revocation of the trust under the circumstances could not work to Terrill’s interest, the power of amendment certainly could. Under it, he might, with the consent of his mother and his aunt, designate himself as sole beneficiary to the exclusion of all other heirs at law of the grantor. In other ways he might modify the trust to his own advantage. He would have only to secure the consent of his mother and his aunt, if either were living, to obtain for himself the control, management, and disposition of the trust corpus, together with the entire ownership of both the corpus and the accumulated income after the grantor’s death. Such a power is not a “remote possibility” — it is a present right, fraught with great actual and potential value. See Jane B. Shiverick, 37 B. T. A. 454, and Sophia P. O. Morton, 38 B. T. A. 419. Cf. Mary A. Cushing, 38 B. T. A. 948.

Nor can it be said that the interests of Mrs. Terrill and Mrs. Hob-son are identical with those of the grantor, thereby giving to the grantor effective control over the right to amend and revoke. On the contrary, the rights of the two daughters of the grantor more nearly coincide with those of Terrill. By an agreement of all three, the trust could be amended to their mutual advantage and to the disadvantage or even of the exclusion of the grantor. It is no answer to say that in this particular case the daughters and grandson of the grantor, doubtless, would not make such an amendment. The trust instrument grants them the power to do so. It is the power to revest title and to control, with which the statute deals. Corliss v. Bowers, 281 U. S. 376. Under neither section 166 nor 167 is the disputed trust income taxable to the grantor.

We are constrained to observe that no attempt to escape taxation was evidenced in these proceedings. The respondent already has assessed and collected a gift tax on the very property which he now asserts to be within the control of the grantor and the income from which he seeks to tax to the grantor. Taxes on the income from that property have been assessed to and paid by the trustee. Taxes on the distributable portion of the income have been assessed to and paid by the petitioners as beneficiaries thereof.

Decisions will be entered wider Rule 50.