source: Caselaw Access Project

author: Opper :

license: Public Domain

text:
    Horace S. Clark and Charlotte C. Clark, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86877.
    Promulgated February 2, 1939.

      Peter 8. Bash, Esq., and P. J. Coffey, Esq., for the petitioners.

      W. B. Lansford, Esq., and J. T. Porter, Esq., for the respondent.
   OPINION.

Opper :

The foregoing facts have been found upon the record submitted by petitioner. The detailed figures in evidence were adduced by a combination of material taken from the petitioner’s records and his memory of the transactions to which they refer. The original accounts, consisting of check vouchers and check stubs, were not introduced in evidence but were present in the courtroom and offered for examination by respondent’s counsel. The testimony mentioned and memoranda prepared by petitioner and used by him at the hearing for reference were objected to by respondent at that time and their admissibility is again contested as the single issue presented in his brief.

In discussing this contention it is material to recognize that it is really two questions that are involved. In the first place the non-introduction of the check stubs themselves seems incapable of creating the possibility of prejudicial error. Their examination at the time of the hearing would have involved a protracted procedure, the result of which could have been of no benefit. Northern Pacific Railway Co. v. Keyes (C. C., North Dakota), 91 Fed. 47, 59. The accuracy of the transcription from those stubs to the memoranda and the testimony thereof by petitioner have not at any time been questioned. See St. Paul Fire & Marine Inswrance Co. v. American Food Products Co. (C. C. A., 8th Cir.), 21 Fed. (2d) 733, 736. The original records were produced and were equally as available for the examination of counsel for respondent or for his use in cross-examining petitioner as though they had been formally offered and received; and the receipt of the evidence was expressly conditioned upon such availability. This was sufficient. Cooper v. United States (C. C. A., 8th Cir.), 9 Fed. (2d) 216, 223. See also North Western Refrigerator Line Co. v, Ervin, 78 Fed. (2d) 186, 189; Equitable Life Assurance Society of the United States v. Sieg, 53 Fed. (2d) 318, 319, 320; Galbreath v. United States, 257 Fed. 648, 658. “A reasonable safeguard against falsification in the preparation of such statements is furnished by placing the records from which they are compiled freely at the disposal of the adverse party.” Northern Pacific Railway Co. v. Keyes, supra. Petitioner testified that he had himself made the transcripts from the original checks and stubs or, where he had not done so, had himself checked the transcript’s accuracy. “When it is necessary to prove the results of voluminous facts or of the examination of many books and papers, and the examination can not be conveniently made in court, the results may be proved by the person who made the examination.” Burton v. Driggs, 87 U. S. 125, 136, citing 1 Greenleaf’s Evidence, sec. 93. We think in this respect petitioner’s testimony was clearly admissible, and the use of the memoranda to refresh the witness’ recollection as to complicated and voluminous dates and figures was certainly not error. Insurance Companies v. Weides, 81 U. S. 375, 380. That the memoranda were then admitted into the record as a convenient presentation of this evidence could have been no more prejudicial than the testimony of the witness which the memoranda did nothing more than tabulate. Rollins v. Board of Commissioners of Rio Grande County (C. C. A., 8th Cir.), 90 Fed. 575, 583. Cf. St. Paul Fire & Marine Insurance Co. v. American Food Products Co., supra.

The second point involved is that the witness testified to certain essential facts which were admittedly not contained in the check stubs from which the memoranda were compiled. As to these facts he purported to be testifying purely from memory, although that memory had been refreshed in the first instance by his examination of the check stubs which were contemporaneous and, at the hearing, by the mem-oranda prepared therefrom. Since the witness’ testimony was definite that his recollection was refreshed, the testimony was admissible. Flint v. Kennedy, 33 Fed. 820. And this is so even though the memorandum from which the witness testified at the hearing was not the same as the one made contemporaneously. Goodfriend v. United States, 294 Fed. 148, 153. Here again the admission of the memoranda was in no sense prejudicial, since they were expressly accepted only for what they were worth and consisted merely of a tabulation in written form of the testimony which, as we have seen, was properly admitted. Rollins v. Board of Commissioners, etc., supra. For the foregoing reasons it is not apparent that any error, and particularly any prejudicial error, resulted from the admission of any of the controversial evidence.

A very different question is presented as to the probative value of that evidence. That the witness should be able to remember, even when assisted by certain partial documentary notes, transactions and occurrences taking place many years before is somewhat difficult to assume. And of course there is the additional difficulty that the burden of satisfactory proof rested upon petitioner. Nevertheless, for what it is worth, petitioner’s testimony stands upon the record uncon-tradicted and it does not appear to be unreasonable. There is ample and undisputed evidence that petitioner and his wife were the owners of the property in question. The properties were used, as petitioner testified, for rental purposes. It can not therefore be questioned that petitioners had an investment in the property of some amount and that the value of this investment was lost. All of this is conceded in respondent’s brief. In spite of the unsatisfactory nature of the proof of petitioners’ cost basis it seems less unjust to permit them to obtain the benefit of the deductions claimed than to reject entirely their whole contention. Unless the deductions are permitted in the present years their benefit will, as respondent admits, be lost for all time. And of course there is no basis upon which some intermediate figure, more satisfactory to respondent, can be ascertained. For these reasons, although with some reluctance, we have concluded that respondent’s determination should be overruled. Joseph Kahn, 38 B. T. A. 1417, and cases there cited.

^Regarding the salvage for which we have found a value of $20,000, petitioner testified that he “received” 20 percent of this salvage in 1934 and 80 percent in 1935, the latter year not being before us. It seems apparent that in fact he never parted with title to and the right to possession of that part of the property represented by this salvage and, therefore, that his loss was instantly diminished by this amount. We have, therefore, allocated it among the buildings lost in proportion to their depreciated bases. Thus $3,208.52 of it must be deducted from the loss suffered in 1933 and $16,791.48 in 1934. Although this is obviously an approximation, there is no other basis in the record for the allocation which it is our duty to make. See Robert McCarthy Bullington, 38 B. T. A. 754; Joseph Kahn, supra.

In determining the depreciation allowed on the buildings which were lost, which must be deducted in determining the loss allowable, no one source of evidence was complete. We have, therefore, used variously the depreciation actually allowed, that specifically admitted by petitioner in his returns, and that resulting from the rates of depreciation claimed and apparently allowed in almost all of the petitioner’s returns in evidence. None of these figures appear to be less (although they might possibly be more) than the depreciation properly allowable, which fulfills the requirement of the statute concerning adjustment of basis. We have thus deemed it proper to approximate in certain instances the depreciation allowed rather than let the entire claim fail. Joseph Kahn, supra.

As to the second issue, the claim for additional depreciation, the contention advanced by petitioner is that certain of his depreciable real property was not included in the depreciation figure appearing in his 1933 and 1934 income tax returns. Petitioner has not established that any identified pieces of property were omitted from the properties comprising the total valuation on which depreciation was claimed in his 1933 and 1934 returns. He claims a higher depreciation basis for the property as a whole than that used in his returns. Even if the evidence be said to establish such a basis, in no instance is there any testimony regarding the remaining useful life of the properties at the time of acquisition or in the tax years, and in only a few instances can the amount of depreciation already allowed be ascertained. Nor can these facts be deduced from other sources of evidence, since the latter are not sufficiently detailed and no correlation was attempted in the testimony. There was not even any categorical testimony of proper depreciation rates on the various types of property. The facts omitted are vital to computation of a proper depreciation allowance and, therefore, petitioner’s claim on this point must fail. Regulations 77, art. 205; Regulations 86, art. 23 (1)-5; Hailey-Ola Coal Co., 24 B. T. A. 895.

Decision will be entered v/nder Rule 50.

       Sec. 113 (b) (1) (B), Revenue Acts of 1032 and 1034.


author: Opper:

text:
    Burke Grain Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81799.
    Promulgated February 2, 1939.

      P. J. Goffey, Esq., and Peter S. Rash, Esq., for the petitioner.

      Albert E. Arent, Esq., and Jane M. Pierce, Esq., for the respondent.
   OPINION.

Opper:

Petitioner, a corporation engaged in the brokerage business, claims an overpayment on the ground of a loss suffered through embezzlements which, although occurring in the tax year, were not in fact discovered until approximately two years later. Respondent resists the claim upon three principal grounds — first, that the loss was not sustained in the tax year because the funds embezzled were margin deposits made by petitioner’s customers and therefore trust funds, and on the authority of John H. Farish & Co. v. Commissioner, 31 Fed. (2d) 79, and similar cases the loss was not sustained unless and until restitution had been made by the taxpayer; second, that no acceptable proof of the amount of the loss appears in the record; and, third, that any loss sustained was compensated for by a payment made to petitioner by its principal stockholder.

The first argument rests upon the erroneous assumption of law that a margin deposited by a client with a broker creates a trust relationship. The rule on this subject, as stated in Meyer on “The Law of Stock Brokers And Stock Exchanges” (p. 252), is that “with respect to funds entrusted to the broker for the purchase of securities on margin, or as collateral to secure a marginal account the broker becomes the debtor of his customer and not the trustee, and is at liberty to mingle them with his own funds and use them for his own purposes.” The same rule extends to the proceeds of short sales. Idem. The cases sustaining these propositions are decisions of the courts of New York State. We have been referred, however, to no contrary authority under the law of Iowa, of South Dakota, or of any other jurisdiction, and as was said by the Supreme Court in Richardson v. Shaw, 209 U. S. 365, 377 (a case cited by respondent although for a different proposition), “The rule thus established by the courts of the state where such transactions are the most numerous, and which has long been adopted and generally followed as a settled rule of law, should not be lightly disturbed * * There is an apparent conflict between the so-called Massachusetts rule and that more generally accepted as to the location of title to securities held under a margin arrangement. Richardson v. Shaw, supra. But whether title to the securities is considered to be in the broker or in the purchaser does not affect the conclusion that as to any balance of accounts the relationship between broker and client is that of debtor and creditor. Hammon v. Paine, 56 Fed. (2d) 19, 22, 23; Lavien v. Norman, 55 Fed. (2d) 91, 93; People v. Thomas, 83 (N. Y.) App. Div. 226; 82 N. Y. S. 215, 219. This outcome is not impaired by the testimony of petitioner’s president. He stated that the margin payments were “very similar, I would say, to a deposit in the bank.” For these reasons we consider the doctrine exemplified by the Parish case to be inapplicable and conclude that on this point the proceeding before us is governed by Peterson Linotyping Co., 10 B. T. A. 542; Southern School-Book Depository, Inc., 10 B. T. A. 930; Piggly Wiggly Corporation, 28 B. T. A. 412, and Gottlieb Realty Co., 28 B. T. A. 418, in which it was determined that a loss by theft or misappropriation is deductible in the year when the act takes place, regardless of the time of discovery. Parher Wire Goods Co., 8 B. T. A. 448, 453.

The second contention advanced by respondent arises collaterally from a requested ruling upon evidence. Depositions of the embezzler introduced at the hearing were received without being read into the record upon the understanding that all questions as to the admissibility of such testimony would be taken under advisement and ruled upon as part of the present decision. Respondent objects to the receipt of testimony so given in so far as it relates to the amount of the loss. His. position is that the petitioner’s books were the best evidence and that failure to produce them or satisfactorily explain their absence precludes receipt of secondary proof. While this position may be supportable with respect to questions concerning the contents of the books, the matter at issue here is a fact as to which the embezzler himself necessarily was in possession of personal knowledge, and as to which the books themselves would be purely corroborative. His testimony was not limited to the detailed schedule of peculations for which petitioner’s books may have been the original source, but he was also asked:

Q. Mr. Gallagher without reference to petitioner’s exhibit 1 at all, are you able to testify as to approximately how much money you extracted and stole from the Burke Grain Company during the period between July 31, 1932 and ending July 31, 1933?
A. Yes approximately.
Q. And approximately how mueh was that?
A. In excess of $11,000.

This in our view was admissible without doing violence to the “best evidence” rule. Meade v. Keane, 16 Fed. Cas. No. 9373; aff'd., 3 Pet 1; Stern v. Local Board of Review, 135 Iowa, 539; 113 N. W. 339. It seems sufficient to shift the burden of going forward to the respondent, and, in the absence of contrary evidence, to justify our finding of fact that the amount of the loss was $11,000.

Finally, we are unable to conclude that payment made by petitioner’s principal stockholder was a compensation for the loss. He testified that the payment was a “capital assessment” and that “We had to have that much money to make the company solvent and have that much working capital which the Board of Trade required * * * and we charged the loss up to capital.” While it is clear that the payment could not have been a loan since the solvency of petitioner would not thereby have been improved, the evidence justifies the conclusion that it was a capital contribution. The result would be to leave the petitioner worse off by the amount of the loss even though liability to the stockholder was represented by the increase in his capital account instead of by a loan. And from the standpoint of the stockholder the funds so contributed are to be regarded as an additional investment in the stock and do not justify any claim to a loss on his part. W. F. Bavinger, 22 B. T. A. 1239; cf. Daniel Gimbel, 36 B. T. A. 539, 542. In addition, of course, the contribution was made long after the tax year, and apparently without any legal obligation to do so.

For the foregoing reasons we conclude that petitioner sustained an uncompensated loss of $11,000 in the present tax year and that it is entitled to the benefit of a deduction therefor.

Decision will be entered wider Rule 50.


author: Muhdook:

text:
    Estate of William H. Block, Deceased, Union Trust Company of Indianapolis, as Former Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80148.
    Promulgated February 7, 1939.

      Merlin M. Dwnbar, Esq., and Luden L. Dunbar, Esq., for tbe petitioner.

      D. A. Taylor, Esq., for tbe respondent.
   OPINION.

Muhdook:

The Commissioner determined a deficiency of $62,--006.88 in income tax of the estate of William H. Block for the calendar year 1932. The parties have settled some of their differences by a stipulation and only two questions require decision by the Board. The first is whether the Commissioner erred in including in the income of the estate for this year the amount of a refund of Federal estate taxes to the estate previously claimed and allowed as a deduction from the income of the estate for the earlier years in which paid. The second is whether the Commissioner erred in failing to allow deductions from the income of the estate for amounts payable annually to beneficiaries of a testamentary trust. The facts relating to these issues have been stipulated and are hereby found as stipulated.

The decedent died on December 11, 1928, a resident of Indianapolis, Indiana. The executor of his estate paid Federal estate tax as follows:

December 11, 1929_$564, 299.23
July 1, 1930_ 14,992.00
January 15, 1931- 233,859.15

Deductions were claimed by the estate for the above amounts on the income tax returns of the estate for the appropriate years. The deductions were allowed. The statute of limitations has now run against any additional assessments of income tax for those years. The Federal estate taxes paid, as above indicated, were computed after deducting a credit for the amount of state inheritance tax which was due under the laws of Indiana as they existed prior to March 6,1931. The laws of Indiana were amended on the latter date to increase the state inheritance tax due upon estates, including the estate of this decedent, and this estate paid to the State of Indiana on June 16, 1932, additional inheritance tax in the amount of $611,228.58. That amount was claimed and allowed as a deduction from income of the estate for the year here involved. The estate had filed a petition with the Board contesting the Commissioner’s determination of Federal estate tax due from the estate. That proceeding had not been closed when the additional state inheritance tax was paid. The payment of that additional state inheritance tax entitled the estate to a larger credit against the Federal estate tax, and the parties to the proceeding before the Board relating to the Federal estate tax liability filed a stipulation on August 27, 1932, settling the liability of the estate for Federal estate tax in which full credit was allowed for the additional inheritance tax paid to the State of Indiana in 1932. The result of the settlement was an overpayment of $603,-983.25 in Federal estate tax, which amount, together with interest, was refunded to the estate on October 12, 1932. The estate kept its books and made its returns upon a cash receipts and disbursements basis. The interest was reported by the estate on its income tax return for the year now before the Board, but the overpayment in the amount of $603,983.25 was not reported. The Commissioner, in determining the deficiency, included the amount of the refund in the gross income of the estate.

The estate of this decedent in years prior to 1932 paid Federal estate taxes, and on its income tax return for each year claimed a deduction for the amount of Federal estate tax paid during that year. The deduction was properly allowed by the Commissioner for each year, since section 23 (c) of the Revenue Act of 1928 allowed the estate a deduction for such taxes paid within the taxable year. Section 301 (b) of the Revenue Act of 1926, relating to estate taxes, provided that a credit not to exceed 80 percent of the Federal estate tax should be allowed for state inheritance taxes paid in respect of any property included in the gross estate. The State of Indiana, like other states, took advantage of that provision by increasing the state inheritance taxes. The change in the Indiana law was not made until after the estate of this decedent had paid $813,150.38 of Federal estate tax, in the computation of which credit had been claimed for the amount of state inheritance tax due to the State of Indiana under the old law. The change in the law of Indiana, and the additional payment made to the state under the new law, entitled the estate to a much larger credit for state inheritance taxes paid than it had theretofore claimed. It was not too late to make a new claim to take advantage of this credit. Such a claim was made, with the result that the refund here in question in the amount of $603,983.25 was made to the estate in 1932, the year here involved.

It is now apparent that this taxpayer has received a refund of the taxes which formed a basis for deductions from its income in prior years and, unless some adjustment is made, $603,983.25 of income of the estate will have been received tax-free. Deductions for taxes paid in that amount have been allowed to offset income and now the taxes have been returned to the taxpayer. Congress never intended such a result. It is too late to adjust this matter by reducing the deductions for the prior years, even if that were proper. Cf. Commissioner v. Central United National Bank, 99 Fed. (2d) 568, affirming 83 B. T. A. 588. The Commissioner contends that justice requires the taking into income for 1932 of the payment received in that year in order to bring into balance the tax accounts of this taxpayer.

The question of whether recoveries of amounts previously deducted from income are to be taken into income of the year of recovery is not a new one. The petitioner cites Inland Products Co. v. Blair, 31 Fed. (2d) 867, affirming 10 B. T. A. 235, Leach v. Commissioner, 50 Fed. (2d) 371, affirming 16 B. T. A. 781, and Lehigh Valley Coal Sales Co., 15 B. T. A. 1401. Tlie holding in each, of those cases was that the deduction was erroneously allowed in the first place and, since the year before the Board was that in which the original deduction was taken that original deduction was reduced by the later recovery. Those cases may be distinguishable upon the fact that there the original deduction was not properly allowed under the statute, whereas here the original deductions were proper. Furthermore, the solution given in those cases is an impractical one in many instances because the tax liability for the prior year has been closed before the recovery by the taxpayer of the amount originally claimed as a deduction.

Income tax liability must be determined for annual periods on the basis of facts as they existed in each period. When recovery or some other event which is inconsistent with what has been done in the past occurs, adjustment must be made in reporting income for the year in which the change occurs. 17o other system would be practical in view of the statute of limitations, the obvious administrative difficulties involved, and the lack of finality in income tax liability, which would result. The foregoing principles, which have been established by the following cases, require that the refund here be included in the income of this estate for the year of recovery. Burnet v. Sanford & Brooks Co., 282 U. S. 359; Houbigant, Inc., 31 B. T. A. 954; aff'd., 80 Fed. (2d) 1012; certiorari denied, 298 U. S. 669; Chicago, Book Island & Pacific Railway Co., 13 B. T. A. 988; affirmed on this point, 47 Fed. (2d) 990; certiorari denied, 284 U. S. 618; Charles W. Nashn 34 B. T. A. 675; aff'd., 88 Fed. (2d) 477; Charleston & Western Carolina Railway Co., 17 B. T. A. 569; aff'd., 50 Fed. (2d) 342; Askin & Marine Co., 26 B. T. A. 409; aff'd., 66 Fed. (2d) 776; Putnam National Bank, 20 B. T. A. 45; aff'd., 50 Fed. (2d) 158; Carr v. Commissioner, 28 Fed. (2d) 551, affirming a Board decision; Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320; Cooper v. United States, 9 Fed. (2d) 216; Nott-Atwater Co. v. Poe, 33 Fed. (2d) 1000; Excelsior Printing Co., 16 B. T. A. 886; Iberville Wholesale Grocery Co., Ltd., 17 B. T. A. 235; S. & L. Building Corporation, 19 B. T. A. 788; Chicago & North Western Railway Co., 22 B. T. A. 1407, 1436; Atlantic Coast Line Railroad Co., 23 B. T. A. 888; First National Bank of Key West, 26 B. T. A. 370; B. F. Avery & Sons, Inc., 26 B. T. A. 1393, appeal dismissed, 67 Fed. (2d) 985; South Dakota Concrete Products Co., 26 B. T. A. 1429; Victoria Paper Mills Co., 32 B. T. A. 666; Chewy Chase Land Co., 34 B. T. A. 150; Dixie Margarine Co., 38 B. T. A. 471. Cf. Davidson Grocery Co. v. Lucas, 37 Fed. (2d) 806.

Most of the foregoing cases are ones in which a taxpayer had been allowed to take a deduction, as for taxes, expenses, losses, or bad debts, and in a later year had recovered all, or a jpart, of the item previously deducted. The uniform holding xyas that, since (the amount recovered had been deducted previously to offset income, it should be reported as a part of gross income for the year in which it was recovered. Those cases can not be distinguished in principle from the present case. The fact that the deductions claimed by this estate in the prior years were for Federal estate taxes, a nonrecurring item unrelated to the earning of income, does not distinguish the case, since some of the cases above cited involved nonrecurring items unrelated to income, such as bad debts, losses, and taxes. Nor is it a sufficient distinction that in some of the above cases the taxpayer was on an accrual basis. The decision in the case of Edward S. Harkness, 31 B. T. A. 1100, is not in conflict, if for no other reason than that the taxes there were deducted by one taxpayer and the Commissioner sought to include the refund in the income of a wholly different taxpayer.

The other question for decision by the Board is whether certain distributions to beneficiaries under a testamentary trust created by the decedent’s will, were taxable to the recipients and, therefore, deductible by the estate, or whether they were payments of annuities not taxable to the recipients and, therefore, not deductible by the estate. Sections 162 (b) and (c) allow deductions of this kind to the estate only in case the distributions are taxable to the beneficiaries. Helvering v. Butterworth, 290 U. S. 365; Bridgeport-City Trust Co., Trustee, 32 B. T. A. 1181; aff'd., 84 Fed. (2d) 991; Bush v. Commissioner, 89 Fed. (2d) 596. The Supreme Court has held, in Burnet v. Whitehouse, 283 U. S. 148, that an annuity, an amount payable in any event and from corpus, if necessary, represents a bequest which is not taxable to the recipient. It is immaterial whether income has been ample for the payment and in all probability there will be no necessity to invade corpus. The decedent in the present case provided by his will in part as follows: “subject to prior payment of annuities hereafter charged, the remainder of the net income of said trust estate shall be paid to my three sons * * * ”; “I direct that the following annuities be paid from the income of said trust fund * * * ”, mentioning annual payments to a sister, two other sons, and a class of grandchildren; and “with regard to the operation of the trust of my general estate, I wish to prescribe the following conditions to be followed in so far as the same are legal and practical:

All payments hereinbefore directed to be made from the income of my residuary estate, shall be made in monthly installments, unless expressly otherwise provided, and except the payments of residuary income to my sons, Meier, Rudolph and Edward, shall begin within one month following my death. Prior to the time such residuary estate is turned over to my Trustees, such payments shall be made by my Executor, and in case at any time, either before or after said residuary estate comes into the hands of said Trustees, there shall not be sufficient income to make such payments, such deficiency shall be made up by pledging a part of the corpus of my estate; such pledge to be discharged from future income, as and when income in sufficient amounts is realized.

Counsel for the petitioner argue that the corpus of the trust was ample under ordinary circumstances to produce the income necessary to pay the annuities at all times. The payments in question are sums certain specified in the will payable for the life of the annuitants which may be paid from corpus of the trust during its existence and upon termination of the trust are expressly chargeable against the trust corpus. It is not material that the will provided for the possible restoration from income of corpus used to pay the annuities. James R. Duncan et al., Executors, 34 B. T. A. 999. We conclude that the annuities in question were not distributions of income but were bequests, not taxable to the annuitants and, consequently, not deductible from income by the estate.

Reviewed by the Board.

Decision will be entered u/nder Rule 50.

Keen dissents from that part of the opinion of the majority having to do with the question of the inclusion of the refund of Federal estate taxes in the income of the estate for the year of recovery.


author: Smith :

text:
    The Old Point National Bank, Sole Remaining Executor of the Estate of Leonard M. Newcomb, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89283.
    Promulgated February 7, 1939.

      Fred F. Ames, G. P. A., for the petitioner.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency in estate tax of $20,190.31.

The decedent, Leonard M. Newcomb, died testate on January 30, 1935, at the age of 57. The estate tax return filed by the executor on behalf of decedent’s estate showed a gross estate, consisting principally of real estate and stocks and bonds, of $167,630.42 and a net estate of $161,724.16. In his determination of the deficiency herein the respondent has added to the net estate $140,737.02 representing the value of certain life insurance policies on decedent’s life; $3,823 representing insurance premiums refunded; and $26 of disallowed debts of the decedent.

In the petition herein a number of issues are raised, all but three of which have been settled by stipulation. It is stipulated that the above item of $140,737.02 includes Reliance Life Insurance Co. policy No. 438490, which is included in the return and is therefore a duplication, and that the amount of $10,000 should be deducted from the said amount of $140,737.02. It is further stipulated that additional deductions in the aggregate amount of $7,904.59, as itemized in paragraph 6 of the written stipulation, are allowable in the recomputation of the tax due. It is further stipulated that a credit should be allowed for the state inheritance taxes paid, the amount of which is to be determined later. The issues remaining for our determination are (1) whether the proceeds of nine life insurance policies referred to in a certain trust agreement are includable in his gross estate; (2) whether certain payments made by the executor of decedent’s estate for the support of his widow and children and for home maintenance are deductible from the gross estate; and (3) whether there may be deductible from the gross estate the value at the date of decedent’s death of a bequest of $100 per month payable on condition to the Phoebus M. E. Church.

It is stipulated that:

8. The insurance policies taken out by the decedent, the proceeds of which have been included by respondent in the decedent’s gross estate, were as follows:
Reliance Life Insurance Company:
No. 42S769_ $45,000. 00
No. 438490_ 10,000.00
No. 438491_ 10, 000.00
No. 438492-35,000. 00
$100,000. 00

Equitable Life Assurance Society:

No. 2575522_ 20,262. 72

Connecticut Mutual Life Insurance Company:

No. 626945_$10,000. 00
No. 629120_ 20, 000.00
30,000.00

Prudential Life Insurance Company:

No. 2088742_ $5, 000. 00
No. 2106336_ 10, 000. 00
Dividend added- 198.57
15,198. 57

Metropolitan Life Insurance Company:

No. 398870-A [3981870-A]_ 10,183.58

Mutual Life Insurance Company of N. Y.:

No. 2283256_ 5,092.17
Total_$180, 737.02
Less Exemption_ 40, 000.00
Amount of Insurance in Controvebsy_._$140,737.02
The policies issued by the Reliance Life Insurance Company were non-participating, that is, no dividends were distributable under the terms of same. The other policies listed above were participating and paid dividends which were used for reducing the amount of the premium paid by the insured. Some of the policies had premium waiving disability clauses, that is, upon the total and permanent disability of the insured, no premiums would be due and payable on such policies.

On December 2, 1932, more than two years prior to his death, the decedent entered into a trust agreement with the Old Point National Bank, trustee, which provided in part as follows:

TEUST AGREEMENT
This Agreement, made and entered into this 2nd day of December, 1932, by and between Leonard M. Newcomb of Phoebus, County of Elizabeth City, and State of Virginia, hereinafter for convenience called the “Insured,” party of the first part; and The Old Point National Bank of Phoebus, Virginia, a corporation created and existing under the laws of the United States of America, or its successors or assigns, hereinafter for convenience called the “Trustee,” party of the second part:
Whereas, the Insured desires to establish with the Trustee what is known as an Insurance Trust and for that purpose has caused to he made payable, or will hereafter make payable, to the Trustee the following described insurance policies, to-wit:
Name of Policy Name of Company Amount
629120 Connecticut Mutual_$20, 000.00
626945 Connecticut Mutual- 10, 000. 00
2106335 [2106336] The Prudential_ 10, 000. 00
2088742 The Prudential_ 5, 000. 00
2283256 Mutual Life of N. Y_ 5,000. 00
3981870 [3981870-A] Metropolitan_ 10,000.00
428769 Reliance Life Ins. Co_ 45, 000. 00
428491 [438491] Reliance Life Ins. Co_ 10,000.00
438492 Reliance Life Ins. Co_ 35, 000.00
Total_$150,000.00
Now Therefore This Agreement Witnesseth: That upon the death of the Insured the proceeds of such of said insurance policies as are then papadle to the Trustee shall be received by the Trustee and held and administered by it upon the terms and conditions hereinafter set forth in this agreement.
Article One.
The duty and responsibility concerning the payment of premium and other charges on said policies during the lifetime of the Insured shall rest solely upon the Insured. The trustee shall in no way be bound to pay the premiums on said policies nor to see that any of said policies are kept in force, and in general the Trustee shall be under no obligation whatever in respect to said policies or any of them during the lifetime of the Insured.
The Insured does hereby malee this trust am irrevocable trust and surrenders the right during his lifetime to in any way change the beneficiaries or any of the other provisions of this trust or to change the beneficiaries in any of the said insurance policies and does hereby surrender the right to terminate, alter, revoke, or modify this agreement in whole or in part. The Insured, does, however, reserve the right during his lifetime to receive all dividends and disability benefits, or privileges of any kind which may accrue or be available on account of said policies during his lifetime and with this exception surrenders all other rights under the policies to the end that this trust be irrevocable. (b) The Insured further reserves the right from time to time to deposit with and make payable to the Trustees other insurance policies to be held and administered pursuant to the terms of this agreement provided, however, that the duties and responsibilities of the Trustee shall not be materially increased without its consent.
If at the time of the death of the Insured there are any life insurance policies on the life of the insured payable to the Trustees which are not specifically enumerated or mentioned either in this agreement or any amendment thereof, then the Insured hereby declares that it is his intention to include in this agreement the proceeds of such policies as fully as though they were specifically mentioned herein.
ARTICLE TWO.
If at the time of the death of the Insured this agreement is still m force and effect then, the Trustees shall upon the death of the Insured, collect and receive any and all sums of money payable under such of the said life insurance policies as are at that time payable to the Trustee, and such sums which so received shall be and become a Trust Fund, and be held and administered as hereinafter set forth in this agreement, and the Trustee shall have full authority to invest said trust fund and from time to time alter, change and vary such investments and re-investments thereof, but at all times limiting such investments and re-investments to which is known as legal investments for trust funds under the laws of the commonwealth of Virginia. [Italics ours.]

The trust fund was to be divided into three equal parts, one for each of the decedent’s three children, Bertha E. Newcomb, Betty Jane Newcomb, and Leonard M. Newcomb, Jr. The income from the trust was to be expended for the benefit of such children or, after they reached the age of 21 years, paid to them direct for life, except that the corpus of the son’s share at the discretion of the trustees might be delivered to him after he reached the age of 30. Upon the death of the beneficiaries the trust funds were to go to their heirs or legatees. In no event was any of the trust property to revert to the decedent or his estate.

It is stipulated that at the time the decedent executed the trust agreement on December 2,1932, “he was in good health; that the execution of the trust was not prompted by any condition of body or mind, as would have led him to believe that death was imminent or near at hand, or that he could reasonably expect death within the reasonable distant future.”

All of the nine policies referred to in the trust agreement were ordinary life policies upon which an annual premium was payable during the life of the insured. The first six, or those issued by the Connecticut Mutual Life Insurance Co., the Prudential Insurance Co. of America, the Mutual Life Insurance Co. of New York, and the Metropolitan Life Insurance Co., were participating policies issued by mutual companies. In every case the policy dividend payable at the end of each year was applied in reduction of the premium payable for the succeeding year.

Connecticut Mutual Life Insurance Co. policy No. 629120 was issued February 29, 1928. The beneficiaries named in the policy were “The Insured’s executors, administrators, or assigns (subject to the rights of the Insured as hereinafter reserved to change any beneficiary or mode of settlement).” On December 3,1928, the beneficiaries were changed to “Old Point National Bank of Phoebus, Virginia, Trustee, its successors or successor in Trust.” The policy had a cash surrender value and provided for loans upon the policy on the proper assignment thereof. The policy provided:

Change of Beneficiary. Subject to the rights of his assignee if any, the Insured may at any time change any beneficiary by filing written notice thereof at the Home Office of the Company on its form therefor, accompanied by the Policy for suitable endorsement by the Company, such change, when so endorsed, to be effective as of the date of the execution of such notice by the Insured.

Connecticut Mutual Life Insurance Co. policy Ho. 626945 was issued February 6,1928. The beneficiary named in the policy was “Old Point National Bank of Phoebus, Virginia, Trustee (subject to the lights of the Insured as hereinafter reserved to change any beneficiary or mode of settlement).” The policy contained the same provisions with respect to change of beneficiary as policy Ho. 629120. There is no record that the insured ever relinquished his right to change the beneficiary.

Prudential Insurance Co. of America policy Ho. 2106336 contained the following provisions:

Provisions as to Total and Permanent Disability:
Waiver of Premiums, Payment of Insurance.
If the Insured shall furnish due proof to the Company that, while this Policy was in full force and effect, he (or she), at any time after payment of the first premium on the Policy, from any cause whatsoever had become permanently disabled or physically or mentally incapacitated to such an extent that he (or she) by reason of such disability or incapacity is rendered wholly and permanently unable to engage in any occupation or perform any work for any kind of compensation of financial value, the Company will waive the payment of any premium or premiums under the Policy the due date of which, as specified on the first page hereof, shall occur after the receipt of proof of such disability and while such disability continues. Without prejudice to any other cause of disability, the permanent loss of the sight of both eyes, or loss by severance of both hands above the wrists, or of both feet above the ankles, or of one hand and one foot, shall be considered disability or incapacity within the meaning of this provision.
If such disability shall occur before the Insured is sixty years of age the Company will, in addition to such waiver, during such disability, pay to the Insured at the Home Office of the Company the amount insured, less any indebtedness, in one hundred and twenty monthly instalments during ten years, each instalment of the amount of $9.74 per $1,000 of insurance payable; the first instalment to become payable three months after the Company shall have received such proof and subsequent instalments monthly thereafter. In lieu of monthly instalments the Insured shall have the privilege of receiving the said amount in annual, semi-annual or quarterly instalments payable during ten years, each instalment of the amount, respectively, of $116.18, $58.25 or $29.16, per $1,000 of insurance payable, the first instalment to be payable at the same time as provided for the first monthly instalment. The Insured shall not have the right to commute any instalments. Endorsement to the effect that the amount of insurance has. become payable as herein specified shall be made on the Policy by the Company before the first instalment shall become payable.
* * * * * * *
Loan Pkovisions.
If this Policy be continued in force, the Insured may borrow from the Company, without the consent of the beneficiary, if any, named herein, with interest at the rate of six per cent, per annum, payable at the end of each policy year, on the sole security of this Policy, an amount up to the limit of the Cash Surrender Value hereinafter specified after deducting therefrom all other indebtedness on account of this Policy, by making written application for the loan and assigning the Policy to the Company as security. * * *

Prudential Insurance Co. of America policy No. 2088742 contained provisions relative to policy dividends. Such dividends paid upon the policy during the life of the decedent were applied in the reduction of premiums.

Mutual Life Insurance Co. of New York policy No. 2283256 issued January 17, 1916, was made payable upon the death of the insured to the insured’s “executors, administrators or assigns beneficiaries, with the right to the Insured to change the beneficiary.” On December 30, 1932, the insured named the Old Point National Bank of Phoebus, Virginia, as beneficiary and there is a notation on the policy that “The right to revoke this designation of beneficiary is reserved to the Insured.” On January 25, 1933, the insured assigned all of his “right, title and interest in policy No. 2283256 issued by The Mutual Life Insurance Company of New York”, to the Old Point National Bank of Phoebus, Virginia, trustee, and this assignment was accepted by the insurance company.

Metropolitan Life Insurance Co. policy No. 3981870-A, issued May 28, 1924, was made payable upon the death of the insured to “The Estate of the Insured, Beneficiary, upon receipt of due proof of the death of the Insured and upon the surrender of this Policy. The right on the part of the Insured to change the Beneficiary, in the manner hereinafter provided, is reserved.” The policy gave the insured several options, among which were1 that the insured might surrender the policy and receive the cash value thereof or borrow upon the security of the policy. There was endorsed upon the policy the following:

In compliance with the written request of the insured it is hereby declared that the amount due at the death of the said insured shall be payable to
The Old Point National Bank, Phoebus, Virginia, and successor in Trust; as Trustee under Agreement bearing date of December 2, 1932, executed by the insured under the policy, and The Old Point National Bank, Trustee. Without the right of revocation.
Dated at New York, this 28th day of December, 1932.

Reliance Life Insurance Co. policies Nos. 428769 and 488491 each contain the following endorsement:

January 13th, 1933.
For Value Received I hereby assign and transfer unto The Old Point National Bank of Phoebus, Virginia, as Trustee all my right, title and interest in Policy No. , issued by the Reliance Life Insurance Company of Pittsburgh upon the life of Leonard M. Newcomb of Phoebus, Virginia, and dated the day of , 193

These assignments were accepted by the Reliance Life Insurance Co. on January 21,1933.

Reliance Life Insurance Co. policy No. 438492 shows the following-endorsement :

Pittsburgh, Pa., January 20, 1933.
At the request of the Insured, the beneficiary under this policy is hereby changed to Old Point National Bank, Phoebus, Va., as Trustee, Without the right of revocation.

The decedent executed a will on January 19, 1935, leaving the residue of his estate in trust for the benefit of his wife and others, including the Phoebus M. E. Church, with the remainder over to his three children. The will provides in paragraphs sixth and seventh as follows:

Sixth : I hereby direct that the Trustee pay to my wife, Rebecca Newcomb, two hundred dollars ($200.00) monthly during her lifetime for her sole benefit, payments to begin immediately and'from the time of my death. Should the ineome from my estate fail to provide the $200.00 monthly income to Rebecca Newcomb, my wife, during her lifetime, the Trustees are to provide this amount of income for her during her lifetime through the sale of bonds or other personal property that I may be possessed of, as they may elect.
Seventh (A) : I direct my Trustees to pay to the Phoebus Methodist Episcopal Church monthly a monthly income of $100.00 as long as the Church is properly kept up and maintained and so long as other contributions and support are forthcoming. If the present standing and size of the Church, both in regard to the number of congregation and income, is not maintained I authorize and direct my Trustees to reduce this bequest or contribution accordingly; and I give them full and complete authority and power in determining whether such a reduction shall be made and if so the amount.
Seventh (B) : I direct my Trustees to pay to my sister, Martha Jane Gates, one hundred dollars ($100.00) monthly during her lifetime, the payments to begin immediately upon my death.
Seventh (C) : In the event the income from my estate at any time shall not be sufficient to take care of the provisions I have made for my wife in paragraph Sixth of my Will and the two bequests contained above in Seventh A and Seventh B I direct the ineome first to be applied towards paying in full the income I have provided for my wife monthly and that the other bequests contained in Seventh A and Seventh B be reduced proportionately.

In paragraph eleventh it is provided:

Eleventh : I direct that at the death of my wife, and after my son, Leonard M. Newcomb, Jr., has reached the age of thirty years, or thereafter, that a distribution of the balance of the estate be made, my son, Leonard M. Newcomb, Jr., to receive one-third (%) of the remaining estate, my daughter, Betty Jane Newcomb, to receive one-third (%) of the remaining estate, my daughter, Bertha E. Newcomb Bird, to receive one-third (%) of the remaining estate. * * *

It is stipulated that:

9. Payments to date to the Phoebus M. E. Church, in accordance with the decedent’s will, have been made in the specified amount of $100.00 per month for the months from February, 1935, to April, 1938, both inclusive, the total amount being $3,900.00.
10. During the period from the decedent’s death to June 1, 1937, as of which date settlement was made with Mrs. Newcomb, the decedent’s widow, she having renounced the will and having demanded her dower under the Virginia statute, the following payments were made pursuant to the provisions of the decedent’s will, and such expenditures were approved and allowed by order of the Circuit Court of Elizabeth City County, Virginia:
Cash paid to Mrs. Newcomb- $5, 800.00
Home Maintenance and Repairs- 11,713. 97
Educational Expense of Children- 3, 668.28
Total_ $21,182.25

The first question to be decided is whether the nine life insurance policies named in the trust agreement of December 2, 1932, are in-cludable in decedent’s gross estate. The respondent has determined, as stated in the deficiency notice, that at the time of his death “the decedent possessed valuable incidents of ownership in the policies in question which render the proceeds subject to inclusion in his gross estate.” The petitioner alleges in its petition that the respondent erred in so determining. At the hearing the respondent filed an amended answer which reads in part as follows:

5. Respondent avers that the corpus of the trust executed by the decedent on December 2, 1932, is subject to be retained in the decedent’s gross estate as the subject of a transfer made in contemplation of and intended to take effect at or after the trustor’s death.
6. In support of the allegations contained in paragraph 5 above respondent relies upon the following facts:
That the decedent made no disposition of the trust corpus during his lifetime; that the transfer of the trust corpus was to take effect upon the decedent’s death, and pursuant to circumstances then arising; that the transfer was testamentary in character, and therefore designed as a substitute for a will; and that the dominant purpose of the trust was to make provision for the donees after the death of the trustor.

The applicable statutory provisions pertaining to the first issue are found in the Revenue Act of 1926, as amended by section 803 of the Revenue Act of 1932, as follows:

Sec. 302. The value of the gross estate of the decedent shall he determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
*******
(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.

The Federal estate tax is imposed upon “the transfer of the net estate” of a decedent. Sec. 301 (a) of the Revenue Act of 1926. It follows that there may not be included in the gross estate property once owned by the decedent but transferred by him prior to his death, unless it was transferred “in contemplation of or intended to take effect in possession or enjoyment at or after his death.” Insurance policies taken out by a decedent upon his own life are property which is not excepted from this rule. In order that life insurance policies may be included in the gross estate the insured must have some legal incidents of ownership in the policies which pass from him at death. Chase National Bank v. United States, 278 U. S. 327.

It is the petitioner’s contention in this proceeding that the execution of the “trust agreement” by the decedent on December 2, 1932, effected an assignment to the Old Point National Bank of Phoebus, Virginia, of all of his right, title, and interest in and to the nine policies covered by the agreement save only the right during the decedent’s “lifetime to receive all dividends and disability benefits or privileges of any kind which may accrue or be available on account” of the policies during his lifetime. The respondent, on the other hand, contends that the execution of the “trust agreement” did not effect an assignment of the policies; that in any event the trust agreement was testamentary in character, was made in contemplation of death, or was to take effect in possession or enjoyment at or after death.; that “at the best, the trust deed, upon its execution, could only operate as an equitable assignment, to take effect as a transfer upon the acquisition of the insurance proceeds.”

The so-called “trust agreement” is equivocal. It declares that the insured makes “this trust an irrevocable trust” and then provides in “Article Two” that:

If at the time of the death of the Insured this agreement is still in force and effect then the Trustees shall upon the death of the Insured, collect and receive any and all sums of money payable under such of the said life insurance policies as are at that time payable to the Trustee, and such sums which so received shall be and become a Trust fund, * * *

It is further provided:

* * * That upon the death of the Insured the proceeds of such of said insurance policies as are then payable to a Trustee shall be recei/ved by the Trustee * * *

The evidence of record does not show that the decedent at the time of the execution of the trust agreement on December 2, 1932, or at any time thereafter, turned over to the Old Point National Bank of Phoebus, Virginia, any of the life insurance policies covered by the trust agreement. Inferentially the insured retained possession of the policies after the execution of the “trust agreement” the same as before. The policies constituted contracts between the insurance companies and the insured. The insured had rights under the policies. The trust agreement contemplated that the insured should take some action with respect to certain of the policies to transfer the insured’s rights in them to the Old Point National Bank, as trustee. Only to the extent that he took such action, either by assigning his rights in the policies to the bank or by making the bank the irrevocable beneficiary of the policies, did the insured transfer his rights in the policies.

The evidence shows that the trust agreement was not executed in contemplation of death. We think that it was not to take effect in possession or enjoyment at or after death with respect to those policies where, pursuant to the trust agreement, the beneficiary was changed to Old Point National Bank, Phoebus, Virginia, or as to those policies which were irrevocably assigned to such bank.

The evidence of record does not give the Board full information with respect to all of the nine policies mentioned in the trust agreement.

With respect to Connecticut Mutual Life Insurance Co. policy No. 629120, the evidence is that the name of the beneficiary was changed to “Old Point National Bank of Phoebus, Virginia, Trustee, its successors or successor in Trust,” on December 3, 1928. That, it will be noted, was prior to the execution of the trust agreement of December 2, 1932. By the terms of the policy the insured had the right to change the beneficiary at any time by filing -written notice thereof at the home office of the company. We are of the opinion that the petitioner did not lose his right to change the beneficiary by the execution of the trust agreement. See Allentown National Bank et al., Executors, 37 B. T. A. 750. The proceeds of this policy were correctly included in the gross estate by the respondent.

Policy fío. 626945 issued by the same company named the beneficiary of the policy of the Old Point National Bank of Phoebus, Virginia, trustee. But the naming of the beneficiary was “subject to the rights of the insured as hereinafter reserved to change any beneficiary or mode of settlement.” There is no evidence before the Board that the decedent ever relinquished his right to change the beneficiary. The proceeds of this policy constituted a part of the gross estate of the decedent.

The Prudential Life Insurance Co. of America policy No. 2106336 permitted the insured to receive payments under the policy if he sustained certain disabilities named in the policy. The insured also had the right up to his death to borrow on the policy without the consent of the beneficiary. These are such incidents of ownership as would require the inclusion of the proceeds of the policy in the gross estate. Chase National Bank v. United States, supra.

The Board is not in possession of complete evidence with respect to Prudential Life Insurance Co. of America policy No. 2088642. Whether the insured had the. same right under that policy as under policy No. 2106336 is not in evidence. In neither case do we know whether the Old Point National Bank of Phoebus, Virginia, was ever named the beneficiary; whether the insured had the right to change the beneficiary; or whether he had the right to receive disability payments under the policy without the consent of the beneficiary. For lack of evidence the action of the respondent in including the proceeds of this policy in the gross estate is approved.

Mutual Life Insurance Co. of New York policy No. 2283256 was assigned by the insured to the Old Point National Bank of Phoebus, Virginia, trustee, on January 25, 1933. The assignment was not in contemplation of death and, since it occurred more than two years prior to the date of the death, the action of the respondent in including the proceeds of this policy in the gross estate is reversed.

With respect to Metropolitan Life Insurance Co. policy No. 3981870-A it is to be noted that on December 28, 1932, the insured named the Old Point National Bank of Phoebus, Virginia, or its successor in trust, as the beneficiary under the policy without the right of revocation. This policy carried cash surrender values and loan privileges and provided that policy dividends would be paid upon the policy. Such policy dividends as were paid during the life of the insured were used by him as a credit against the subsequent annual premium. Such dividends had they been received in cash by the insured would not have constituted taxable income under any of the revenue acts subsequent to 1918. Although section 302 (c) of the Revenue Act of 1926, as amended, requires the inclusion in the gross estate of property transferred by a decedent prior to his death where he retains the right to the income from the property up to the date of his death, the Board is of the opinion that a mere right to receive policy dividends upon an ordinary life policy upon which premiums are to be paid during the life of the insured does not require the inclusion of the proceeds of such an insurance policy in the gross estate. See D. W. Blacksher et al., Executors, 38 B. T. A. 998. The payment of a policy dividend by a mutual life insurance company is merely for the purpose of correcting the premium charge. Lederer v. Penn Mutual Life Insurance Co. (C. C. A., 3d Cir.), 258 Fed. 81; aff'd., 252 U. S. 523. After the beneficiary of the policy was irrevocably changed to the Old Point National Bank of Phoebus, Virginia, as trustee, the petitioner had no further rights to surrender the policy or to borrow money upon the security of the policy. The action of the respondent in including the proceeds of this policy in the gross estate is reversed.

On January 13,1933, the insured assigned all of his rights, title, and interest in and to Reliance Life Insurance Co. policies Nos. 428769 and 438491, and with respect to Reliance Life Insurance Co. policy No. 438492 the insured on January 20, 1933, named the Old Point National Bank of Phoebus, Virginia, as trustee, the beneficiary without the right of revocation. The insured had no rights in any of those policies after the date of assignment or the date when the name of the beneficiary was irrevocably changed. The action of the respondent in including the proceeds of these three policies in the gross estate is reversed.

It is stipulated that during the period from the date of decedent’s death until June 1, 1937, the date of settlement of the widow’s claim for a dower interest in the estate, there was paid out of decedent’s estate $5,800 to decedent’s widow; $11,713.97 for home maintenance and repairs, and $3,668.28 for educational expense of decedent’s children. The petitioner contends that these payments are deductible under section 303 (a) (1) of the Revenue Act of 1926, which provides for the deduction from the gross estate of “such amounts reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction.”

The respondent’s position is that the amounts in question were not paid out of the estate as an allowance for the support of dependents during the administration of the .estate but that they were bequests which were paid pursuant to the terms and provisions of the decedent’s will and are therefore not deductible from the gross estate.

The evidence is that after decedent’s death his widow continued to occupy and maintain their residence, a 14-room house, on the same scale as before decedent’s death. She employed four servants. She testified in this proceeding that the $200 a month paid to her was not sufficient to maintain the home and that some of the large items of expense were paid by the executors. Presumably those expenditures are included in the item of $11,713.97 for “Home Maintenance and Repairs.” We are satisfied from the evidence of record that at least $11,281.25 of the total amount of $21,182.25 is a reasonable allowance for the support of decedent’s dependents, cf. Mary M. Buck et al., Executors, 25 B. T. A. 780; aff'd., upon this point in Buck v. Helver-ing (O. C. A., 9th Cir.), 73 Fed. (2d) 760, and since that amount, and more (exclusive of the $200 per month paid to the widow pursuant to the provisions of the will), was allowed by the laws of the jurisdiction, it is deductible under the statute. However, in its petition the petitioner has claimed the deduction of only $11,281.25 for the support of dependents and on the pleadings no greater amount can be allowed.

The remaining issue involves the deduction of the value at the time of decedent’s death of the bequest of $100 a month to the Phoebus M. E. Church. Conditioned upon certain contingencies the payments of $100 per month were to continue from decedent’s death until final distribution of the trust estate, which was to be made upon the death of his wife and when his son reached the age of 30. Petitioner contends that the value of the bequest at the time of decedent’s death, computed on the basis of a continuation of the payments for a period of approximately 16 years, was $19,200, which it contends is deductible as a charitable bequest. Petitioner admits in its brief, however, that there was no absolute certainty at the time of decedent’s death that the exact sum of $19,200 would ever be paid to the church. Under the provisions of the decedent’s will the payments are conditional, first, upon the church being “properly kept up and maintained” and “other contributions and support are forthcoming” and, second, upon there being sufficient income from the decedent’s estate for the payment of $200 per month to decedent’s widow.

In view of these conditions we do not think that it could be ascertained at the time of decedent’s death that any definite and certain payments were to be made to the church the value of which could be claimed as a charitable bequest within the meaning of the statute. The respondent is sustained in the disallowance of the deduction of this item.

Reviewed by the Board.

Judgment will be entered wader Rude 50.


author: Smith:

text:
    County National Bank and Trust Company of Santa Barbara, Executor of the Last Will and Testament of Ralph Isham, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89211.
    Promulgated February 9, 1939.

      Paul B. Oromelin, Esq., Bolitha J. Laws, Esq., and John W. Townsend, Esq., for the petitioner.

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

Smith:

This proceeding is for the redetermination of a deficiency of $12,038.48 in the income tax of Ralph Isham, deceased, for 1933. The parties have filed a written stipulation of facts, with all the material documents attached, which we adopt as our findings of fact. The stipulated facts may be summarized as follows:

Ralph Isham, deceased, was the father and sole devisee and legatee of Albert Keep Isham, who died a resident of Santa Barbara, California, on November 8, 1931. The petition in this proceeding was filed by Ralph Isham prior to his death, which occurred on August 25, 1937, and his executor, the County National Bank & Trust Co. of Santa Barbara, has been duly substituted as the party petitioner in this proceeding.

In his will Albert Keep Isham, hereinafter referred to as the son, devised and bequeathed to his father all of his property, both real and personal. The son’s will was admitted to probate on December 7, 1931, in the Superior Court of the State of California, in and for the County of Santa Barbara. The County National Bank & Trust Co. of Santa Barbara became the administrator, c. t. a., of the son’s estate. The son’s will provided in part as follows:

It is my will, and I direct that all inberitance taxes, whether imposed by the United States Government, or by tbe government of any state in which I may have property at the time of my death, on all of tbe property devised or bequeathed to my father, Ralph Isham, in and by Paragraph Second of this my will, and also on the life interest given to my said father in and by Paragraph Third of this my will, and also on the remainder after said life interest, in the property therein devised and bequeathed to said The Northern Trust Company, as trustee, shall be paid by my executor out of the principal of the property bequeathed and devised by said Paragraph Third, and that the same, when so paid, shall not in any manner or to any extent whatsoever be charged against my said father, Ralph Isham, or deducted from the property devised and bequeathed to him in and by said Pakagbaph íTbst hereof, or be charged against or deducted from his life interest in the property devised and bequeathed by said Pabagkaph Thied hereof.
In case, however, I leave no property on which the provisions of Pabagkaph Thibd hereof can operate, all said inheritance taxes on the property devised and bequeathed by Pakagbaph Second hereof shall be chargeable against my said father, and payable out of said last mentioned property.
Pakagbaph Second: I give, devise, and bequeath to my father, Ralph Isham, of said Oity of Chicago, his heirs, executors, administrators and assigns, as his own absolute property, all the property, real, personal and mixed, of any and every kind and description whatsoever and wheresoever situate, of which I may die possessed, or in or to which I may have any right, title or interest at the time of my death, or over which I may then have any power of disposition, including all such income of the property held in trust under the provisions of the last will and testament of my grandfather, Albert Keep, as I may be entitled at the time of my death to have paid over to me by the trustees thereunder, but excluding all of the principal of said trust property, which said principal is hereinafter disposed of in and by Pabagkaph Thikd hereof.

Paragraph third of the will referred to above dealt with certain trust property in which the father, Ralph Isham, was bequeathed a life interest. However, at the time of the son’s death the trust had terminated so that this provision of the will is not material. All of the son’s property passed to the father under the above quoted paragraph second of the will.

On or before June 4,1932, all claims against the son’s estate had been paid except a claim filed on March 15,1932, by one Richard H. Travers in the amount of $250,000 for services allegedly rendered as financial advisor to the son during his lifetime. This claim was rejected on March 17, 1932, and a suit thereon was subsequently brought by Travers, which was settled on October 5, 1933, by a compromise payment to Travers of $15,000.

Included in the assets of the son’s estate were 500 shares of stock of the Guarantee Trust Co. of Chicago, Illinois, which had a fair market value on November 8,1931, the date of the son’s death, of $182,250. The administrator of the son’s estate on November 23, 1933, filed a petition with the court for permission to sell the said 500 shares of stock, which permission was granted by order of the court entered November 27, 1933. The shares were sold on November 27, 1933, for $107,680.

On November 24, 1933, the administrator filed a “final account and report and petition for final distribution” and on December 4, 1933, the court entered its “decree of settlement of accounts and of final distribution.” Among the assets listed for distribution in the final account were cash on hand in the amount of $137,651.61, a large amount of miscellaneous stocks and bonds, and several parcels of California real estate.

During the year 1933 and prior to the filing of the final aceount on November 24,1933, income was derived from the properties comprising the son’s estate in the amounts of $949.69 interest and $83,840 dividends. All of such income was paid to and received by the administrator and is reflected in the cash on hand or other assets listed in the administrator’s final account. All of the assets of the estate so listed were distributed to and received by the father, Ealph Isham, during the year 1933 except cash in the amount of $24,578.38 which was allowed and ordered paid to certain other persons;

During the year 1933 and prior to the final distribution of the son’s estate the administrator paid out of funds of the estate the aggregate amount of $8,049.61, consisting of the following items:

(a) Interest--- $2.11
(b) Taxes:
(1) Los Angeles County real estate- $311.34
(2) Santa Barbara County real estate- 2,435.59
(3) California solvent credits- 1,839.56
(4) Federal check_ 2. 86
(5) California inheritance__ 2,060.68
(6) Additional Federal estate- 120.20
(7) Federal excise on dividends_ 1,277.27
- 8,047.50
Total_ 8,049. 61

The respondent now concedes that all of the above items not allowed as deductions in the determination of the deficiency herein are allowable except the California inheritance tax of $2,060.68 and the additional Federal estate tax of $120.20.

A fiduciary return of income (form 1041) was filed by the administrator of the son’s estate for the year 1933, showing gross income of $84,789.69, including interest of $949.69 and dividends on stock of domestic corporations of $83,840. The only deductions claimed on the return were interest paid, $2.11 and taxes paid, $8,047.50, leaving a net income of $76,740.08. The amount of $2,170.08 was shown in the return as the beneficiary’s (father’s) share of distributable income. This amount is the difference between the dividends of $83,840 and the sum of $7,099.92, representing the interest and taxes paid less the interest received, reported as an ordinary net loss, and $74,570, representing the capital loss on the sale of the above mentioned 500 shares of stock of the Guarantee Trust Co. of Chicago.

The administrator of the son’s estate also filed an income tax return on behalf of the son’s estate for 1933, on form 1040, which showed no net income. The father filed an individual income tax return (form 1040) for the year 1933 in which he reported a gross income of $94,244.57, including the dividends received by the son’s estate in the above stated amount of $88,840. He also reported a capital net loss of $124,154.57, including the aforesaid amount of $74,570 representing the loss on the sale of the 500 shares of Guarantee Trust Co. of Chicago stock.

In his determination of the deficiency herein the respondent has disallowed the capital net loss deduction of $74,570 claimed by the father, which is the principal item in controversy in this proceeding.

Also, in computing the father’s distributable income from the son’s estate, the respondent disallowed $6,772.34 of the aggregate amount of $8,049.61 of interest and taxes paid by the administrator as set forth above. The only part of the amount allowed was an item of $1,277.27 representing Federal excise tax on dividends. The respondent now concedes, however, and it is stipulated, that all of such items except the California inheritance tax in the amount of $2,060.68 and the additional Federal estate tax of $120.20 are deductible from the gross income of the son’s estate and that the father’s net income as shown in the deficiency notice is overstated accordingly.

The items of income and deductions and the respective contentions of the parties are summarized in the following table:

The allegations of error as set forth in the petition are that :

(a) The Commissioner erred in including in petitioner’s 1933 gross income any sum in excess of $2,170.08 as representing petitioner’s interest in the income from the property comprising the Estate of Albert Keep Isham, Deceased.
(b) The Commissioner erred, in the alternative, in including in petitioner’s 1933 gross income any sum in excess of $76,740.08 as petitioner’s interest in the income from the property comprising the Estate of Albert Keep Isham, Deceased.
(c) The Commissioner erred, in any event, in failing to allow petitioner a deduction from gross income in the amount of $74,570 as a capital loss sustained by him in 1933 upon the sale of shares of stock of the Guarantee Trust Company of which petitioner was the legal and beneficial owner.
(d) The Commissioner erred in failing to determine and to hold that petitioner has overpaid his 1933 income taxes in the amount of $335.84.

As to the first issue the petitioner contends that in computing the father’s share of the income of the son’s estate during the period of administration allowance must be made for the $74,570 capital loss resulting from the sale by the administrator of the 500 shares of stock of the Guarantee Trust Co. of Chicago, Illinois. Petitioner further contends that if the capital loss in question is not allowable to the son’s estate in computing the father’s distributable income, then it is allowable as a deduction to the father in his individual income tax return.

Sections 161 and 162 of the Eevenue Act of 1932 provide in material part as follows:

SEO. 161. IMPOSITION OP TAX.
(a) Application of Tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
*****$*
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * *
*******
(b) Computation and Payment. — The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). For return made by beneficiary, see section 142.
SEO. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
* * * * * *' *
(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the ease of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

Article 863 of Kegulations 77 provides in part that:

Decedent’s estate during administration. — The “period of administration or settlement of the estate” is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the settlement of estates. * * * Where, however, the executor sells property of the estate for more than its value at the death of the decedent, the excess is income, or may be capital gain, taxable to the estate. * * *

An estate in process of administration must be treated as a tax entity separate and distinct from the heirs, devisees, and beneficiaries. Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509; Baltzell v. Casey, 1 Fed. (2d) 29; aff'd., Baltzell v. Mitchell, 3 Fed. (2d) 428; certiorari denied, 268 U. S. 690. The petitioner does not contend otherwise in this proceeding. The income of a trust estate is to be determined and taxed as in the-case of an individual taxpayer except that the amounts of income properly paid or credited to the beneficiaries are allowable as additional deductions. The sale of the shares of stock here in question admittedly was made by the administrator of the son’s estate. Undoubtedly the resulting loss of $74,570 was a loss of the estate, the benefit of which it might have claimed in its income tax return in accordance with the statute. Baltzell v. Mitchell, supra. However, the estate as a tax entity is not before us and we are not called upon to make any determination of its tax liability. The taxpayer before us is the beneficiary of the son’s estafe and we are concerned with the income of the son’s estate only as to the amount of such income as is taxable to the beneficiary during the taxable year. The plain wording of the statute is that the beneficiary is taxable on all of the income of the estate “properly paid or credited” to him during the taxable year. It is stipulated that the distributions which the father received from the estate during the taxable year 1933 included interest of $949.69 and dividends of $83,840. There is no questiton but that these amounts were “income” to the estate and after they were “properly” paid to the father they are deductible by the estate and taxable to him.

The provisions of the will and the laws of the state having jurisdiction over the administration determine what income of the trust estate is properly to be paid to the beneficiaries. Anderson v. Wilson., 289 U. S. 20; Merchants' Loan & Trust Co. v. Smietanka, supra.

The will of the son here contains no provision for the payment by the executor or administrator of any income of the estate to the beneficiary, except as to the trust fund which never became operative. It has been beld, however, that the income of the estate of a decedent distributed to a residuary legatee during the period of administration of the estate is taxable to the legatee, although the will contains no specific provision for such payment of income. Riker v. Commissioner, 42 Fed. (2d) 150; Little v. White, 47 Fed. (2d) 512. No contention is made by the petitioner that the distributions made to the father during the taxable year were not in accordance with the laws of the State of California.

In Ardenghi v. Helvering, 100 Fed. (2d) 406, the Circuit Court of Appeals for the Second Circuit held, affirming 37 B. T. A. 345, that the beneficiary of a trust estate was not entitled to deduct in her individual income tax return the excess of the amount paid out by the trust estate for estate and succession taxes over the income of the estate. For the taxable years there involved the income of the estate was about $67,000, the estate and succession taxes paid by the executors amounted to about $245,000, and $75,000 was distributed to the beneficiary. In its opinion the court said:

* * * On the other hand in Baltzell v. Mitchell, 3 Fed. (2) 428, (C. C. A. 1) [1 USTC ¶ 110], and Alelí v. Tait, 30 Fed. (2) 54 (C. C. A. 4) [1 USTC ¶355], the beneficiary was not allowed to deduct principal losses, “realized” by the executor during the period of settlement, on the theory that they should be marshalled against income. Although it was not given as the reason, we believe that the justification for these decisions was that under the local law such losses were capital losses as between the legatee and the estate, and properly allocated against; principal. Certainly it is no answer to say that if losses were allowed, gains must be surcharged to the legatee’s income. Capital gains would not be “properly paid” to the legatee during “administration or settlement of the estate”. The suggestion that; the payments might be regarded as “negative income” is a strange fantasy that we need not stop to consider.

The petitioner submits in its brief that:

4. Where the beneficiary is the owner of a future estate in remainder, or there is lut a dry trust, he is entitled to have losses incurred in connection with the sale of the corpus of the trust or estate deducted in determining his taxable share of trust income.

In Baltzell v. Casey, supra, it was held that the life beneficiary of a trust estate is taxable on the income received therefrom without deductions of the capital losses of the estate. The taxpayer there was one of the remaindermen and had a vested interest in the corpus of the trust fund. It was held in T. Rosslyn Beatty, 28 B. T. A. 1286, that the beneficiaries of a trust, who were also the remaindermen, were not entitled to deduct the capital losses of the trust, which amounted to more than half of the trust income distributed to them and on which they were held taxable. These cases dealt with trusts and not estates in process of administration, as is here involved, but we do not think that any distinction can be made on that ground. The statute itself makes no distinction. It provides that:

Tie taxes imposed by this title upon individuals shall apply to the income of estates or of any hind of property held in trust, including—
*******
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * *

The son’s estate here was in a true sense a taxpayer within the intendment of the statute and was not merely a “dry trust” or conduit through which the father received his distributions of income, as petitioner contends. The fact that the father was the sole beneficiary of the estate and, as well, the sole heir and devisee under the son’s will does not change the taxable status or the statutory rights of either the estate or of the beneficiary.

Petitioner further contends that at the time of the sale of the shares of stock in question legal title to such shares was vested in the father, either by reason of the laws of the State of California or by reason of the fact that the period of administration of the son’s estate had expired. Reference is made to section 300 of the California Probate Code which provides as follows:

Title to decedent's estate. Possession. When a person dies, tbe title to bis property, real and personal, passes to tbe person to whom it is devised or bequeathed by his last will, or, in the absence of such disposition, to the persons who succeed to his estate as provided in division II of this code; but all of his property shall be subject to the possession of the executor or administrator and to the control of the superior court for the purposes of administration, sale or other disposition under the provisions of division III of this code, and shall be chargeable with the expenses of administering his estate, and the payment of his debts and the allowance to the family, except as otherwise provided in this code.

Petitioner cites Western Pacific Railway Co. v. Godfrey, 166 Cal. 346 (1913); 136 Pac. 284, in which the court stated, upon authority of a number of cited cases, that the estate of a decedent vests in his heirs or devisees and legatees immediately upon his death.

Granted that this is the law of the State of California, it does not follow that the estate may not be treated as a separate tax entity for Federal income tax purposes and required to pay an income tax on the gain realized from the son’s property during the period of administration. Certainly the framers of the law did not intend for the tax on the income of estates of deceased persons during the period of administration to apply to estates in process of administration in one state, where title to decedent’s property vests in the heirs or legatees upon decedent’s death, and not in another state where it remains in the executors or administrators until it is distributed or the estate closed. We do not regard this question as one that can be determined by reference to state statutes or the rule of property prevailing in the jurisdiction where a decedent’s estate is being administered. Cf. Freuler v. Helvering, 291 U. S. 35. The laws of the State of California would, of course, govern in determining what income of the estate was distributable to the beneficiary. Freuler v. Helvering, supra. But, as stated above, no contention is made that the distributions in question here were not made in accordance with the laws of that state.

The shares of Guarantee Trust Co. of Chicago, Illinois, stock which the administrator sold, with the resultant loss, were not distributed in kind to the father prior to the sale. The stipulated facts are that the shares were sold by the administrator on November 27,1933, pursuant to the order of the court having jurisdiction over the administration. The final account and report of the administrator was filed on November 24, 1933, but the court’s decree of settlement of accounts and final distribution was not entered until December 4, 1933. The fact that the sale was made “after settlement of debts and claims against the estate” does not support petitioner’s contention that the sale was legally a sale by the father of his own property and the loss thereon allowable to the father individually.

The remaining issue is whether in computing the father’s taxable income from the estate allowance should be made for California inheritance tax amounting to $2,060.68 and the additional Federal estate tax amounting to $120.20 paid by the administrator during the taxable year.

As suggested by the petitioner in its brief, this issue involves the same provisions of the statute and the same questions of law as the foregoing issue and does not call for any extended discussion. It might be well to point out, however, that there is a provision in the son’s will, as quoted above:

* * * that all Inheritance taxes, whether imposed by the United States Government, or by the government of any state in which I may have property at the time of my death, on all of the property devised or bequeathed to my father, Ralph Isham, in and by Paragraph Second of this my will, and also on the life interest given to my said father in and by Paragraph Third of this my will, and also on the remainder after said life interest, in the property therein devised and bequeathed to said The Northern Trust Company, as trustee, shall be paid by my executor out of the principal of the property bequeathed and devised by said Paragraph Third, and that the same, when so paid, shall not in any manner or to any extent whatsoever be charged against my said father, Ralph Isham, or deducted from the property devised and bequeathed to him in and by said Paragraph First hereof, or be charged against or deducted from his life interest in the property devised and bequeathed by said Paragraph Third hereof.
In case, however, I leave no property on which the provisions of Paragraph Third hereof can operate, all said inheritance taxes on the property devised and bequeathed by Paragraph Second hereof shall be chargeable against my said father, and payable out of said last mentioned property.

Under the statute, section 23 (c) of- the Revenue Act of 1932, the taxes in question are permitted as a deduction only to the estate. This provision is in part as follows:

SEC. 2 3. DEDUCTIONS EEOM GROSS INCOME.

In computing net income there shall be allowed as deductions:
* ***** *
(c) Taxes Generatxy. — Taxes paid or accrued within the taxable year, * * * *******
For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.

See Keith v. Johnson, 271 U. S. 1. To allow the beneficiary to offset the taxes against the income received from the estate would be to allow a deduction indirectly which the statute forbids directly. See Anna F. Ardenghi, 37 B. T. A. 345. We said in that case :

* * * we think the question of whether or not a beneficiary is subject to tax must depend upon whether or not the beneficiary has received a distribution during the taxable year from the income of the estate or trust. If the estate had income and distributed a part of that income to the beneficiary, it is taxable to the beneficiary, regardless of the not inconsistent fact that inheritance taxes in an amount in excess of the income of the estate were paid either from other income and corpus, or solely from corpus. * * *

As we have ruled above with respect to the capital loss of the estate on the sale of stock, we think that the California inheritance taxes and the additional Federal estate taxes paid by the administrator of the estate are deductions which the statute allows the son’s estate as an entity and which can not be taken into account in determining the taxable income of the beneficiary or legatee.

Judgment will be entered u/nder Bule 50.