text:
    Cap Andrew Tilles, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86505.
    Promulgated September 16, 1938.

      Robert E. Moloney, Esq., for the petitioner.

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

Smith:

This proceeding involves deficiencies in petitioner’s income tax for the years 1931 and 1932 in the respective amounts of $3,406.53 and $2,983.99. Petitioner alleges that respondent erred:

(1) In disallowing the deduction of losses of $24,305 in 1931 and $29,108.50 in 1932 upon the sale of certain shares of stock in those years.

(2) In increasing gross income for each of the years 1931 and 1932 by the amount of $1,800 representing dividends paid in those years on shares of stock which petitioner had pledged as security for payments to his divorced wife.

(3) In disallowing the deduction of office and business expenses of $4,696.49 in 1931 and $4,427.93 in 1932.

(4) In disallowing the deduction of $200 in 1932 representing contributions to a fund being raised to provide a musical education for a girl who did not have sufficient means of her own.

Each of these issues will be discussed separately and in the order indicated.

Issue 1. — The petitioner is a resident of St. Louis, Missouri, and is a man of considerable wealth. He is unmarried at the present time, having been divorced from his former wife in 1909. He has no children.

In December 1931 petitioner decided to sell to his nephew, Cap A. Lick, Jr., certain securities, which at that time had a value considerably less than their cost. He consulted with the revenue agent in charge at St. Louis about the deductibility of the losses on such sales for income tax purposes and was advised that the sales could be made directly to the nephew, provided they were bona fide sales. Accordingly, on December 16, 1931, petitioner transferred to Cap A. Lick, Jr., the following shares of stock, the cost of which to the petitioner and the agreed selling price to his nephew were as shown:

On the same date, December 16, 1931, Cap A. Lick, Jr., gave the petitioner his check for $5,400, drawn on his personal account at the Mississippi Valley Trust Co., in payment for the above listed securities. The check was either cashed by the petitioner or deposited to his credit.

Also, in December 1932, the petitioner under similar circumstances sold to another nephew, George Tilles, Jr., 100 shares of Illinois Central Kailroad Co. stock, which had cost him $10,300, for $937.50, and 100 shares of Chicago, Rock Island & Pacific Railway Co. 7 percent preferred stock, which had cost him $10,775, for $450. In payment for those shares George Tilles, Jr., gave petitioner his personal check for $1,387.50, drawn on his account at the Mississippi Valley Trust Co.

All of tlie above sales were made at the prevailing market price of the shares sold. They were all regular in form and there was a completed transfer of the shares from petitioner to his nephews.

Respondent has disallowed the deduction of the losses claimed by the petitioner on the sales in question on the ground that they were not bona fide sales but were gifts of the securities to the nephews.

It was established on the testimony of petitioner and his nephews that petitioner previously had made them large gifts of securities, amounting, in the case of Cap A. Lick, Jr., to $250,000 or $350,000, and in the case of George Tilles, Jr., to about $60,000. There was an agreement that petitioner was to receive payment for some of these securities out of the dividends on them or the profit on their sale. Petitioner made a cash deposit of $2,000 to the account of George Tilles, Jr., at the Mississippi Valley Trust Co. at about the time the securities were sold to him on December 27, 1982.

The evidence also establishes that petitioner managed his nephews’ business affairs to a great extent. He held powers of attorney from both of them, which authorized him to draw funds from their bank accounts and to buy and sell securities for them. Petitioner had access to the safe deposit box at the Mississippi Valley Trust Co. in which the securities belonging to both of his nephews were kept.

We do not think that these circumstances invalidate the sales. There was a clear intention on the petitioner’s part to sell the securities in question and his nephews agreed to purchase them at their market value. All of the formalities of a sale were complied with in each instance. The securities were properly transferred to the nephews and thereafter at all times were considered their property. They paid the petitioner for them with their own funds. The fact that petitioner may have given his nephews some or all of the money with which the purchases were made does not defeat the sales so long as the gifts were free and unencumbered and the money belonged to the nephews to do with as they pleased. Cf. Commissioner v. Behan, 90 Fed. (2d) 610, affirming 32 B. T. A. 1088; Joseph Blumenthal, 30 B. T. A. 125; Madeira v. Commissioner, 98 Fed. (2d) 556, reversing Percy C. Madeira, 36 B. T. A. 456; Arthur B. Hyman, 36 B. T. A. 202; Nathan R. Allen, 38 B. T. A. 160.

The sales were admittedly for the purpose of reducing income tax liability but this in itself does not invalidate an otherwise valid transaction. Gregory v. Helvering, 293 U. S. 465.

Upon consideration of all the evidence, the Board finds as a fact that the sales to the nephews were actual, bona fide sales, from which it follows that the petitioner is entitled to deduct the losses claimed.

Issue S. — In each of the years 1931 and 1932 the respondent increased petitioner’s reported net income by the amount of $4,800 representing payments made during those years to petitioner’s divorced wife out of dividends on shares, of stock which petitioner had deposited with the bank to secure such payments.

Petitioner obtained an absolute divorce from his wife, Corinne L. Tilles, June 10, 1909. It is stipulated that the divorce was obtained “for the fault of the said Corrine L. Tilles.” The decree of the court granting the divorce reads in part as follows:

Now at this clay [June 10, 1909] the Court ⅜ ⅜ * being satisfied that the plaintiff is an innocent and injured party and entitled to the relief prayed for in his petition, doth order, adjudge and decree that he be absolutely and forever divorced from the bonds of matrimony existing between plaintiff and said defendant, * * * and that the defendant pay the costs of this proceeding * * *

Petitioner’s former wife remarried within a week after the divorce was granted.

On May 12, 1909, petitioner and his wife entered into a predivorce agreement under which petitioner agreed to pay his wife $400 a month for life “in lieu and stead of permitting any judgment or decree for alimony against me” and to pledge certain shares of stock of a par value of over $100,000 to insure such payments. The agreement contains the following concluding paragraph:

I make this proposition and agreement solely in consideration of my marital duty, and to adjust any matter of alimony, and prevent the consideration of said matter of alimony by the Court in which my suit is pending, in case it should hold I am entitled to a decree for divorce.

The securities in question were deposited with the Mississippi Valley Trust Co. of St. Louis, with a letter of instruction and a copy of the agreement of May 12, 1909. In each year since 1909 the petitioner has paid to his former wife $4,800 in accordance with the agreement.

In entering into the predivorce agreement and as part consideration therefor petitioner’s wife waived her rights to certain securities of an undisclosed value which petitioner had given to her from time to time during their married life and which at the time of her separation were in his possession.

The Commissioner ruled in 1928 with respect to some of the prior years that the income from the securities held by the Mississippi Valley Trust Co. under the agreement of May 12, 1909, was not taxable to the petitioner. In determining the deficiencies for the years involved in this proceeding, however, the respondent has reversed his prior ruling and has included all the dividends from such securities in petitioner’s taxable income.

We are of opinion that this issue is controlled by the decision of the Supreme Court in Douglas v. Willcuts, 296 U. S. 1, in which it was held that the payments made by a taxpayer to his divorced wife in lieu of alimony were made in satisfaction of his legal obligation and were includable in his taxable income. See also Helvering v. Brooks, 82 Fed. (2d) 173; Helvering v. Coxey, 297 U. S. 694; Helvering v. Stokes, 296 U. S. 665; Albert C. Whitaker, 33 B. T. A. 865.

One of the cases relied upon by petitioner is Edward, T. Hall, 36 B. T. A. 398. That case turns upon the fact that there was no legal obligation on the part of the taxpayer to support his wife or to pay her alimony in the years when the payments in dispute were made. To the same effect is Henry Oliver Rea, 35 B. T. A. 1132; Harry S. Blumenthal, 34 B. T. A. 994. We do not think that those cases are controlling here. Apparently petitioner was legally obligated to make the payments of $4,800 per year to his wife as agreed upon in the predivorce agreement of May 12, 1909. It was pointed out in the Hall case that there was no property jointly owned by the spouse and that the wife had no property of her own which was retained by the husband after separation. In the instant case, however, petitioner’s wife did own certain securities which the petitioner retained and in which the wife waived her property rights in consideration for the payments which she was to receive under the separation agreement. There was, therefore, a continuing obligation on the part of the petitioner to make the payments to her even after her remarriage.

Issue S. — It is stipulated with respect to this issue that for 1931 and 1932 business and farm expenses shall be allowed in the respective aggregate amounts of $3,130.99 and $2,951.95, and disallowed in the respective aggregate amounts of $1,565.49 and $1,475.98.

Issue If.. — In 1932 petitioner made a donation of $200 to a fund to provide a musical education for a young girl, Anna Poe, who was said to have a very promising voice. Anna Poe was then clerking in a department store and had no means of her own with which to provide a musical education. Similar contributions were made to the fund by other parties.

With respect to this contribution the petitioner testified as follows:

She [the child's music teacher] was interested in a young girl that wanted a musical education. She had a wonderful voice, and she had several different people contributing so much to the support of that girl to send her to New Tori? for a musical education. She was a poor girl and had no means of support: Sho was a clerk in a department store. I helped her in her education through Mrs. Baer [the music teacher].

Section 23 (n) of the Revenue Act of 1932 provides in part that:

(n) Charitable and Other Contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
(2) a corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The above quoted provision of the statute is substantially the same as the provision of the Eevenue Act of 1921 and all intervening revenue acts. The Eevenue Act of 1918 permitted the deduction from gross income, not in excess of 15 percent of the taxpayer’s net income, of:

Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational pur, poses, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual * * * [§ 214 (a) (11)].

The only explanation contained in the Committee Eeports of Congress on the revenue bill which later became the Eevenue Act of 1921 is the following from the Ways and Means Committee Eeport No. 350, 67th Congress, 1st Session:

Section 215 would allow the deduction, under proper restriction, of contributions or gifts to a community chest fund or foundation.

The statutes and the provision above referred to in the various acts are clearly in pari materia. Quite clearly the contribution here in question could not be deducted under the provisions of the Eevenue Act of 1918. We do not think that it was the intention of Congress by the use of the language contained in the Eevenue Act of 1921, and succeeding revenue acts, to allow the deduction from gross income of a charitable gift which was for the benefit of only one person. The facts are simply that the child’s music teacher thought that her pupil had a promising voice and was interested in having her receive a musical education. She solicited several of her friends for gifts to enable her to defray the child’s expenses for a musical education.

In James Sprunt Benevolent Trust, 20 B. T. A. 19, the Board held that the petitioner was not organized exclusively for religious, charitable, scientific, literary, or educational purposes and was not exempt from taxation under section 231 of the Eevenue Act of 1921. The trust was created for the purpose of giving temporal support to “a son or grandson or a blood relation who will be called to the Gospel Ministry of the Southern Presbyterian Church.” The Board stated:

* * * The authorities, which we have reviewed at length, seem unanimously to agree that purposes such as these are not public charities in a legal sense and are not entitled to the privileges, such as exemption from taxation, generally accorded such charities. “A gift for ‘the support of those of my children and their descendants who may be destitute,’ is not a charity.” Perry on Trusts and Trustees, vol. 2, p. 1163. “* * * Charity is generally defined as a gift for public use. Such is its legal meaning. * * *” Kain v. Gibboney, 101 U. S. 362. “* * * A charity is a gift to a general public use, which extends to the rich, as well as to the poor. * *” Perin v. Carey, 24 How. 465.

In Havemeyer v. Commissioner, 98 Fed. (2d) 706, reversing 36 B. T. A. 859, it was held that contributions to the United Special Aid Association, an unincorporated association, were deductible from gross income. The association was organized by a small group of individuals and the contributions were disbursed largely, though not entirely, to needy and worthy old family retainers. The court overruled the contention that the organization merely served as a means for the bestowal of private bounties. The fact that the beneficiaries were all personally known to one or more of the members and were persons who might have been given aid if the association had not existed does not change the character of the association. The Board has carefully considered the opinion of the court in that case but is of the opinion that the facts there are substantially different from those which obtain in this proceeding. The action of the respondent in disallowing the deduction of the $200 gift is approved.

Judgment will be entered v/nder Bule 50.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    W. F. Taylor Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89597.
    Promulgated September 20, 1938.

      Sidney M. Goolt, Esq., for the petitioner.

      John E. Marshall, Esq., for the respondent.
   OPINION.

Black:

There is very little dispute, if any, between the parties in this proceeding as to the facts. The dispute arises as to the legal consequences of the facts. Petitioner contends that the facts prove the ascertainment of worthlessness and the charge-off in the year 1933 of a debt amounting to $79,303.26 which it held against the Ogden Co., and that as a consequence it is entitled to a deduction of this amount from its gross income under the provisions of section 23 (j) of the Revenue Act of 1932.

The Commissioner concedes that petitioner, prior to the sale of the Ogden Co. stock, held a bona fide debt against the Ogden Co. of $79,303.26 and that petitioner charged this debt off its books in the year 1933. The Commissioner contends, however, that petitioner did not ascertain the said debt to be worthless in 1933, and that on the contrary the debt was not worthless but was voluntarily canceled by petitioner as an act of debt forgiveness and petitioner is not entitled to the deduction which it claims or to any part thereof.

For reasons which we shall later state in more detail, we think the Commissioner must be sustained in his contentions as to $5,083.97 of the debt charged off. As to the balance of the debt, to wit, $74,-219.29, we think the Commissioner should not be sustained and that petitioner must prevail.

If, as respondent contends, the facts show a case where a creditor voluntarily canceled the debt of a solvent debtor, it would require no citation of authority to support respondent’s contention that no deduction is allowable. A creditor can not voluntarily forgive a debt against a solvent debtor and then be heard to claim a deduction for a bad debt ascertained to be worthless and charged off in the taxable year. Such action would be a perversion of the statute. But we have no such situation in the instant case. The uncontradicted evidence shows that petitioner had guaranteed the payment of all the outside debts of the Ogden Co. In fact it is clear from the evidence in the case that the Ogden Co. operated on the credit of petitioner and the Taylor estate.

At the time in question, the Ogden Co. owed to the bank and outside creditors the total sum of $54,898.69. This was exclusive of the $79,303.26 which it owed to petitioner and the $25,000 which it owed to the Taylor estate, all amounting to the total sum of $159,201.95 of indebtedness. The value of the total assets of the Ogden Co. was $59,982.66.

The Frank Grocery Co., Ltd., agreed to purchase the shares of stock of the Ogden Co. and pay for them $59,982.66, the value of the underlying assets. This payment was to be made in the following manner: The Frank Grocery Co., Ltd., assumed and agreed to pay the bank $25,000 and to pay all the other indebtedness of the Ogden Co. to outside creditors, amounting to $29,898.69. The total thus to be paid amounted to a gross of $54,898.69.

When these amounts were paid, the Frank Grocery Co., Ltd., still owed $5,088.97 of the agreed purchase price of the Ogden Co. stock, which was paid in cash to petitioner. Petitioner agreed to cancel and charge off all its claims against the Ogden Co. Petitioner subsequently paid this $5,083.97 cash which it received to the Taylor heirs, who were the owners of a majority of the Ogden Co. shares of stock. Petitioner, of course, had the right, if it chose to do so, to pay this $5,083.97 over to the Taylor heirs, but it can not claim to that extent a deduction of the debt against the Ogden Co. charged off. It could at least have collected that much of the debt and therefore its failure to do so must be attributed to its own voluntary act. The stockholders of the Ogden Co. were not entitled to receive anything for their stock until the creditors were paid, and petitioner was a creditor in the amount of $79,303.26 and should have applied as a credit thereon the $5,083.97 cash received.

But petitioner can not be charged with the $54,898.69 paid over by the Frank Grocery Co., Ltd., the purchasers, to the bank and other outside general creditors. These were debts which petitioner had unconditionally guaranteed and had to be paid in full before petitioner was entitled to collect anything on the indebtedness of the Ogden Co. to it. Therefore when all these debts were paid there was nothing left which petitioner could apply to its claim for $79,303.26, except the $5,083.97 paid in cash which we have already disposed of above, and the balance of petitioner’s claim, amounting to $74,219.29, was thereupon definitely ascertained to be worthless.

As to this $74,219.29, petitioner has never been reimbursed in any way and is entitled to a deduction as a debt ascertained to be worthless and charged off within the taxable year. Cf. Deeds v. Commissioner, 47 Fed. (2d) 695, reversing the Board on this point in E. A. Deeds, 14 B. T. A. 1140.

The transactions disclosed by the evidence in the instant case were not carried out in pursuance of any scheme of tax avoidance. They were parts of a bona fide business transaction. As said by the court in the Deeds case:

The proper answer to this question depends, we think, upon the purpose and reasonableness of the action taken. It cannot be used as a subterfuge, merely to avoid the payment of taxes nor as a means of benefaction and bounty; but, if the step be taken in the interest of the taxpayer, in the exercise of an experienced business judgment, and in an effort to avoid even greater and otherwise certain losses, we cannot see that the taxpayer should be precluded from taking the deduction, because the amount of the loss then to be suffered was thus definitely ascertained, and the fact of such partial loss made certain by the action of the taxpayer himself. The facts are none the less clear that, after cancellation, the debts were in fact worthless, were realized to be so by the taxpayer, and were charged off on his books.

The facts in the instant case are stronger for petitioner than the facts were for the taxpayer in the Deeds case. In the Deeds case the taxpayers retained a substantial continuing stock ownership interest in the Smith Gas Engineering Co. long after they had canceled and charged off $293,970 of their indebtedness against the corporation. Notwithstanding this continuing stock ownership interest, the court held that the taxpayers should be allowed the deduction for their debt thus canceled and charged off. In the instant case petitioner owned no interest whatever, nor did its stockholders in the Ogden Co. after the debt was canceled and charged off.

Now it is, of course, true that if when petitioner canceled and charged off its claim of $79,303.26 against the Ogden Co. it had a contract of reimbursement from some other solvent source, it would not be entitled to the claimed deduction. Cf. Glendinning, McLeish & Co. v. Commissioner, 61 Fed. (2d) 950, affirming 24 B. T. A. 518.

But the action of the banks in permitting petitioner and the Taylor heirs to continue to hold 6,000 bales of cotton in the hope of there being later a rising market, a circumstance strongly relied upon by respondent in his brief, was no contract for reimbursement. True, it turned out that petitioner and the Taylor heirs were fortunate in their judgment to hold the cotton. Later there was a rising market and petitioner and the Taylor heirs succeeded in selling the cotton for $100,000 more than they could have sold it when the bank first demanded that it be sold. But this increase in price must be accounted for by them in full in determining gain or loss on the sale of the cotton. Their judgment to part with all their interest in the Ogden stores and apply the proceeds to the payment of the bank’s indebtedness and other outside indebtedness of the Ogden Co. on which they were guarantors proved to be good, but there was no certainty that it would be so. The market for cotton might just as easily have declined further, thereby increasing their losses.

Such transactions, though intimately connected, are separate and are not parts of the same transaction; they must be separately treated for tax purposes and can not deprive petitioner of its right to a deduction of that part of the indebtedness of the Ogden Co. to petitioner which it ascertained to be worthless in 1933 and charged off. This we have already held to be $74,219.29.

Now if respondent’s contention that petitioner should be deprived of the deduction of this bad debt charge-off because it was incurred as a part of the consideration for continuing to hold the 6,000 bales of cotton in question is correct, then the amount charged off would become a part of the cost of the cotton and would be recovered tax-free when the cotton was sold. We think this treatment of the transaction would be artificial and untenable and should not be indulged in. We do not have the cotton transaction before us for consideration in this proceeding, but we dare say that, when petitioner came to compute its gain or loss on the sale of the 6,000 bales of cotton, the Commissioner did not allow petitioner to use, as a part of its basis of cost of the cotton, the $79,303.26 or any part of its claim therefor against the Ogden Co. charged off in 1933. There would be no grounds for adding to petitioner’s cost of the 6,000 bales of cotton the amount of its indebtedness against the Ogden Co. charged off. The connection between the two transactions would be too remote and incidental to justify such treatment of them.

So the situation comes down to this: Petitioner has had an actual bona fide loss to the extent of $74,219.29 in its charge-off of the Ogden Co. indebtedness and if it does not get the deduction now, it will never get it. We think it is entitled to the deduction now.

As said by the court in the Deeds case:

» * ⅞ This was not the ordinary case of mere forgiveness of indebtedness. It was not a gift. It was the performance of an act which highly experienced and skillful business men honestly believe to be to their own best interests in the avoidance of loss and therefore to the interest of the government in maintaining income. But it nevertheless was an event which definitely and permanently prevented the collection of the debt. Compare the very closely analogous situation disclosed in Jones v. Commissioner, 38 Fed. (2d) 550 (C. C. A. 7).

While under our decision petitioner’s claimed loss as deducted on its return is reduced from $79,303.26 to $74,219.29, this reduction is not enough to result in any deficiency. Petitioner’s net loss shown on its return was $25,329.26. The effect of our decision is to reduce this net loss to $20,245.29.

Decision will ~be entered for fetitioTier.


author: Muedock :

text:
    Seaboard Security Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Seaboard Small Loan Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Southern Security Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 79970, 79971, 79972, 79973.
    Promulgated September 20, 1938.

      J. Robert Sherrod, Esq., Norman B. Frost, Esq., and O. H. Chmil-lon, Esg., for the petitioners.

      DeWitt M. Evans, Esq., and J. M. Morawski, Esq., for the respondent.
   OPINION.

Muedock :

These cases are separate, although they were heard together. The question in each is whether that particular petitioner was formed or availed of within the taxable year for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. Sec. 104 (a) of the Eevenue Acts of 1928 and 1932. The purposes behind the formation of these corporations have been explained by the witnesses. They were business purposes as opposed to tax reducing or avoiding purposes. There, was no thought of avoiding surtaxes upon Appleby, who was the sole original stockholder. We have no hesitation in holding that none was formed for the purpose described in section 104.

The question of whether any one, or more, was availed of for that purpose is somewhat more difficult to answer because it involves consideration of a complication of figures in each case. These were not mere holding or investment companies within the meaning of section 104 (b), nor has the Commissioner made any finding that any one had permitted its gains and profits to accumulate beyond the reasonable needs of its business. The evidence indicates that such was not the case.

Seaboard Small Loan in 1931 was using almost all of its available funds in its business. That business fell off somewhat in 1932 and the corporation had more funds than it was able to use in that particular year. But the reasonably anticipated needs of the future would absorb all of those excess funds. Those in charge believed that the demand for small loans would increase as soon as business recovered somewhat and then all of the available funds would be used in the business once more. There is no evidence to the contrary. Subsequent events bore out the expectation which the witnesses had in 1931 and 1932.

Appleby paid but little Federal income tax. In some years he could have received increased dividends from these corporations without having to pay any tax or no more than a negligible amount. His reason for not paying dividends was not to avoid taxes on the shareholders, but was to build up the business of the corporations so that they could earn more. The business was able to absorb the earnings just about as fast as they were realized. Cash was the stock in trade of these corporations, and they had to have an ample supply constantly and readily available. Their business was a highly competitive one. They were relatively small corporations as compaied to their principal competitors. The business was rather risky. Large amounts were lost annually in bad debts. Adverse legislation was a threat. Considering all of the circumstances, it seems reasonably clear that no one of these three corporations ever had on hand an excess of earnings beyond the reasonable needs of its business.

Appleby did not withdraw funds from the business for his own use either directly through loans or indirectly through any other channel. The trustee accounts were not used by him for that purpose. The evidence shows that those accounts had a real business purpose and that they did not benefit Appleby personally in any way, except that they enabled him to conduct the business of these corporations more conveniently. The corporations at most times owed him more than he owed them. Appleby was constantly trying to build up Seaboard Small Loan to the point where bankers and investors would be interested in it as a credit risk. He seems to have attained his goal a few years after the years in question. But even during these years he was not merely putting earnings aside for the future but was currently using those earnings except as business temporarily declined during the unusual business depression.

Decision will b& entered wnder Rule 50.


author: Sternhagen:

text:
    Nicholas Roerich, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83065.
    Promulgated September 21, 1938.

      Herbert Plant, Esq., and Sidney Portnof, Esq., for the petitioner.

      Lloyd W. Oreason, Esq., for the respondent.
   OPINION

Sternhagen:

1. The first and principal question is whether the $73,300 and $74,221.79 deposited by Horch in the petitioner’s individual account in 1926 and 1927, respectively, were his, and more particularly, were proceeds to him from the sale of his paintings, as the Commissioner has determined. This question turns upon a determination of fact as to which there is a flat conflict of the testimony of petitioner, the alleged seller, and Horch, the alleged buyer. It is clear that Horch placed the money in petitioner’s account and that petitioner used it. The amounts are said categorically by Horch to have been the purchase price of petitioner’s paintings, and categorically by petitioner to have been gratuitous contributions by Horch to defray the cost of the Asiatic expedition. Petitioner says, “I sold no paintings or any other thing for said $73,000 to Horch or any other person.” “I sold no paintings or any other thing for said $74,271.78 to Horch, his wife, or any other person.” Horch says, “In 1926 I bought paintings from petitioner which were in this country prior to that year. In 1926 I paid for the paintings $73,300. In 1927 I bought more for about $74,000. These amounts bore no relation to what I loaned or advanced for use by Roerich in any one of his expeditions. These were all purchases of paintings. I gave additional monies for expeditions.” So it is necessary to consider the circumstances to reach a decision, not definitively as to a sale of the paintings to establish title, but as to whether petitioner received income. The question of title is only justiciable here as a postulate.

Petitioner’s counsel seeks to discredit Horch’s testimony by charging him with bad faith as a vindictive informer. This is perhaps not an unnatural attitude for petitioner. But the Board must remain unmoved by the sentiments growing out of the changed spiritual or emotional relations of these men and endeavor from a detached viewpoint to make a fair and impartial appraisal of the evidence. It does not appear that Horch was an informer. The Government’s investigation seems to have begun with the petitioner’s bank account, and Horch was called upon for information when it was found that he had had a power of attorney. He requested a summons before giving his information; but it would be ironic indeed if that made his evidence less reliable than if he had volunteered it. Before the Board, where he was called as a witness for the Government, his testimony was covered by searching cross-examination. It was through this witness that most of the facts were placed in the record. The petitioner lives in India, and his evidence is by way of answers to written interrogatories — a form of evidence far from satisfactory, since it omits confrontation and personal cross-examination by a challenging adversary. Without this, one is left in suspense by the inconsistency or lack of precision of several of the answers to the interrogatories. For example, what precisely is meant by Roerich’s answer that his 1928 written “confirmation” of sale to Horch was “a pure formality” signed “for technical reasons?” How is one to interpret the equivocal statement that the valuation and prices fixed for the paintings were “not necessarily for purposes of sale?” If Horch were a rogue whose testimony were not to be believed, there would still be not enough on petitioner’s side to overcome the Commissioner’s determination and the face value of the documentary and other written evidence which supports it.

We are convinced by the evidence that the petitioner intended to sell and did sell paintings and that the amounts in question which Horch deposited in his bank account must be regarded as the price received for paintings and were therefore his income, as the Commissioner has determined.

Petitioner clearly contemplated the sale of his paintings when in 1922 he gave to Corona Mundi the exclusive right to sell all his painting's and books throughout his lifetime; when, in May 1923, he expressly granted that corporation the exclusive right to purchase the paintings which might result from the Asiatic expedition and stated the terms of purchase as “according to the present prices of my paintings”; and when, in April 1923, he gave Horch a general power of attorney which expressly included the power “to sell such of my paintings * * * at such price and upon such terms as he may deem advisable.” In 1925 his correspondence clearly manifests a continuing purpose to sell the paintings then on loan to the Museum for exhibition purposes, fixes the prices of the 1925 paintings as those on the 1924 “price list”, and contemplates a later “distribution of money for the paintings.” The 1926 catalogue of the Museum indicates these paintings as in the loan exhibition, and in the 1929 catalogue this indication has been removed and some pictures are shown as gifts from Roerich and from his wife. There is no later word of Roerich himself that his purpose to sell had been changed. To say, as petitioner does, that the list prices were fixed for purpose of inventory and insurance may be quite true and yet not incompatible with the purpose of sale.

Horch, to be sure, was in the dual position of acting for himself and acting as Roerich’s attorney. This necessitates caution in identifying his acts as between the two. But Roerich does not disavow anything Horch did as his attorney. He doesn’t charge an abuse of fiduciary power or a betrayal of trust in respect of the paintings— he doesn’t claim that he still owns the paintings. The controversy seems, upon the present record, to be only whether the expedition paintings now apparently owned by the Museum were acquired by it from Horch or from Roerich. As to this, the evidence, while not free from doubt, is far stronger that Roerich was paid for them by Horch than that Roerich gave them to the Museum. Horch says that whenever he wrote, either in his own records or in communications to Roerich, that he was making the loan exhibition permanent, he meant that he was buying the paintings. This is not difficult to believe. It is entirely consistent with Roerich’s purpose to sell the paintings. On the other hand, if Horch’s statement that the loan exhibition was being made permanent is to be regarded as being made by him as attorney for Roerich and as applying to any act of donation made by his principal, it would be a kind of fiduciary act not clearly covered by the terms of his power of attorney and widely at variance with the express power to sell the paintings. Indeed the cable sent by Horch on October 19, 1926, said not merely that the loan exhibition had been made permanent, but that it had been “made permanent by Odomar”, which was their code name for Horch. We find it much easier to believe that Roerich adopted Horch’s paying for the paintings and making the loan exhibition permanent as Horch’s own act than that Roerich silently ratified a donation of the paintings made in his behalf by his attorney without express authority.

The circumstances of the payments by Horch fit so well into the terms of sale which Roerich had stated that the inference is difficult to resist. Although Horch had with others made large voluntary contributions to finance the Asiatic expedition, these particular amounts were immediately identified on Horch’s records of bank deposits and later in his financial report to petitioner with making the loan exhibition permanent. This identifying notation on the report to petitioner in 1928 was never questioned by petitioner, and was apparently accepted equally with that of the sale to Crane for $2,000 and to Mrs. Getz for $900.

Petitioner proved by Lichtmann and Miss Grant that their contributions of $500 and $200 to the 1926 fund of $75,000 were gratuities, and urges this as evidence that no part of the $75,000 was otherwise. Their intention as to their contributions does not, however, give a similar character to Horch’s payment. There is no occasion, such as the promotion of justice among them, which requires that Horch should be held to have made a gift despite his own testimony that he did not intend to do so. A gift is not ordinarily to be presumed and evidence by the alleged donor himself is of prime importance. Botchford v. Commissioner, 81 Fed. (2d) 914 (C. C. A., 9th Cir.); Bass v. Hawley, 62 Fed. (2d) 721 (C. C. A., 5th Cir.); Fisher v. Commissioner, 59 Fed. (2d) 192 (C. C. A., 2d Cir.). So it is not necessary to say, as petitioner does, that if Horch bought paintings for his contribution of $73,300, then Lichtmann and Grant each likewise must have bought an aliquot part of the paintings, and that since an apportionment to them is mathematically difficult, this completely destroys all demonstration of a purchase by Horch. The Commissioner has not treated the Lichtmann and Grant amounts as income to petitioner, and there is therefore no necessity here to deal with them on their own account. The $2,900 received from Crane and Getz is now admitted by petitioner to have been income to him from the sale of paintings in 1926, and these three amounts embrace all that the Commissioner has included in income as received for the sale of paintings.

The $74,271.78 paid by Horch in 1927 was in exact conformity with the terms of sale laid down by petitioner and was thus accounted for in a report which was received by him without protest in 1928, long before there was any friction between them and when Roerich could easily have corrected errors.

As against this circumstantial evidence and Horch’s direct testimony, the direct statement of Roerich denying a sale loses its force. In addition to these prior and contemporary facts is the written confirmation of August 29, 1928, signed by petitioner about the time when he received Horch’s itemized account. This provides a substantial assurance of the fact of sale. Petitioner would put it aside as unsubstantial because given, as he says, at Horch's request “for technical reasons.” This is quite meaningless and suggests no ground for disregarding the writing. Petitioner was by no means ignorant, and he cannot be heard to say that he didn’t mean what he so clearly and deliberately wrote, especially when the written statement is entirely consistent with and “confirms” what is otherwise evident. There is no reason to believe that Horch was imposing on petitioner. He was clearly supplying the funds, and the purchase price paid was the amount petitioner had himself fixed. So why should Roerich not be expected to sign a confirmation of sale? If we cannot give credence to a written statement like this, then which of his statements are to be respected? A disclaimer of such a clear written statement casts a shadow over all his statements. And the shadow is deepened by the wilting, signed in September 1928, purporting to transfer paintings to an organization, which has not been otherwise referred to, called Nicholas Roerich Painting and Art Collections, Inc.; by the inexplicable promise of the Museum in November 1929 to pay petitioner 4 percent on a. $200,000 valuation of his paintings, and the payment of the 4 percent for over a year; and by the itemized claim against the Tibetan Government, prepared at Roerich’s personal direction in India, which included “Prof. Roerich’s wages $100,000” (Roerich was to receive no wages), and “Loss of orders in paintings which could not be accepted by Professor Roerich because of impossibility of communication $50,000.”

It is therefore held that the petitioner in 1926 received $76,200 as his individual taxable income from the sale of paintings, and in 1927 received $74,271.78 similarly. The Commissioner’s determination to this effect is sustained.

2. As to the sale of paintings in 1934, the Commissioner determined the amount so received by petitioner to be $8,569. The evidence shows, as petitioner admits, that sis paintings were sold for $6,219, and that a commission of $150 was paid, leaving a net received by him of $6,069. This net amount is properly to be included in petitioner’s taxable income on that account for 1934.

3. Petitioner’s statement that in 1934 he made charitable contributions of $1,300 to the Koerich Museum, Inc., and Master Institute of United Arts, Inc., and $1,470 to the Urusvati Himalayan Research Institute is not proven by evidence sufficient to support findings to that effect. Deductions of such amounts are therefore not properly allowable.

4. The Commissioner determined that the petitioner’s income for 1926 and 1927 included several items of interest, an item of profit from the sale of Liberty bonds, and an item of book royalty. These items were credited to petitioner’s bank account during the years in question and' the evidence provides no reason to exclude them from his taxable income. The Commissioner’s determination as to these items is sustained.

5. The respondent, by amended answer, affirmatively pleads that for 1934 petitioner’s taxable income should include $5,743.75 compensation and subsistence paid to him by the United States Government for his services in seeking drought-resisting grasses in Asia. The petitioner, admitting the facts, argues that since he is a nonresident alien and since the amount was received for services performed outside the United States, it is not subject to tax. This argument is clearly correct in view of the plain language of sections 211 (a) and 119 (c) (3) of the Revenue Act of 1934. The Commissioner’s argument that the amounts, being paid by the United States, were necessarily from sources within the United States, and that since the statute was expressly broadened as to the tax on interest, it must be regarded as broadened as to compensation for services, is without force against the unambiguous language of the controlling statute. The affirmative claim is denied.

6. In an amended answer filed after the hearing, respondent raised the issue of petitioner’s right to the personal exemptions of $3,500 and $2,500 which, had been, allowed him for the three years in question, since he was a nonresident alien and did not file a true and accurate return. In his reply, duly filed, petitioner met the issue and argues to the merits that his income for 1926 and 1927 was less than the exemptions. He contends, however, that respondent’s claim must be denied because the pleading of it after the hearing constituted laches. The argument of laches can not avail petitioner now after he has met the issue by his pleading. There is an intimation that had he had an opportunity, he might have met the issue by additional proof; but no objection was made to the pleading, no attempt was made to get the further evidence into the record, no suggestion is made as to the nature or the extent of the countervailing evidence, and it is not easy to imagine what sort of evidence might be available to petitioner to overcome the plain provisions of the statute.

Petitioner was a nonresident alien, and as to him the statute provides that the filing of a true and accurate return is a condition precedent to the allowance of deductions and credits. He filed no returns for 1926 and 1927, and only a tentative return for 1934 which did not purport to be true and accurate. Hence he may not “receive the benefit of the deductions and credits allowed in this title.” The allowance of these credits in the Commissioner’s determination was incorrect and the affirmative claim as to these items is sustained. Myra Furst, 19 B. T. A. 471; Gladstone Co., Ltd., 35 B. T. A. 764 (dismissed, C. C. A., 2d Cir.). This statute would also require the disallowance of the claimed deductions for charitable contributions which have already been denied on another ground.

7. The petitioner filed no returns for 1926 and 1927, and only a skeleton “tentative return” for 1934. The latter was not “the return required to satisfy the statute.” Florsheim Brothers Drygoods Co. v. United States, 280 U. S. 453. The addition to the tax of 25 percent is under such circumstances required for all three years, Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519; certiorari denied, 297 U. S. 723; Edmonds v. Commissioner, 90 Fed. (2d) 14 (C. C. A., 9th Cir.), certiorari denied, 302 U. S. 713; Sabatini v. Commissioner, 98 Fed. (2d) 753; National Contracting Co., 37 B. T. A. 689, 696 (on review, C. C. A., 8th Cir.).

8. The Commissioner in his determination added 50 percent to the deficiencies on the ground that some part of the deficiencies was “due to fraud with intent to evade tax.” (Bevenue Act of 1926, sec. 275 (b); Revenue Act of 1934, sec. 293 (b).) The burden to establish fraud to support the 50 percent penalty is on the respondent (sec. 601, Revenue Act of 1928), and it has been held that the evidence of fraud must be “clear and convincing.” Griffiths v. Commissioner, 50 Fed. (2d) 782 (C. C. A., 7th Cir.); Henry S. Kerbaugh, 29 B. T. A. 1014; affd., 74 Fed. (2d) 749 (C. C. A., 1st Cir.). “Mere doubt is not enough”, Arthur M. Godwin, 34 B. T. A. 485. As to 1926 and 1927, it cannot be said that the deficiencies were due to fraud with intent to evade tax, although there is enough to justify a suspicion to that effect. As to 1934, however, there can be little, if any, doubt that petitioner had income which, as he now admits, was unquestionably his own, in excess of any exemptions to which he might reasonably believe himself entitled, and which he knowingly failed to report. Horcb’s letter clearly advised him in plenty of time of the need of a return, and he himself had in 1930 signed and filed a return for 1929 which carried a schedule of profitable transactions in securities, including some which had been bought with the proceeds of the sale of his paintings. He knew in 1935 that only the so-called tentative return had been filed showing an estimate of no tax due. He says he relied on Horch to file the return; but he knew within 1935, after he had fallen out with Horch, that no proper return had been filed. The conclusion is ines-capa,ble that the failure to file a return for 1934 and the resulting deficiency were due to fraud with intent to evade tax and that 50 percent is properly added to the deficiency.

Judgment will be entered under Rule 50.

       But see the statement of September 10, 1928, that they had been transferred to Nicholas Roerich Painting and Art Collections, Inc.

       SEC. 211. GROSS INCOME.
      (a) Generad Role. — In the ease of a nonresident alien individual gross income includes only the gross income from sources within the united States.
      SEC. 119. INCOME FROM SOURCES WITHIN UNITED STATES.
      ****** *
      (c) Gross Income prom Sources Without united States. — The following items of gross income shall be treated as income from sources without the united States
      * * * * * * *
      (3) Compensation for labor or personal services performed without the United States;

       [Sec. 217 (g) (1), Revenue Act of 1926.] Except as provided in paragraph (2) a nonresident alien individual * * * shall receive the benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources in the United States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits.


author: Smith:

text:
    Ralph L. Gray, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 86940, 86941.
    Promulgated September 21, 1938.

      Albert F. Hillix, Esq, and Elmer B. Hodges, Esq., for tbe petitioner.

      James C. Maddox, Esq., for tbe respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, involve deficiencies in petitioner’s income tax for the calendar years 1933 and 1934 in the respective amounts of $1,802.89 and $2,278.91. The deficiencies for both years result from the addition to petitioner’s taxable income of $8,805.40 in 1933 and $9,467.16 in 1934, representing the income of a trust fund created by the petitioner in 1931 for the benefit of his wife and two minor children.

The liability of the petitioner for income tax on the trust income is the sole issue involved in both proceedings.

By a declaration of trust dated July 14, 1931, the petitioner, a resident of Kansas City, Missouri, declared himself sole trustee of a fund of $300,000 which he concurrently deposited to his credit as trustee for the benefit of his wife and two minor children. The trust declaration provides in the preamble that:

* * * I, Ralph L. Gray, * * * in consideration of love and affection and of the sum of One Dollar to me paid by each of the beneficiaries named herein, have set apart and deliver to myself as Trustee, * * * the following described personal property or money:
Three Hundred Thousand Dollars ($300,000.00) which I have concurrently herewith deposited in The First National Bank of Kansas City, Kansas City, Missouri, to the credit of “Ralph L. Gray, Trustee.”

Paragraph 3 of the trust declaration provides that:

The entire Trust Estate shall forthwith be divided by the Trustee into three equal parts, which are hereinafter respectively called, for the sake of convenience, “Wife’s Share,” “Son’s Share,” “Daughter’s Share.”

It is further provided in the consecutive paragraphs 4, 5, and 6 that the income of all three shares of the trust fund shall be paid quarter-annually to petitioner’s wife for life, as to her individual share, and as to the other two shares until her son and daughter shall have arrived at respectively the age of 22 years. After the son and daughter shall have arrived at the age of 22 the income from their shares is to be paid to them directly for life and upon their death, if occurring after the age of 25, to their heirs or appointees. There is no provision anywhere in the trust instrument designating the manner in which any of the income shall be expended by the wife. It is provided in paragraph 17 that:

If at any time prior to the termination of the Trust by reason of any illness, accident, emergency or other misfortune or need for educational purposes or any other reason whatsoever, in the uncontrolled and absolute discretion of the Trustee, further funds shall be necessary for the comfortable maintenance, support or education of either the said Stewart Sill Gray or the said Gayle Gray or the said Anna Marie Gray, then the Trustee is authorized and directed to pay, as the ease may be, to either the said Anna Marie Gray out of the principal of the Wife’s Share, or to the said Stewart Sill Gray or his guardian or curator out of the principal of the Son’s Share, or to the said Gayle Gray or lier guardian or curator out of the principal of the Daughter’s Share, such sum or sums as the Trustee in his, its or their absolute discretion may deem proper, but not exceeding the sum of Ten Thousand Dollars ($10,000.00) in any one year, and the judgment of the Trustee in this respect shall be final and conclusive upon all persons interested in the Trust Estate. Nothing in this Article (17) contained shall create any legal or equitable rights whatsoever in any beneficiary hereunder.

Other provisions of the trust instrument deal at length with the appointment of successor trustees — the petitioner’s wife was to be a successor cotrustee — management of the trust fund, and other matters not here material.

Paragraph 25 of the trust instrument reads as follows:

The Trust hereby created and the terms of this indenture may at any time during the life time of Ralph L. Gray, the Settlor, be altered, modified, and/or amended by an instrument in writing, duly executed both by the Settlor and by the said Anna Marie Gray, if such instrument be executed before the death of the said Anna Marie Gray and before March 31, 1943, or, if such instrument be executed after March 31, 1943, by both the Settlor and by such of the three, the said Anna Marie Gray, the said Stewart Sill Gray and the said Gayle Gray, as shall be then of lawful age and surviving, provided that no alteration, modification or amendment shall be made, by which there shall be revested in the Settlor, either presently or in the future, any part of the principal or income of the Trust Estate, and provided also that such right of alteration, modification and/or amendment includes the right to relinquish the power of alteration, modification and/or amendment herein given.

At the same time that the petitioner executed the declaration of trust and pursuant to a provision therein he entered into an agreement, as trustee, with the First National Bank of Kansas City, Kansas City, Missouri, whereby the bank was employed as custodian and agent for the trustee and was given custody of the trust fund.

The income of the trust fund consisted in 1933 of dividends in the amount of $3,889.25 and other income in the amount of $4,916.15. In 1934 the income consisted of ordinary interest $1,770, interest on tax-free covenant bonds $3,735, and dividends $3,962.16. All of such income was distributed during the respective years of its receipt by the trust to Anna Marie Gray by checks drawn by a trust officer of the First National Bank of Kansas City and deposited in her individual bank account. All of such income was reported by her in her individual income tax returns for 1933 and 1934.

The petitioner and his wife, Anna Marie Gray, lived together as husband and wife and maintained their home at 1015 Greenway Terrace, Kansas City, Missouri, during the years 1933 and 1934. They had three dependent minor children, two of whom, Stewart Sill Gray and Gayle Gray, are the son and daughter, mentioned in the declaration of trust.

There was no agreement or understanding between the petitioner and his wife that any part of the income of the trust fund should be used by her for the maintenance and support of herself or of the minor children. She did, however, during the taxable years 1983 and 1934 use a portion of the income of the trust for such purposes, although not requested to do so by the petitioner. During the same time the petitioner continued to maintain his home and meet household bills for the maintenance and support of his family.

In his individual income tax returns for 1933 and 1934 the petitioner claimed the statutory credit of $400 for only one dependent child. In restoring the trust income to the income reported by petitioner in his returns the respondent has allowed an additional credit of $800 for petitioner’s two other minor children. In his determination of the deficiencies herein the respondent has ruled that under section 167 of the Revenue Acts of 1932 and 1934 the income of the trust for 1933 and 1934 is taxable to the petitioner because all of such income inured to his benefit, or was payable on his legal obligations.

The parties have stipulated as follows:

I£ the finding of the Board excludes items enumerated in Paragraphs 8 and 4 of the written stipulation of agreed facts from taxable income of petitioner, the deductions enumerated in paragraphs 5 and 6, and credit for two dependents taken on the returns of Anna Marie Gray for the years 1933 and 1934, respectively, and referred to in paragraph 7 of said stipulation of agreed facts, are to be eliminated in computing petitioner’s tax.
In other words, there were certain other items of deductions, credits for dependents, that were taken from the wife’s return and the husband’s return, and as the income goes back the tax goes back.

The pertinent provisions of the statute are found in sections 22 and 167 of the Revenue Acts of 1932 and 1934, which read in material part as follows:

SEC. 22. GROSS INCOME.
(a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, * * *
SEC. 167. INCOME EOR BENEFIT OE 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; * ⅜ *
* ******
then such part of the income of the trust shall be included in computing the net income of the grantor.

The Supreme Court held in Douglas v. Willcuts, 296 U. S. 1, that amounts of trust income distributed to the settlor’s divorced wife in lieu of alimony and all interest in her husband’s property came within the broad statutory definition of gross income and were taxable to the husband whose obligation to support his wife was thereby discharged. On authority of Douglas v. Willcuts, supra, the Court in Helvering v. Schweitzer, 296 U. S. 551, reversed, per curiam, Schweitzer v. Commissioner, 75 Fed. (2d) 702, in which the lower court had held, reversing 30 B. T. A. 155, that the settlor was not taxable on the income from a trust created by him for the benefit of his three minor children and payable to him solely for their support, maintenance, and education.

Likewise, in Helvering v. Blumenthal, 296 U. S. 552, the Court in a per curiam opinion reversed 76 Fed. (2d) 507, where the lower court had held, reversing 30 B. T. A. 591, that the settlor was not taxable on the income of a trust paid to a bank in liquidation of the settlor’s indebtedness. Likewise, in Helvering v. Stokes, 296 U. S. 551, the Court reversed the lower court, 79 Fed. (2d) 256, which had affirmed 28 B. T. A. 1243, and held that the settlor was taxable on the income of a trust created for the maintenance, support, and education of his three minor children.

In Hill v. Commissioner, 88 Fed. (2d) 941, affirming 33 B. T. A. 891, it was held that the income of a trust used to support the settlor’s wife and maintain the family home was taxable to the settlor. Also, in Commissioner v. Grosvenor, 85 Fed. (2d) 2, the court held, upon authority of Douglas v. Willcutts, supra, reversing 31 B. T. A. 574, that the income from two trusts created for the support and education of the settlor’s two minor daughters was taxable to the settlor. There, all of the net income of both of the trusts was to be paid to the settlor’s wife and was to be expended by her for the support, maintenance, and education of the minor children without any liability to account for the expenditure of the income to any person. In its opinion the court said:

* * * Mr. Grosvenor, being admittedly under a legal duty to support his minor children, was directly benefited by the payments of trust income which discharged that duty. Under the foregoing authorities, such income must be taxed as his. He attempts to distinguish them on the ground that here the income was paid to Mrs. Grosvenor without accountability therefor to any one. She was directed, however, to expend it for the support, maintenance, and education of the daughters, and, to the extent that she did so, he was relieved of his parental obligation. In the absence of evidence to the contrary, it should be assumed that all of it was so used. Compare Schweitzer v. Commissioner, 75 Fed. (2d) 702, 704 (C. C. A. 7). * * *

In the instant case the trust declaration does not direct that the income shall be used for the maintenance and support of the minor children. The respondent contends, however, that, by reason of the fact that a portion of the income of the trust fund during the years 1933 and 1934 was in fact used by the wife for the maintenance and support of the minor children, coupled with the fact that the petitioner did not in his returns claim any credit for the support of his two minor children, it must be held that the trust was created for the benefit of the petitioner and that he is accordingly liable to income tax upon the income of the trust fund for 1933 and 1934, as was determined by the respondent.

The facts in these proceedings are similar to those which obtained in Henry A. B. Dunning, 36 B. T. A. 1222. There the trust income was payable to the grantor’s wife without restriction on the use thereof. The wife used part of the income for the support and maintenance of herself and children; there was no agreement that she should use any of the income for the support of the children; the husband maintained the home and paid household expenses. We held that the trust income was not taxable to the grantor. We pointed out that: “There is no agreement, no trust provision, no court decree requiring the expenditure of the trust income for the purposes for which it was used or for any purpose that would relieve the petitioner of any of his obligations”, hence, that the case did not come within the rule laid down in Douglas v. Willcuts, supra, and similar cases.

The action of the respondent in adding to the petitioner’s income the income received by the wife from the trust fund in 1933 and 1934 is reversed.

Judgments will be entered under Bule 50.


author: Muedoce :

text:
    Charles Steele, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85694, 86878, 86879, 86880.
    Promulgated September 21, 1938.

      Montgomery B. Angelí, Esq., and Weston Vernon, Jr., Esq., for the petitioner.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

Muedoce :

The petitioner claims that he made a valid, complete, and absolute gift of $1,000,000 to his wife in May 1917; thereafter she made him a loan of the money which was valid in all respects; she had a legally enforceable right to the interest and the principal; and, consequently, when he paid his obligations of principal and interest to her, be was not making gifts. Tbe Commissioner now' refuses to see in the transactions of May 1917 any absolute gift and bona fide loan. Tbe decision depends upon whether tbe evidence shows an actual completed gift and an obligation to pay tbe principal and interest on a legally enforceable loan.

These transactions were not prompted by any desire to avoid or minimize taxes. There was no gift tax in effect in 1917. Tbe United States bad just entered a great war. Although tbe petitioner was a wealthy man, be did not want to have all of his fortune at tbe risk of bis partnership business, in view of tbe uncertainties of tbe future. He deemed it wise to make some provision for bis wife and daughters which would not be subject to those partnership risks. So he decided to make a gift of a substantial sum to each. He had ample funds to cover the checks which he used to make the gifts, and the steps taken were regular in every way. The funds were actually and completely transferred from his account to their separate accounts. The evidence on this point is precise, complete, and convincing. There were no strings of any kind to the gifts, no restrictions as to use, and no agreements as to use of the funds by the donees.

The loans afford no satisfactory reason to disregard the reality of the gifts. The petitioner worked out the plan of the loans for the benefit and protection of the members of his family in trying times. He wanted them to receive 6 percent upon their money, but he knew that sound.securities would not return that much income. The interest provision enabled them to secure the 6 percent. The risk of his partnership business was satisfactorily eliminated by the notes, which made the women his general creditors, talcing precedence as to his individual property over firm creditors, and by the ample and sound collateral which he gave. There was no ulterior motive back of the loans. Every step was calculated to produce the desired result. The loans were valid and binding. The petitioner could have been compelled to pay the interest and principal, and, consequently, when he made the payments, he was not making gifts.

Since no tax was due, of course, there can be no question of a penalty for failure to file a timely return. But in connection with the main issue, it is noteworthy that the representatives of the Commissioner, with full knowledge of the facts, accepted the return of the interest on the notes, as income of the women and as a deductible payment by the petitioner, for many years. A different attitude was taken for the first time in 1935 and the belated explanation was that there was no consideration for the note and payment of interest could not be enforced. The evidence shows that the Commissioner erred.

Decision will be entered under Bule 50.


text:
    Rebecca Terry White, Sole Devisee and Legatee of the Estate of Anna Davis Terry, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89925.
    Promulgated September 22, 1938.

      Ballinger Mills, Esq., for tbe petitioner.

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

Smith:

Section 302 of the Revenue Act of 1926 provides in part that:

Srco. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
* * * * * * ⅛
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

The respondent’s position is that the trust conveyances made by the decedent and her husband were testamentary in character and were to take effect in possession or enjoyment at or after death within the meaning of section 302 (c), above.

We do not so construe the trust instruments. We think that they effected completed transfers of the trust properties to the trustee for the benefit of the petitioner and that the transferors retained no interest therein except the possibility of reverter in case the petitioner should predecease them. The language of the trust instruments is that the grantors desire “to give to our daughter, Rebecca S. Terry, out of our community estate, property of the approximate value of Twenty-Five Thousand Dollars ($25,000.00)”; that the grantors “have given * * * and clo by these presents give * * * to J. W. Terry, Trustee for our daughter, Rebecca S. Terry, the following described bonds.” (Italics supplied.)

The trustee was directed to pay to the petitioner so much of the trust income as she might require or request and, in his discretion, to invest the remainder of the income “for her.” The income so invested was to become a part of the trust estate. The trust instruments further provided that “These gifts are advancements from our community estate.”

The above provisions of the trust instruments show quite plainly, we think, that the settlors intended to make a present gift, in the nature of an advancement, to the petitioner of the property thereby conveyed to the trustee.

The further provision of the trust instruments that in the event of the death of one of the grantors during the life of the beneficiary the trust estate “shall be brought into hotchpotch” is not contradictory of, and does not defeat, this construction. Bringing into “hotchpotch” means, generally, the blending and mixing of property belonging to different persons in order to divide it equally. See “hotchpotch”- — Bouvier’s Law Dictionary, and Words and Phrases; In re Farmers’ Loan & Trust Co., 181 App. Div. 642; 168 N. Y. S. 952.

Article 2576 of Vernon’s Annotated Texas Statutes, vol. 8, p. 153, provides that:

Advancements brought into hotchpotch. — Where any of the children of a person dying intestate, or their issue, shall have received from such intestate in his lifetime any real, personal or mixed estate by way of advancement, and shall choose to come into the partition and distribution of the estate with the other distributees, such advancement shall be brought into hotchpotch with the whole estate, and such party returning such advancement shall thereupon be entitled to his proper portion of the whole estate; provided that it shall be sufficient to account for the value of the property so brought into hotchpotch at the time it was advanced.

An “Advancement” bas been defined by tbe courts of tbe State of Texas as a payment of a portion of money or property, or a settlement of real estate, made by a parent to or for a child, in advance or m anticipation of tbe distributive share to which each such child would be entitled after tbe death of tbe parent, and with a view to an apportionment or settlement in life. See Woessner v. Wells, 28 S. W. 247; Wipff v. Heder, 6 Tex. Civ. App. 685; 26 S. W. 118; Ruiz v. Campbell, 6 Tex. Civ. App. 714; 26 S. W. 295.

With reference to tbe above quoted section of tbe Texas statutes tbe Supreme Court of Texas said in Oxsheer v. Nave, 90 Tex. 568; 40 S. W. 7:

* * * By another article of our statutes (Rev. St. 1895, art. 1694) the heirs are expressly required to account for advancements; but this provision, it would seem, was inserted out of abundance of caution. Advancements are not part of an estate, though the heirs may bring them into hotchpotch and claim their full share of all the property. * * *

It is apparent from tbe provisions of tbe trust instruments here that tbe trust property was to be brought into hotchpotch upon tbe death of either of tbe grantors, not as a part of tbe community estate, but simply for tbe purpose of determining the amount which tbe petitioner was to receive from tbe community estate in addition to her previously acquired interest in tbe trust property. In tbe same paragraph of tbe trust instruments directing that tbe estate be brought into hotchpotch upon tbe death of either settlor is tbe further provision that upon tbe death of tbe petitioner tbe trust property “shall revert to and become a part of our community estate.” Consider together, these provisions show clearly that it was not tbe intention of tbe grantors that tbe trust properties should revert to and become a part of tbe community estate upon tbe death of either of them, but only in case their daughter should predecease them.

Tbe respondent contends that under tbe provision of tbe trust agreements:

* * * the bonds conveyed by the decedent and her husband are brought into hotchpotch for the purpose of determining the value of the surviving spouse’s interest in the community estate. Consequently under the terms of the trusts the transfer here was to be charged to, taken out of, or become a part of the vested interest in the community estate of the spouse who was first to die. * * *

the identity of tbe grantor of tbe trust could not be determined until tbe death of tbe first spouse to die; and that tbe only transfer which occurred upon tbe execution of tbe trust instruments was tbe transfer of tbe right of tbe beneficiary to receive tbe income from the trust property for tbe life of tbe decedent, her husband, and herself.

We do not agree with the respondent’s contentions. The transfers under the trust instruments, we think, were completed transfers of a portion of the grantors’ community estate, and the properties passed completely out of the ownership of the grantors, with the possibility of reverter in case the beneficiary predeceased them.

The Supreme Court held in Helvering v. St. Louis Union Trust Co., 296 U. S. 39, that property which the decedent had previously transferred in trust, irrevocably, for the benefit of his daughter for life, with remainder over, was not a transfer intended to take effect in possession or enjoyment at or after death and was not taxable in decedent’s gross estate, notwithstanding that the trust estate was to revert to the grantor in case the daughter predeceased him. The generating source of title to the trust property, the Court said, was the trust instrument and not the death of the grantor. To the same effect is Becker v. St. Louis Union Trust Co., 296 U. S. 48.

The respondent’s contention here that the transfers under the trust instruments of December 27, 1924, and February 7, 1925, were intended to take effect in possession or enjoyment at or after death, and, accordingly, are taxable in the community estate of the decedent and her husband, is not sustained.

Judgment will be entered under Bule 50.


author: Arnold:

text:
    Estate of Harriet Blair Borland, Chauncey Borland, Bruce Borland, and Cyrus H. Adams, Jr., Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82722.
    Promulgated September 23, 1938.

      J. F. Dammann, Esg., and Stuart J. Templeton, Esg., for the petitioners.

      W. Frank Gibbs, Esg., for the respondent.
   OPINION

Arnold:

Section 302 of the Revenue Act of 1926 provides that the value of the gross estate of a decedent shall be determined by including the value at the time of death of all property, real or personal, tangible or intangible, wherever situated, “to the extent of the interest therein of the decedent at the time of his death.” Section 303 of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932, provides that in the case of a resident the value of the net estate shall be determined by deducting from the value of the gross estate the items therein set forth, including amounts “for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate.” The section further provides that “The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or moneys’ worth.”

The petitioners contend that the statute requires them to include only the interest of the decedent in the securities held in account #1. The decedent’s interest, they contend, is not the total value of the securities, but only so much thereof as remained after deducting therefrom the superior interest of Mitchell, Hutchins & Co. Petitioners further contend that, even if the pledged securities are treated as the property of the decedent and their entire value included in decedent’s gross estate, the indebtedness to Mitchell, Hutchins & Co. constitutes a prior charge against the securities and is a proper deduction in determining the value of the decedent’s net estate, proper credit being given for the value of Carrie D. Holland’s securities in account #1.

The respondent contends that the courts and this Board have already held, in City Bank Farmers’ Trust Co. v. Bowers, 68 Fed. (2d) 909, and Rodiek v. Helvering (C. C. A., 2d Cir.), 87 Fed. (2d) 328, affirming 33 B. T. A. 1020, that securities pledged to secure the indebtedness of another shall be included in a decedent’s gross estate to the extent of their full value. Respondent argues that the securities pledged by Harriet Blair Borland were at all times considered by the parties to the two agreements to be the absolute property of the decedent, and that the extent of her interest therein was the fair market value of the securities at September 16, 1933. In answer to the second phase of petitioner’s argument, respondent points out that Mitchell, Hutchins & Co. had no claim against decedent or her estate because of the indebtedness of Carrie D. Holland, and, therefore, the pledging of decedent’s securities to secure the brokers was not a liability incurred or contracted for an adequate consideration in money or money’s worth.

We are in accord with respondent’s position regarding the inclusion of the fair market value of the decedent’s pledged securities in her gross estate. There can be no doubt that these securities were owned outright by the decedent and that only the possession thereof was relinquished by her. She retained her other rights of ownership, such as the right to the income therefrom, the right to substitute other securities therefor, and the right to sell them. The reservation of the right to substitute other securities for those pledged would have enabled decedent, before her demise, to have reduced the particular securities to possession, thus clearly indicating the ownership thereof. Since this is true, the value of the pledged securities should be included in decedent’s gross estate under section 302 (a) of the Revenue Act of 1926 and article 10 of Regulations 80. Cf. City Bank Farmers v. Trust Co., supra, and Rodiek v. Helvering, supra, cases involving the gross estates of nonresident decedents.

This brings us to the question of whether petitioners are entitled to a deduction from the gross estate in determining the net estate subject to tax. Section 303 (a) (1) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932, provides for the deduction of “any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such * * * indebtedness, is included in the value of the gross estate.” Having determined that decedent’s pledged securities should be included in her gross estate without diminution, are petitioners entitled to deduct the indebtedness, if any, existing on September 16, 1933?

Respondent denies the right to any deduction because the indebtedness was not that of decedent, but an indebtedness of Carrie X>. Holland. He says that decedent’s act was prompted by generosity and possibly love and affection for a kinsfolk, and, therefore, that there could be no full and adequate consideration in money or money’s worth to support the claimed deduction. We do not understand that respondent denies the existence of the indebtedness, or the amount thereof at September 16, 1933; his denial is that the indebtedness was the decedent’s, or that any liability existed as to her estate to pay the indebtedness of Carrie D. Holland.

Legally, Mitchell, Hutchins & Co. had no claim against decedent’s estate because of any personal liability of the decedent. However, the brokers held certain securities which were assets of the estate but which the petitioners could not reduce to possession without satisfying the brokers’ lien. The brokers had acquired their special interest or property in decedent’s securities when, pursuant to decedent’s loan of the securities, they were pledged to secure the indebtedness of Carrie D. Holland. Grover C. Ligon, 37 B. T. A. 763. The pledge of decedent’s securities as collateral subjected the securities to the liability of the brokers’ lien, to the extent they might be necessary to discharge the lien. Dunscombe v. Crocker-Wheeler Electric Mfg. Co., 249 N. Y. S. 223; Hammon v. Paine, 56 Fed. (2d) 19; Miner v. Goodbody (N. J.), 166 Atl. 99. This liability became fixed and determined during the administration of the decedent’s estate and thereupon constituted an indebtedness in respect to property within the meaning of section 303 (a) (1) of the 1926 Act, as amended.

There remains for consideration the limitation contained in section 303 (a) (1), as amended, to the effect that the deduction of any indebtedness in respect to property shall, when founded upon a promise or agreement, be limited to the extent that the indebtedness was contracted bona fide and for an adequate consideration in money or money’s worth. Eespondent, as above stated, has pointed out that there was no consideration flowing to the decedent which will support the claim, nor was there any contractual obligation between the decedent and the brokers which would support the deduction.

This argument, that the consideration must flow to the decedent to support a deduction claimed by the estate, has been considered and rejected in a number of court and Board decisions. In Jeptha E. Wade, Jr., et al., Executors, 21 B. T. A. 339, 346, the Board stated:

From a careful consideration of the provisions of section 803 (a) (1) of the Revenue Act of 1926, and of the legislative history of the section, we are of the opinion that it is not necessary that the consideration for the claim against the estate or mortgage upon or indebtedness in respect of property referred to in the section should have been received by the decedent. The law does not require that the consideration should be received by the decedent. The statute requires (1) that the indebtedness should be incurred or contracted bona fide; (2) that there shall be an adequate and full consideration; and (3) that the consideration shall be in money or money’s worth.

To tlie same effect are tire following decisions: United States v. Mitchell (C. C. A., 7th. Cir.), 74 Fed. (2d) 571; Carney v. Benz (C. C. A., 1st Cir.), 90 Fed. (2d) 747; Commissioner v. Porter (C. C. A., 2d Cir.), 92 Fed. (2d) 426, affirming 34 B. T. A. 798; Percy B. Eckhart, Executor, 33 B. T. A. 426; petition to review dismissed, 91 Fed. (2d) 1010.

In this proceeding the decedent, by subjecting her securities to the brokers’ lien, protected the brokers as to the indebtedness of Carrie D. Holland, and secured a forbearance from the brokers in closing out the Holland account. There can he no question about the bona fides of the transaction, either with respect to Carrie D. Holland or the decedent, and we are satisfied that there was adequate and full consideration in money or money’s worth, even though the principal monetary consideration was not received by decedent. Tier estate acquired substantial rights by subrogation, and these rights were later exercised by her executors in recovering a portion of the indebtedness from the collateral deposited by Carrie D. Holland. Cf. H. Rodney Sharp, 38 B. T. A. 166, 177.

In determining the amount of their claimed deduction petitioners would reduce the total indebtedness of account #1 by the value of Carrie D. Holland’s collateral at September 16, 1933, arriving at a balance of $95,042.06, which they claim is deductible as the indebtedness in respect of the property included in the gross estate without diminution. This liability, however, was contingent upon the fluctuations of the market; it was not fixed or determinable until the brokers exercised their lien, or the petitioners paid off the indebtedness and released the collateral. The latter occurred on April 30, 1936, when petitioners paid off the balance of $32,173.17. Including this payment, the decedent’s estate had paid $131,995.05 into account #1 over and above credits to the account by way of interest and dividends from Carrie D. Holland’s securities and proceeds from the sale of securities of Carrie D. Holland. On April 30, 1936, the value of Carrie X). Holland’s collateral in account #1 was $43,113.81, which amount should be credited against the payments made by the executors to determine the amount of the indebtedness satisfied by the decedent’s estate. The difference, amounting to $88,881.24, represented the indebtedness in respect to property, which was paid during the administration of the estate, and this amount should be deducted from decedent’s gross estate in accordance with the provisions of section 303 (a) (1) of the Revenue Act of 1926, as amended. Percy B. Eckhart, Executor, supra.

Decision will be entered under Pule 50.