author: TuRNer:

text:
    Max Thomas Davis (Also Known as M. T. Davis) and Alma Arlene Davis (Husband and Wife), Petitioners, v. Commissioner of Internal Revenue, Respondent. The M. T. Davis Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 103725, 103726.
    Promulgated March 17, 1942.

      Harold K. Bell, Esq., for the petitioners.

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

TuRNer:

Davis contends that he is entitled to a deduction for 1936 of $2,000 as a debt due from Holmes to him, which debt he ascertained to be worthless and charged off in that year. The respondent claims that the payment to Holmes did not constitute a loan but represented money advanced to him for use in a stock venture in which Holmes and Davis were to share the profits and that the transaction was not a loan by Davis to Holmes. There is also some argument that on the evidence the advance was made not by Davis but by the M. T. Davis Co.

In our opinion, the evidence definitely shows that the money advanced, whether or not it was in the nature of a loan, was advanced by Davis and not by the corporation, and no extended discussion on that point is required. With respect to the character of the advance the record is not so clear. Davis in his testimony refers to it as a loan by him to Holmes and that characterization of the advance receives some support from the letter written by Mrs. Holmes to Davis under, date of August 21, 1936. After carefully following the testimony of Davis while he was on the stand and later reviewing the transcript thereof and the exhibits introduced at the hearing, we are convinced that Holmes and Davis did not regard the advance as a loan at the time it was made and that the money was not repayable by Holmes in any event but only upon successful termination of the venture. The agreement between them was not reduced to writing and the matter of losses was not discussed. The record is silent as to whether or not Holmes personally was putting cash into the venture and, if so, how much. The transaction with Holmes was summed up by Davis in the statement, “I wouldn’t charge him any interest in view of the fact that he would give me half the profits of his dealings”, and later, “I just gave him the $4,000 and the time that he was through with his dealings he would pay me the note. It wasn’t a note. He would pay me the loan.” The money was advanced in February 1934. It was not until some time in 1935 that Holmes was transferred to Tifton, Georgia, after which, according to the recollection of Davis, he made one trip back to Cleveland. At no time did Davis ask Holmes for a return of the money and he gives us no information as to whether prior to the receipt of the letter from Mrs. Holmes on August 21, 1936, he knew of the result or outcome of the stock venture, or, if so, when he obtained the information. In one part of his testimony he stated that at no time either while Holmes remained in Cleveland or after he moved to Tifton, Georgia, did he ever discuss with him the matter of the $2,000. At another place, in response to the question, “Did you keep track of that investment?”, his answer was, “The bookkeeper does”, and then in response to the question whether he made any inquiry as to whether the investment was producing income his answer was, “No.”

It is true that Davis in the course of his testimony characterized the advance to Holmes as a loan and that Mrs. Davis in her letter of August 21,1936, referred to the matter as a borrowing of money from Davis stating, “I do not know what his part of the loss or profit was, but I want to straighten that up too.” This letter was written, however, after she had made an inquiry of Davis as to the value of certain insurance policies and had received a reply from Loewenthal advising her that he had been retained by Davis to look into the matter for her free of any expense. In our opinion, the references made to the matter by Mrs. Holmes in her letter are not conclusive of the character of the transaction between Davis and Holmes, and, considering the facts as revealed by the testimony of Davis, we think it not unlikely that Mrs. Holmes, knowing the money used in the venture or a part of it came from Davis, assumed it was received as a loan without really knowing the terms of the agreement between her husband and Davis, or whether Holmes in fact owed Davis anything. Davis’ explanation of the transaction, his attitude toward Holmes, and his conduct with respect to the transaction are much more revealing and, regardless of the use in his testimony of the term “loan”, indicate to us that there was no intention as between him and Holmes that the money should be repaid by Holmes in any event, but that its repayment was dependent upon the outcome of the venture, in which case and. at which time he should receive a return of his money and one-half of the profits. Davis testified that nothing was said about losses and that he understood he was not “to receive any losses.” These statements, in our opinion, are of no particular moment. Most likely Davis and Holmes were like most people indulging in a speculative venture; they were too engrossed in the contemplation of hoped-for profits to consider the possibility of losses. The transaction was, in our opinion, not a loan by Davis to Holmes but the joining with Holmes in a speculative venture with the hope of profits. Considering the facts of record with respect to the origin of the transaction, its terms, the possibility of repayment, and the conduct of the parties with respect thereto up to the time of Holmes’ death, we are convinced that the idea of classifying the transaction as a loan was in the nature of an afterthought suggested to Davis by Mrs. Holmes’ letter of August 21. It is our opinion and we find that the relationship of debtor-creditor did not exist between Davis and Holmes, and, there being no debt, the first issue is determined for the respondent. Davis may have sustained a loss in some year on the transaction, but he is not claiming a loss deduction here, and even if he were the record does not contain evidence establishing the year in which the loss was sustained.

The sole question remaining is whether that portion of the compromise amounts agreed to and paid by Davis and the corporation for prior tax years attributable to interest on the tax for such prior years was interest within the meaning of section 23 (b) of the Eevenue Act of 1936 and therefore deductible by them. The petitioners contend that said amounts were claimed by the Government to be due from them as interest and were paid by them as interest and are therefore deductible as such, while the respondent rests his case on the contention that the amount agreed to and paid was a lump sum compromise of liability for income tax, penalty, and interest and in mitigation of criminal liability for evasion of income taxes and that no portion thereof was interest within the meaning of the statute.

A compromise is a contract. Although compromises are favored in the law, nevertheless a compromise contract is a proper subject for judicial consideration as to its meaning, validity, or consideration, in the light of the language used and in the light of the circumstances surrounding the making of it. Big Diamond Mills Co. v. United States, 51 Fed. (2d) 721; Colorado Milling & Elevator Co. v. Howbert, 57 Fed. (2d) 769. As was said in Insurance Co. v. Dutcher, 95 U. S. 269: “The practical interpretation of an agreement by a party to it is always a consideration of great weight. The construction of a contract is as much a part of it as anything else. There is no surer way to find out what the parties meant, than to see what they have done.” Examining the compromise contract here involved in the light of the foregoing, we find that the petitioners in their last compromise offer recited that they had been charged with an attempt to evade and failure to meet income taxes, together with penalty and interest, for the years and in the amounts set out therein. The offer further recited that to secure their respective releases for said years “from all civil and criminal liability, resulting from the violation or failure for the years mentioned, the sum of $104,131.96 is hereby tendered voluntarily with the request that it be accepted in compromise of the said liabilities.” The agreement further recited that Davis would enter a plea of guilty to count two of indictment No. 15780 and abide by the sentence of the court. In the Attorney General’s acceptance of the offer, he stated: “Under this offer taxpayers agree to pay the sum of $104,131.96 in settlement of all liability with respect to income taxes, penalties and interest of the corporation for the years 1924 to 1934 inclusive, and of the individual for the years 1925 to 1934 inclusive.” In the statement prepared by the Attorney General’s office and submitted to the court by the district attorney after Davis had pleaded guilty, the $104,131.96 is described as “representing tire full amount of income taxes found to be due with the 50 per cent penalties and interest for all years.” The statement also contained the following: “Of the amount agreed to be paid, $47,006.61 represents taxes, $23,621.57 represents 50 per cent ad valorem penalties, and $33,503.78 represents- interest on the taxes.” In the light of the foregoing, we think it is apparent that the petitioners and the Attorney General regarded the payment of the $104,131.96 as constituting the payment of the taxes, penalties, and interest that were claimed by the Government to be due from the petitioners.

Our conclusion is that, regardless of any additional purpose served, payment of the $104,131.96 did represent and effect the payment of the income taxes, penalties, and interest claimed by the Government to be owing. The parties having so regarded the payment, we shall do likewise here. Accordingly we hold that the amounts of $9,066.63 and $24,437.15 included in the $104,131.96 represented interest on the taxes of Davis and the corporation, respectively, for the years there involved. Interest paid on Federal taxes is interest on a debt and is deductible from gross income in computing income taxes. United States v. Jaffray, 97 Fed. (2d) 488; affd., 306 U. S. 276. On this issue the contention of the respondent is therefore rejected.

Decision will be entered under Bule SO.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    E. M. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. E. M. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. D. E. Japhet & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 103909, 103910, 103968.
    Promulgated March 17, 1942.

      Whitfield H. Marshall, Esq., for the petitioners.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Smith :

The petitioners contend that their shares of stock in Terminal (the old company) became worthless during the taxable year 1937 by reason of the foreclosure sale of the corporation’s assets, giving rise to a deductible loss under section 23 (e) of the Eevenue Act of 1936. The respondent’s position is that the claimed losses, in any event, are nonrecognizable for tax purposes, under the reorganization provisions of the statute, section 112 (b) (3) and 112 (g) and (h) of the 1936 Act, and, further, that the stock of Terminal did not become worthless in 1937.

The provisions of the Eevenue Act of 1936 referred to above are as follows:

SEC. 23. deductions FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * * * * *
(e) Losses by iNravnurAES. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
SEC. 112. RECOGNITION OE GAIN OR LOSS.
*******
(b) Exchanges Solely in Kind.—
*******
(3) Stock for stock on reorganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
* ■ * * * * * *
(g) Definition of Reorganization. — As used in this section and section 113—
(1) The term “reorganization” means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock; of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation, or (O) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however affected.
(2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.
(h) Definition of Contkoi.. — As used in this section the term “control” means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 percentum of the total number of shares of all other classes of stock of the corporation.

Considerable portions of the briefs filed in this proceeding are directed to the question whether under the facts above set forth there was a reorganization of Terminal in 1937 when the bondholders, who were likewise the principal stockholders of Terminal, acquired its assets at foreclosure sale and transferred them to the new corporation in exchange for its shares of stock. Since these briefs were filed, the United States Supreme Court on February 2, 1942, handed down opinions in Helvering v. Alabama Asphaltic Limestone Co., 315 U. S. 179; Palm Springs Holding Corporation v. Commissioner, 315 U. S. 185; Marlborough Investment Co. v. Commissioner, 315 U. S. 189; and Helvering v. Southwest Consolidated Corporation, 315 U. S. 194. All of those cases involved questions of reorganization, either under the 1928, 1932, or 1934 Acts, on facts similar in some respects to the facts in the instant case.

We do not think, however, that the issue presented in this proceeding requires a determination of the reorganization question. Petitioners claim a loss deduction on account of their stock in the Terminal Compress & Warehouse Co. becoming worthless in the taxable year 1937. The respondent has determined that the claimed loss, if sustained, is nonrecognizable under section 112 (b) (3) because petitioners exchanged their stock in the old corporation for stock in the new corporation in a reorganization. For section 112 (b) (3) to apply, obviously, there must first be an exchange of stock for stock. There was no such exchange in the instant case. The stockholders of the old company did not exchange their old shares for shares of the new company, or for anything else. The old shares had become utterly worthless before the new corporation was formed and carried no exchange value or other rights of participation in the new company. It was only the bondholders who had that right. While it is true that a majority of those bondholders were also former stockholders of the old corporation, it was not as such stockholders, but rather as bondholders, that they participated in the new venture and received stock of the new corporation. In Helvering v. Alabama Asphaltic Limestone Co., supra, the Court said:

* * * And it is clear that the fact that the creditors were for the most part stockholders of the parent company does not bridge the gap. The equity interest in the parent is one step removed from the equity interest in the subsidiary. In any event, the stockholders of the parent were not granted participation in the plan qua stockholders.

The interests of the stockholders of the old company in the assets of the company and their investments in the stock were lost when the assets were sold at foreclosure sale for the benefit of creditors.

We have found as a fact on the evidence of record that the stock of the Terminal Compress & Warehouse C©. (the old corporation) became worthless in 1937, the year in which the foreclosure proceedings were commenced and all of its assets were sold for-the benefit of creditors. We think that petitioners sustained deductible losses of their investments in the stock in that year.

Decisions will be entered under Rule 50.


author: Leech:

text:
    Mary Louise Bok, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105465.
    Promulgated March 17, 1942.

      Truman Henson, Esq., for the petitioner.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Leech:

Respondent determined a deficiency in petitioner’s income tax of $38,796.64 for the calendar year 1937. The issues submitted are the correctness of respondent’s action in (1) including in petitioner’s gross income for that year, the income received by a trust created by petitioner in 1932 and (2), denying petitioner the deduction of depreciation upon a residence property and its furnishings.

The facts were stipulated. We include by reference the stipulation, together with the exhibits made a part thereof, as our findings of fact.

Petitioner is a resident of Philadelphia, Pennsylvania. Her return for the calendar year 1937 was filed with the collector of internal revenue for the first district of Pennsylvania. She is a woman of large means which she has, for many years, devoted in great measure to charitable purposes.

Petitioner, on September 14, 1932, created what was designated as the Caledonia trust, under a written trust indenture. By its terms this trust was irrevocable and was to expire on September 14, 1935, or upon the prior death of petitioner, with reversion of the trust corpus to petitioner or her estate. On November 13, 1934, under a written trust indenture, petitioner extended this trust until September 14, 1938, or her prior death, with reversion to petitioner or her estate. On December 22, 1937, petitioner extended this trust and divided it into two parts under two indentures of trust providing that the trust was to continue until the death of petitioner, with remainders over to charity. Each of the four indentures of trust carried the specific provision that the trust was irrevocable.

The corpus of the Caledonia trust at all times consisted of 91,000 shares of $7 cumulative preferred stock of the Curtis Publishing Co. This stock was duly transferred on the books of the corporation to the names of the trustees, pursuant to the trust, and all dividends thereon since September 14, 1932, have been paid by that corporation directly to these trustees.

Petitioner was not one of the trustees of the Caledonia trust nor did she retain control over them or over the trust corpus, income, policy, or investments.

It is admitted by respondent that no question of “family group” is here involved. The beneficiaries of the Caledonia trust were a charitable corporation and 33 aged, infirm, and other needy individuals, including a medical missionary, artists, a music student, a former actress, the well known blind and deaf mute, Helen Keller, cripples, invalids, and other deserving persons in need of financial assistance. None of the beneficiaries of the trust had legal claim to support by petitioner. None were related to her except six who were remote relatives, who received an aggregate of less than 6 percent of the trust income. Petitioner was under no obligation to make any gifts, payments, or donations to any of the beneficiaries. All of the income'of the trust in each year has consisted of dividends, with the exception of a small amount of bank interest.

Petitioner is the widow of Edward W. Bok, who died January 9, 1930, and who at the time of his death owned a residence with furnishings at Mountain Lake, Florida. Under the will of her husband petitioner acquired these furnishings outright, together with a life estate in the real property, with power of sale and with right of participation in the proceeds of any sale. Petitioner never occupied these premises after the death of her husband except for a few weeks in the winter of 1930-1931. On March 3, 1931, petitioner placed this property with brokers for sale and, on November 2, 1932, placed it with brokers for rent. By four written leases, the first executed December 20, 1934, she has since rented the premises furnished. The premises were so rented during the taxable year 1937. During that year, and prior and subsequent thereto, petitioner was engaged in renting other properties not residences of hers which she owned in fee or in which slie had life estates with power of sale. During 1937, petitioner was also engaged in developing plans for subdivision and sale of another large tract of suburban real estate which was not her residence and in which she held a life estate with power of sale.

[Respondent contends that petitioner is taxable upon the income of the so-called Caledonia trust. The sole basis for this determination, as set out in the deficiency letter, was section 166 of the [Revenue Act of 1936. In his answer to the petition, he asserts the additional liability under sections 22 (a) and 167 of that act. However, neither at the hearing nor on brief does respondent urge section 166 or section 167 as the basis for liability. Thus it may be assumed that he has abandoned his contentions under these sections. However, it may be observed that under the stipulated facts the Caledonia trust was irrevocable, no part of the contested income was subject to accumulation for future distribution to petitioner, and that trust therefore does not fall within the provisions of either section.

With respect to respondent’s argument that petitioner is taxable upon this trust income under section 22 (a), sufra, his theory is that if petitioner had not executed the trust but had received the income directly and then distributed it by gift to the beneficiaries, she would have been taxable on such income, therefore she is taxable here, regardless of the interposition of this trust, since she should not be permitted to do indirectly what she can not do directly.

One justification for this theory is said to be that this trust may have been created to avoid income tax. Aside from the fact that the evidence does not support this assumption, the taxpayer’s right to such avoidance by legal means has been sustained too often to require discussion. Gregory v. Helvering, 293 U. S. 465; United States v. Isham, 17 Wall. 496; 84 U. S. 728.

[Respondent also contends that, because a short term trust was used here by petitioner, the question is controlled by the decisions in Helvering v. Clifford, 309 U. S. 331; Harrison v. Schaffner, 312 U. S. 579; Helvering v. Horst, 311 U. S. 112; Commissioner v. Barbour, 122 Fed. (2d) 165; and Helvering v. Elias, 122 Fed. (2d) 171. It is urged that in these cases, although involving another application of the so-called short term trust doctrine, the board language used by the court warrants the application of that doctrine to other situations within which the facts here fall. We do not agree.

Here the grantor did not retain the semblance of control of the trust corpus, income, or operation. No family group was involved. Upon the existence of one or more of these conditions, the decisions in the cited cases rest. If the case of Helvering v. Horst, supra, has any application here, it is in the distinction which the Court draws between the situation there existing and one, where as here, a gift has been made of the property from which the income flows. Thus one example mentioned by the Court is the gift of a leasehold, in which case it is pointed out that the rentals are income to the donee of the leasehold, not to the donor.

Here the corpus of the trust consists of a definite, determinable estate in property. It was conveyed irrevocably in trust. No power of control was reserved by the petitioner, as grantor. It is a charitable trust. The beneficiaries were a charitable corporation and 33 aged, infirm, and needy individuals to whom petitioner owed no obligation of support. The normal expenditure of the income received by these beneficiaries could result in no economic benefit to petitioner. Any benefit petitioner may have received as a result of this transfer occurred upon the transfer to the trust. Petitioner has paid a gift tax on this transfer.

In its last analysis, respondent’s theory would require that the income of every short term trust be taxed to the grantor of the trust, irrespective of the purpose for which the trust was created or the result effected. That Congress had any such intention in enacting section 22 (a), supra, we can not reconcile with its rejection of the recommendation by the Treasury, when the Revenue Act of 1934 was under consideration, that the income from short term trusts be made taxable to the creator of the trust; Eevenue Revision 1934, Hearings Before the Committee on Ways and Means, H. R., 73d Cong., 2d sess., p. 151; Helvering v. Wood, 309 U. S. 344.

We sustain the petitioner. We do not think she is taxable upon the income of the Caledonia trust. United States v. First National Bank of Birmingham, 74 Fed. (2d) 360.

The second issue involves petitioner’s claim for deduction of depreciation upon a residence in which she owned a life estate with power of sale and participation in the proceeds thereof. She also seeks to deduct depreciation upon the residential furnishings which were her property.

Respondent has disallowed any such deduction on the ground that the property had not actually been devoted to commercial use. However, petitioner has not occupied the property since 1931. In 1932, she placed it in the bands of agents for sale and in 1933, for rent. Since that time it lias been on the market for sale or rent. Petitioner has leased it on four separate occasions under written leases for a substantial rental and it was so leased during the taxable year 1937.

This history does not indicate that these rentals were casual and merely incidental to her retention of the property as her residence. It is true that conversion to commercial use is not accomplished merely by placing residential property in the hands of agents for sale or rental. Such conversion occurs upon its actual rental by a tenant. But this event actually occurred here on December 20, 1934. We reverse respondent on this issue. The basis for such depreciation is the fair market value of the depreciable property on that date. Heiner v. Tindle, 276 U. S. 582. The parties have stipulated the values necessary to this computation.

Decision will be entered wnder Rule SO.


author: Van Fossan:

text:
    Martha F. Mason, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92376.
    Promulgated March 18, 1942.

      J. Merrill Wright, Esq., for the petitioner.

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

Van Fossan:

The questions for decision are (1) whether petitioner is entitled to, a charitable deduction with respect to the gift to the trust for the Allegheny General Hospital and, (2) whether various other gifts in trust which petitioner made during the taxable year were gifts of future or present interests.

The deed of trust under which the insurance policies were transferred for the benefit of the Allegheny General Hospital provided that the trust should not extend for more than ten years after payment of the policies unless the settlor’s husband and two nephews or, in case of their death, an executive officer of the Union National Bank should fail within that period to terminate the trust and designate beneficiaries to whom the corpus should be paid. The interest of the charity was, therefore, subject to being defeated by exercise of a power of appointment. At the time of the gift, it was impossible to tell whether that power would ever be exercised and, if it was exercised, when this would occur. It is thus impossible to hold that the hospital would be the ultimate beneficiary. Moreover, a charitable remainder subject to such a contingency is so uncertain as to be incapable of valuation. See Burdick v. Commissioner, 117 Fed. (2d) 912; Robbins v. Commissioner, 111 Fed. (2d) 828; Davison v. Commissioner, 81 Fed. (2d) 16; Schoenheit v. Lucas, 44 Fed. (2d) 476, 492; Humes v. United States, 276 U. S. 487. Since the fact of the charitable remainder is uncertain and its value can not be ascertained, petitioner is not entitled to any deduction therefor under section 505 (a) (2) of the Revenue Act of 1932.

Petitioner contends that, if the value of the entire trust is not deductible, at least that part is deductible which represents the interest in the trust given to the charity for the life of the settlor. Respondent has permitted a deduction for the life interest of the charity in the annuities transferred. The only dispute is as to what deduction, if any, should be allowed for the life interest of the charity in the insurance policies.

The value of the life interest in the insurance policies, as such, is limited to the value of the anticipated dividends over the period of the life expectancy of the insured, who is, in this case, the donor. The trust provided that the net income shall be taken to include “all dividends or other returns received from any policy of insurance excepting such surplus or other dividends which may be applied to the purchase of paid up additions to the sum insured * * The record does not show, however, what the provisions of the policies were with respect to use of the dividends for purchase of additional insurance. There is the possibility that all dividends were to be so used and that there was, therefore, no expectancy of income from the policies during the life of the insured. That being true, the charity would receive no income from the insurance policies. Thus petitioner has failed to prove that the life interest of the charity in the insurance policies themselves had any value.

Petitioner argues that the value of the life interest of the charity in the policies should be determined by discounting the cost of the policies for a period representing the life expectancy of the donor at the time of the gift. Since she has failed to show that the charity would receive any income as long as the funds continued to be invested in the insurance policies, petitioner’s argument assumes that the trustee could, at any time, convert the policies into other property at a value equal to the cost of the policies or their cash surrender value. The exercise of the right to convert is, however, wholly a matter of speculation. The right to convert the policies into income-producing property was in the trustee and not the charity. There is no assurance that it would exercise that right. Furthermore, a reading of the entire trust instrument leads us to the conclusion that the settlor did not intend that the trustee should surrender the policies. Thus the existence of any income to the charity from the insurance policies during the life of the insured is wholly contingent and incapable of valuation. Accordingly, petitioner is not entitled to the deduction claimed.

The second issue has to do with the number of $5,000 exclusions to which petitioner is entitled under section 504 of the Revenue Act of 1932. The answer turns on whether certain of the gifts in trust constitute gifts of present or future interests.

Respondent has allowed exclusions with respect to two outright gifts, a gift in trust for petitioner’s husband, and outright gifts amounting to $3,800 to two of the beneficiaries of the trusts set up by petitioner. Petitioner claims additional exclusions with respect to the gift of the insurance policies in trust for the Allegheny General Hospital and with respect to gifts to 14 other trusts established for individual beneficiaries.

It is clear that petitioner is entitled to no exclusion with respect to the gift of insurance policies, inasmuch as we have held that there is no basis in the record for finding that the gift of the income during petitioner’s life had any value. The gift of the remainder interest is, of course, a gift of a future interest.

The 14 trusts for individual beneficiaries, by reason of similarity in language, fall into two groups. The first is composed of two trusts which were substantially the same except as to the beneficiary named. Both trusts were dated December 23, 1935. The income was to be accumulated until January 1, 1939, at which time the trust was to terminate and the entire fund be paid over to the beneficiary. In the event that the beneficiary should die before January 1, 1939, the trust was to terminate and the property be distributed, in one case to the heirs of the beneficiary and, in the other, to the son of the beneficiary or, if he be not living, to his heirs. There was no intervening estate, but the beneficiary was not entitled to receive anything for more than three years after the creation of the trust. The problem is whether, by reason of that fact, the trust was limited to commence in use, possession, or enjoyment at a future date.

Where the income of a trust is to be accumulated until the beneficiary reaches the age of twenty-one, the gift in trust has been held to be a gift of a future interest. Commissioner v. Taylor, 122 Fed. (2d) 714; certiorari denied, - U. S. - (Jan. 5, 1942); Commissioner v. Barbour, 121 Fed. (2d) 728; Welch v. Paine, 120 Fed. (2d) 141. Likewise, a gift in which the income was to accumulate during the life of the grantor has been held a future interest. Commissioner v. Glos, 123 Fed. (2d) 548. We see no difference in principle between those cases where the income was to accumulate for an indefinite period but, neverthless, a period which was bound to terminate, and the case at bar where the income was to accumulate for a fixed period. In either case, the right of the beneficiary to use, possession, or enjoyment is postponed until the future time when the period of accumulation shall end. Therefore, we hold that the gifts were of future interests.

The second group is composed of 12 trusts, identical except as to the beneficiary, who is, in each case, a nephew or niece of the petitioner. Each trust was dated December 23, 1935, and was to terminate December 31, 1940. The trustee was directed to pay the income to the beneficiary quarterly. No distribution was to be made,, however, prior to January 1, 1937. In case the beneficiary should die prior to the termination of the trust, the property was to go to his or her appointee or, in default of appointment, to his or her heirs at law. Thus the beneficiary was not entitled to receive any payment of the income until a definite period had elapsed. The principle applicable is exactly the same as that applicable in the case of the preceding two trusts. The only difference is that the period of accumulation is shorter. Nevertheless, the right of the beneficiary to use, possession, or enjoyment was definitely postponed until a future time. Accordingly, petitioner is not entitled to an exclusion with respect to these gifts.

Decision will be entered for the respondent.


author: TURNER:

text:
    The Clarkson Coal Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102444.
    Promulgated March 18, 1942.

      E. F. Hoeschen, Esq., for the petitioner.

      J ones Smith, Esq., for the respondent.
   OPINION.

TURNER:

In 1935 the petitioner, by purchase and at a total cost of $40,021.15, became the owner of the entire issue of $50,000 par value first mortgage bonds of the Clarkson Coal & Dock Co. In 1936, the Clark-son Coal & Dock Co. being in default on the bonds, John F. Swain, trustee, under the bond indenture and at the request of the petitioner, instituted proceedings for the foreclosure and sale of the mortgaged property for the purpose of satisfying petitioner’s claim for principal and interest due under the bonds. The sale was at public auction and Swain, as trustee for petitioner, purchased the property at a price of $62,308.45. The fair market value' of the property at the time of the sale is not shown. The question is whether the petitioner, under Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, realized taxable income as the result of such foreclosure and sale of the mortgaged property.

In Helvering v. Midland Mutual Life Insurance Co., supra, no money passed as a result of the foreclosure sale and the purchaser of the property at the said sale was the owner of the claim in satisfaction of which the proceeds of the sale were to be applied. Such being the case, the purchaser was not called on to pay the purchase price in cash, only to receive it again in satisfaction of its claim, but that same end was accomplished by crediting payment of the purchase price to satisfaction of the claim. The Supreme Court, holding that legal effect should be given to the transaction according to the terms of the sale, just as if the purchaser had been a stranger and cash had actually been paid, said:

* * * A mortgagee who, at foreclosure sale, acquires the property pursuant to a bid of the principal and accrued interest is, as purchaser and grantee, in a position no different from that of a stranger who acquires the property on a bid of like amount. It is true that the latter would be obliged to pay in cash the amount of his bid, while the formality of payment in cash is ordinarily dispensed with when the mortgagee acquires the property on his own bid. But the rights acquired qua purchaser are the same in either case; and, likewise, the legal effect upon the mortgage debt is the same. In each ease the debt, including the interest accrued, is paid. Where the stranger makes the purchase, the debt is discharged by a payment in cash; where the mortgagee purchases the property, the debt is discharged by means of a credit. * * *

Such is the case here. The petitioner was the owner of a claim against the Clarkson Coal & Dock Co. for principal and interest under the bonds and that claim was secured by a first mortgage on the dock property. The foreclosure proceedings were instituted and carried out for the purpose of satisfying that claim, and there is no contention that there were other creditors, or, if so, that they had equal or prior rights to those of the petitioner. It is true the foreclosure was accomplished in the name of Swain, as trustee, but the claim belonged to the petitioner and in the notice published as required by Wisconsin statute it was stated that the dock property therein described would be sold at public auction for cash “to satisfy the amount which shall then be due on said mortgage and trust deed, together with expenses of the sale, attorneys’ fees, trustees’ fees and insurance premiums paid.” Pursuant to foreclosure the dock property was sold for the sum of $62,308.45 and petitioner’s claim as owner of the bonds for principal and interest thereunder was discharged by means of a credit just as effectively as if cash had actually passed, and to the extent that such application of the selling price of the dock property to the discharge of petitioner’s claim discloses a realization of gain on the bonds and the payment of interest thereunder, the respondent’s determination is approved. Helvering v. Midland Mutual Life Insurance Co., supra. Cf. T. Eugene Piper, 45 B. T. A. 280.

Claiming that it did not become the purchaser or owner of the dock property at the foreclosure sale or at any time thereafter, the petitioner seeks to distinguish Helvering v. Midland Mutual Life Insurance Co., supra. To support this claim a mass of evidence was offered and for such benefit as the petitioner may derive therefrom we have made detailed findings of fact showing conveyance of the property by the sheriff to Swain, as trustee, and subsequent conveyance by him to Arrowhead. If, however, the identity of the purchaser at the foreclosure sale should be of importance along with the identity of the holder of the claim satisfied by reason of such foreclosure and sale, this same evidence unmistakably shows that, even though legal title to the property was taken in the name of Swain, as trustee, petitioner was the real party in interest and became and continued to be the actual owner of the property until the transaction with Arrowhead in 1940. Furthermore, the failure to indulge in the formality of surrendering the bonds themselves is of no moment. The Wyatt Co. and Worrell Clarkson, Sr., held the bonds as security for petitioner’s indebtedness to them, not as owners, and the fact that the physical evidences of the bonds were not formally delivered and canceled can in no way affect the income tax consequences flowing from the satisfaction of petitioner’s claim thereunder.

Decision will be entered u/nder Rule 60.


author: Black:

text:
    Byus-Mankin Lumber Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106994.
    Promulgated March 18, 1942.

      Oarl G. Sanders, Esq., for the petitioner.

      E. L. Gorbin, Esq., for the respondent.
   OPINION.

Black:

The Commissioner has determined a deficiency in petitioner’s income tax for the year 1936 of $1,578.13 and a deficiency in petitioner’s excess profits tax for the same year of $272.79. The deficiencies are due to three adjustments which the Commissioner made in the income tax return which petitioner filed for the taxable year. These adjustments were as follows:

Unallowable deductions and additional income:
(a) Loss on construction contracts_$10,526. 84
(b) Income tax deducted_ 86. 66
(c) Loss on sales_ 60.00
Total_ 10,673.50

The petition assigns error only as to adjustment (a) shown above. Facts have been stipulated as follows:

Tbe petitioner is a corporation, duly organized and existing under and by virtue of tbe laws of tbe State of West Virginia, with its principal office at No. 801 North Kanawha Street, Beckley, West Virginia. The return for tbe period here involved was filed with the Collector for tbe Southern District of West Virginia.
Tbe taxes in controversy are income and excess profit taxes for tbe calendar year 1936, in tbe amount of $1,850.92, together with the interest thereon, except tbe taxpayer has heretofore submitted to tbe payment of tbe proper taxes described in item (d) Schedule No. 1-A, showing an additional income of $60.00, and item (e) Schedule No. 1 showing additional income of $86.66.
The taxpayer, Byus-Mankin Lumber Company, entered into a contract, No. W-6144-QM-18, dated March 25, 1933, with the United States Government, for the construction and completion of a bachelor officers’ quarters at Fort Humphrey, now known as Fort Belvoir, Virginia.
This contract was entered into prior to August 10, 1933, the effective date of the National Industrial Recovery Act and the President’s Reemployment Agreement of the United States Government. U. S. G. A. Title 15, Paragraphs 701 to 712; U. S. C. A. Title 15, Paragraphs 703 and 704.
The contractor in this instance signed this agreement to comply with the National Industrial Recovery Act and the President’s Reemployment Agreement and codes of fair competition adopted thereunder, and did comply with the terms and provisions of said Act and Agreement, whereby and by reason thereof the contractor was forced to pay out and expend the sum of $10,526.84 as an additional outlay and expense for material and labor. The taxpayer suffered a net loss in excess of $30,000.00 on this contract.
The contract was completed during the calendar year 1934, or the early part of 1935, and the taxpayer, as such contractor, filed with the Comptroller General of the United States, Claim No. DO 443555 (1) for $10,526.84 under the Act of June 16, 1934, 48 Stat. 974, U. S. C. A. Title 41, Paragraph 28, within the time prescribed by law. This claim for the balance due from the Government to the taxpayer was carried on the books of the Byus-Mankin Lumber Company as an asset of said Company until the 28th day of July, 1936, at which time the Byus-Mankin Lumber Company received a letter from the Comptroller General disallowing this claim altogether. The balance due on this contract and claim in- the .sum of $10,526,84 was charged- off as a loss by the taxpayer for the year 1936, that being the year that the claim was disallowed by the Comptroller General.
The Congress of the United States, 1938 Session, passed Senate Bill No. 3628 to provide for certain relief of contractors on Government projects who suffered losses by reason of the enactment of the National Industrial Recovery Act.
This claim is now pending in the Court of Claims at Washington, D. C.
The Byus-Mankin Lumber Company has at all time kept its books and records and filed its income tax returns on the accrual basis.

The President’s Reemployment Agreement, which petitioner signed and in which it agreed to comply with the National Recovery Act and the codes of competition adopted thereunder, was as follows:

Pkesedent’s Reemployment Agreement
(Authorized by Section 4a National Industrial Recovery Act)
During the period of the President’s emergency reemployment drive, that is to say, from August 1 to December 31, 1933, or to any earlier date of approval of a Code of Pair Competition to which he is subject, the undersigned hereby agrees with the President as follows:
(1) After August 31, 1933, not to employ any person under 16 years of age, except that persons between 14 and 16 may be employed (but not in manufacturing or mechanical industries) for not to exceed 3 hours per day and those hours between 7 a. m. and 7 p. m. in such work as will not interfere with hours of day school.
(2) Not to work any accounting, clerical, banking, office, service, or sales employees except outside salesmen) in any store, office, department, establishment, or public utility, or on any automotive or horse-drawn passenger, express, delivery, or freight service, or in any other place or manner, for more than 40 hours in any 1 week and not to reduce the hours of any store or service operation to below 52 hours in any 1 week, unless such hours were less than 52 hours per week before July 1, 1933, and in the latter case not to reduce such hours at all.
(3) Not to employ any factory or mechanical worker or artisan more than a maximum week of 35 hours until December 31, 1933, but with the right to work a maximum week of 40 hours for any 6 weeks within this period; and not to employ any worker more than 8 hours in any 1 day.
(4) The maximum hours fixed in the foregoing paragraphs (2) and (3) shall not apply to employees in establishments employing not more than two persons in towns of less than 2,500 population which towns are not part of a larger trade area; nor to registered pharmacists or other professional persons employed in their profession; nor to employees in a managerial or executive capacity, who now receive more than $35 per week; nor to employees on emergency maintenance and repair work; nor to very special cases where restrictions of hours of highly skilled workers on continuous processes would unavoidably reduce production but, in any such special case, at least time and one third shall be paid for hours worked in excess of the maximum. Population for the purposes of this agreement shall be determined by reference to the 1930 Federal census.
(5) Not to pay any of the classes of employees mentioned in paragraph (2) less than $15 per week in any city of over 500,000 population, or in the immediate trade area of such city; nor less than $14.50 per week in any city of between 250,000 and 500,000 population, or in the immediate trade area of such city; nor less than $14 per week in any city of between 2,500 and 250,000 population, or in the immediate trade area of such city; and in towns of less than 2,500 population to increase all wages by not less than 20 percent, provided that this shall not require wages in excess of $12 per week.
(6) Not to pay any employee of the classes mentioned in paragraph (3) less than 40 cents per hour unless the hourly rate for the same class of work on July 15, 1929, was less than 40 cents per hour, in which latter case not to pay less than the hourly rate on July 15, 1929, and in no event less than 30 cents per hour. It is agreed that this paragraph establishes a guaranteed minimum rate of pay regardless of whether the employee is compensated on the basis of a time rate or on a piecework performance.
(7) Not to reduce the compensation for employment now in excess of the minimum wages hereby agreed to (notwithstanding that the hours worked in such employment may be hereby reduced) and to increase the pay for such employment by an equitable readjustment of all pay schedules.
(8) Not to use any subterfuge to frustrate the spirit and intent of this agreement which is, among other things, to increase employment by a universal covenant, to remove obstructions to commerce, and to shorten hours and to raise wages for the shorter week to a living basis.
(9) Not to increase the price of any merchandise sold after the date hereof over the price on July 1, 1933, by more than is made necessary by actual increases in production, replacement, or invoice costs of merchandise, or by taxes or other costs resulting from action taken pursuant to the Agricultural Adjustment Act, since July 1, 1933, and, in setting such price increases, to give full weight to probable increases in sales volume and to refrain from taking profiteering advantage of the consuming public.
(10) To support and patronize establishments which also have signed this agreement and are listed as members of N. It. A. (National Recovery Administration),
(11) To cooperate to the fullest extent in having a Code of Pair Competition submitted by his industry at the earliest possible date, and in any event before September 1, 1933.
(12) Where, before June 16,1933, the undersigned had contracted to purchase goods at a fixed price for delivery during the period of this agreement, the undersigned will make an appropriate adjustment of said fixed price to meet any increase in cost caused by the seller having signed this President’s Reemployment Agreement or having become bound by any Code of Pair Competition approved by the President.
(13) This agreement shall cease upon approval by the President of a code to which the undersigned is subject; or, if the N. R. A. so elects, upon submission of a code to which the undersigned is subject and substitution of any of its provisions for any of the terms of this agreement.
(14) It is agreed that any person who wishes to do his part in the President’s reemployment drive by signing this agreement, but who asserts that some particular provision hereof, because of peculiar circumstances, will create great and unavoidable hardship, may obtain the benefits hereof by signing this agreement and putting it into-effect and then, in a petition approved by a representative trade association of his industry, or other representative organization designated by N. R. A., may apply for a stay of such provision pending a summary investigation by N. R. A., if he agrees in such application to abide by the decision of such investigation. This agreement is entered into pursuant to section 4(a) of the National Industrial Recovery Act and subject to all the terms and conditions required by sections 7(a) and 10(b) of that act.

There is no dispute but that the petitioner, in carrying out its contract for certain army construction at Fort Belvoir, Virginia, was forced to expend the sum of $10,526.84 as an additional outlay for material and labor by reason of its signing and complying with the President’s Eeemployment Agreement. That fact has been stipulated. Inasmuch as petitioner had a loss in excess of $30,000 on its contract, it is clear that such loss was $10,526.84 greater than it otherwise would have been if petitioner had not signed such agreement. It is also clear that petitioner is entitled under the applicable statutes to take this loss as a deduction in some year. The question is in what year? The Commissioner takes the position that petitioner’s entire loss on the contract should have been taken as a deduction in the year when the contract was completed, which, according to the stipulated facts, was either during the calendar year 1934 or the early part of 1935.

The petitioner claims that by reason of the President’s Eeemployment Agreement which it signed in 1933 and the claim which it filed with the Comptroller General under the Act of June 16,1934, it had a debt against the United States for the amount of $10,526.84 which it v/as entitled to accrue and did accrue on its books as an asset and that when the Comptroller General denied petitioner’s claim in July 1936 petitioner then and there ascertained such debt to be worthless and charged it off and is entitled to a deduction therefor in the year 1936 under section 23 (k) of the Eevenue Act of 1936. We think it is true that if under the facts which are enumerated in the stipulation it can be said that the $10,526.84 extra expenditures which petitioner was compelled to make represented a debt of the United States, then petitioner’s contention is well founded and it is entitled to the deduction which it claims. But was this $10,526.84 a debt of the United States? We think not.

In Missouri Valley Bridge & Iron Co., 14 B. T. A. 1162, we said, among other things, as follows:

■" * * Before a deduction can be allowed on account of a worthless debt it is essential that the existence of a valid debt be established. Luke & Fleming, Inc., 1 B. T. A. 12; Louis Titus, 2 B. T. A. 754; Federal Fuel Co., 3 B. T. A. 814. In the last case cited this Board said:
If the debtor was not legally liable to the taxpayer, then there was no debt to become worthless. It can not become worthless because of inability to establish legally the liability for the debt, for in such a case there is not an ascertainment of worthlessness of an existing debt, but an ascertainment of the nonexistence of such a debt.

After making the foregoing statement, the Board went on to say in the Missouri Valley Bridge & Iron Co. case: “In the instant case the petitioner has wholly failed to prove that there was ever a valid debt due it from the United States.” To the same effect we think we must hold in the instant case.

The President’s Eeemployment Agreement which petitioner signed did not anywhere bind the United States Government to repay to petitioner any excess expenditures for materials or labor which, it might be required to make in the carrying out of such agreement. The Attorney General held, in an opinion in the year 1933, that heads of executive departments and independent establishments had the power and authority to enter into supplemental contracts, based upon good, and valuable consideration, with persons who made contracts with the Government prior to the date of the passage of the Industrial Recovery Act for the delivery of materials or the performance of labor subsequent to such date, agreeing to reimburse such persons for increased costs incurred by them as a result of the operation of the industrial codes or of the President’s Reemployment Agreement. See 37 Op. Atty. Gen. 253.

While it is no doubt true, as the Attorney General held in the foregoing opinion, that proper representatives of the Government could have entered into a supplemental contract with petitioner increasing the cost figure of the contract which it held, in an amount sufficient to cover the increased costs occasioned by the signing of the President’s Reemployment Agreement and the codes which were promulgated under the provisions of the Industrial Recovery Act, there is no evidence that any such supplemental contract was entered into. Petitioner’s claim of $10,526.84, which is the subject of the claimed deduction in this proceeding, was not based upon any supplemental contract which it had with the United States Government but was based upon a law enacted by Congress June 16, 1934. That law is referred to in the stipulation of facts and is printed in the margin. That law gives exclusive and final jurisdiction to the Comptroller General and claims rejected by the Comptroller General are not within the jurisdiction of the United States District Courts. Breen Stone & Marble Co. v. United States (U. S. Dist. Ct. Minn., 1938), 21 Fed. Supp. 982.

While it is undoubtedly true that this Act of June 16, 1934, conferred upon petitioner the right to file the claim which it did file, there was no such certainty of the payment of the claim as would entitle petitioner to treat it on its books as an account receivable and carry it on its books in that manner until 1936 and then charge it off in that year as a bad debt when the Comptroller General denied its payment and take it as a deduction from income in 1936. We do not think the provisions of the law authorizing the deductions of bad debts ascertained to be worthless and charged off in the taxable year authorize such a deduction. The $10,526.84 involved in this proceeding was either deductible by petitioner in the year that it was expended as “Ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” under section 23 (a) of the Revenue Act of 1934, or it was deductible as a loss, when the contract was completed, under section 23 (f) of the Revenue Act of 1934. Commissioner v. Thatcher & Son, 76 Fed. (2d) 900.

Let us assume that the tables were reversed in the instant case and we had before us the year when petitioner expended the extra amounts for material and labor which it did expend on account of signing the President’s Reemployment Agreement, and petitioner was claiming as a deduction these expenditures and the Commissioner had denied the deduction because the petitioner had been given the right to file a claim under the Act of June 16,1934, for reimbursement and had filed such a claim. Would we deny the deduction because such claim had been filed ? We think not.

As said by the court in Commissioner v. Thatcher & Son, supra:

* * * The fact that the taxpayer expended some $63,000 in excess of what it received for completing the work of the defaulting subcontractors reduced its taxable income for the years when the expenditures were made. Had it succeeded in recovering damages from the subcontractors or their sureties, sueh recovery would have been income in the year when received. Burnet v. Sanford & Brooks Co., 282 U. S. 359. * * *

The instant case is not like Glendinning, McLeish & Co., 24 B. T. A. 518; affd., 61 Fed. (2d) 950. In that case the taxpayer had an unconditional contract that it would be reimbursed for the expenditures which it sought to deduct. Under such circumstances we held that the expenditures in question were not deductible in the year when made, and the Second Circuit affirmed. In the instant case, as we have already pointed out, the President’s Reemployment Agreement which petitioner signed contained no provisions for reimbursement. The Act of June 16, 1934, made no guaranty to petitioner that it would be reimbursed for the extra expenditures which it had made. It merely gave petitioner the right to file a claim for reimbursement and conferred upon the Comptroller General the sole discretion to decide whether such claim should be allowed. It turned out that in 1936 the Comptroller General rejected petitioner’s claim, and, under an act which Congress passed in 1938 liberalizing the law with respect to reimbursements in such cases, petitioner has renewed its claim by bringing suit upon it in the Court of Claims, and that suit is still pending. We think the Act of 1938 and petitioner’s suit brought in the Court of Claims thereunder does not affect, one way or the other, its right to the deduction which it claims in 1936.

The Commissioner argues in his brief that no deduction would be allowable to petitioner in any event, until the termination of its suit in the Court of Claims under the Act of 1938'. We do not agree with that contention. In our opinion petitioner’s present suit in the Court of Claims has no effect whatever in the determination of what year it is entitled to take the deduction of $10,526.84. But, for reasons we have already stated, we think petitioner is not entitled to the deduction in 1936 and we sustain the Commissioner in his disallowance of it.

Decision will ~be entered for respondent.

       § 28. [U. S. C. A., Title 41.] Losses due to com'pUanee with codes; claims for

      The Comptroller General of the United States is authorized and directed to adjust and settle on a fair and equitable basis claims of persons who entered into a contract or contracts with the United States prior to August 10, 1938, including subcontractors and materialmen performing work or furnishing material or necessary fuel direct to the contractor under such contracts, for additional costs incurred by reason of compliance on and after August 10, 1933, with a code or codes of fair competition approved by the President under section 703 of Title 15, or by reason of compliance with an agreement with the President executed under section 704 of Title 15 in the performance after August 10, 1933, of the contract or any part thereof. In the event that such contract was performed wholly or in part by a surety on the bond of the contractor, the claim may be presented by and settlement made with such surety, but such surety shall have no greater rights than would have accrued to the contractor had such contractor completed the contract. Any contractor, subcontractor, or completing surety desiring an adjustment and settlement with respect to any such contract under sections 28 to 33 of this title for increased costs incurred after August 10, 1933, by reason of compliance with the codes or reemployment agreements shall file with the department or administrative establishment concerned a verified claim itemizing such additional costs, .and any subcontractor on any such contract may file his claim directly with the head of the department or independent establishment concerned or through the contractor. After the claim has been examined by the head of the department or independent establishment concerned, or such person or persons as he shall designate, the claim shall be transmitted to the Comptroller General of the United States, accompanied with an administrative finding of fact and recommendation with respect to the claim. (June 16,1934, c. 553, § 1, 48 Stat. 974.)


author: Aknold :

text:
    Estate of Fannie W. Norris, Deceased, Daniel W. Norris, Emmet L. Richardson and Perry J. Stearns, as Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104902.
    Promulgated March 18, 1942.

      Perry J. Steams, Esq., for the petitioner.

      S. V. Hiken, Esq., for the respondent.
   OPINION.

Aknold :

The petitioners, as executors and trustees of the will of Fannie W. Norris, who died on April 26, 1937, on July 25,1938, paid $5,000 and transferred property of the value at date of decedent’s death of $284,341.10 to the Columbia Hospital and the Norris Foundation, respectively, both of Milwaukee, Wisconsin. The hospital and foundation are corporations organized and operated exclusively for religious and charitable purposes within the purview of section 303 (a) (3) of the Revenue Act of 1926, as amended. The petitioners contend that such amounts are deductible as bequests, legacies, devises, or transfers to religious or charitable corporations under section 303 (a) (3). The respondent contends that the amounts paid were not bequests to the charities, but to testamentary trustees in whom was vested discretion to pay or to divert the trust property to other uses, and that even if the payment and transfer are considered as bequests to charitable corporations or uses, they were so contingent, conditional and uncertain at the date of decedent’s death as to make them nondeductible.

Transfers of a testamentary character only are deductible under section 303 (a) (3). Taft v. Commissioner, 304 U. S. 351. Its purpose is to encourage testators to make charitable gifts. Y. M. C. A. v. Davis, 264 U. S. 47. The estate tax is not a succession tax. It taxes not the interest to which the legatees and devisees succeed on death but the interest which ceased by reason of the death. It is a tax upon the transfer of the net estate by a decedent. “It comes into existence before and is independent of the receipt of the property by the legatees.” Edwards v. Slocum, 264 U. S. 61. In Mississippi Valley Trust Co. et al., Executors, 28 B. T. A. 387; affd., 72 Fed. (2d) 197; certiorari denied, 293 U. S. 604; rehearing denied, 293 U. S. 631, the Board stated:

* * * The rights of the parties hereto are determined entirely by the will of decedent. They accrued finally when the will became effective, the date the decedent died, December IS, 1929.

The gifts made by decedent in his will are valued as of the date of death to determine the amount of the deduction. Ithaca Trust Co. v. United States, 279 U. S. 151. The value must be determined from data known or reasonably ascertainable at date of death. United States v. Provident Trust Co., 291 U. S. 272; Humes v. United States, 276 U. S. 487.

Under the will of the decedent the trustees were directed, if they were satisfied that they “shall have in their possession trust property more than sufficient to meet in full all the previous requirements” of the will, to pay out of the principal of the residuary estate to the Columbia Hospital “a sum not exceeding” $5,000. In Robbins v. Commissioner, 111 Fed. (2d) 828, in which the daughter of decedent was given the power under the will to appoint by her last will to Amherst College up to but not in excess of $250,000 from the principal of the trust fund of which she was beneficiary for life, the court held that at the time of decedent’s death, the definiteness and certainty required were lacking, since the daughter could have fulfilled the requirements of her father’s will by exercising the power of appointment to the extent of one cent or one dollar. It is immaterial that in that case the daughter failed to exercise the power, whereas the trustees herein exercised their discretionary power as to amount and paid $5,000 to the hospital. Receipt of the property by the legatee merely evidences the exercise of the power residing in the trustee. In their discretion they did that which the testatrix should have done by direction of the estate is to get the benefit of the deduction. A testamentary gift deductible under the statute must be absolute in its terms in so far as the testator can make it and effective as of the date of death. Burdick v. Commissioner, 117 Fed. (2d) 972; certiorari denied, 314 U. S. 631; Knoernschild v. Commissioner, 97 Fed. (2d) 213. There was no mandatory requirement or direction in the will of decedent that $5,000 should be paid to the Columbia Hospital.

The will of decedent in subparagraph (S) of paragraph eighteen further empowered and authorized the trustees, after payment of not. exceeding $5,000 to the Columbia Hospital, “to appropriate and pay over such sums of money as they, in their discretion, may deem best, as additional bequests to beneficiaries named in “paragraphs fourteen, fifteen and eighteen.” Paragraphs fourteen and fifteen contain numerous specific bequests to various relatives, friends, employees, and the First Unitarian Society of Milwaukee. Paragraph eighteen contains the provisions with respect to the disposition of the residue by the petitioners as trustees thereof and, among other things, provides for many annuities payable by the trustees to various persons. In sub-paragraph (T) of paragraph eighteen the trustees were further empowered “at their discretion and option, to pay to any worthy charitable, religious or educational corporation, association or enterprise, operating in the city of Milwaukee, Wisconsin, such sums of money out of the principal in their hands as they may deem best.” Thus it was within the discretion of the trustees to apply all or any part of the principal of the residuary estate to increase specific legacies and bequests made by decedent to the extent of leaving nothing for the Norris Foundation and possibly one dollar or one cent to the Columbia Hospital, or to transfer to such charities an amount determined in their sole discretion. At the time of death of decedent there was, under the provisions of the will, uncertainty and indefiniteness as to the .organization or organizations, except perhaps the Columbia Hospital, which were to benefit thereunder and as to the amount or amounts payable. It was wholly uncertain whether such organizations would ever receive anything. That the testatrix intended her trustees to make the final determination as to whether the legatees and annuitants mentioned in paragraphs fourteen, fifteen, and eighteen should receive additional bequests or whether charitable, religious, or educational organizations should be given any of the excess not needed to fulfill the specific bequests made by her is indicated by the fact that she made a specific charitable bequest to the First Unitarian Society of Milwaukee. In her original will she bequeathed $1,000 to that organization and later increased the amount to $5,000 in one of the codicils to her will. From the language of the will, it may reasonably be inferred that it was the primary intention of the testatrix to charge the trustees with the duty to provide for the beneficiaries of her bounty whom she had expressly named. If she had intended to make mandatory bequests effective at the time of her death she could have done so as she did in the case of the First Unitarian Society. It is reasonable to assume that if she had had an intention to make certain a gift to either the Columbia Hospital or the Norris Foundation she would have made such gifts definite and mandatory upon her trustees.

Although the hospital and the foundation received money and property out of the residuary estate, they did not receive them “through any act of the testator.” Robbins v. Commissioner, supra. It is true the trustees exercised a power given them by the will of decedent, but no absolute gift, reasonably certain and definite, so as-to permit a valuation thereof at date of death, was made by decedent. Whether gifts were to be made at all, designation of beneficiaries, except the Columbia Hospital, and amounts to be given, were left to the discretion of the trustees. Acts of the trustees were required to make such determinations and to make the bequests effective. A bequest must be certain and definite in its terms so that the beneficiary and property passing thereby, and his right thereto, may be readily ascertained at the time of the death of the testator. This clearly appears from the statement in Y. M. C. A. v. Davis, supra, as follows:

Congress was thus looking at the subject from the standpoint of the testator and not from the immediate point of view of the beneficiaries. * * * Congress was in reality dealing with the testator before his death. It said to him: “if you will make such gifts, we will reduce your death duties and measure them, not by your whole estate, but by that amount, less what you give.”

Commenting on this language, the court, in Mississippi Valley Trust Co. v. Commissioner, supra, said:

The meaning of this language is that the testator and he alone must provide for the charitable bequest. It means that the provision by the testator must be one that is definite in ascertainment and that is legally enforceable; it must possess the qualities of a definite command which will define the legal rights of all the parties to the property intended to be affected.

Neither the Norris Foundation nor the Columbia Hospital could successfully maintain a suit at law or equity to compel the trustees to make the payments for which deduction is claimed.

It is argued by petitioners that under the laws of Wisconsin the acts of the trustees in exercising their discretion in favor of the hospital and foundation relate back to the effective date of the will, and the payment and transfer of money and property become thereby specific bequests from the trust fund to such charitable corporations. However that may be, the deductibility of these amounts is a question of Federal law and not state law. Lyeth v. Hoey, 305 U. S. 188. Smith v. Commissioner, 78 Fed. (2d) 897, which reversed 31 B. T. A. 480, and wherein the law of Bhode Island, providing that a compromise agreement be given the same effect as though originally a part of the will, was applied in determining that amounts paid to charities pursuant to the compromise agreement were deductible, was expressly overruled in Robbins v. Commissioner, supra.

Since the bequests involved were too uncertain and indefinite to permit valuation of them at the time of the death of decedent, the amounts of $5,000 and $284,341.10 paid and transferred by the petitioners as trustees under the will of decedent to the Columbia Hospital and the Norris Foundation, respectively, are not deductible from the value of the gross estate under section 303 (a) (3), supra.

Decision will be entered for the respondent.

       Sec. 303. For tlie purpose of the [estate] tax the value of the net estate shall be determined—
      (a) In the case of a citizen or resident of the United States, by deducting from the value of the gross estate—
      **#***«:
      (3) The amount of all bequests, legacies, devices, or transfers * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * * no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, or to a trustee or trustees, * * * but only if such contributions or gifts are to be used by such trustee or trustees * * * exclusively for religious, charitable * * * or educational purposes * * *.


author: ARNOLD:

text:
    F. J. Sensenbrenner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 107716.
    Promulgated March 18, 1942.

      Maxwell H. Herriott, Esq., for the petitioner.

      Jonas M. Smith, Esq., for the respondent.
   OPINION.

ARNOLD:

The Commissioner determined a deficiency in gift taxes in the amount of $7,761.94 for the year 1937. It is alleged in the petition that the respondent erred in- determining the amount of gifts for the year 1937 in disallowing exclusions in the amount of $5,000 each on six gifts made in trust and in reducing the exclusion of one trust from $5,000 to $195.19. The facts are stipulated.

The petitioner is a resident of Neenah, Wisconsin.

On November 10,1930, the petitioner entered into seven agreements with the First Union Trust & Savings Bank of Chicago, Illinois, known, respectively, as Trusts Nos. 13272 to 13278, inclusive. On June 14, 1937, the petitioner made a gift of property to each trust of the value of $5,075.

Each trust agreement provides, inter alia, that the trustee shall pay the entire net income derived from the trust fund to or for the use of the grandchild named therein during a certain number of years after the date of the agreement, whereupon the principal shall be paid to the grandchild; that if such grandchild dies before such date the trustee thereupon shall divide the principal into as many equal separate trusts as there are children of such grandchild then living and shall hold one separate trust for and pay the income thereof to such child until it attains the age of 26 years. The agreements numbered 13272, 13273, and 13274 further provide that, during the minority of any beneficiary to whom income payments are directed to be made, the trustee shall make such payments to John S. Sensenbrenner, son of petitioner, and from and after his death, if he shall die before the termination of income payments, to the petitioner:

* * * to be applied for tbe care, maintenance, comfort, support and education of sucb beneficiary in sucb manner as tbe person receiving sucb payments shall in bis sole discretion deem best, and neither of them shall be accountable to tbe Trustee, to tbe beneficiary, or to any other person or Court for tbe payments so received by him. From and after tbe death of tbe survivor of tbe said John S. Sensenbbennek, and the Donor, tbe Trustee may make sucb payments in any one or more of tbe following ways: (a) directly to said minor; (b) to tbe legal guardian of said minor; (c) to a relative of said minor to be expended by sucb relative for tbe education and maintenance of said minor; or (d) by itself expending tbe same for the education and maintenance of said minor.
Tbe income payments provided for hereunder shall be made in quarterly installments or oftener as tbe Trustee shall deem best, but shall only be made when and as sucb income, after it shall have accrued, shall be in the possession of tbe trustees for payment * * *.

The pertinent provisions of the seven trust agreements are identical in language except for the name of the beneficiary, the number of years during which the income payments are to be made prior to the distribution of principal, and the person to whom the income is payable during the minority of the beneficiary. In trust agreements numbered 13275 and 13276 the income payments to be made thereunder during the minority of any beneficiary were payable to Margaret Sensenbrenner Gilbert, daughter of petitioner, and under agreements numbered 13277 and 13278 to J. Leslie Sensenbrenner, son of petitioner.

The names of the grandchildren designated as primary beneficiaries, the number of years from date of agreement during which the income payments were to be made prior to distribution of principal, and the ages of the beneficiaries on June 14, 1937, are as follows:

The petitioner filed his gift tax return for 1937 with the collector of internal revenue for Wisconsin at Milwaukee, Wisconsin. Therein he claimed exclusions of $5,000 for each gift made on June 14, 1937, to the trusts herein involved. The Commissioner disallowed the claimed exclusions, but allowed an exclusion to the extent of $195.19 on the gift to trust numbered 13272 for the benefit of F. James Sensenbrenner. The exclusion was computed as follows: $5,075 (value of gift) x .04 x .96154 (annuity factor for one year).

The applicable statute is section 504 (b) of the Eevenue Act of 1932, providing as follows:

SEO. 504. NET GIFTS.
* * * * * * *
(b) Gifts Less Than §5,000. — -In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.

The petitioner contends that the gifts were gifts of present interests in property, whereas the respondent contends the gifts were gifts of future interests in property except the gift to trust numbered 13272. He contends the latter gift is a gift of a future interest with respect to the principal but concedes it is a gift of a present interest with respect to the income payments. He bases this concession on the fact that F. James Sensenbrenner was of age on June 14, 1937, the date of the gift, and was entitled under the provisions of the trust agreement to immediate payment of income as it was received by the trustee. He contends that, since all the other beneficiaries were minors on the date the gifts were made, payments to them were dependent upon the exercise of discretion vested in another.

In our opinion the respondent’s determination must be sustained with respect to the principal of the gifts. Charles v. Hassett, 43 Fed. Supp. 432 (U. S. Dist. Ct. Mass.). “Future interests” have been defined as any interest or estate, whether vested or contingent, limited to commence in possession or enjoyment at a future date. Ryerson v. United States, 312 U. S. 405; United States v. Pelzer, 312 U. S. 399; art. 11, Regulations 79 (1936 Ed.); H. R. No. 708, 72d Cong., 1st sess., p. 29; S. R. No. 665, 72d Cong., 1st sess., p. 41. Under the provisions of each trust agreement the principal was payable at a date certain in the future to the named beneficiary if. living, otherwise to his or her issue, and in the event of failure or death of such to the surviving sister and/or brothers of the primary beneficiary. At the time of the gifts it was not certain whether any of the grandchildren named would ever receive the principal of the trust. The use, possession, and enjoyment of the principal was postponed to the happening of an uncertain event in the future, i. e., the survival of each beneficiary at the designated date of distribution of the principal. Each “gift thus involved the difficulties of determining the ‘number of eventual donees and the value of their respective gifts’ which it was the purpose of the statute to avoid.” United States v. Pelzer, supra. In Commissioner v. Glos, 123 Fed. (2d) 548, the court stated:

We are not concerned with any nice distinction between contingent and vested remainders, for Congress has included all future interests. The sole statutory distinction between present and future interests lies in the question of whether there is postponement of enjoyment of specific rights, powers or privileges which would be forthwith existent if the interest were present. This is within the recognized significance of the term “future interest.”

In our opinion the rights and interests of the beneficiaries in the seven trusts were of the same character. It has been held that an immediate life interest in income is a present interest, Commissioner v. Brandegee, 123 Fed. (2d) 58, as well as the right to receive income either for life or a term of 25 years, whichever is the shorter J. Willis Gardner, 41 B. T. A. 679 (on appeal, C. C. A., 7th Cir.); Charles v. Hassett, supra. As heretofore stated, the respondent concedes that the interest of one of the beneficiaries, F. James Sensen-brenner, in the income of the gift is a present interest.

Under the agreements the trustee was directed to make payments of the income during the minority of any beneficiary to a designated person or the donor. The designated person was a son or daughter of the petitioner and apparently the father or mother of the grandchild beneficiary. Each agreement provided that the payments from the trustee were “to be applied for the care, maintenance, comfort, support, and education of such beneficiary in such manner as the person receiving such payments shall in his sole discretion deem best.” It was only the manner of the application of the income and not the amount of the income which was subject to the discretion of any person. The agreements do not provide for the accumulation of income for future distribution. In Paine v. Welch, 42 Fed. Supp. 348, wherein the trustees by the terms of the trust agreement could in their discretion, pay, distribute, or withhold, in full or in part, the share of any beneficiary in either principal or income, the court held that the beneficiaries’ interests were not limited to commence in use, possession, or enjoyment at some future date, stating as follows:

* * * In the trust instruments involved there is nothing limiting the possession or enjoyment of the beneficiaries until some time in the future, unless the discretionary power of the trustee to make or withhold payments can of itself be considered such a limitation. I do not think it is such a limitation in tlie gift. Such a discretion cannot be exercised entirely arbitrarily, but is subject to the control of a court of equity.

In our opinion the interests of all the beneficiaries herein involved in the income from the gifts are present interests and not future interests within the meaning of section 504 (b) of the Revenue Act of 1932.

Article 19 of Regulations 79 (1936 Ed.) provides a method for the determination of the value of annuities and other interests for the purpose of gift taxation. So much of article 19 as is pertinent herein is set forth in the margin. In computing the value of the interest in the income of the gift to F. James Sensenbrenner, the respondent used the annuity factor applicable to one year as shown in Table B, set forth at the end of article 19. The period from the date of the gift, June 14,1937, to the date of distribution of the principal of the gift, November 10, 1938, is one year, four months and twenty-six days. The petitioner contends that the method is erroneous in that it requires the use of the annuity factor applicable to the number of years nearest to the time when the principal is payable to the respective beneficiaries and in that it disregards the additional four months and twenty-six days of the period. The petitioner introduced no evidence as to the factor to be used or as to a better method to be applied to ascertain the value of the gifts in question.

The method of valuing annuities, life, remainder, and reversionary interests set forth in article 19 of Regulations 79 (1936 Ed.) has been applied by respondent and has appeared over a long period of years in regulations pertaining to estate taxes as well as gift taxes. Art. 10, Regulations 80 (1937 Ed.); art. 13, Regulations 80 (1934 Ed.). Regulations 70 (1929 Ed.) and Regulations 68; art. 12, Regulations 37 (1917 Ed.); art. 19, Regulations 79 (1933 Ed.) and art. 7, Regulations 67 (1924 Ed.). There may be better and more accurate methods, but we can not for that reason disapprove of a method long in use without evidence establishing a better one. Simpson v. United States, 252 U. S. 547. In Commissioner v. Marshall (C. C. A., 2d Cir.), 125 Fed. (2d) 943, the court stated that the method of valuing remainders in article 19 of Regulations 79 “is not so arbitrary as to be unreasonable and invalid.” Cf. Anna L. Raymond, 40 B. T. A. 244; affd., 114 Fed. (2d) 140; certiorari denied, 311 U. S. 710.

However, the trust agreements provide that the income payments shall be made in quarterly installments. Section 7 of article 19 provides that if the annuity is payable quarterly the value shall be determined by multiplying the aggregate amount to be paid within a year by the figure in column 2 of Table B, opposite the number of years the annuity is payable, and then multiplying the product by 1.01488. The respondent in his computation failed to multiply “the product by 1.01488” and this should be done. The value of the gift of income to F. James Sensenbrenner is, therefore, $5,075 x .04 x .96154 x 1.01488. The value of the gifts of income to the other grandchildren should be computed accordingly, using the factor in'Table B, applicable to the years of the period during which the income is payable to them, respectively.

Decision will loe entered wnder Rule 50.

      Art. 19. Valuation of property.—
      *******
      (7) Annuities, life, remainder and reversionary interests. — * * * In case the donor creates a trust under which a specified annuity is payable to the donee, the value of such gift should be determined by using Table A or Table B, whichever is applicable, shown at the end of this article. If the annuity is payable at the end of each annual period, the factor is obtained directly from the table. If the annuity is payable for the life of an individual, the amount payable annually should be multiplied by the figure in column 2 of Table A opposite the number of years in column 1 of such table nearest the age of the individual (as of the date of the gift) whose life measures the duration of the annuity, or if payable for a definite number of years the amount payable annually should be multiplied by the figure in column 2 of Table B opposite the number of years in column 1 of such table.
      *******
      If the annuity is payable semiannually, quarterly, or monthly, the value should be determined by multiplying the aggregate amount to be paid within a year by the figure in column 2 of Table A opposite the number of years in column 1 nearest the actual age of the person whose life measures the annuity, or the figure in column 2 of Table B opposite the number of years the annuity is payable, as the case may be, and then multiplying the product by 1.01820 for monthly payments, by 1.01488 for quarterly payments, or by 1.00990 for semiannual payments.


author: Smith:

text:
    The Commodore, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102997, 103633.
    Promulgated March 19, 1942.

      Gardner Abbott, Esq., for the petitioner.

      Walter W. Kerr, Esq., for the respondent.
   opinion.

Smith:

The respondent has determined that the basis of petitioner’s property for the purpose of depreciation allowances is the basis of its predecessor, the Northwest Co., reduced by the second mortgage indebtedness in the amount of $678,967.48 which was canceled in the reorganization proceedings under section 77B of the National Bankruptcy Act. In so holding the respondent relies upon section 270 of chapter 10 of the National Bankruptcy Act, effective September 22, 1938, which provides as follows:

Sec. 270. In determining the basis of property for any purposes of any law of the United States or of a State imposing a tax upon income, the basis of the debtor’s property (other than money) or of such property (other than money) as is transferred to any person required to use the debtor’s basis in whole or in part shall be decreased by an amount equal to the amount by which the indebtedness of the debtor, not including accrued interest unpaid and not resulting in a tax benefit on any income tax return, has been canceled or reduced in a proceeding under this chapter. The Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe such regulations as he may deem necessary in order to reflect such decrease in basis for Federal income-tax purposes and otherwise carry into effect the purposes of this section.

The petitioner argues that the respondent erred because (1) section 270 can not be applied retroactively to cover this case, and (2) if it could be so applied the 1940 amendment to the section is equally.retroactive. That amendment, which was enacted on July 1, 1940, provides that the basis of properties in the hands of the transferee of the debtor in the reorganization proceedings may not be reduced below the fair market value of the property at the date of the reorganization. The petitioner contends that the fair market value of the property at the date of the reorganization was not less than $806',000 so that even if section 270, as amended, is applied the respondent’s determination is incorrect because it reduces the basis of the property in petitioner’s hands below $806,000. No allegation of error is made with respect to respondent’s adjustment of petitioner’s rate of depreciation.

A preliminary question to be decided is whether there was in fact a reorganization in the year 1936 within the meaning of section 112 (g) (1) of the Revenue Act of 1936 so that petitioner is required by the provisions of section 113 (a) (7) to use the basis of its predecessor, the debtor in the bankruptcy proceedings, for the purpose of computing depreciation allowances. The respondent concedes that there was a reorganization within the meaning of the statute and this concession is entirely correct on the evidence. The petitioner received all of the assets of the Northwest Co. in exchange solely for its voting stock, which was then transferred by the Northwest Co. to the trustee under the indenture securing the first mortgage leasehold bonds. At the time of the reorganization the first mortgage bondholders were the sole owners of the equity in the properties of the Northwest Co. The transaction was plainly a “reorganization” as defined by section 112 (g) (1) (B) of the Revenue Act of 1936 — “the acquisition by one corporation in exchange solely for all or a part of its voting stock; * * * of substantially all the properties of another corporation.” Cf. Helvering v. Alabama Asphaltic Limestone Co., 315 U. S. 179, with Helvering v. Southwest Consolidated Corporation, 315 U. S. 194.

The question remaining for our consideration is whether the petitioner is entitled to use the basis of the transferor company for the property, unadjusted by the amount of the second mortgage principal indebtedness which was canceled in the proceedings under section 77B. The petitioner must prevail unless section 270 of the 1938 amendment of the National Bankruptcy Act may be applied retroactively to reduce the basis of property for depreciation in taxable years prior to its effective date. We do not have before us the question whether in years following the enactment of section 270 the basis of petitioner’s property is to be reduced.

It is a fundamental rule of construction that a statute will not be applied retroactively unless that clearly appears to be its purpose. Brewster v. Gage, 280 U. S. 327; United States v. Magnolia Petroleum Co., 276 U. S. 160; Shwab v. Doyle, 258 U. S. 529. The Senate Judiciary Committee reported as follows with regard to section 270:

Sections 288, 269, and 270 are intended to preclude tax assessments resulting from tlie sealing of indebtedness on tbe basis of a write-down in the valuation of a debtor’s assets, without an actual sale or exchange of such assets. Section 270 avoids the possibility of any double deduction. Where debt forgiveness, resulting from a debt readjustment, is exempt from the tax upon income or profit, the cost of the property dealt toith hy the settlement is to he decreased, for future lax purposes, by an amount equal to the amount of the indebtedness cancelled or reduced in the proceeding. [S. R. No. 1916, 75th Cong., 3d sess., p. 39.] [Emphasis supplied.]

It is clear that section 270 itself has only prospective operation. There is no language in the section to indicate an intention that it should affect prior years. The reference to “future tax purposes” in the Senate Committee report rules out entirely the possibility of retroactive application. Section 270 refers only to reductions of indebtedness in proceedings under “this chapter,” viz., chapter 10, enacted in 1938, and therefore the section is not by its terms applicable to property which was transferred in the course of proceedings under section 77B.

Thus, section 270 in itself does not support the respondent’s determination. It may be argued that section 276 c lends support to the respondent. The respondent does not mention section 276 on brief but the point is worthy of consideration. Section 276 c provides in material part as follows:

e. the provisions of sections 77A. and 77B of chapter VIII, as amended, of the Act entitled “An Act to establish a uniform system of bankruptcy throughout the United States,” approved July 1, 1898, shall continue in full force and effect with respect to proceedings pending under those sections upon the effective date of this amendatory Act, except that—
* * * * * * . *
(3) sections 268 and 270 of this Act shall apply to any plan confirmed under section 77B before the effective date of this amendatory Act and to any plan which may be confirmed under section 77B on and after such effective date, except that the exemption provided by section 268 of this Act may be disallowed if it shall be made to appear that any such plan had for one of its principal purposes the avoidance of income taxes, and except further that where such plan has not been confirmed on and after such effective date, section 269 of this Act shall apply where practicable and expedient.

The purpose of section 276 was to keep section 77B operative, with certain exceptions, with respect to proceedings pending under section 77B on the effective date of the 1938 amendment of the National Bankruptcy Act. S. R. No. 1916, 75th. Cong., 3d sess., supra. There is nothing in the language of this section which requires section 270 to be applied so as to reduce the basis of the property during taxable years prior to 1938. When read in connection with the other subdivisions of section 276, it is clear that subdivision (c) simply extends the prospective operation of section 270 to properties which were transferred in the course of a section 77B reorganization which occurred prior to September 22, 1938, since section 270 does not otherwise cover such properties. The petitioner’s contention is therefore sustained. The respondent’s reduction of the basis of the petitioner’s depreciable property by the amount of the second mortgage indebtedness which was canceled in the course of the proceeding under the bankruptcy act was erroneous.

The second issue presented for our consideration is whether the cost of replacing a portion of the cornice of the petitioner’s building is a deductible expense. The original decorative stone work on three corners of the hotel was found to be in an unsafe condition after a storm and was completely removed. In its place the petitioner installed copper sheeting at a net cost of $5,248. The petitioner deducted that amount as an ordinary and necessary business expense in computing its income for the taxable year ended June 30, 1938. The respondent disallowed the deduction, claiming that the outlay was a capital expenditure recoverable only through depreciation. We are satisfied on the evidence that the copper sheeting installed merely kept the building in ordinary operating condition and did not materially add to its value or prolong its life. Under such circumstances the expenditure is deductible as an ordinary and necessary business expense. Illinois Merchants Trust Co., Executor, 4 B. T. A. 103; art. 23 (a)-4, Regulations 94.

Decisions will be entered, under Rule 50.