author: Tyson :

text:
    Monroe Sand and Gravel Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75782.
    Promulgated October 26, 1937.

      Robert A. Littleton, Esq., Allan, Sholars, Esq., and Sol Weil, C. P. A., for the petitioner.

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

Tyson :

The respondent has asserted income tax deficiencies in the amounts of $1,666.77 and $5,620.32 for the calendar years 1930 and 1931, respectively. Petitioner assigns the following errors:

For the year 1929, the respondent’s failure to allow deductions of $11,530 as bad debts, $4,736.63 as depletion or amortization of the cost of leases, and $2,022.22 as commissions, for the purpose of determining the amount of petitioner’s net loss to be carried over to the taxable year 1930.

For the. year 1930, the respondent’s failure to allow a deduction of the 1929 net loss predicated upon redetermination of the above assignments of error and, also, deductions of $3,044.86 as depreciation, $7,452.61 as commissions, and $212.31 as a loss.

For the year 1931, the respondent’s failure to allow a deduction of the 1930 net loss predicated upon redetermination of the immediately preceding assignments of error and, also, deductions of $3,248.24 as depreciation and $8,412.49 as commissions.

The respondent denied all of such assignments of error, and further answering the respondent affirmatively alleges that in determining petitioner’s net taxable income for the years 1930 and 1931 he erred as follows:

For the year 1930, that respondent allowed a deduction claimed by petitioner in the amount of $21,153.79 as royalties, whereas $8,483.02 thereof was erroneously allowed in that such amount “does not constitute an allowable deduction”, and that the correct deficiency is $3,044.73 for the year 1930.

For the year 1931, (1) that respondent allowed a deduction claimed by petitioner in the amount of $34,950.79 as royalties, whereas $14,001.68 thereof was erroneously allowed in that such amount “does not constitute an allowable deduction”; (2) that of $8,679.89 claimed by petitioner as a deduction for commissions, the respondent disallowed $8,412.48, whereas the amount disallowed should be increased by $201.40; (3) that respondent allowed a deduction claimed by petitioner in the amount of $26,400 as compensation of officers, whereas $13,200 thereof was erroneously allowed in that such last amount “does not constitute an allowable deduction”, and that the correct deficiency is $8,908.69 for the year 1931. Respondent prays that the Board redetermine the deficiencies to be in the alleged increased amounts. Petitioner’s reply denies that the respondent erred in any of the respects as affirmatively alleged in his answer.

At the hearing, petitioner waived and abandoned its assignments of error involving a claimed deduction for 1929 as depletion, in the amount of $4,736.63, which was disallowed by the respondent, and also its claim, made at the hearing, for deductions as depletion in the amounts of $5,653.36 for 1930 and $9,334.45 for 1931. On brief petitioner concedes that it is not entitled to a deduction of $11,530 as a bad debt for 1929. On brief the respondent concedes that petitioner is entitled to the claimed deduction of $2,022.22 as commissions for 1929, resulting in a net loss for that year; to the claimed deduction of $212.31 as a loss for 1930; to the claimed deductions as commissions in the amounts of $7,452.61 for 1930 and $8,412.48 for 1931; and to the claimed deductions for each of the years 1930 and 1931 for depreciation at the rates of 12½ percent on boat No. 2, 12½ percent on the dragline, and 20 percent on the wash plant, based on the stipulated cost of each of those items of property. Effect to the above concessions by both parties will be given in the recomputation under Rule 50.

On brief both parties state that'the only remaining issues presented to the Board for redetermination are those affirmatively pleaded by respondent and involving the questions of deductions as (1) royalties for 1930 and 1931, and (2) salaries for 1931.

The petitioner is a Louisiana corporation, engaged in the sand and gravel business. It was incorporated in November 1922, with an authorized capital stock of $25,000, which, by amendment to its charter in January 1923, was increased to the sum of $125,000, divided into 1,250 shares of the par value of $100 each. At or about that time the petitioner acquired the Heard and Faulk leases granting to it the exclusive right, for a period of years, to excavate and sell sand, clay, and gravel from certain described property situated in the Parish of Ouachita at specified royalties per cubic yard to be paid to the owners of such property. Such leases were acquired for stock and were capitalized on petitioner’s books in the amount of $100,000. From the time of the acquisition of those leases to and including the year 1931, the petitioner has been engaged in the business of excavating and selling sand and gravel from the properties embraced in those leases.

In the early part of 1926 the petitioner was having financial difficulties and was threatened with insolvency proceedings. It owned the Heard and Faulk leases, which had considerable value, but its machinery and equipment had little value and was practically worthless for the purposes for which it was being used. Petitioner’s indebtedness at that time amounted to approximately $130,000 and it was without funds.

Prior to about March 24, 1926, Ralph S. Thornton and H. H. Holloway had no interest in the petitioner or the Heard and Faulk leases. On or about that date they each acquired 25 percent of the petitioner’s outstanding stock and the other 50 percent of petitioner’s outstanding stock remained in the ownership of T. E. Stevens. The sum of $8,000 cash was paid for the stock so acquired but the record is not clear as to whether Holloway paid that amount individually or whether it was paid by both Holloway and Thornton. Petitioner’s indetedness of approximately $130,000 was assumed or underwritten by Holloway and Thornton at the time they purchased their stock. Under date of March 24, 1926, they entered into a written agreement with petitioner, pursuant to resolutions of its board of directors and stockholders. Such agreement provided that in consideration of the financial “services and assistance and activities” theretofore performed and agreed to be thereafter performed by Thornton and Holloway, the petitioner obligated itself to pay them in equal proportions, “the sum of Five Cents per cubic yard on and for all material mined and sold and delivered from the Faulk and Heard leases in Ouachita Parish”, during the full term and life and operation of such leases or renewals thereof.

Without the execution of such agreement, Thornton and Holloway would not have invested in petitioner’s stock or loaned it their credit by assuming or underwriting the petitioner’s indebtedness of approximately $130,000 and by guaranteeing or pledging further financial assistance as conditions might demand. The payments to be made Thornton and Holloway, pursuant to that agreement, had no connection with any salaries which would be or were paid to Thornton and Holloway as officers of the petitioner, nor were such payments dependent upon their continued connection with the petitioner. Such payments, measured by 5 cents per cubic yard for all material mined, sold, and delivered, constituted compensation under the agreement of March 24, 1926, for services of Holloway and Thornton in rendering financial assistance by assuming or underwriting petitioner’s indebtedness of approximately $130,000 and for their undertaking to render such further financial assistance as might be necessary in the continued operation of the business of petitioner.

Holloway and Thornton devoted the necessary amount of time and attention to the affairs and the operations of petitioner. As rapidly as possible petitioner’s old machinery and equipment was abandoned or junked, the proper kind of machinery was purchased, and a different method of operation was installed. During 1929 to 1931, inclusive, petitioner’s gross sales showed a material increase. In 1929 Thornton and Holloway bought the shares of petitioner’s stock then held by T. E. Stevens. During 1930 and 1931 Holloway was president and Thornton was secretary and treasurer of the petitioner.

From March 24, 1926, to and including the year 1931, the amounts due under the above mentioned agreement were credited on petitioner’s books to the accounts of Thornton and Holloway. Petitioner kept its accounts on the accrual asis. In its income tax return for 1930 the petitioner took a deduction of $21,153.79 as royalties, which amount included the sum of $8,432.02 credited in that year to the accounts of Thornton and Holloway under the said agreement. In its income tax return for 1931, the petitioner took a deduction of $34,950.79 as royalties, which amount included the sum of $14,-001.68 credited to the accounts of Thornton and Holloway under the said agreement.

The respondent has made a broad affirmative allegation that .each of the above mentioned amounts of $8,432.02 for 1980 and $14,001.68 for 1981, claimed by petitioner as a deduction for royalties and allowed by respondent in his determination of petitioner’s tax liability for each of those years, “does not constitute an allowable deduction.” On brief he contends that such amounts did not constitute royalties and that therefore he was in error in allowing the deduction thereof as royalties; that there is no proof that such amounts constituted reasonable compensation for services actually rendered in those taxable years and therefore such amounts are not deductible as “a reasonable allowance for salaries or other compensation for personal services actually rendered”, as provided in section 23 (a) of the Revenue Act of 1928; and that they did not constitute such ordinary and necessary business expenses as justified their deduction.

Upon this record, we conclude and so find that the said credits to the accounts of Thornton and Holloway, pursuant to their agreement with petitioner, were not for royalties, since neither Thornton nor Holloway owned any interest in the land of which petitioner was the lessee and the credits due them under the agreement were not made by petitioner for its use or right to extract sand and gravel from such land. Cf. W. N. Thornburgh Manufacturing Co., 17 B. T. A. 29, 34; L. Schepp Co., 25 B. T. A. 419. Accordingly, such amounts are not properly deductible as royalties or “rentals or other payments required to be made as a condition to the continued use or possession, * * * of property”, to which the taxpayer had no title or equity, as provided by section 23 (a) of the Revenue Act of 1928. We further conclude and so find that the credits did not constitute “salaries” within the meaning of section 23 (a), supra, for they were not made as compensation in addition to the regular salaries of Thornton and Holloway for services actually rendered in those taxable years.

However, the respondent having affirmatively pleaded that the said amounts are not “allowable deductions”,' he must sustain his burden of proof. Section 23 (a) of the Revenue Act of 1928 contains a broad provision for the deduction of “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * The credits due Thornton and Holloway under petitioner’s contractual obligation were not a division or distribution of petitioner’s net profits, but constituted a charge against petitioner’s gross receipts, irrespective of the amount of its net profits, if any. The petitioner’s contractual obligation was in consideration for the financial assistance of Thornton and Holloway to assure petitioner’s financial integrity and the continued operation of its business enterprise. This obligation was a charge upon the maintenance and operation of petitioner’s* business and, in our opinion, the credits in the amounts of $8,432.02 for 1930 and $14,001.68 for 1931 made pursuant to such obligation constituted ordinary and necessary expenses incurred in petitioner’s business and, as such, are allowable deductions. Cf. La Monte & Son v. Commissioner, 32 Fed. (2d) 220, reversing 13 B. T. A. 365, and Louis C. Rollo, 20 B. T. A. 799. The respondent has therefore obviously failed to sustain his burden of proof on this issue raised by his affirmative pleading.

In regard to the second issue, involving the question of salaries, the record discloses that during the year 1931 there was credited monthly on petitioner’s books, officers’ salaries in the total amounts of $14,400 to Holloway and $12,000 to Thornton. On its return for the year 1931, petitioner claimed such amounts, totaling $26,400, as a deduction for salaries. The respondent allowed such claimed deduction, but by his affirmative pleading alleges that his allowance thereof was erroneous to the extent of $13,200. Respondent contends that the officers’ salaries, totaling $26,400, were unreasonable. The record fails to establish that such officers’ salaries claimed by petitioner and heretofore allowed by respondent were unreasonable, but on the contrary, Holloway, the only witness testifying directly on this point, although an interested one, testified that such salaries were reasonable for the services rendered. Accordingly, respondent has failed to sustain his burden of proof on this issue raised by his affirmative pleading.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Estate of Eben B. Phillips, Rollin B. Fisher and Harold B. Driver, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81802.
    Promulgated October 27, 1937.

      W. A. Barrows, Esq., for the petitioners.

      John F. Greaney, Esq., for the respondent.
   OPINION.

Van Fossan:

This proceeding involves a deficiency in estate taxes of $2,646.52. The issue is whether decedent’s gross estate should be reduced by (1) a claim against the estate for support of decedent’s divorced wife under a certain agreement, and (2) a claim against the estate for support of a minor under a certain agreement and court decree construing said agreement. The aforesaid agreements and court order are hereinafter more fully related.

The proceeding was submitted upon stipulated facts, with attached exhibits, and briefs. For the purpose of this report we shall set forth only such portions thereof as are necessary to determine the issues.

The decedent died testate February 28, 1933, leaving his divorced wife, aged 45, who is still living, and one minor child, who became of age May 9, 1937. The petitioners were named executors .and trustees in his will, which was duly probated, and the petitioners duly appointed and qualified.

The disputed claims grew out of the following circumstances:

On or about January 25, 1926, the decedent, who had been living apart from his wife, and who was desirous of obtaining an uncontested divorce and remarrying, entered into a written agreement, as of that date, with his wife and with her attorney as trustee for the purpose of enforcing the agreement.

The agreement recited that the husband intended to apply for a divorce from his wife, “who does not desire to contest the said proceedings”; that the husband “for several reasons is willing to agree, in case a divorce is granted,” to make his wife an allowance of $5,000 per year, payable quarterly during her life or until she remarried; that custody of their two minor children should be given the wife and suitable provision made for their care, maintenance, support, and education by decedent; that decedent is a beneficiary of and has a vested interest in a trust created by the will of Maria L. Phillips under which he receives, annually, a sum in excess of $5,000; that decedent is willing to transfer and assign by a valid and sufficient instrument in writing a portion of the income from the Phillips trust so that his wife will receive $5,000 annually, “beginning with the date when a divorce is granted”, and continuing for life or until she remarries; that in case the Phillips trust terminated decedent would create a $100,000 trust out of his distributive share thereof to pay his wife the allowances agreed upon. The remaining provisions consist of decedent’s covenant with Michael L. Sullivan, as trustee, that he, his heirs, administrators, and executors will pay the $5,000 annually; an assignment of a portion of his income from the Phillips trust to Michael L. Sullivan, as trustee, to enable the latter to pay said allowance; an assignment to the Old Colony Trust Co. of $100,000 out of decedent’s distributive share of the Phillips trust to become effective if the latter trust terminated prior to the wife’s death or remarriage; the acceptance by the wife of the $5,000 annual allowance as being “in full satisfaction for all and every claim that she now or may hereafter have for or on account of having been the wife of” the decedent, except that decedent shall perform the agreements hereinafter set forth regarding the children; that the wife accepts said allowance as “in full satisfaction of all liability * * * for her fair and reasonable and adequate support and maintenance * * a covenant that decedent, “his heirs, administrators and executors shall pay” the annual allowance beginning “on the date of the decree in the divorce proceedings or as soon thereafter as reasonable”; that the wife may appoint a new trustee or any successor with the same powers and duties.

Provision for decedent’s children was made in a supplemental agreement between the same three parties under date of January 25, 1926. In addition to other covenants therein decedent agreed to pay his wife $1,000 annually, for each child, for clothing and furnishings; he agreed to pay $15 per week for each minor, while living at home, and the entire expense of each minor while away from home for the purpose of attending school or college; that he would pay their entire expense while away from home for any other purpose under stated circumstances; and that he would, in case of illness or other extraordinary or unforseen circumstances, furnish additional funds to pay the expenses thereof.

Thereafter, and on April 2,1926, decedent obtained an uncontested divorce as contemplated and desired. He married again on April 18,1926.

By an indenture dated April 18, 1929, the decedent established a $100,000 trust for the benefit of his divorced wife pursuant to the agreement of January 25,1926, but not upon the exact terms specified in that agreement. This indenture, known as the “Gertrude M. Phillips Settlement”, recited the payment of $100,000 “concurrently herewith” to Old Colony Trust Co., as trustee, and granted the trustee the necessary powers for handling the fund and paying the income to decedent’s divorced wife during her lifetime or until she remarried. The settlement states further “The execution of this indenture and the payment by the Settlor [decedent] of the said $100,000 hereunder shall constitute full performance by the Settlor of all his obligations under an agreement dated 25th of January, 1926 between him and the said Gertrude M. Phillips relating to alimony.”

As of the same date a written agreement was made by decedent with his divorced wife wherein he agreed that in case the income of the $100,000 trust was insufficient to pay Gertrude M. Phillips $5,000 per annum, he would make up the deficit. If the income from the $100,000 trust was in excess of $5,000, the excess was to be credited against any years in which the net income was less than $5,000.

At the time of the decedent’s death the principal of the $100,000 trust had shrunk to $54,099.23 and the income amounted to $3,468 a year. On the estate tax return the petitioners deducted $21,230.12, as a claim against the estate “on account of their liability under the' agreement of April 18, 1932 [sic 1929], as the annuity value of the indicated income deficit of $1,532.”

The executors and trustees, being uncertain as to their liabilities under the additional stipulations of January 25, 1926, because of doubt whether'the decedent’s promises therein contained terminated with his death, filed a bill for instructions in the Superior Court of Sullivan County, New Hampshire, naming the divorced wife, the two children, and the trustee under the agreement as respondents. In this proceeding after hearing and argument a decree was entered on August 2, 1933, holding that the executors were bound by the additional stipulations of January 25, 1926, to the same extent that the decedent was bound while living, and that such agreement “like any other debt contracted or obligation incurred in the lifetime of the testator will have precedence over any distribution made by will”, and that the executors should set aside sufficient funds to meet such obligations and if the estate is not large enough to make certain that such obligations can be discharged in full they should keep the estate open during the minority of the child. This decree is still in force. Accordingly, the petitioners in the estate tax return deducted as a claim against the estate $12,556.20 (erroneously stated as $5,330.66 in the respondent’s notice of deficiency) on account of these liabilities, as the amount of payments made and to be made under the additional stipulations of January 25, 1926, and the court decree for the support of the minor child until she comes of age.

The respondent made no objection to the computation of the amount of the claims mentioned in the two preceding paragraphs, but disallowed both the said claims on the ground that “the relinquishment of dower is not a consideration in money or money’s worth” and that “the same is also true as to support after decedent’s death as his obligation to support his dependent ends at that time.” Such disallowance of these two deductions claimed by the petitioners resulted in the deficiency assessment of $2,646.52 which is at issue in this case.

The deductions claimed by petitioners arise out of contracts entered into by decedent prior to his death. It is asserted that the amounts claimed, $21,230.12 and $12,556.20, are properly deductible under section 303, Revenue Act of 1926, as amended by section 805, Revenue Act of 1932. This assertion rests upon the contentions-that consideration for the agreements as to decedent’s divorced wife “was primarily the uncontested divorce”, and that the consideration for the agreement regarding decedent’s minor child “was the uncontested divorce and the limitation of the decedent’s liability for support.”

Respondent denies that the agreements are supported by adequate consideration in money or money’s worth, particularly in view of section 804 of the Revenue Act of 1932, and contends that the alleged consideration is invalid because against public policy under the rule announced in Schley v. Andrews, 225 N. Y. 110; 121 N. E. 812; Hemingway v. Ball, 119 N. J. Eq. 471; 183 Atl. 172, affirming 179 Atl. 374; and Sayles v. Sayles, 21 N. H. 312.

The claims herein, being “founded upon a promise or agreement”, shall be limited, under the statute, “to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth.” As to the first claim we have, in addition to the above, the limitation in section 804, that “a relinquishment * * * of dower, * * * or other marital rights in the decedent’s property or estate, shall not be considered to any extent a consideration ‘in money or money’s worth’.”

The agreements in evidence fully establish that Gertrude. Phillips relinquished not only dower but all her other marital rights in decedent’s property in consideration for the payments which decedent bound himself to make. If this relinquishment shall not be considered to any extent as consideration, there can be no justification for the claim of $21,230.12, since petitioners concede and urge that the consideration was primarily the uncontested divorce. It appears that the statute by its own- terms expressly precludes claims having their foundation in agreements relinquishing dower or other marital rights. In this view it is immaterial whether the consideration is valid or invalid in New Hampshire. If invalid, as respondent claims, it would support the result herein. If valid, we would still be precluded from allowing the deduction under the Federal taxing statute.

The claim for $12,556.20 is different. No relinquishment of dower or marital rights is involved. The relationship is that of parent and child. The liability of a father to support, maintain and educate his child in accordance with his means is too well settled to require citation of authority. By his agreement with the trustee and Gertrude Phillips the decedent fixed the amount of his liability with respect to his children, adopted or natural, obligating himself and his estate to pay certain sums for their support.

After decedent’s death the' question arose whether the executors were bound to continue the payments to the child in accordance with decedent’s agreement. It is stipulated that the executors requested a ruling by the New Hampshire courts on their liability under decedent’s agreement. The divorced wife, the children, and the trustee were made parties to this action. The court ruled that decedent’s agreement bound the executors to the same extent that the decedent was bound while living, and that such agreement “like any other debt contracted or obligation incurred in the lifetime of the testator will have precedence over any distribution made by will.”

This ruling of the court establishes the validity and enforceability of the claim. The next question is whether the facts justify its deduction under the taxing statute. This claim, like other claims, founded upon an agreement, shall be limited to the extent that it was contracted bona fide and for an adequate consideration in money or money’s worth. No question of a lack of bona fides is raised. The sincerity of the decedent is unquestioned. The purpose as to each agreement was to fix and determine his liabilities so a divorce could be obtained, and a new marriage consummated. As to his child, he reduced his broad liability for support and maintenance to certain sums which he obligated himself to pay at stated intervals. Adequate consideration need not be confined to something coming-in—compromising or limiting the amount of one’s liability may be an adequate and full consideration for decedent’s agreement.

We have examined the cases cited by respondent, but they differ so in their facts that we can not say they support his contention. We have found no case involving the issues here presented, although similar agreements have been considered from an income tax standpoint by the courts and the Board. Douglas v. Willcuts, 296 U. S. 1; Frank G. Hogan, 35 B. T. A. 26; Pearl A. Long, 35 B. T. A. 479; Henry Oliver Rea, 35 B. T. A. 1132; Commissioner v. Tuttle, 89 Fed. (2d) 113, affirming 31 B. T. A. 782.

Agreements, oral and written, have supported deductible claims against the decedent’s estate, United States v. Mitchell, 74 Fed. (2d) 571; Commissioner v. Strauss, 77 Fed. (2d) 401; Smith v. United States, 16 Fed. Supp. 397; Benz v. Carney, 15 Fed. Supp. 145; Maude L. Porter et al., Executors, 34 B. T. A. 798, but none of these cases involved claims arising out of marital or parental obligations.

In Commissioner v. Estate of Kelly, 84 Fed. (2d) 958, the court observed:

The test of whether or not a claim is deductible is whether it is enforceable against decedent’s estate. If it is an enforceable claim against her estate, it is then deductible, otherwise, it is not. The indebtedness must have been contracted in good faith and “for an adequate and fair consideration in money or money’s worth.” This does not mean that the “consideration in money or money’s worth” must necessarily have passed to decedent in order to make such indebtedness deductible. [Citing eases.] There can be no doubt but that the indebtedness in question was contracted in good faith and was for a fair and adequate consideration, and is enforceable against decedent’s estate.

In the instant case, it is clear that the claim is enforceable against the estate. The court has so held. We believe also it satisfies the further requirement of the statute that it be contracted bona fide and for an adequate and full consideration in money or money’s worth. In the normal course, the obligation of a parent for the support and maintenance of a child during minority ceases with the death of the parent. Here the court interpreted the written agreements to perpetuate the contract right to such support after the parent’s death. Here, also, the parent converted the obligation to support into a fixed amount. These considerations were real and in our opinion constituted adequate and full consideration in money or money’s worth. See Jeftha H. Wade, Jr., 21 B. T. A. 339.

The deduction of the claim for $12,556.20 should be allowed.

Decision will be entered under Rule 50.

       SEC. 805. DEDUCTIONS.
      Section 303 (a) (1) of the Revenue Act of 1926, as amended, is amended to read as follows:
      “(1) Such amounts—
      “(A) for funeral expenses,
      “(B) for administration expenses,
      “(C) for claims against the estate,
      “(D) for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, and
      “(E) reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. The deduction herein allowed in the ease of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth. There shall also be deducted losses incurred during the settlement of estates arising from fires, storms, shipwrecks, or other casualties, or from theft, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for income tax purposes in an income tax return.”

       SEC. 804. RELINQUISHMENT OF DOWER, ETC., AS CONSIDERATION.
      Section 303 (d) of the Revenue Act of 1926 is amended by adding at the end thereof a new sentence to read as follows:
      “For the purposes of this title, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in decedent’s property or estate, shall not be considered to any extent a consideration ‘in money or money’s worth’.”

         Latty v. Commissioner, 62 Fed. (2d) 952; Porter v. Commissioner, 60 Fed. (2d) 673; Glaser v. Commissioner, 69 Fed. (2d) 254; certiorari denied, 292 U. S. 654.


text:
    Max Gross, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74187.
    Promulgated October 27, 1937.

      S. M. Reiss, Esq., for the petitioner.

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

Tyson :

An income tax deficiency of $556.89 for the year 1930 is under review in this proceeding. The issue is whether or not the petitioner sustained a deductible loss in that year through the alleged purchase and sale of 50 shares of bank stock made by a business associate on petitioner’s behalf.

The petitioner is a resident of New York City, and. owned 50 percent of the capital stock and was a director of the Carmen Dress Co., a corporation, which was engaged in the manufacture of ladies dresses. The other 50 percent of the corporation’s stock was owned by Abe B. Levy, who was also its president. During 1929 Levy purchased some 300 shares of stock of the Bank of the United States at prices ranging from 208% to 239 dollars per share. These purchases were made personally by Levy, carried in his own name, and pledged as collateral to secure his private loans with the Irving Trust Co. At some time during this year, following said purchases, Levy told the petitioner about the purchase of 100 of said shares at $238.50 per share and he advised petitioner that he, Levy, “had taken fifty of such shares” and would carry them for petitioner, stating that he thought they would make some money out of it, and petitioner told him it was all right. After these purchases the price of the bank stock began falling on the market and, on February 17, 1930, Levy sought to hedge against loss by purchasing 100 additional shares of the stock, paying $82 per share. Later, Levy told petitioner of this last purchase explaining that he had made it in order that they might make up their loss already sustained by the fall in prices of the stock. He also told petitioner that the latter could have the benefit of such gains, if any, as might be realized from 50 shares of the last purchase, to the extent of his loss on the 50 shares first purchased for him, buCwould not be held liable for any loss on account of the last purchase of 50 shares.

After these two purchases of stock were made and on April 30, 1930, petitioner and Levy entered into a written agreement, as follows:

Agreement made this 30th day of April, 1930, between Abe Levy, of the County of Nassau, State of New York, and Mas Gross, of the Borough of Manhattan, City, County and State of New York.
WITNESSETH :
Whereas, Levy purchased Fifty (50) shares of stock of the Bank of the United States for Gross, and
Whereas, said Levy is holding said stock, although in his name, for the account of Gross, and
Whereas, Gross agrees that in the event of any loss from such purchase that he will reimburse Levy for such loss, and
Whereas, it is understood that said stock cost Levy $238.50 per share and
Whereas, Levy has made an additional purchase of stock of the Bank of the United States for which he paid at the rate of $82.00 per share, and
Whereas, Levy is willing to give Gross the benefit of such purchase in order to minimize, if possible, the loss which said Gross may have to take;
New, Therefore, in consideration of the mutual agreements herein contained, and in further consideration ,of the sum of One ($1.00) Dollar, lawful money of the United States of America by each of the parties hereto in hand paid, receipt whereof is hereby acknowledged, it is agreed as follows':
First: That Levy will hold said stock for at least one (1) year from the date hereof, unless requested by the said Gross to sell said stock sooner.
Second: It is understood that when said stock is sold, the loss, if any, is to be determined by deducting the sale price from the purchase price of $238.50 and also crediting said Gross with the difference between the market value of Fifty (50) shares of stock and the price of $82.00.
Third: It is further understood and agreed', however, that Gross is not to be charged with any loss on the additional stock purchased by Levy, and that Gross is only to be charged with a loss, if any, on the original purchase of Fifty (50) shares at $238.50 per share.
Fourth: When the loss, if any, is determined Gross is to make settlement of the amount with Levy.
Fifth: Should Gross desire, at any time before the expiration of one (1) year, to close out the said Fifty (50) shares of stock, Levy agrees to sell when directed by him to do so, in which event Gross will make good any loss, or, on the other hand, if the stock shall appreciate in value in excess of the purchase price, the profit is to be paid to Gross.
In Witness Whereof the parties hereto have hereunto set their hands and seals the day and year first above written.
Max Gross (l s)
A. B. Lew (n s)

During 1930 the market price of the Bank of the United States stock continued to drop, and it was current rumor in about December of that year that the institution was bankrupt. The petitioner and Levy had several conversations during the latter part of 1930 on the subject of selling the stock. With the approval of petitioner, Levy sold, on December 6, 1930, to his brother, Louis Levy, 200 shares of the bank stock, including the 100 shares in which petitioner was interested, for the cash price of $1 per share. Five days later, on December 11, the bank closed its doors.

Levy reported the sale of these shares to the petitioner and the two came to an agreement as to the portion of the loss each should bear. To cover petitioner’s agreed part of the loss he executed and delivered to Levy several promissory notes, but on what date, or dates, does not clearly appear in the record. Petitioner made no cash payments to Levy on account of his loss during the taxable year, but beginning December 1, 1931, and from time to time thereafter up until April 1, 1933, he made payments to Levy aggregating $3,249.64, which the latter credited upon the notes.

The petitioner files his income tax return upon the cash receipts and disbursements basis. Respecting his income tax obligation for 1930, the petitioner claims that he sustained a loss of $11,925 on account of the stock transactions carried out by Levy, on petitioner’s behalf, under the circumstances hereinabove detailed, and that he should be allowed to deduct such loss from his gross income for said year. On brief the respondent challenges the alleged ownership by the petitioner of the stock involved as well as the bona fides of the sale to Levy’s brother made a few days before the bank closed its doors. He also contends that, in no event did the petitioner suffer a deductible loss in 1930, because, being on a cash basis, he parted with no money or property in that year on account of the transaction.

The view we take of the matter as here presented renders unnecessary a consideration of either the bona fides issue raised by respondent as to the sale of the stock to his brother by Abe B. Levy or of the nature of the interest of petitioner in such stock, since we are of the opinion that respondent’s determination should be sustained because the facts show that petitioner made his return for the taxable year on a cash receipts and disbursements basis and they further clearly show that petitioner did not in that year part with any money or property as a result of the loss which he here claims as an allowable deduction. A taxpayer reporting on a cash receipts and disbursement basis can be allowed only such loss deductions as represent actual outlays of cash or property in the taxable year and the claimed deduction here is not of that character. Eckert v. Burnet, 283 U. S. 140; A. F. Osterloh, 13 B. T. A. 713; aff'd., 37 Fed. (2d) 277; Morris Sass, 17 B. T. A. 261; James Klein Bowen, 27 B. T. A. 824; Edmond A. Hughes, 27 B. T. A. 1022; Frank Kuhn, 34 B. T. A. 274.

Petitioner relies upon A. W. D. Weis, 13 B. T. A. 1284, but, as was said in Frank Kuhn, 34 B. T. A. 274, 276, which is equally as applicable here, "‘that case stands for an entirely different principle, namely, that a taxpayer whose investment is lost in the taxable year is not to be deprived of the deduction therefor merely because the lost investment was derived from borrowed capital. The distinction between that case and Eckert v. Burnet, supra, appears in Burns Manufacturing Co. v. Commissioner, 59 Fed. (2d) 504, in which it is also said that the Weis case must be regarded, in so far as it considers the cash basis, as overruled by the Eckert case.”

The respondent’s determination is approved.

Decision will be entered for respondent.


author: Hill:

text:
    R. R. Ratliff, Petitioner, v. Commissioner of Internal Revenue, Respondent. Vada Ratliff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84460, 84461.
    Promulgated October 27, 1937.

      W. F. Tarver, Esq., for the petitioners.

      J. E. Marshall, Esq., and J. H. Yeatman, Esq., for the respondent.
   OPINION.

Hill:

In these consolidated cases the respondent determined a deficiency of $88.12 in income tax against each petitioner for the year 1933. The petitioners owned a certain royalty interest in oil lands in Texas, one-half of which they sold for $7,121.25 cash. In ! making their returns for income tax they each reported one-half of ¡the $7,121.25 and each claimed a deduction for depletion of 27½ percent, which the respondent disallowed: The correctness of respondent’s ruling is the question for decision. The facts have been stipulated as follows:

It is agreed that the facts in this case are that R. R. Ratliff and wife Vada Ratliff were and are residents of the State of Texas, and filed their income tax returns in the 1st District of Texas, and are the owners in fee simple of a one-half undivided interest in a certain 56.87 acre tract of land in the T. & N. O. Railway Survey No. 6, which was patented to Edward Calvert Smith and R. R. Ratliff as assignee to Wm. S. Rhodes by the State of Texas by Letters Patent dated November 3, 1932, Montgomery County, Texas. (The owner of the other one-half is Edward Calvert Smith). On or about October 1932, R. R. Ratliff and wife Vada Ratliff and Edward Calvert Smith executed an oil and gas lease to the Bishop Oil Company of California, reserving a ⅛ royalty of all of the oil and gas produced. Shortly thereafter an oil well was drilled and oil produced, and is still producing. On or about March 16th, 1933, which was after oil was produced, R. R. Ratliff and wife Vada Ratliff sold to Steve Farrish a one-half of their royalty in the oil and gas and other minerals produced for a cash consideration of $7,121.25. That in their returns for the calendar year 1933, petitioners each reported one-half of this amount, and each claimed a depletion deduction of 27½ percent on one-half of the said sum of $7,121.25 received from the sale of the royalty interest. The respondent disallowed said deductions. The only issue before the Board is whether petitioners are entitled to the depletion deduction claimed.

We think that the respondent was correct in disallowing the claimed deductions for depletion as depletion is not allowable on sales, but is confined to operating income. Without elaboration, it is sufficient to cite the following cases:

In Darby-Lynde Co. v. Alexander, 51 Fed. (2d) 56, it was said:

The discussion before the Senate Finance Committee, where the amendment which ultimately became section 204 (c) (2), 26 USCA § 935 (c) (2) originated, discloses that the framers of this legislation had in mind operating income as distinguished from income derived from sales. See report of hearings before that Committee, pages 153, 154, 177 and 179.
We conclude that the words “gross income”, as used in section 204 (c) (2), supra, mean income derived from the sale or other disposition of oil and gas produced, and not from the sale of the oil and gas properties.

Cf. Macon Oil & Gas Co., 23 B. T. A. 54.

In Commissioner v. Fleming, 82 Fed. (2d) 324, the same result was reached and the court held that, where undivided interests in oil and gas leases were sold for cash plus certain amounts payable from part of lessee’s share of oil and gas produced, the vendor was entitled to deduct depletion allowance from part of income arising from reserved oil in computing taxable income, but not from part arising from cash payment.

In Anna Taylor, 3 B. T. A. 1201, the Board held to the same effect and there said:

Section 214 of the Revenue Act of 1921, which allows a deduction to taxpayers for the depletion of oil based on discovery value, except in so far as such a deduction reduces the basis, is not applicable to determine gain or loss from the sale of property. * * * This section, however, throws some light on this appeal. It indicates that Congress did not consider that section 214 relating to depletion allowances was applicable to gain or loss on the sale of property.

In J. M. Hudson, 14 B. T. A. 983, the petitioner and his wife owned the fee simple title to certain lands, which they leased and retained the usual royalty interest. After oil was discovered they sold part of their royalty interest for cash and it was held they were not entitled to depletion on the part sold. The Board there said:

The petitioner is contending that in computing the profit or loss resulting from the sale of a portion of his and his wife’s royalty interests, they should be permitted to apply against the selling price such amounts as the respondent would have allowed them as deductions under section 214 (a) (10) of the 1921 Act for depletion based on a discovery value as if they had not sold such a portion of their royalty interest. This was the identical question that was before the Board in the Appeal of Anna Taylor, 3 B. T. A. 1201, in which we decided adversely to such a contention. Our decision there is controlling here. See also Appeal of S. T. Hunt, 4 B. T. A. 1077.

It is earnestly argued on behalf of petitioners that these cases apply only to lessors and lessees and not to owners of the fee as they are. It is sufficient answer to this to point out that in the Fleming and Hudson cases, supra, the taxpayers were the owners of the fee, had made leases, and retained royalties or interests in oil. Clearly petitioners’ position is not tenable. The ruling above referred to has never been departed from and the ruling of the respondent is approved.

Decision will be entered for the respondent.


author: Black :

text:
    Arthur S. Barnes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81873.
    Promulgated October 27, 1937.

      John E. Mack, Esq., Andrew T. Smith, Esq., and Dwight E. Rorer, Esq., for the petitioner.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Black :

The principal question in this proceeding is whether petitioner filed a false or fraudulent return for 1928 with intent to evade tax. If this question is decided in petitioner’s favor, we need go no further as any deficiency that might be due would be barred by the statute of limitations for the reason that the exceptions to the statute provided for in section 276 of the Revenue Act of 1928 would not be applicable and the deficiency notice was not mailed to petitioner within the two-year period of limitations provided for in section 275 (a) of the same act.

Congress has provided (sec. 601, Revenue Act of 1928) that “in any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax * * * the burden of proof in respect of such issue shall be upon the Commissioner.” In Duffin v. Lucas, 55 Fed. (2d) 786, the Circuit Court of Appeals for the Sixth Circuit said that “* * * it is a fundamental rule of judicial procedure that fraud can not be lightly inferred but must be established by clear and convincing proof.” In Henry S. Kerbaugh, 29 B. T. A. 1014; aff'd., 74 Fed. (2d) 749, the Board said:

* * * A charge of fraud has always been regarded as a serious matter in the law. Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence. George L. Rickard, 15 B. T. A. 316; M. Rea Gano, 19 B. T. A. 518; Budd v. Commissioner, supra.

The respondent contends (1) that the entire amount of $225,547.13 awarded to petitioner by the arbitration award was income to petitioner in 1928, $85,000 being actually received and $140,547.13 being constructively received; (2) that petitioner knew that his tax would be greater, due to the surtax brackets, if the full fee were reported in one year than if it were divided between two years, and, knowing this, caused Van Iderstine to delay paying him the full $225,547.13 during 1928; and, (3) that in any event, petitioner’s failure to report as income in any year the amount of $50,295.23 invested in Treasury certificates is sufficient evidence to justify a finding of fraud.

We think that, notwithstanding the $50,295.23 item was denominated in the award as a reimbursement to petitioner for capital expenditures, it should have been included in petitioner’s gross income for either 1928 or 1929. This case, in some of its features, is like that of Sara R. Preston, 35 B. T. A. 312. Whether the $50,295.23 item should have been included in income for 1928 as the Commissioner contends, or in 1929 when petitioner actually received the Treasury certificates into which the $50,000 fund had been converted, we need not decide. We do not have the year 1929 before us in this proceeding and therefore have no jurisdiction as to that year, and w'e are not called upon to decide that it should be included in 1928 income unless we hold that petitioner’s income tax return for 1928 was false or fraudulent with intent to evade tax. If it was not, then the statute of limitations has barred any deficiency. The arbitration award specifically stated that “The amount of said reimbursement is fixed at $50,000 and said Bonynge & Barker are to pay to said Barnes-as a reimbursement to his expenditure said amount and without claiming said amount, so paid, as a deduction on account of income tax, either Federal or State.” We do not think such a statement as above quoted would make the $50,000 item income to Bonynge & Barker (because they never received it); neither do we think it would relieve petitioner from including such a payment in gross income when he received it. We would so hold if we reached that question for decision.

But notwithstanding we would so hold, we can not hold that its omission from income in 1928 establishes that petitioner filed a false and fraudulent return for that year with intent to evade tax. Even if we assume, as the Commissioner contends, that petitioner constructively received the bonds in 1928 and should have included them in his gross income for that year, we can not hold that his failure to include them was due to a fraudulent intent.

Petitioner seems to have believed in good faith that, because of the recitations in the arbitration award, this $50,000 in question would be returned as income by Bonynge & Barker; that they and not he would have to return it and pay tax on it. Petitioner testified that he did not know until 1934 that Bonynge and Barker had not returned the $50,000 in question as a part of their income. In this state of facts we can not find that petitioner’s omission of this $50,000 item from his income tax return for 1928 was due to fraud with intent to evade the tax.

As to the item of $90,251.90, we think there is still less ground for holding that it was fraudulently omitted from petitioner’s income tax return for 1928. Cf. Sara R. Preston, supra. This item was not actually received in cash by petitioner until 1929 and, only by holding that it was withheld by Van Iderstine at the connivance of petitioner, as respondent alleges, could we hold that it was income to petitioner and was knowingly omitted from his income tax return for 1928 in order to lessen his income tax for that year.

Van Iderstine was dead at the time of the hearing and did not testify.

There is no evidence whatever that petitioner caused Van Iderstine to delay turning over to him any portion of the Monell fee. In fact, the evidence that was introduced shows that the opposite was true. Petitioner appears to have made every effort within reason to obtain his share of the fee as soon as possible. Petitioner was put on the witness stand by the respondent and testified that from October 29, 1928, until he had actually received his entire fee he continually endeavored to settle with Van Iderstine; that Van Iderstine “always had a reason” why he would not settle but “would not give it to me”; that at no time had he ever asked Van Iderstine not to pay him until after the first of January; that when he filed his return for 1928 he did not know what his income would be for 1929; that the delay in payment was not in any way brought about by himself; that up until January 8, 1929, he did not believe he could get the Treasury certificates simply by calling for them; that when he asked . Van Iderstine to “settle” with him, he considered that an indirect request for the delivery of the certificates as well as the balance of the cash; that he knew very little about income taxation; that he never considered himself fit for that type of work as he had no accounting mind; and that he never took an income tax case in his life.

After a careful consideration of all of the evidence, we hold that the respondent has not sustained his burden of showing fraud.

For us to hold that petitioner’s income tax return for 1928 was filed falsely or fraudulently with intent to evade tax would have to be based too much on inference. We would have to infer that Van Iderstine, if he were living, would testify in a way which would support respondent’s theory of the case. This we may not do.

It is therefore our opinion, and we have so found in our findings of fact, that petitioner did not file a false or fraudulent return for 1928 with intent to evade tax. This finding makes it unnecessary for us to decide whether any part of the $140,547.13 was constructively received by petitioner during the taxable year 1928, for the reason that any deficiency that might be due would be barred by the statute of limitations. Sec. 276 (a), Revenue Act of 1928.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Leech:

text:
    Margaret E. B. Fleming, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78416.
    Promulgated October 27, 1937.

      Paul G. Rodewald, Esq., for the petitioner.

      H. D. Thomas, Esq., for the respondent.
   OPINION.

Leech:

This proceeding arises upon the determination of a deficiency in income taxes against the petitioner for the calendar year 1931 in the amount of $3,990.12. The issues raised by the pleadings are: (1) the correct basis for determining the gain to petitioner from the sale, in 1931, of securities purchased in 1927 by a testamentary trust, and distributed to petitioner as remainderman after the death of the life beneficiary; (2) the correct basis for determining the gain to petitioner from the sale in 1931 of securities distributed to her as a residuary legatee; (3) the correct amount of the deduction to which petitioner is entitled by reason of her charitable contributions during the taxable year, under the Revenue Act of 1928, section 23 (n); and (4) the amount of credit on income tax to which petitioner is entitled under the Revenue Act of 1928, section 33 and section 144 (d).

We find the facts as stipulated.

John Eaton died on September 16, 1911, a resident of Pittsburgh, Allegheny County, Pennsylvania, leaving a will which was duly probated, paragraph 16 of which is as follows:

16. I hereby direct that the other half of my estate be invested by my Executor herein named in trust for the benefit of my daughter, Lulu Eaton Brown, and her daughter, Margaret Eaton Brown, during the lifetime of said daughter Lulu Eaton Brown. On the death of my daughter, Lulu Eaton Brown, I give, devise and bequeath the said one-half part of my said estate to my granddaughter, Margaret Eaton Brown, and direct that same be paid to her when she arrives at the age of twenty-one (21) years.

Margaret Eaton Brown, referred to in the paragraph quoted, is the petitioner.

Lulu Eaton Brown died on August 12, 1929, on which date the petitioner was over 21 years of age, and thereafter the trustee under the will of John Eaton filed his account. Thereafter, on January 22, 1930, the Orphan’s Court of Allegheny County, Pennsylvania, entered the following decree:

And Now, to-wit, January 22nd, 1930, the account in this case having been filed and confirmed nisi and having been examined and audited by the Court, upon consideration thereof it is decreed that the account be confirmed absolutely, and that the funds in the hands of the accountant, to-wit, $3,608,407.63, be paid in accordance with the schedule of distribution hereto attached and made part hereof unless exceptions are filed within ten days.
Per Curiam

Pursuant to that decree, the securities described in the schedule of distribution attached thereto were delivered and paid over to the petitioner on or after February 3, 1930. No exceptions either to the account or to the decree were ever filed.

During the year 1931 the petitioner sold certain of the securities delivered to her pursuant to the aforementioned decree. In her income tax return for the taxable year she used as the basis for determining her gains or losses from such sales amounts aggregating $1,100,488.75. In the notice of deficiency the respondent determined such basis to be the values of the respective securities on August 12, 1929, the date of the death of Lulu Eaton Brown, and determined such values to be in the aggregate amount of $1,074,265.

The securities thus sold were purchased on various dates in 1927 by the trustee under the will of John Eaton, the accountant whose account was confirmed by the decree of January 22, 1930, at prices which, were the fair market values thereof on the respective dates of purchase.

Louis Brown, the father of the petitioner, died on May 2, 1930, a resident of the city of Pittsburgh, Allegheny County, Pennsylvania, leaving a will, which was duly probated. By article X of that will the said Louis Brown devised and bequeathed his entire residuary estate to the petitioner, absolutely, if she should survive him. The executor of the will of Louis Brown duly filed his account, which was confirmed by the Orphans’ Court of Allegheny County, Pennsylvania, by the following decree entered January 28,1931:

And now, to wit, January 28, 1931, the account in this case having been filed and confirmed nisi, and having been examined and audited by the Court, upon consideration thereof, it is decreed that the account he confirmed absolutely, and that the funds in the hands of the accountant, to wit, $1,705,685.94, be paid in accordance with the schedule of distribution hereto attached and made part hereof, unless exceptions be filed within ten days.
Per Curiam

Pursuant to this decree, the securities described in the schedule of distribution attached thereto were delivered to the petitioner on or after February 9,1931. No exceptions either to the account or the decree were ever filed, and time for filing exceptions was not extended by the court.

At all times material, the procedure in the Orphans’ Court of Allegheny County, Pennsylvania, in connection with the accounting for and distribution of property of an estate or trust was as follows: The executor or other accountant prepared an account of his administration and filed it with the clerk of the court, who thereupon advertised the account, and all parties in interest had a certain time within which to file exceptions thereto. The account, together with the exceptions, if any, was audited by the court at a public hearing held by one of the judges. The auditing judge, after passing upon any exceptions to the account, then entered a decree settling and confirming the account absolutely, or as restated by the court. The decree usually provided that the funds in the hands of the accountant be paid in accordance with a schedule of distribution attached to and made part of the decree, unless exceptions should be filed within ten days. The decrees of January 22, 1930, and January 28, 1931, referred to and quoted from above, were in the usual form of decree. Such a decree of the Orphans’ Court is absolute unless exceptions are filed within ten days, unless the time be extended by the court. Under the Pennsylvania practice existing in 1930 and 1931 it was, and now is, necessary that exceptions be filed in order that an appeal may be taken from such decree. Under such decrees the distribution can be, and generally is, made immediately after the expiration of the ten days allowed for exceptions if no exceptions are filed within that period.

Included among the securities paid and distributed to the petitioner pursuant to the decree of January 28, 1931, were 887 shares of common stock of Bethlehem Steel Corporation, which, on February 9, 1931, had a fair market value of $48,674. The fair market value of those shares on January 28, 1931, was $44,350, which value the respondent used in the deficiency notice, as the basis for determining petitioner’s gain or loss upon the sale thereof during the year 1931.

During the taxable year 1931 the petitioner contributed the sum of $10,000 to the Diocese of Pittsburgh of the Protestant Episcopal Church and the sum of $3,615 to the Conference of Church Workers Amongst the Deaf. Those contributions or gifts were made exclusively to one or more of the uses described in section 23 (n) of the Revenue Act of 1928.

In the year 1931 the petitioner received interest upon obligations of corporations containing contracts or provisions commonly known as tax-free covenants of the character prescribed in section-144 (a) (1) of the Revenue Act of 1928, to the respective sellers of which she had paid at the time of purchase amounts aggregating $2,834.24 for interest accrued thereon to the date of sale. In her return for the year 1931 the petitioner excluded that amount of $2,834.24 received by her as interest upon those obligations from her income but did not claim, and has not been allowed, credit against the tax under section 33 of the Revenue Act of 1928 for taxes withheld at the source under section 144 of that act.

Issue No. 1.—Petitioner contends that her basis for computation of gain or loss on her sales of the securities distributed to her by the trustee under the Eaton will was their cost to the testamentary trust.

The Revenue Act of 1928 is controlling. The respondent argues that section 113 (a) (5) is applicable, by reason of the sentence therein which is:

* * * In all other eases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *

Accordingly, in computing the contested deficiency, respondent used as such basis the value of the securities when, he says, they were distributed to petitioner. This position is supported by the report of the Senate Committee on Finance, accompanying the Revenue Act of 1928, when it was introduced in the Senate. 70th Cong., 1st sess., Report No. 960, p. 26.

Petitioner denies the existence of the authority in the quoted sentence for such treatment, since, she says, she acquired these securities, not by will or intestacy, but by her purchase through the trustee, and, therefore, their cost to the testamentary trustee is her basis. Revenue Act of 1928, sec. 113 (a).

It may well be that these securities were purchased by the testamentary trust, and that the title to them was then acquired by petitioner, remainderman. George Emlen Roosevelt, Trustee, 28 B. T. A. 194. Cf. Brewster v. Gage, 280 U. S. 327; McFeely v. Commissioner, 296 U. S. 102, reversing 74 Fed. (2d) 1017. However, our immediately pertinent question is not when but how the petitioner, remainderman under the will of her father, not the trustee, acquired these securities. And, unless upon some theory of representation or agency of the trustee for the remainderman, petitioner, we see no reason for the conclusion necessary to petitioner’s position here, that the mode of acquisition by the trustee was that of the petitioner. But the testamentary trustee was not the agent of petitioner, the remainderman. The trustee was the creature of the decedent, made so by his will. It was thus designated as the continuing instrumentality of the decedent to execute his and not the will of the petitioner, remainderman. She neither controlled the terms of the trust nor its res until distributed to her. All she had before that distribution was a right to share therein in accordance with the terms of the testamentary trust, the right to which vested in her at the death of decedent. McFeely v. Commissioner, supra; Brewster v. Gage, supra. Thus, it was by virtue of the provisions of the testamentary trust created by the will of her father, that petitioner was the remainderman under that trust and received the securities in question. They may have been purchased by the trustee, but the petitioner acquired them by will. This would seem inherent in our decision in George Emlen Roosevelt, Trustee, supra, where it was held that the basis to the beneficiary of such property purchased by the trustee after the death of the testator and later distributed to the beneficiary, was controlled by section 204 (a) (5) of the Revenue Act of 1926. We, therefore, conclude that the quoted provision of section 113 (a) (5) of the Revenue Act of 1928 applies.

Petitioner contends, in the alternative, that, assuming section 113 (a) (5) does thus apply, the date of distribution within the purview of that section is the effective date of the decree of distribution of the Orphans’ Court of Allegheny County, Pennsylvania, which was February 3, 1930. It is the position of the respondent that the date of distribution in such circumstances as are here present was either August 12, 1929, the date of the death of the life tenant, or January 22, 1930, the actual date of entry of the nisi decree by the Orphans’ Court of Allegheny County in the audit of the account of the trustee under the will of petitioner’s father.

In considering this question, since we have held petitioner, re-mainderman, acquired the Eaton securities by will, we think the facts present essentially the case of a testamentary trust for the life of petitioner’s mother and a bequest of the corpus to petitioner on the death of the mother.

But, in such a situation, the mere falling in of the life estate of the mother does not effect a “distribution” within the contemplation of the quoted provision of section 113 (a) (5), supra. Van Nostrand v. United States, 18 Fed. Supp. 295. The normal and undoubted meaning of the term as there used is “separation or segregation from the trust estate, so that it [the bequeathed property] no longer forms any part or parcel thereof.” Willcuts v. Ordway, 19 Fed. (2d) 917. See also Mason v. Routzahn, 275 U. S. 175; Fidelity & Columbia Trust Co. v. Lucas, 66 Fed. (2d) 116; Matthiessen v. United States, 65 Ct. Cls. 484 (2 B. T. A. 921). Such separation or segregation did not occur here by the mere entry of the nisi decree. Since the record contains no evidence of capricious or unnecessary delay in securing the decree of distribution (First National Bank of Birmingham, Guardian, 31 B. T. A. 847), we think the disposition of this issue is controlled by Arthur E. Braun, Trustee, 29 B. T. A. 1161. Upon the authority of that decision, we conclude the date of distribution here was the effective date of the decree of the Orphans’ Court, mentioned above, to wit, February 3, 1930.

Issue No. 2.—The correct basis of the petitioner for the securities involved in the second issue is February 9, 1931, the effective date of the decree of the Orphans’ Court of Allegheny County, Pennsylvania, authorizing the distribution of those securities. Arthur E. Braun, Trustee, supra.

Issue No. 3.—On the third issue, we hold that petitioner is entitled to an additional deduction of 15 percent of the amount by which her income may be increased over that reported in her return, in the computation under this opinion under Rule 50, since the amount of the, contributions as stipulated exceeded 15 percent of the aggregate income asserted in the deficiency notice. Revenue Act of 1928, sec. 23 (n). Helvering v. Bliss, 293 U. S. 144.

Issue No. J¡..—Although apparently not in dispute, the stipulation does not reveal whether petitioner returned as income any interest received on bonds upon which tax was withheld at the source. We think she is entitled to a credit on contested income tax, of the amount of such, tax withheld at the source on the bond interest, only, which is included in her taxable income, as such. Revenue Act of 1928, sec. 33, and sec. 144 (d).

Decision will be entered under Rule 50.

       SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Property acquired after February 28, 1913.—The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * *

         SEC. 33. TAXES WITHHELD AT SOÜRCE.
      The amount of tax withheld at the source under section 144 shall be allowed as a credit against the tax.

       SEC. 144. WITHHOLDING OF TAX AT SOURCE.
      (d) Income of recipient.—Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return.


author: Arundell:

text:
    John Ernest Goldring, Petitioner, v. Commissioner of Internal Revenge, Respondent.
    Docket No. 87498.
    Promulgated October 27, 1937.

      H. B. Jones, Esq., for the petitioner.

      B. M. Coon, Esq., for the respondent.
   OPINION.

Arundell:

This proceeding raises two questions. First, whether or not the petitioner was a resident of the United States after May 24, 1933. Second, whether he is taxable on the income from the trust created in 1930 for the benefit of his wife and children. In determining the deficiency, herein the respondent regarded the petitioner as a resident of the United States during the entire year 1933, and treated as taxable to him the $9,600 payable to petitioner’s divorced wife for her use and also the $2,400 payable to her for the support of the two children.

In the amended petition filed the petitioner alleges that he “ceased to be a resident of the United States on or about the 24th day of May, 1933.” This we take to be a concession that he was a resident in 1933 until May 24. However, if the quoted allegation can be construed otherwise, the evidence satisfies us that he was a resident from January 1 to May 24, 1933. He bought a house in California in the summer of 1930 and he and his wife intended to establish their residence there. Because of subsequent marital difficulties he never occupied the house, but it is at least doubtful whether he abandoned his intention of establishing residence in California. He retired from active business in Canada,- closed his house there, and went to California in September 1930. The petitioner’s testimony is that after he and his wife separated he decided that he would not become a permanent resident of the United States. Permanent residence is not necessary to bring an alien within the definition of a resident. See article 1022, Regulations 77. Cf. J. P. Schumacher, 32 B. T. A. 1242. The evidence as to petitioner’s activities from September 1930 to 1933 is very meager. His testimony is that in that period he was in California “off and on. I was touring around a great deal * * *. We were back and forth to Canada * * *. I was not a permanent resident of any place. I spent some weeks out in the south part, California, in a beach home.” In the year before us, 1933, he was living in California at the beginning of the year and remained there until May 24. During the period when, as he testified he was in California “off and on”, he several times declared himself to be a resident of California. These declarations appear in the written documents of August 1, 1930, and February 17, 1932, which are described in the findings of fact. The evidence on the point of residence up to May 24, 1933, not only fails to overcome the presumptive correctness of the Commissioner’s determination, but tends to support it. For the remainder of the year we are satisfied that the petitioner was not a resident of the United States. The evidence is that on May 24, 1933, he and his second wife packed up their possessions and departed from the United States with the definite intention of taking up residence in Canada and that they carried out that intention. They have been in the United States since then, but only for temporary visits. Consequently, we hold that the petitioner can be classified as a resident in 1933 only for the period ending May 24.

The decisions concerning the taxability of income from trusts established by husbands for the benefit of wives have been recently summarized in Robert Glendinning et al., Executors, 36 B. T. A. 486, as follows:

It is now well settled, following the decision in Douglas v. Willcuts, 296 U. S. 1, that the income of a trust paid directly to a divorced wife is taxable to the husband who created the trust, whenever the purpose of the trust and the provision for payment of its income is to satisfy a legal obligation of the husband to support and maintain his wife, whether the satisfaction of that obligation results from the payment of alimony decreed by a competent court, or from the carrying out of a separation agreement which provides for such payments in lieu of alimony, dower, or other rights of the wife in the property of the husband. Albert C. Whitaker, 33 B. T. A. 865; Helvering v. Brooks, 82 Fed. (2d) 173. See also Helvering v. Coxey, 297 U. S. 694, reversing 79 Fed. (2d) 661; Helvering v. Stokes, 296 U. S. 551, reversing 79 Fed. (2d) 256.
In several recent cases, however, this proposition has been limited, where it appeared that the legal obligation of the husband to support and maintain his wife had been terminated, under the law of a particular state, by divorce or by subsequent remarriage of the wife; Harry S. Blumenthal, 34 B. T. A. 994; aff'd., — Fed. (2d) — (June 28, 1937); Henry Oliver Rea, 35 B. T. A. 1132; Edward T. Hall, 36 B. T. A. 398. And in these cases it was held that the income of the trust distributed to the wife after divorce or remarriage is not taxable to the husband.

Also, it is now held that income from trusts created for the support of minor children is taxable to the settlor where he is under a legal duty to support them. Commissioner v. Schweitzer, 296 U. S. 551; Commissioner v. Grosvenor, 85 Fed. (2d) 2.

The $400,000 face amount of securities placed in trust in this case was held by the trustee on two trusts; one for the benefit of the wife for life and the other for the benefit of the two children. The corpus of each was $200,000. At the time the trust instrument of August 1, 1930, was executed by petitioner and his wife they had reached an agreement settling their dispute over the proceeds of the sale of the Simpson’s stock. The trust instrument refers to the fact that an agreement has been reached in connection with certain claims made by the wife. The settlement agreement of the same date refers to the creation of the trust. The settlement agreement provides that “in consideration of the settlement of said stocks and securities [in trust] and .of certain other good and valuable consideration” the wife accepts the trust provisions in settlement of her claims in connection with the Simpson’s stock and releases her dower in a described parcel of Canadian realty and in any of the lands owned by the petitioner. These facts bring the case within the holding of Helvering v. Brooks, supra. There a husband created an irrevocable trust, to pay the income to his wife as a settlement of their property rights arising from the marital relation. A divorce decree subsequently granted to the wife contained no provision for alimony or settlement of property rights. The opinion reads in part:

* * * The taxpayer argues that there is a distinction between an agreement to pay alimony and an agreement for the settlement of property rights between husband and wife. The asserted distinction is without substance on the present issue. Whether the trust income is used to discharge the husband’s duty, made specific by agreement, to support the wife, or to discharge an obligation to pay her agreed sums for a release of rights in his property cannot be material in determining the taxability of the husband. The creation of a trust the income of which is to be used to discharge any legal obligation of the settlor enables him to enjoy the benefit of the income; hence the income is properly taxable to him.

See, as apparently contra to the Brooks and Coxey cases, Commissioner v. Tuttle, 89 Fed. (2d) 113.

The argument of the petitioner follows that made in the Brooks case, supra, claiming a distinction between agreements for settlement of property rights and agreements in contemplation of divorce for the purpose of discharging a husband’s family obligations. If any such distinction can be drawn from the decided cases it can. not he made here. Although the petitioner testified that the matter of a divorce had not been mentioned when the agreements of August 1, 1930, were executed, it is obvious from the entire record that a separation was imminent. Some marital difficulty had arisen in June 1930; this was followed by the wife’s demand for some $450,000 representing the proceeds of the stock; shortly after the agreement the wife sold off the household furniture and, as the petitioner testified, he was forced to move to a hotel in Toronto and Mrs. Goldring went to California. Moreover, the language of the agreements here definitely establishes that they were entered into for the specific purpose of providing for the support of the petitioner’s wife and children. Under the trust agreement the wife was to receive certain sums for life “for her separate maintenance and support” and specified amounts for the “ordinary support” of the children. Consequently, it can not be said that they were solely for the purpose of settling the wife’s claim growing out of the Simpson’s stock or that they were made without reference to petitioner’s obligations to support his wife and children. This case is not like the case of Henry Oliver Rea, 35 B. T. A 1132, where under state law there was no obligation on the part of the husband to support his wife after divorce. See also Edward T. Hall, 36 B. T. A. 398. The statutes of California, applicable here, make it discretionary with the divorce court to compel the husband to provide for support and maintenance of the wife and children. Secs. 137, 139, 142, Civil Code of California. We are of the opinion that all of the income distributed to the wife in 1933 prior to May 24 is taxable to the petitioner for the reasons above given. If it can be said that the income from $200,000 of the trust fund is primarily for the support of the children, rather than in settlement of the wife’s claimed property rights, then that part of the income becomes taxable to the petitioner under the Schweitzer and Grosvenor cases, supra. The son did not become of age until November 1,1934, which was after the taxable period. The daughter became of age on. May 3, 1933. On May 1, 1933, she received the last installment' of the amount set out in the findings of fact as. the amount paid her in 1933 prior to the time that the petitioner gave up residence in the United States.

The petitioner having failed to file a return for the year 1933, the imposition of a 25 percent penalty is mandatory. Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519.

Decision will be entered under Rule 50.


author: Sternhagen:

text:
    Wytheville Building & Land Fund Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82775.
    Promulgated November 2, 1937.

      Walter E. Barton, Esq., for the petitioner.

      Francis L. Van Haaften, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner having determined that petitioner was not exempt from tax, it petitions on the ground that it is, within section 103 of the Revenue Act of 1932, a “ (4) Domestic building and loan association substantially all the business of which is confined to making loans to members.”

It is not necessary to consider whether the petitioner may properly bear the statutory label of domestic building and loan association. If, like the 1918 Act, the statute controlling the present case carried no further qualification, it might be necessary because of the recognition of it by the Virginia Corporation Commission as a building and loan association to treat it as within this category of the revenue act. United States v. Cambridge Loan & Building Co., 278 U. S. 55. But the revenue acts since 1921 have carried a limitation which narrowed the category to those “substantially all the business of which is confined to making loans to members”,, and the limitation was primarily designed to exclude mortgage and investment companies operating in the guise of building and loan associations. Employees Industrial Loan Association, 27 B. T. A. 945.

The petitioner claims to be within the narrower definition because the method of its operation is to make every borrower a member. Colloquially it speaks of the owners of its 250 outstanding shares as its “permanent” members and those who sign the prescribed form as an incident to a loan as its “installment” members. None of the former are among those to whom loans are made, and none of the latter are in any way interested in the earnings or have a voice in the corporation’s affairs. The so-called shares for which a borrower is treated as subscribing are simultaneously assigned and redeemed. They are never issued and never are outstanding. No matter how successful the corporation may be, the borrower’s obligation as to loan and interest remains fixed throughout the term, and there is no offsetting benefit from the company’s prosperity. See Johnstown Building & Loan Association, 6 B. T. A. 463. We think they were not members; and, since all the petitioner’s business was making loans to them, it can not be found as a fact that substantially all its business was confined to making loans to members. Without such a finding there is no exemption from tax. Liberally as the exemption should be applied, United States v. Cambridge Loan & Building Co., supra; Permanent Loan & Savings Association, 2 B. T. A. 132; South Euclid Savings & Loan Co., 14 B. T. A. 1079; Richland County Building & Loan Association, 15 B. T. A. 537; Guaranty Building & Loan Co. of Marion, Indiana, 27 B. T. A. 754, its limits are not to be overridden by an artificial ritual which is without substance. There must be some evidence of cooperative effort to reduce burdens and share benefits, and nothing of this sort appears in this petitioner’s business. It seems to be a straight lending business, of which the profits are distributed to its 35 shareholders. See Law of Federal Income Taxation, Paul and Mertens, vol. 3, sec. 32.06.

Judgment will be entered for the respondent.


text:
    J. S. Rippel & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59009.
    Promulgated November 2, 1937.

      John A. Conlin, Esq., for the petitioner.

      Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Black :

On June 29,1934, the Board’s report in this proceeding was promulgated and on August 6,1934, the Board’s decision pursuant to its report was entered to the effect that there is a deficiency in petitioner’s Federal income tax for the year 1928 in the amount of $1,920.01. No petition for review to a United States Circuit Court of Appeals was ever filed in the proceeding. On October 14, 1937, petitioner filed a motion for reconsideration, alleging as grounds therefor, among other things, as follows:

That said decision of the Board was rendered in error, because:

(1) A memorandum decision in an issue of exact similar facts was made by this Board in Philip N. Lillienthal and reversed by the United States Circuit Court of Appeals for the Ninth Circuit on December 5,1935 (C. C. A. 80 Fed. 2nd, 411)
(2) Also see decision by the Board in Frank M. McNabb, 33 B. T. A. 192, in which Member Trammell, who wrote the opinion in the Rippel case, stated:
“I now think that the Rippel case was in error, and should not be followed.”
(3) Further, the decision by the Supreme Court in John J. Watts supports the now contention that the Rippel & Co. decision by this Board was in error.
The decision in the Rippel ease by the Board was promulgated June 29, 1934, and Order entered August 6, 1934.
Petitioner, Rippel & Co., did not appeal to the Circuit Court but paid the tax under protest, and, under date of January 7, 1935, lodged with the Bureau of Internal Revenue claim for refund, which has been examined by the Commissioner" of Internal Revenue and rejected in view of the final decision by this Board.
In fairness and in justice to petitioner it is urged that this Board reopen and reconsider its decision because of subsequent decisions in the higher courts holding that facts in issue similar as those in the Rippel ease were non-taxable reorganizations.
(See Buttgenback & Co., 63 Fed. (2d) 630, granting petition to review)
(See also Garden City Feeder Co., 27 B. T. A. 1132)

If the Board had authority and jurisdiction to entertain petitioner’s motion for reopening and reconsideration of its report promulgated June 29, 1934, and its decision entered August 6, 1934, it might be granted.

The decision of the Board in the case of J. S. Rippel & Co., 30 B. T. A. 1146, appears to be in conflict with the opinion of the United States Circuit Court of Appeals for the Ninth Circuit in the case of Lilienthal v. Commissioner, 80 Fed. (2d) 411, involving a similar transaction. However, the Board’s decision in the J. S. Riffel & Co. case has now become final and the Board does not consider that it has any power or authority to reopen it. Section 1001 (a) of the Revenue Act of 1926, as amended by the Revenue Act of 1932, reads as follows:

The decision of the Board rendered after the enactment of this act * * * may be reviewed by a Circuit Court of Appeals, or the Court of Appeals of the District of Columbia, as hereinafter provided, if a petition for such review is filed by either the Commissioner or the taxpayer within three months after the decision is rendered.

As has already been stated, the Board’s decision in the J. S. Rippel & Co. case was entered more than three years ago and no petition for review thereof was filed with any United States Circuit Court of Appeals. Section 1005 of the Revenue Act of 1926 provides the date on which the Board’s decision becomes final. It reads in part as follows:

The decision of the Board shall become final—
(1) Upon the expiration of the time allowed for filing a petition for review, if no such petition has been duly filed within such time * * *.

It seems plain that under the facts above stated, and the provisions of the foregoing statute, the Board’s decision has become final and that we are now without any statutory authority to reopen it, notwithstanding it appears that an error of law may have been committed in the rendering of our decision.

It is well settled that the Board is a tribunal of limited authority and jurisdiction, and where the statute provides that our decisions shall, under certain circumstances, become final, we have no power to reopen and change them when such finality has taken place. The statute which prescribes when the Board’s decision shall become final is somewhat similar to a statute of limitation. It is a statute of repose. It works for and against the Government, as it works for and against the taxpayer. There have been cases decided by the Board in favor of the taxpayer where no petition for review was filed and the Board’s decision has become final, where a subsequent decision by the Supreme Court of the United States on the same point has shown that the Board’s decision was wrong. The Commissioner is not permitted, however, in such cases where the Board’s decision has become final, to reopen them. The same rule must naturally and properly apply to the taxpayer.

We think the case of Buttgenbach & Co. v. Commissioner, 63 Fed. (2d) 630, cited by petitioner, is distinguishable on its facts. In that case both parties stipulated that an error had been made because of a mutual mistake, and joined in asking the Board to correct it. We have no such stipulation here. In the instant case, there was a hearing on the merits and the error in the Board’s decision if any, is one of law and not one occasioned by a mutual mistake of fact between the parties.

We do not see where the case of Garden City Feeder Co., 27 B. T. A. 1132, also cited by petitioner, has any application. In the latter case no question whatever had arisen as to the Board’s decision having become final. No such question was in the case. For the reasons above stated, an order will be entered, denying petitioner’s motion for reopening and reconsideration.