text:
    L. O. Koven & Brother, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 108105.
    Promulgated August 5, 1942.

      Irving Warshaw, G. P. A., for the petitioner.

      B. S. Garnett, Bsq., for the respondent.
   OPINION.

Mellott:

The Commissioner determined the following deficiencies in income tax for the calendar years 1936 and 1937:

1936_ $2,767.60
1937_ 4,167.16
Total_ 6, 934. 76

The sole issue is whether respondent erred in denying a credit in the amount of $15,624.24, claimed under section 26 (c) of the Revenue Act of 1936, in computing the surtax for each year on petitioner’s undistributed profits.

The proceeding was submitted upon a stipulation of facts, documents introduced in evidence without objection, and admissions in the pleadings. The facts are found to be as stipulated. The following summary will suffice for present purposes.

Petitioner is engaged in the manufacturing business in New Jersey and filed its income and excess profits tax returns for the taxable years with the collector of internal revenue for the fifth district of New Jersey. Its books were kept and its returns were made upon an accrual basis.

Under date of September 15,1933, petitioner entered into a written contract with Henrietta Koven in which it was agreed that the corporation was indebted to her in the sum of $156,242.39. The contract provided that the indebtedness was to be evidenced by a bond of the corporation in that amount payable September 15, 1943, with interest at the rate of 6 percent per annum.

In order to provide for additional assurance of the payment of the bond when due it was agreed that a mortgage be executed, which would be a valid first lien on the real estate; that the bond and mortgage be in form provided by the creditor; and that interest be paid monthly until the principal sum should be fully paid and satisfied. In addition to these provisions the agreement stated:

2. (a) It is expressly understood and agreed that the Corporation set aside as a reserve from the profits of the Corporation for the year 1933, a sum equivalent to ten (10%) per cent of the face amount of the debt or Fifteen Thousand Six Hundred and Twenty-Four 24/100 ($15,624.24) Dollars and a like amount shall be set aside as a reserve from the annual profits or earnings of the Corporation each and every year thereafter until the said reserve aggregates the amount of the said debt or until the debt evidenced by the within referred Bond and Mortgage is fully paid.
(b) The Corporation covenants and agrees that until the Bond to Koven is fully paid only the yearly profits of the Corporation which shall be in excess of the amount required to be set aside as hereinabove provided may be used for the payment of dividends.
(e) The corporation further covenants and agrees that in case the amount of the net profits of the Corporation during any year be less than the amount required to be set aside as a reserve for the amortization of the Bond and Mortgage hereinbefore provided, then, in such event any deficiency shall be set aside out of the free and unrestricted surplus of the Corporation from prior years and in case there be no free and unrestricted surplus, then such deficiency shall be added to the amount of reserve for the amortization of the Bond and Mortgage required to be set aside out of the earnings of the next succeeding years and the Corporation covenants and agrees not to pay any dividends out of the succeeding year’s profits until such deficiency, plus the amount of reserve required to be set aside for the then current year be earned and are set up as a reserve on the books of the Corporation, restricting same from being used for the payment of dividends.
3. It is expressly understood and agreed that upon the full payment of the debt to Koven, the Corporation shall be fully released from the restrictions here-inabove provided with respect to the payment of dividends.

The following schedule shows petitioner’s adjusted net income for each year and its earned surplus at the beginning of the year:

Petitioner set up on its books an account called “Eeserve for Amortization of Mortgage.” At the end of each year it added $15,624.24 to this account. The amount in the account at the end of each year was:

1983_$15, 624. 24
1934_ 31,248.48
1935_ 46,872.72
1936_ 62,496.96
1937_ 78,121. 20

“No action was taken by petitioner to set aside the sum of $15,624.24 in either of the years 1936 and 1937, or in any other year, other than to set up the reserve on its books of account * * *. Petitioner at all times had the use and control of the aforesaid funds, and such funds were all held in a general bank account and used in its business as occasion demanded. No trustee was ever designated for the purpose of holding funds for the amortization of the indebtedness in question. The creditor never at any time made any examination of the books of the corporation.”

The entire amount of the indebtedness to Henrietta Koven was unpaid on December 31,1937.

In its income and excess profits tax returns for each of the taxable years petitioner, on line 28, listed the amount of $15,624.24 as a “Credit for Contracts Eestricting Dividend Payments”, deducting this amount, together with other items not now in controversy from its adjusted net income. In determining the deficiencies in tax the Commissioner disallowed the claimed credit and made other adjustments not now in issue.

Upon brief the parties discuss the applicability of subdivisions (1) and (2) of section 26 (c) of the Eevenue Act of 1936, shown in the margin.

Petitioner contends that the contract meets every requirement of section 26 (c) (1). It can not be gainsaid that there was a written contract; that it was executed prior to May 1, 1936; and that it contained a provision expressly dealing with the payment of dividends. "When we seek to find the amount which is “equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year (s) as dividends without violating” the provision of the contract, the answer is not so readily apparent.

Petitioner argues that article 26-2 of Regulations 94, construing section 26 (c) (1), is “improper, unreasonable, arbitrary and capricious.” It takes particular exception to the interpretation that the credit may not be allowed where a corporation is merely required to set aside periodically a sum to retire its bonds or where the applicable contract merely provides that while its bonds are outstanding the current assets shall not be reduced below a specified amount. It also criticises the portion of the regulation dealing with the credit under (c) (2), especially the interpretation that a provision of a contract merely requiring the corporation to retire annually a percentage or amount of the bonds, to maintain a sinking fund to retire all or a certain percentage of the bonds at maturity, or to pay into a sinking fund for the retirement of bonds a specified amount based upon a percentage of gross sales, gross income, or finished products does not entitle a corporation to credit under this subdivision of the statute.

We agree with petitioner’s major thesis that the Treasury Department can not, by regulation, add to, amend, or alter an act of Congress. The regulation in question, however, is, in our judgment, valid and not subject to the objections urged by petitioner. It has been before the Board in several cases and has been approved. See, for example, Honokaa Sugar Co., 43 B. T. A. 151; and Henry Hill & Timber Co., 43 B. T. A. 1073. In each of the cited cases the Commissioner’s interpretation that the contract must be one which operates as a legal restriction against the corporation as to the amount which it can distribute within the taxable year as dividends was approved. The statute, being “in the nature of a gratuitous special deduction” (Atlantic Co. v. Commissioner, 129 Fed. (2d) 87, must be strictly construed. Cf. Moloney Electric Co. v. Commissioner, 120 Fed. (2d) 617; Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46.

Petitioner insists that in determining whether the credit should be allowed under section 26 (c) (1) the accumulated or free surplus should not be taken into consideration. It says:

The surtax on undistributed profits does not apply to the surplus of corporations accumulated in prior years. The amount taxable is computed on the adjustment of the net income of the corporations for the current taxable year.

The statement is correct so far as it goes; but it does not aid petitioner under the facts now before us. While accumulated surplus is not to be subjected to the surtax, it must be considered in determining the amount which can be distributed within the taxable year without violating the provisions of a written contract. Trianon Hotel Co., 44 B. T. A. 1073. Of course, if the contract restricts payment out of the accumulated earnings, this provision must be considered in determining the amount which Can be distributed. Columbia Concerts, Inc., 46 B. T. A. 1072. Cf. Kilby Steel Co., 41 B. T. A. 1237. But petitioner’s contract did not so restrict it. On the contrary it was specifically required to use its “free and unrestricted surplus * * * from prior years” if its net earnings were less than $15,624.24. Under the circumstances we think it must be held that petitioner’s “free and unrestricted surplus from prior years” is to be taken into consideration in determining the amount which it could distribute without violating the contract. Giving effect to the stipulated facts the amount for each taxable year is as follows:

It is obvious that the amount which petitioner could have distributed as a dividend in each of the years is in excess of its adjusted net income. The credit under section 26 (c) (1) is limited to the excess of the latter over the former. Since there is no excess, no credit may be allowed under this subdivision. Cf. Central West Coal Co., 44 B. T. A. 661 (on appeal, C. C. A., 7th Cir.); Thew Shovel Co., 45 B. T. A. 920 (on appeal, C. C. A., 6th Cir.).

But is petitioner entitled to a credit under the provisions of section 26 (c) (2)? This section requires that there be: (1) a written contract executed prior to May 1, 1936; (2) that the contract contain a provision expressly dealing with the disposition of earnings and profits of the taxable year; and (3) that it require a portion of the earnings and profits of a taxable year: (a) to he paid within the taxable year in discharge of a debt, or (b) to he irrevocably set aside in the taxable year in discharge of a debt. When the above conditions are met, then the credit may be given to the extent that such amount (a) has been paid or (b) has been set aside. Antietam Hotel Corporation v. Commissioner, 123 Fed. (2d) 274.

The contract between petitioner and Henrietta Koven meets most of these requirements. It was executed September 15, 1933, and contains a provision dealing with the disposition of earnings and profits of the taxable year. It does not require that a portion of the earnings and profits be paid during the taxable year in discharge of a debt and no payment was made. It does require, however, that $15,624.24 “be set aside as a reserve from the annual profits or earnings of the Corporation” each and every year from and including 1933 “until the said reserve aggregates the amount of the said debt or until the debt evidenced by the within referred Bond and Mortgage is fully paid.”

The stipulated facts have been set out above and need not be repeated. Briefly summarized, they show that no action was taken by petitioner to set aside the $15,624.24 “other than to set up the reserve on its books of account”; that it at all times had the use and control of such funds; that no trustee was ever designated for the purpose of holding them; and that they “were all held in a general bank account and used in its business as occasion demanded.” Examination of the balance sheet attached to its return for 1937 indicates that its business had actually demanded the use of some of the amount; for while its “Reserve for Amortization of Mortgages” was $78,121.20 and its “Free Surplus” was $70,359.08, its cash on hand was only $34,233.81.

Respondent urges that the act of petitioner in creating the book reserve while continuing to use the money in its business can not be considered as meeting the requirements of the statute and that the intent of Congress when it inserted the words “or to be irrevocably set aside” in the statute was that such money should be placed beyond the reach and control of the owner and held for a particular purpose. This was the view taken by the Board in construing a similar expression in section 351 (b) (2) (B) of the Revenue Act of 1936, as amended by section 355 of the Revenue Act of 1937, having reference to deductions in the computation of personal holding company surtax. Securities Co. of New Jersey, 45 B. T. A. 1048. In commenting on the use of the word “irrevocably” it was pointed out that the Senate Committee on Finance (S. Rept. No. 1242,75th Cong., 1st sess.) had said:

⅜ * * The wor(j “irrevocably” is added to protect the revenue, so that amounts may not be set aside for retirement of debt, and deductions secured, although finally such amounts are never used to retire the indebtedness.

Conclusion was reached that the book entry, setting aside a portion of the net profits for the purpose of retiring its bonded indebtedness, did not constitute an irrevocable setting aside of profits within the meaning of the statute.

In the cited case it was pointed out that “The ordinary meaning of the word ‘irrevocable’ is that the action referred to is incapable of being recalled or revoked; past recall.” If funds are “irrevocably set aside” for the payment of a debt, there must be some definite act which divests the corporation’s control over them. Antietam Hotel Corporation v. Commissioner, supra.

The cases cited and relied upon by petitioner have been examined but are believed to be distinguishable on their facts. Commissioner v. Strong Manufacturing Co., 124 Fed. (2d) 360; certiorari granted, 316 U. S. 651, and Antietam Hotel Corporation v. Commissioner, supra, involved the question whether there was an actual setting aside of earnings in the taxable year — not whether there was an “irrevocable” setting aside. In Carolina-Florida Realty Co., 46 B. T. A. 777, the amounts were required to be, and were, paid to a trustee for deposit in a sinking fund. Prudential Financial Corporation of Quincy, 46 B. T. A. 796 (on appeal, C. C. A., 1st Cir.), involved facts more nearly analogous to those in the instant proceeding. In that case the contract provided that the corporation “shall irrevocably set aside fifty percent (50%) of its net earned income each ¿alendar year for the retirement or payment of the principal amount of Certificates of Indebtedness.” The resolution of the board of directors directed that the amount in question be “irrevocably set aside in a special fund or reserve account * * * to be used exclusively for the retirement of the certificates of indebtedness.” This was done. Discussing whether the setting aside was irrevocable, this Board pointed out that the contract “required petitioner to ‘irrevocably set aside * * *’ ” the amount; that this was a condition precedent to the purchase of certificates from petitioner; that there clearly was consideration for the resolution of the board of directors; and “because of the presence of such consideration, the book entries * * * could not be reversed at the will of the directors.” Answering another con- ' tention of the Government, it was pointed out “that the funds actually were retained in petitioners bank account and were neither used in the business of petitioner nor in the making of choice risk loans.” In the instant proceeding there was no corporate resolution and the contract did not require that there be an irrevocable setting aside. Petitioner’s creditor, for aught that appears in this record, had not seen fit to make an irrevocable setting aside, a condition precedent to the loan. Good faith on the part of the debtor would no doubt require that it refrain from reversing the entries sotting up the reserves; but it clearly had the power to do so. There was nothing irrevocable in the action taken by this petitioner. It amounted to no more than a reminder that the portion of its surplus contained in the so-called reserve account was not available for the payment of dividends. No money was actually set aside for the payment of a debt, the sums credited to the account remained completely subject to petitioner’s dominion and control, and it continued to use them in, and subject them to, the risks of its business. Moreover the contract contemplated that the amount of the book reserve should be used precisely as it ■was used in petitioner’s business.

Under the present facts it can not be found that there had been an “irrevocable” setting aside of earnings and profits in the taxable years nor can a conclusion to that effect be reached. It follows that petitioner is not entitled to the claimed credit under section 26 (c) (2), supra.

Decision will be entered for the respondent.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the ease of a corporation the following credits shall he allowed to the extent provided in the various sections imposing tax—
      »**«*♦*
      (c) CONTRACTS RESTRICTING PAYMENT OF DIVIDENDS.-
      (1) Prohibition on payment of dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.
      (2) Disposition of profits of taxablf. year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1036, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30,1936.


source: Caselaw Access Project

author: Arundell:

license: Public Domain

text:
    The Scottish American Investment Co., Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent. British Assets Trust, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent. Second British Assets Trust, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104249, 104250, 104251, 108440, 108441, 108442.
    Promulgated August 6, 1942.

      Marion N. Fisher, Esq., for the petitioners.

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

Arundell:

The only question before us is whether or not petitioners are resident foreign corporations taxable under section 231 (b) of the Revenue Acts of 1936 and 1938. Petitioners contend that they were engaged in business in the United States during the taxable years and had an office or place of business here. They maintain that for these reasons they were resident foreign corporations during the taxable years. Respondent argues that petitioners had no real office or place of business in the United States and transacted no business in this country. Pie argues that petitioners’ “office” was engendered solely for tax purposes and had not the substance of a real office.

A resident foreign corporation is defined in section 231 (b) as a foreign corporation engaged in trade or business within the United States or having an office or place of business here. In Linen Thread Co., Ltd. v. Commissioner, 128 Fed. (2d) 166, the Second Circuit Court of Appeals held that the terms “office” or “place of business” are not “mutually exclusive and though used in the statute in the disjunctive do not necessarily mean that an office may not be a place of business or the latter be but an office. Yet they apparently were not used synonymously * * The court further placed its stamp of approval on the Commissioner’s regulations (art. 231-1 (b), Regulations 101, promulgated under the Revenue Act of 1938), which provide that,

Whether a foreign corporation has an “office or place of business” within the United States depends upon the facts in a particular case. The term “office or place of business,” however, implies a place for the regular transaction of business and does not include a place where casual or incidental transactions plight be, or are, effected.

Other cases that throw light on the question presented are Aktiebolaget Separator, 45 B. T. A. 243; affirmed per curiam, 128 Fed. (2d) 166, and the Board’s opinion in B. W. Jones Trust, 46 B. T. A. 531.

With these fundamental concepts in mind, a brief resume of the facts will be helpful in reaching the conclusion whether or not petitioners have established within the United States an “office or place of business” within the meaning of the statute.

Petitioners are among the very largest of the foreign investment trusts with American holdings. Their investments were made primarily in conservative companies and they were interested in safety and an adequate return rather than in capital enhancement. The American investments represented many millions of dollars. It is not questioned that during the taxable years petitioners were actively engaged in carrying on the business for which they were organized.

Prior to December 1936 these petitioners had an arrangement with J. P. Morgan & Co. and the National City Bank to collect the income from their American securities and to otherwise keep them advised with reference to these securities. While these arrangements appear on the whole to have been satisfactory, there was some dissatisfaction with the failure to receive prompt information about the companies in which petitioners held securities and the Scottish company some time before had been required to pay more than $200,030 interest to the United States Government by reason of its failure to promptly pay certain taxes which it did not realize were due. In order to secure better representation within the United States and because the Revenue Act of 1936 offered certain tax advantages to foreign corporations that established an office or place of business within the United States, petitioners decided in December of that year to establish such offices and took steps to that end by the designation of Cooper as assistant secretary of each of petitioners. He immediately and within the month rented space and opened offices and started business.

The offices so established by Cooper in behalf of petitioners and maintained through the several years, in our judgment, meet the test of the statute. They were not places for the mere handling of a casual or incidental matter, but in these offices were carried on regularly the various transactions that these offices were established to care for. Cooper was in charge and had under his direction two full time employees. Full and adequate records, as detailed in our findings of fact, were kept for each petitioner in the United States offices and it was here that all dividend checks were sent and thereafter deposited, and action on all proxies determined. Petitioners’ home offices were kept informed of general developments in the United States and specific reports were made concerning petitioners’ United States holdings. Reorganization plans of corporations in which petitioners owned securities were carefully followed and recommendations were made to the home offices concerning what steps, if any, should be taken to protect petitioners’ interests. Stock rights and scrip when received were disposed of by petitioners’ American representative without consultation with the home offices.

All United States tax returns of petitioners were prepared by the staff located in the United States. Moreover, the office expenses were not inconsequential. The expenses of Scottish, for example, ranged from a low of $1,382.78 for the short period of operation in December 1936 to a high of $9,391.36 for 1938.

In our opinion, an office handling affairs to this extent must be regarded as real and substantial. It was here that a very large part of the affairs of petitioners in this country were taken care of. What we said in B. W. Jones Trust, supra, seems apropos:

* * * Here there is nothing artificial about the office maintained for the trusts. This office was not merely a name or desk space for receiving dividends (see Recherches Industriclles. 45 B. T. A. 253), but an office in the sense of the common everyday conception. It was not established for purposes of compliance with a statute but was maintained in this country because of the administrative necessity of having local supervision of its affairs. Whatever affairs of the trusts were conducted in this country were transacted through that office. * * *

Nor do we think one can take one by one each activity carried on in the American office of these petitioners and argue that each activity is not in and of itself the transaction of business. The collection of dividends and interest by a railroad that had leased its entire property and had ceased to function as such may not constitute the doing of business within the purview of the Revenue Act of 1909, McCoach v. Mine Hill & S. H. R. Co., 228 U. S. 295, but it does not follow that the collection of the income of a large investment trust from hundreds of different sources is not to be regarded as the transaction of business. To reason otherwise might well lead to the conclusion that investment trusts are not engaged in carrying on a business.

Even if it be true that tax considerations prompted the opening of the offices in the United States, it would be of no particular significance. Congress extended the invitation to foreign ■ corporations to establish an office or place of business in this country. So long as the office is not a sham but 'is a place for the transaction of business, petitioners qualify under section 231 (b). It should be noted that petitioners by opening offices in this country subjected themselves to the imposition of tax on certain gains on which they would not have been taxed had they been nonresident foreign corporations. See section 231 (a) of the Eevenue Acts of 1936 and" 1938 and Regulations 94 and 101, article 231-2 (a). Thus, if the petitioners had extensive capital gains in the taxable years they might well have been required to pay a greater tax by reason of being resident foreign corporations. The fact that the United States office was relatively small and that it was occupied by all three petitioners is not important. The joint occupancy of the office was a logical result of the fact that each of petitioners was engaged in a similar business.

We think petitioners have established that during the taxable years they had within the United States an office or place of business within the meaning of section 231 (b), sufra/ that the office was used for the regular transaction of business and not as a place where casual or incidental transactions might be, or were, effected. The conclusion reached requires that the year 1936 be accorded the same treatment as the latter years involved herein. The respondent is reversed.

Decisions will be entered under Rule 50.

       SEC. 281. TAX ON FOREIGN CORPORATIONS.
      *******
      (b) Resident Corporations. — A foreign corporation engaged in trade or business within the United States or having an office or place of business therein shall be taxable without regard to the provisions of subsection (a), but the normal tax imposed by section 13 shall be at the rate of 22 per centum instead of at the rates provided in such section.

       (b) Kesident Corporations. — A foreign corporation engaged in trade or business within the United States or having an office or place of business therein shall be taxable as provided in section 14 (e) (1).


author: Disney:

text:
    Stephen Hexter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105467.
    Promulgated August 6, 1942.

      Richard H. Lenin, Esq., and Harry N. Wyatt, Esq., for the petitioner.

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

Disney:

The prime question presented to us in this proceeding is whether the petitioner is taxable upon the income of a trust set up by him. The deficiency notice recites in that respect, in substance, that the income could be and was used to discharge the trustor’s obligations and to pay insurance premiums on policies on his life; therefore it is held that the trustor is subject to tax on the income under section 167 (a) (3) and section 22 (a) of the Eevenue Act of 1936. The latter contains the familiar general “definition” or statement as to what is included in income, and need not be set forth at length here. The more particular section, 167 (a) (3), is shown in the margin. Upon brief the respondent not only urges the applicability of the rationale of Douglas v. Willcuts, 296 U. S. 1, to the discharge of petitioner’s household obligations by trust income, and that exactly under the words of section 167 (a) (3) trust income paid premiums on life insurance policies on the trustor, but also suggests that there was reallocation of family income and that Helvering v. Olifford, 309 U. S. 331, requires taxation thereof to the trustor. The petitioner argues that he may not be taxed on the trust income in the absence of a requirement in the trust instrument requiring application of such trust income either to payment of insurance premiums upon his life or to discharge of his obligations, and urges that the life insurance policies belonged, and had for about three years belonged, wholly to his wife, who, after the trust was set up, paid the premiums from a bank account containing other moneys, sufficient for that purpose, as well as the trust income; also, that the wife was reimbursed by the petitioner for any trust income temporarily used by her for household obligations of the petitioner. On this issue the petitioner has the burden.

We first consider the question as to payment of premiums on life insurance policies on the life of the grantor of the trust. It is wholly true, as the respondent says, that the text of section 167 (a) (3) plainly provides for taxation to the grantor of a trust, of trust income “applied to the payment of premiums upon policies of insurance on the life of the grantor”; and it is true that here the premiums paid were upon such policies on the grantor’s life. Nevertheless, a reading of the cases on the subject convinces us that, even if we assume that trust income paid the premiums, the statute does not apply here, where there appears in the trust instrument no requirement that the trust income be so expended, and where the petitioner had, some three years before the trust was formed, transferred the policies absolutely to his wife, who is also the trustee-beneficiary who paid the premiums. Of the fact of such absolute transfer there can be no doubt, for although the respondent points out that the transfer was to the wife for her lifetime, the instrument of transfer recites that “all rights vested” in the petitioner’s wife only during her lifetime, but thereafter “the said rights of owner shall vest” in Lillie Benedikt, and after death of the survivor of the wife and Lillie Benedikt “said rights of owner” shall vest in the executors or administrator of such survivor. It is plain that no rights could revert to the transferor or his estate, and we think that the respondent erroneously invokes Burnet v. Wells, 289 U. S. 670, as indicating an interest in the policies continuing in petitioner. There the Court said, “The controversy is one as to the boundaries of legislative power”, and finding the statute plain, did not construe it. Louise B. Jonas, 40 B. T. A. 971 (975). In any event, the case did not involve policies assigned by the assured some year prior to the trust, and did involve a trust instrument making specific provision for use of trust income upon premi- • urns. We find in that case no assistance on this point. Nor do we find it in Henry A. B. Dunning, 36 B. T. A. 1222, strongly relied on by the respondent because of the fact that the policies there had been assigned by the trustor and the trust instrument did not require use of trust income upon premiums; for there it is emphasized that the suggestion was made by the trustor that trust income be used for insurance premiums, the beneficiary’s husband, the grantor, exercised control over the trust income, the use of trust income for the premiums was of benefit to the trustor, and the beneficiary had never before paid the insurance premiums. All of these elements are negatived in the instant case, where there was no suggestion and no control by the grantor, the wife had for about three years herself paid the premiums, and was amply able to do so from her own funds in the taxable years, and the payments were of no benefit to the grantor. In Frederick K. Barbour, 39 B. T. A. 910 (reversed on other grounds, 122 Fed. (2d) 165), we distinguished the Dunning case and held the trustor not taxable on trust income where, as here, the beneficiary paid the premiums on a policy on grantor’s life, but owned by the beneficiary, and there was no restriction on the use of the trust income. In George, Washington, Sr., 36 B. T. A. 75, we commented upon the fact that payments by the beneficiary of a trust of premiums upon policies on the trustor’s life were voluntary, not required of the. beneficiary by provision of trust, or agreement, and, though finding that the beneficiary may have used some trust income to pay premiums, held the amount of the premiums should not be taxed to the trustor. In Commissioner v. Jergens, 127 Fed. (2d) 973, the trustor, as here, could never receive anything from the accumulation or proceeds of life insurance, and the court held the trustor not taxable on the amount of premiums paid on life insurance, saying of section 167 (a) (3):

We think it plain, construing the whole section, that it is only when part of the income of the trust is held or, accumulated or held for future distribution to the grantor, or be distributed to the grantor, that premiums paid on life insurance policies donated to the trust are to be considered income of the grantor. In this case the grantor could never receive anything from accumulations or the proceeds of the insurance. To hold that the grantor had an economic interest in policies would require adding conjecture to conjecture as to what might happen in the future. We agree with the conclusions of the Board.

We conclude and bold that the petitioner was not taxable upon the amounts applied upon life insurance.premiums.

Nor do we find in the facts here grounds for holding that the trust income should be taxed to the trustor, under the doctrine of temporary reallocation of income within an intimate family group, under Helvering v. Clifford, Supra. True, the family group appears, but there is no right of revocation, no discretion vested alone in the grantor as to use of the trust fund or income, no possible reversion to him. He can benefit in no manner, presently or prospectively, by the trust, but parted permanently from all economic benefit from the corpus and income thereof. To say that because of the facts of husband-wife relationship and joint trusteeship the grantor retained control, despite the fact that a sole beneficiary was cotrustee, is to be blind to the reasons behind the respect paid, in section 167, to the position of one with substantial adverse interest — which the wife here had. With all ownership and co-equal trustee powers in the wife, the fact of family relationship should not, we think, be given the effect desired here by the respondent. In our view the Clifford case does not reach so far.

We next consider the taxability to petitioner of trust income with respect to use upon the trustor’s legal obligations. There is evidence that the wife paid household bills from the same bank account into which the trustee income was deposited to her credit, and was reimbursed, in part currently and in part later by cash, note and payment thereof at a date after issuance of the deficiency notice, and the respondent impugns the reliability of such proof of late payment. Except to the extent that, due to petitioner’s illness, the wife paid household bills and was currently reimbursed, pursuant to agreement by the petitioner, we do not rest our conclusion upon evidence other than the trust instrument. That agreement made no requirement that trust income be utilized to discharge the trustor’s obligations, of any nature. Absent such provision, the mere fact of payment from trust income is not alone sufficient to cause taxation to the trustor, even if we assume, without deciding, that payment from the account into which the trust income went is payment from such income. In Everett D. Graff, 40 B. T. A. 920, we distinctly held that lack of agreement or provision of the trust agreement for application of trust income to trustor’s obligation was sufficient to cause denial of taxation of trust income to him. There is no contention here that there was such agreement; only such fact of payment in discharge of obligation is urged. Henry A. B. Dunning, supra, and Ralph L. Gray, 38 B. T. A. 584, are also both to the effect that mere payment, without trust agreement, of trust income upon trustor’s debts, is not the criterion and does not require taxation to him. Jay C. Hormel, 39 B. T. A. 244 (reversed on other grounds 111 Fed. (2d) 1), refers to the two cases last cited and comes to the same conclusion. It is our opinion that under the trust agreement here involved the petitioner is not taxable upon trust income upon the ground that it was used to discharge the trustor’s obligations.

We come now to consider whether the respondent erred, as affirmatively alleged by him by amended answer, in allowing certain items claimed by the petitioner as business expenses. The principal item is salary paid to a secretary, with minor matters, including subscriptions to financial publications, rental on safe deposit boxes, telephone and telegraph. The burden here is of course upon the respondent. The evidence on the point is conflicting. The petitioner in his Federal income tax return for 1936 stated that his principal occupation or profession was that of “Director”, for 1931 “Director or investor.” He has been in a serious physical condition since 1929, and during the taxable years was ill for weeks at a time. His condition prevented his moving around or walking to any great extent, though at times he could walk around the block, and could go to his office in a taxicab. His ability to write was affected most of the time during the taxable years. However, directors’ meetings were held at his home when he was unable to attend. The petitioner testified, with reference to his activities in causing the leasing of advertising space for Buck & Rayner, that he “presumed to do it”, that he liked to work, and had been active too long to be a “play boy”, that he “wanted to have something to do that would produce results and make a-: greater profit for Buck & Rayner.” The company received several thousand dollars income through his efforts in that regard. Although one Gundaker was the active executive officer in charge of the business of Buck & Rayner, he consulted the petitioner on practically all important matters, including wage agreements, construction work for tenants, adjustments of rents, and accounts. In an advisory capacity the petitioner was consulted in general on all matters. The corporate bylaws forbade Gundaker to spend any item above $500 without approval of another director, and he practically always consulted the petitioner. Considering all of the evidence upon this issue, we think that it can not be held that the respondent has shown error on his part in allowing deduction for expense of business. Though the petitioner was an investor, and so testified, yet, it does not appear that his activities were confined merely to “doing only what is necessary from an investment point of view.” Foss v. Commissioner, 75 Fed. (2d) 326. The petitioner, in our opinion, in some things went further and comes within the ambit of those cases holding that business activity includes activity in the affairs of companies in which investments are owned. Petitioner to some considerable extent at least partook in the internal affairs of such corporations. To that extent we consider him engaged in business. However, this does not justify allowance of all items asked. The evidence shows that in 1936 to the extent of $378 and in 1937 to the extent of $368.50 items deducted were for subscription to financial news and services; also, that $16.84 in 1936 and $12 in 1937 were for rental on petitioner’s personal safety deposit box. These items we consider shown by the evidence to be without basis in activities in the affairs of petitioner’s corporations, but rather ordinary expenses of investment, and disallow them. Also, the record shows that the petitioner’s secretary, for whose salary deductions were taken of $2,080 for 1936 and $2,120 in 1937, spent time not only on matters relative to corporations in which the petitioner was interested, but handled as well his investments, investments for his wife, and for the Stephen Hexter trust, above herein considered. It is obvious that to some extent her salary should not be charged alone to matters relative to the corporations in which petitioner was interested ; and it is upon the ground of such interest and activity and to that extent that we consider him in business. Therefore we allow the secretary’s salary only to that extent; and estimating as well as we are able from the evidence, we find that one-fourth of the salary items should be, and they are, allocated to investment matters, and disallow them to that extent.

Decision will be entered under Bule 60.

       SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part ol the income oí a trust—
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      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.