author: Leech:

text:
    M. L. Long, Petitioner, v. Commissioner of Internal Revenue, Respondent. L. E. Long, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 81161, 81241.
    Promulgated November 19, 1936.

      Glaude Gollard, G. P. A., and Ben M. Davis, Esq., for the petitioners.

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

Leech:

These consolidated proceedings seek redeterniination of income tax deficiencies determined for the year 1931 against the petitioners, M. L. Long and L. E. Long, in the amounts of $484.10 and $983.88, respectively. The issue in each proceeding is the same and is determined by the ascertainment of the basis for gain or loss to the petitioners with respect to a ranch property owned by them jointly and sold in the taxable year.

The facts are stipulated and we include by reference, as our findings of fact, the formal stipulation filed.

Briefly stated, the facts are that the petitioners are brothers and residents of the State of Texas. The mother of the petitioners, Flora T. Long, died testate October 9, 1920, leaving a large estate devised to petitioners and their sister, Alice P. Greer. By the will, no special devise of any particular assets of the estate was made. A one-third interest in the estate in fee simple was given to each of the petitioners and a life interest in the remaining one-third to their sister, with remainder, at her death, to any child or issue then living of a deceased child. In the event of her death with no living descendants the remainder interest went to the two petitioners or their issue in equal portions.

Petitioner L. E. Long was designated as executor of the will. It directed that he take no court action to administer the estate except the probating of the will and the filing of the necessary inventory and appraisement of the estate. After paying the debts the executor was further directed to partition and divide the property of the estate equally among the three beneficiaries in accordance with the provisions of the will.

The estate of the decedent consisted of real and personal property of a net value of $443,449.80. Included in the assets of the estate was a property known as the “Borden County Banch”, which was appraised for Federal estate tax purposes at a value of $95,040. This asset was subject to encumbrances representing indebtedness to the State of Texas in the amount of $6,240.

On April 30, 1921, petitioner L. E. Long, in conformity with the direction of the will, partitioned and set aside to each of the three heirs a share of the estate as representing the interest acquired by each under the will. In conformity with the direction of the will this partition was effected by a joint partition deed executed by the two petitioners and their sister. This partition deed recites the direction of the will for the partition of the property and the fact that the conveyances between the parties thereto are made for the purpose of partitioning and dividing the property of the estate in accordance with the terms, conditions, and stipulations of the will. This partition of the estate is stated in the partition deed as made in accordance with the will by setting apart to Alice P. Greer a life estate, with remainder over to certain real estate in the city of Fort Worth, Texas, as provided in the will, and setting apart to the two petitioners, jointly, and in fee simple, all of the remainder of the estate, real, personal, and mixed.

The partition deed further provides that, for the purpose of carrying into effect the partition of the estate agreed upon as in accordance with the terms of the will, the two petitioners convey to Alice P. Greer a life estate in the Fort Worth city property set apart to her, with remainder over, as provided in the will, and she, in turn, conveys to the two petitioners, jointly, all the remainder of the property of the estate.

On the same date that the partition deed was executed, the two petitioners and their sister entered into a contract providing that the rents from the Fort Worth city property conveyed to her in the partition of the estate, together with the rents from certain other properties set apart and conveyed to the two petitioners, should, until the expiration of a certain lease upon one of these properties, be pooled and the net amount, after payment of taxes, insurance, and incidental repairs to the property, be divided equally among the three parties to the agreement. In consideration of their sister’s agreement to this arrangement the petitioners each agreed to pay her $5,000.

The Borden County Ranch was sold by the petitioners during the taxable year 1931 for a total consideration of $96,189.

In determining the deficiency, the respondent has computed a gain upon the sale of the Borden County Ranch by treating this property as acquired by petitioners, in part, from their sister under the partition deed in consideration of a life interest in two-thirds of the Fort Worth city property set apart to her. Under this theory respondent has computed a value for this life estate in two-thirds of the Fort Worth city property thus acquired by petitioners’ sister and has allocated this value against those items of property set apart to the two petitioners. This allocation is made upon the basis of the values of these several properties as appraised for estate tax purposes. In this way he has arrived at a cost of $18,803.05, to petitioners, of a life estate in one-third of the Borden County Ranch. He has added this amount to the value of a two-thirds interest in that property to reach a basis for computation of the gain to petitioners upon sale of the ranch in 1931. In making this computation respondent has included nothing in petitioners’ base for the remainder interest in the one-third of the property subject to the life estate in favor of petitioners’ sister. This is done upon the theory that the petitioners took merely a contingent and not a vested remainder interest in this one-third under the will.

Petitioners contend that under their mother’s will they took in fee simple a two-thirds interest in the Borden County Ranch and also a vested remainder in the remaining one-third subject to be divested in the event of the birth of a child to their sister.

We are of the opinion that both the petitioners and the respondent are in error in their computations of the cost base to petitioners of the Borden County Ranch. They have treated the execution of the partition deed as a transaction of purchase and sale of property with a resulting complicated, and at best, uncertain computation of gain or loss with respect to each item of property involved.

We do not think the transaction is to be so viewed. It can not be reasonably questioned, had the parties submitted the partition of the estate to the court and agreed to a decree setting aside to each party certain of the assets of the estate as constituting a fair and equitable division in accordance with the general devise of the will, that each of the heirs would have then taken the property assigned, set aside, and conveyed by decree of court, as property received under the will and, consequently, with bases for purposes of computing gain on resale, in the amounts at which these several items of property were appraised for Federal estate tax purposes.

The partition deed, executed by the three beneficiaries under the will, did nothing more than effect a similar partition of the property. It was manifestly not a transaction entered into for profit. It was not a purchase and sale of property in the ordinary sense, but was simply a transaction carried out to effect a partition of the estate and vest title to the partitioned properties in the several beneficiaries in a manner that would cause an absolutely equal division, without loss or gain, and thus effect the disposition of the property made by the will. As such it was no more than an incident in the administration of the estate. We are not concerned here with the technical question of deraignment of title but merely the actual source from which the petitioners acquired the Borden County Ranch. In our view this property, of which they stood possessed after the administration of their mother’s estate through the execution of the partition deed, was acquired by them under her will and their basis for gain or loss on its disposition was the same as if it had been set aside and conveyed to them by decree of court in a formal administration of the estate. Cf. Marie Minor Sanborn et al., Executors, 33 B. T. A. 1120.

As stated, both the petitioners and the respondent, in their compu-' tation of gain or loss on the resale of this property, have treated the execution of the partition deed as a transaction giving rise to gain or loss and have attempted to compute values for the interests in the various properties involved in that conveyance. Their computations differ in result for the reason that the respondent fails to include in petitioners’ basis any amount as representing the remainder interest in one-third of the Borden County Ranch, whereas the petitioners have computed a value for this interest, as well as including in the cost of the life interest in one-third of the property an amount representing a portion of the $10,000 paid their sister under the contract covering the pooling of rents from the several town properties. This payment is allocated to the properties set apart to the petitioners in the proportion that each property bears to the total thus received. The respondent in his computation also reduces petitioners’ cost basis by an item of $13,365.20 as representing a loss sustained in the destruction of a ranch house by fire and depreciation sustained on the property subsequent to. its acquisition by petitioners. This item is not reflected in the computation by petitioners under which they determined a loss as resulting from the sale of the property but the petitioners do not deny the fact of loss or depreciation nor is there any testimony disproving the item either in its character or amount.

It is evident to us that these computations of both respondent and the petitioners are incorrect. Even though we consider the execution of the partition deed as affecting such dispositions of property as to give rise to gain or loss, the result is a cost basis for the Borden Ranch in the hands of petitioners in the amount of its net value as appraised for estate tax purposes. The record shows that at the time of the execution of the partition deed the values of the various properties of' the estate had not changed from the date of their appraisement for estate tax purposes, so that we are concerned here with cost bases constituting appraised values, as of the date of death of petitioners’ mother. Further, the execution of the partition deed was with the purpose of reaching a definite result. That was an exactly equal partition which would leave the beneficiaries possessed of the interest devised to each under the will, or, in other words, a division without gain or loss. In the absence of evidence to the contrary we assume' that this object was effected and the division made without gain or loss to any one concerned, and for that which each party to the transaction gave up he or she received an equal value in return. Under such conditions the basis for gain or loss of each item of property would be exactly offset by property conveyed at an equal basis, since cost and value were the same, and the several transfers would result in no change of base as to the properties of which the several parties stood possessed after the execution of the partition deed. It would necessarily follow that the two petitioners would take the Borden County Ranch at the value for which assessed for estate tax purposes, or $95,040, less the encumbrance of $6,240, because it was acquired by them subject to tins encumbrance. This property -would therefore have a basis of $88,800 for gain or loss on resale by them. This basis should be increased by $6,240, representing the encumbrance which they later paid off, and also by the sum of $600, admittedly expended by them on the ranch subsequent to its. acquisition. The total, so computed, should be reduced by the sum of $13,365.20, since this item, used by respondent in his computation of the cost basis, has not been disproved by petitioners.

The contention of petitioners, that the $10,000 paid their sister by them under the contract providing for the limited pooling of the rents upon the city properties should be considered as constituting, in part, a cost to them of the Borden County Ranch, is without merit. There is nothing in the agreement which indicates that this payment was, to any extent, consideration for the execution of the partition deed. The contract under which it was paid’was merely an agreement between the parties to pool the rents of certain city properties and divide them equally for a given period. The properties involved, belonging to the two petitioners, were of less rental value than those set apart to their sister and the payment, in question, appears to he-no more than an adjustment on account of such difference.

Judgment toill he entered under Hule 50.


source: Caselaw Access Project

author: TueneR:

license: Public Domain

text:
    Dwight Whiting and George N. Whiting, Trustees and Beneficiaries for and of Emily S. Perkins, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78532.
    Promulgated November 25, 1936.

      L. Dana Latham, Esq., for the petitioners.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

TueneR:

The first question presented for our determination is whether or not the respondent erred in including 49,995 shares of common stock of the Whiting Co. in decedent’s gross estate. If we find that the stock ivas properly included, it will then be necessary to determine the fair market value of the stock at the date of decedent’s death.

It is the contention of the petitioners that under the agreement of March 19, 1917, they acquired from the decedent all of her right, title, and interest in and to the stock of the Whiting Co. They further contend that nothing passed from the decedent to them under the agreement dated September 12, 1917, but rather that they gave to her, in place of the annuity of $18,000 per year, the income from the stock for life, which, based on experience and future prospects, would greatly exceed the annuity. If these contentions are sound, no interest in the Whiting Co. passed from the decedent at or by reason of her death, and the respondent erred in including the said stock in her gross estate.

It is the contention of the respondent that the agreement of March 19, 1917, was never carried out; that the decedent never at any time delivered the stock of the Whiting Co. in accordance with its terms; that, in any event, the agreement of March 19, 1917, having been revoked, the stock belonged to the decedent at the time the trust agreement of September 12, 1917, was executed; and that the transfer there made falls within the provisions of section 302 (c) of the Revenue Act of 1926, as amended by section 803 (a) of the Revenue Act of 1932, and the stock so transferred constitutes a part of the decedent’s gross estate by reason of that section of the statute. It is further contended that even though it be said that the instruments of March 19 and September 12, 1917, were effective to transfer all interest of the decedent in the stock of the Whiting Co., these-transfers were made in contemplation of death and for that reason the statute requires that the stock be included in her gross estate.

Considering the contentions of the parties in reverse order, the facts definitely and clearly show that none of the transfers in question were made in contemplation of death. The motive which prompted them was the desire of the decedent to arrange her business affairs so that she and her husband might resume married life free from disputes, differences, and quarrels such as were previously experienced by them. Contemplation of life rather than contemplation of death prompted the transfers.

By the terms of section 302 (c) as amended, supra, a transfer by trust or otherwise is to be included in the gross estate of the decedent grantor where the possession, enjoyment, or the right to the income from the property so transferred is retained for the grantor’s-life, or where the right is retained, either alone or in conjunction with any person, to designate the person who shall possess or enjoy (he property or the income therefrom. Reading the instrument of September 12, 1917, it is apparent that the decedent in the instant case retained no right, either alone or in conjunction with any person, to designate the persons to possess or enjoy the property or the income therefrom. That designation was made at the time of the execution of the instrument itself and no such right was retained. Assuming, however, that the agreement of March 19, 1917, was not carried out or that it was revoked and the stock revested in the decedent, it does appear that the decedent did retain, under the trust instrument of September 12, 1917, the right to the income from the stock during her life, a fact which would bring the transfer within the language of section 302 (c) as amended. It is this provision on which the respondent relies to sustain his position with reference to the transfer to trust. It is not contended that the decedent had any right to revoke the trust so made.

Prior to March 3, 1931, section 302 (c) of the Revenue Act of 1926 contained no specific provision for the inclusion in the gross estate of property transferred in trust where the decedent retained only the right to the income from the property for life. That section did provide for the inclusion of property so transferred when the transfer was to take effect in possession and enjoyment at or after death, and in administering the 1926 Act and prior acts the respondent treated transfers whereby the grantor retained the right to the income from the property for life as transfers intending to take effect in possession or enjoyment at death. In Burnet v. Northern Trust Co., 283 U. S. 782, and Morsman v. Burnet, 283 U. S. 783, the Supreme Court, on authority of May v. Heiner, 281 U. S. 238, rejected that interpretation of the statute and held that property irrevocably transferred to trust with only a reservation by the grantor of the income for life did not constitute a part of the grantor’s estate at death. On March 3, 1931, the day after these decisions by the Supreme Court, Congress adopted a joint resolution amending section 302 (c) of the Revenue Act of 1926 to specifically cover such transfers, and later, by section 803 (a) of the Revenue Act of 1932, amended the said section to its present form.

Our question, then, is whether or not section 302 (c), supra, as amended, relates back and covers transfers made prior to the dates of the amendments in cases where the death of the decedent does not occur until after the amendment dates. The answer to that question can be drawn from the decision of the Supreme Court in Helvering v. Helmholz, 296 U. S. 93. There the Court had before it the interpretation of section 302 (d) of the Revenue Act of 1926, which deals with the power to revoke, alter, or amend a trust instrument!. The provisions there dealt with first appeared in the Revenue Act of 1924. The transfer under consideration was made in 1918. The Court, after pointing out that tjie transfer was complete at the time of the creation of the trust, that no interest remained in the grantor,, and under the revenue act then in force the transfer was not taxable as intended to take effect in possession or enjoyment at the death of the grantor, held that if “section 302 (d) of the Act of 1926 could fairly be considered as intended to apply * * * its operation would violate the Fifth Amendment.” See also White v. Poor, 296 U. S. 98. Cf. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. We are unable to draw a distinction between the application of section 302 (d) in the above cases and section 302 (c), as amended, in the instant case. Jerome C. Smith v. United States, 16 Fed. Supp. 397. Cf. Bingham v. United States, 296 U. S. 211; Industrial Trust Co. v. United States, 296 U. S. 220; Nichols v. Coolidge, 274 U. S. 531.

It is contended by the respondent, however, that the decedent did not divest herself of legal title to the stock of the Whiting Co. by the trust instrument of September 12, 1917, and that she did not part with the title until the date of her death. He further contends-that by the terms of the instrument the remainder over did not vest in the petitioners as beneficiaries upon the execution of the trust instrument, but vested at the time of decedent’s death. In support of these contentions respondent points to the first paragraph of the instrument, which provides that the trustees, or trustee, “shall have, hold and control all of said property, and shall have and exercise all of the rights and powers of the holder of the legal title thereof, for the purpose of managing and controlling the same * * and to the fifth paragraph of the instrument, which provides for termination of the trust upon the death of the decedent and, upon such termination, that the “said property and all property into which it may have been converted, shall thereupon vest absolutely in Dwight Whiting and George 1ST. Whiting, share and share alike, or, in the event of the prior decease of them, or either of them, the share of each such deceased person shall immediately vest absolutely in such person, or persons, as he shall have designated by will * * It is argued that the language of the first paragraph clearly shows that the decedent intended to and did retain the legal title to the stock of the Whiting Co. until the date of her death and in effect that she merely appointed Dwight Whiting and George N. Whiting as agents to manage the property for her. In our opinion this contention can not be sustained. The property involved was personal property. The whole purport and tenor of the agreement was that the petitioners here should receive the property as trustees. The language quoted indicates that they were to “have and exercise all of the rights and powers of the holder of legal title.” It was also provided that they were to have the right to sell and convey any part of the property. These provisions clearly indicate the presence in the trustees of the legal title. The decedent parted with everything that she had, in so far as the stock of the Whiting Co. was concerned, except a right to the income during her life. Cf. Tait v. Safe Deposit Trust Co. of Baltimore, 74 Fed. (2d) 851.

With reference to the language contained in the fifth paragraph of the trust instrument to the effect that the property should vest absolutely in Dwight Whiting and George 1ST. Whiting upon the death of the decedent, the argument of the respondent is definitely answered in Kinney v. Commissioner, 80 Fed. (2d) 568, affirming 30 B. T. A. 604. That was a California case and the trust instrument contained language almost identical with that contained in the fifth paragraph of the trust instrument in the instant case. After reviewing the California statutes and court decisions it was held that the remainder vested at once in the beneficiaries. The court further stated: “There were persons in being who could take, under the terms of the instrument, upon the ceasing of the precedent interest, which brings the matter in controversy under the code provision defining vested estates. Moreover, there was no contingency directly (or indirectly) expressed, which could defeat the vesting of the interests.” It is thus apparent that Dwight Whiting and George N. Whiting received a vested remainder in the trust property at the time of the transfer under the trust instrument in 1917 rather than at the date of the decedent’s death.

In reaching the foregoing conclusion we do not overlook the provision in the trust agreement of September 12, to the effect that in event the income of the trust was insufficient for the payment to the decedent of $1,500 monthly, the trustees were authorized and were under a duty to pay the deficiency from the corpus. The evidence indicates that at the time of the creation of the trust it appeared that the future annual income would be greatly in excess of the payment to be made to the decedent, as actually proved to be the case, for every year thereafter down to the time of her death. Under these circumstances the possibility of an invasion of the corpus was too remote and improbable to be of any significance here. Cf. Ithaca Trust Co. v. United States, 279 U. S. 151.

It is apparent from the foregoing that it is not necessary to discuss or consider the effect of the instrument of March 19,1917. Even though it be said that the decedent parted absolutely with the stock of the Whiting Co. on March 19, 1917, and, regardless of whether or not she reacquired it upon revocation of the March agreement, she definitely and finally parted with any interest that she might have had under the trust instrument of September 12, 1917, except a right to the income for life. The right to the income was obliterated at her death and nothing was left which passed from her to the petitioners or any other living person in so far as the stock of the Whiting Co. was concerned. The trust instrument was irrevocable and she retained no power thereunder by which she could recall at any time during her life any portion of the property conveyed. It was error to include the stock of the Whiting Co. in the decedent’s gross estate.

Reviewed by the Board.

Decision will be entered for the petitioners.

      Sec. 803. (a) Section 302 (c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows:
      “(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.”


author: Mellott: Hill,

text:
    John Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77906.
    Promulgated December 3, 1936.

      Charles M. Bryan, Esq., for the petitioner.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Mellott:

Petitioner contends that the compensation received by him is exempt from the Federal income tax under the rule, often enunciated by the courts, many times applied by this Board, and implicit in our dual system of government, that neither sovereign may tax the means or instrumentalities through which the other exercises usual, traditional, or essential governmental functions. For “the power to tax involves the power to destroy.” McCulloch v. Maryland, 4 Wheat. 316; Collector v. Day, 11 Wall. 113; Ambrosini v. United States, 187 U. S. 1; Metcalf & Eddy v. Mitchell, 269 U. S. 514; McCallen Co. v. Massachusetts, 279 U. S. 620, 628; Indian Motocycle Co. v. United States, 283 U. S. 570; Helvering v. Powers, 293 U. S. 214.

Just what instrumentalities or agencies of a state are exempt from the Federal tax “cannot be stated in terms of universal application” but each case must be determined upon its own facts. Register v. Commissioner, 69 Fed. (2d) 607; Burnet v. Livezey, 48 Fed. (2d) 159. While it is true, as stated by petitioner upon brief, that courts do not attempt to limit or define the precise line of demarcation between those activities having some relation to government, “which are nevertheless subject to taxation, from those which are immune”, Metcalf & Eddy v. Mitchell, supra, and while it is also true that the Treasury Department can not do so by regulation (Helvering v. Powers, supra), nevertheless the Supreme Court has held specifically that “one who is not an officer or employee of a state, does not establish exemption from Federal income tax merely by showing „that his income was received as compensation for service rendered under a' contract with the state.”

Finding has been made that petitioner was not an officer. Such finding is a mixed finding of fact and conclusion of law, premised upon the failure of the petitioner to show that an. office, as defined by the Supreme Court, embracing the idea of tenure, duration, emoluments, and duties fixed by law, had been created by legislative enactment of the State of Tennessee. The statutes merely authorize the county trustee to appoint an attorney to institute and prosecute suits for the collection of delinquent taxes or the foreclosure of the tax liens. While it is true that petitioner served for one year under each appointment, he was not appointed for any definite period. For aught that is contained in the law, the county trustee could have superseded him at any time, with or without cause. He took no oath of office and furnished no bond, neither being required. He was free to engage in other activities if he had seen fit to do so. These circumstances indicate, and seem to require the finding or conclusion, that he was not an officer.

Upon brief petitioner argues that he is — or was — an agency or instrumentality through which the state exercises one of its fundamental acts of sovereignty, the collection of taxes; that he was “a collector of state and county revenue”, and “simply the third step in the collection of revenue.” Manifestly he was not a true tax collector. He was charged with no taxes, handled no money, gave no bond, maintained no official records and filed no report. He was merely the “attorney chosen by the county trustee with the approval of the county judge” to institute and prosecute suits against delinquent taxpayers and to foreclose the tax liens. His activities were stated by him as follows: “I physically handle no money. I prepare the statement * * * which is in turn sent to the clerk of the chancery court, who receipts for the money shown by the statement. * * * I issue the formal dismissal.” These are activities of an attorney rather than of a collector of taxes. For such activities he was paid a fee, contingent upon the amount recovered — an arrangement quite commonly made between an attorney and his client.

In R. E. L. Johnson, 25 B. T. A. 359, the petitioner, an attorney employed as chief counsel under the back tax law of Arkansas to prosecute suits in the state courts for the collection of back taxes, claimed that his compensation was exempt from the Federal income tax. He, like petitioner, was permitted to occupy an office in a publicly owned building, in that case the Statehouse, and to use, without charge, clerical and stenographic assistants paid by the state. He was paid a commission out of the collections made, his appointment had no fixed term, he took no oath of office, gave no official bond, devoted his entire time to such work, engaged in no other law practice and had no other professional engagements or associations. It was held, following Lucas v. Howard, 280 U. S. 526; Lucas v. Reed, 281 U. S. 699; Metcalf & Eddy v. Mitchell, supra; Mesce v. United States, 64 Ct. Cls. 481; and J. F. Roberts, 13 B. T. A. 448; affd., 44 Fed. (2d) 168, that compensation so received was not exempt from the Federal income tax. A similar holding was made in Harry D. Kremer, 31 B. T. A. 566, where the taxpayer had been employed by the revenue agent of Kentucky, his compensation being paid out of the statutory fee allowed for making the collections.

It is apparent that petitioner was not an employee of the state or a political subdivision thereof. He had the “liberty of action” and freedom from detailed control or right of control possessed by an independent contractor but not by a mere employee. He was free to come and go as he .pleased, to exercise his best professional skill and judgment in the preparation and prosecution of the bills in chancery, to select, employ, and discharge his own assistants, and to employ means and instrumentalities of his own selection for the completion of the task undertaken. These are indicia of an independent contractor and the conclusion is inescapable that such was the relationship between petitioner and the political subdivisions of the state. It follows that the compensation received by petitioner was income, taxable to him under the revenue acts in force when it was received.

There remains for consideration the question whether or not the penalty should be assessed. Upon brief petitioner states that “the imposition of a penalty upon him would be the punishment of an innocent person who has acted throughout in the utmost good faith.” He testified that at one time he had discussed with the collector of internal revenue whether or not he was liable for the tax and quoted him as stating, in effect, that he had “never heard of anyone occupying your position” who ever paid the tax. He did not, however, ask for nor receive, an official ruling upon the subject.

The statute is specific — section 3176 of the Revised Statutes as amended by section 1003 of the Revenue Act of 1924 and by section 1103 of the Revenue Act of 1926, and section 291, Revenue Act of 1928; and inasmuch as the petitioner filed no return reporting the receipt of the income the penalty must be imposed. “It does not matter why he failed to file a return.” Harry D. Kremer, supra, and cases cited; Frederic C. Pitcher, 31 B. T. A. 957; Douglas L. Edmonds, Administrator, 31 B. T. A. 962 (on appeal to the 9th Circuit); Sarah A. W. Coursey, 33 B. T. A. 1068.

Reviewed by the Board.

Judgment %oill he entered for the respondent.

Hill,

dissenting: Petitioner was appointed annually during a period of 10 years as attorney to file and prosecute suits for the collection of delinquent land taxes. He was appointed by the county trustee of Shelby County, Tennessee, with the approval of the chairman of the county court, pursuant to a statute enacted by the General Assembly of the State of Tennessee. The majority opinion holds that petitioner was neither an officer nor an employee of the state or of its political subdivisions, nor an instrumentality for the exercise of a governmental function, and concludes that his compensation received as such attorney is subject to the Federal income tax. The conclusion reached, I think, is erroneous.

In the majority opinion it is stated that “The statutes merely authorize the county trustee to appoint an attorney to institute and prosecute suits for the collection of delinquent taxes or the foreclosure of the tax liens.” I am constrained to disagree with the correctness of this statement.

Section 1588 of Michie’s Tennessee Code (1932) provides that, between the dates of February 1 and March 1 of each year, the county trustee shall deliver the delinquent lists showing all unpaid land taxes to an attorney chosen by him, with the approval of the county judge or chairman of the county court; and section 1598 provides that if the county trustee and county judge fail to employ an attorney as required of them by the statute, and within the time provided for the filing of suits, the Commissioner of Finance and Taxation shall employ an attornej'' and file such suits, and for such failure of the trustee and county judge or chairman, they shall pay to the State of Tennessee a penalty of 10 percent of all delinquent taxes shown by the delinquent lists in the office of the trustee. The appointment, of the attorney appears, therefore, to be mandatory upon and not discretionary with the county trustee.

Petitioner does not contend that he was an “officer” and the record establishes, in my opinion, that he was not. The statute created no “office” of attorney, and petitioner took no oath of office, nor gave any bond. But the question whether petitioner was an “employee” presents a more perplexing problem.

Petitioner had very limited, if any, independence of control in the mode, manner, and means of carrying on his work, which is said to differentiate the independent contractor from an employee or servant. Metcalf & Eddy v. Mitchell, 269 U. S. 514; Mesce v. United States, 64 Ct. Cls. 481. He was appointed pursuant to statutory authority, and the character and extent of his duties were specified by the statute, as well as to a very large extent the mode and manner of performing his duties. He was required to file all suits between February 1 and March 1 of each year; the form of action and the court in which it should be brought were specified; he was required to file against all delinquents, even though in some cases the amount involved was not more than 25 cents; he could not dismiss any action or settle with the taxpayer for less than the full amount of tax, penalty and interest shown by the delinquent lists, except when specially authorized by the state and county officials to do so. Even petitioner’s compensation was subject to regulation by the state legislature without his consent, and it was in fact so changed several times. His functions could be and were suspended by the legislature on occasion. He did not operate under a contract, but by virtue of appointment, and his functions involved matters in which the public was directly interested. He did not select and furnish his own office at his own expense, nor pay the salaries of his assistants, except only to the minor and incidental extent of typing the bills filed in court. He was not free to use his own efforts and instrumentalities and do the work as his judgment dictated. Mesce v. United State, supra.

On the other hand, petitioner was furnished an office in the county court house designated “Delinquent Tax Office.” All furniture and supplies, printed forms and regularly employed assistants were furnished and paid for by the county. He was the head of the office, and the clerks furnished by the county worked under his direction. He devoted his full time to the performance of his duties. He was appointed annually, the tenure under each appointment being for one year.

All of these are qualifications of an “employee”, and in my opinion, taken together, serve to bring petitioner well within such classification and exempt his compensation from the Federal tax.

However, in addition to the status of the petitioner as an employee, I am impelled for another reason and on a different ground to reach the same conclusion respecting the exemption from taxation of his compensation. The record establishes, in my opinion, that he was an integral and essential part of the machinery or agency set up by the state legislature for the collection of delinquent taxes.

It is now settled law that the income of even an independent contractor is immune to Federal taxation where such income arises out of an instrumentality through which a state immediately and directly exercises its sovereign power. Burnet v. Coronado Oil & Gas Co., 285 U. S. 393; Indian Motocycle Co. v. United States, 283 U. S. 570.

In Metcalf & Eddy v. Mitchell, supra, the Supreme Court stated this principle as follows:

* * * this court has repeatedly held that those agencies through which either government immediately and directly exercises its sovereign powers, are immune from the taxing power of the other. Thus the employment of officers who are agents to administer its laws * * * its obligations sold to raise public funds * * * its investments of public funds in the securities of private corporations, for public purposes * * * surety bonds exacted by it in the exercise of its police power * * * are all so intimately connected with the necessary functions of government, as to fall within the established exemption; and when the instrumentality is of that character, the immunity extends not only to the instrumentality itself but to income derived from it * * *.

The General Assembly of the State of Tennessee, by the statutes hereinabove referred to, created a definite plan for the collection of taxes and provided therein the machinery for the operation of such plan. It consisted of three separate and distinct steps or divisions.

First, the county trustee was charged with the collection of taxes until they become delinquent.

Second, within 30 days after the taxes became delinquent, it was the duty of the county trustee to prepare delinquent lists and deliver to deputy trustees, sheriffs, or constables appointed by him, who, in turn, were charged with the collection of such taxes by distress and sale of personal property until the first day of the following January, when the lists of any taxes then remaining uncollected were returned by the officers to the county trustee.

Third, the county trustee was then required under penalty to deliver the lists to an attorney selected and appointed by him, with the approval of the county judge or chairman of the county court, to file suits for the collection of all delinquent land taxes. After the filing of suits the county trustee was relieved of all responsibility and had no further connection with the collection of the taxes. From that time on, petitioner was the sole agency or instrumentality through which the taxes could be collected.

’ Certainly, the chancery court, in which the suits were filed, could not properly be called a tax collecting agency. It could take no initiative in the filing and prosecution of suits; its function was that of a judicial tribunal. Nor was the clerk of the court, to whom the taxes were paid as a result of suits instituted by petitioner, a collector of taxes. It was not his duty to take any steps to file or prosecute suits or otherwise enforce collection. He merely received the money and administered the general fund into which it was paid, as a result of the activities carried on by the petitioner. It was through the efforts of the petitioner and petitioner alone that collection of the taxes was enforced. After the suits were filed there was no other officer, agent or instrumentality provided by the legislature whose business or duty it was to take any action to enforce collection of delinquent taxes. The county trustee could not even receive the money and give a valid receipt therefor, if payment of the taxes had been tendered at his office.

From these considerations, I can not escape the conclusion that petitioner was an indispensible part of the machinery created and set up by the state legislature for the collection of taxes, and the sole agency for collection of delinquent land taxes by suit; and being an essential part of the “instrumentalities, means and operations” whereby the State exercised a governmental power appropriately belonging to it, his compensation is exempt from taxation by the United States.

The majority opinion cites and relies, among others, upon the decision in R. E. L. Johnson, 25 B. T. A. 359, which in turn cited J. F. Roberts, 13 B. T. A. 438, affd., 44 Fed. (2d) 168. All of the cases so cited are, in my opinion, clearly distinguishable on principle from the instant case.

Johnson was employed under the provisions of the so-called back tax law of Arkansas to assist the attorney general in connection with the filing of suits for the collection of certain delinquent corporation taxes. The primary duty devolved upon the attorney general, and the statute provided only that “the Governor is authorized to employ any attorneys that may be necessary to assist the Attorney General m such suits.” It seems plain to me that attorneys so appointed did not constitute the exclusive machinery or agency set up by the legislature for the collection of delinquent taxes. Appointment was not required but merely authorized when necessary. Such attorneys were merely incidental when appointed, and were not an integral or essential part of the tax collecting instrumentality. If such attorneys were not appointed, there still remained responsible officers or agencies for the collection of the taxes.

Roberts was appointed pursuant to an act of the Legislature of the State of Georgia, which authorized the state tax commissioner, under certain specified conditions, to employ “competent men” to investigate tax matters in the several counties of the state, with a view to assisting the local authorities in securing proper returns of ad valorem taxes. Here again the appointee was not an essential part of the tax collecting agency, but merely incidental or supplemental. He was not only not an integral part of the tax collecting machinery, but his appointment was authorized only under certain special circumstances.

On the first issue, the decision, in my opinion, should be for the petitioner. On the second issue, it would follow that, since there is no taxable income, no penalties are due for failure to file returns.

Tyson agrees with this dissent.


author: MellOtt :

text:
    Robert Ridgway, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77666.
    Promulgated December 3, 1936.

      Hyman W. Kehl, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

MellOtt :

Petitioner contends that the compensation received by him from the cities of New York and Chicago is exempt from the Federal income tax, under the well settled rule, often enunciated by the courts and applied by this board, that the Federal Government may not interfere with the exercise of essential governmental functions of the states through taxing the instrumentalities or agencies by which their traditional acts of sovereignty are exercised. McCulloch v. Maryland, 4 Wheat. 316; Collector v. Day, 11 Wall. 113; Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429; Ambrosini v. United States, 187 U. S. 1; Flint v. Stone-Tracy Co., 220 U. S. 107; Metcalf & Eddy v. Mitchell, 269 U. S. 514; and Helvering v. Powers, 293 U. S. 214.

It is earnestly argued that the Board of Transportation of New York City, in planning, constructing, and operating its subways, was engaged in a governmental, rather than a proprietary, activity, because of the “peculiar conditions” existing in that city. Some of the conditions referred to are the immense population and congestion, restricted physical facilities, magnitude of the task and inability to induce private capital to undertake it. It is said that the “exigencies of the situation created by the immensity of the task * * * actually forced” the city to undertake it. Upon brief it is stated:

It certainly was not a desire to go into the transportation business; or any expectation of earning the ordinary expense of maintaining a transportation system, to say nothing of profits; nor was it a grand gesture. It was caused by primary and pressing concerns of health, safety, and the well-being of its citizens; the relocation of industries out of joint with and retarding the development or destroying the value of neighborhoods and properties; the shifting of population to avoid intolerable housing and living conditions inimical to the welfare of the City from any governmental angle; the proper planning and development of the City as a whole; the articulation of the immense masses of traveling and working population and to give to the poor sections of the City, the same type of transportation and at the same rate furnished to the more favorable portions of the City. These are governmental functions and duties which a government necessarily owes to its citizens.

Petitioner also contends that inasmuch as he had nothing whatever to do with the operation of the subways, he can not be said to have been engaged in a business of a proprietary nature. He claims that the engineering department was entirely separate and apart from the operating department, and that, while the latter may have been a business activity, the construction of the subways under his supervision was a governmental function. The distinction made by petitioner between the construction of a subway and its operation is not sound. Both are part of the same activity, viz., providing rapid transit for New York City; and both were performed by the city acting through the same agency, the Board of Transportation.

The powers of a municipal corporation are divided into two parts, one governmental, in the exercise of which it represents the sovereign or state; and the other proprietary. Harris v. District of Columbia, 256 U. S. 650. The question as to which capacity New York City was acting in when it constructed and operated its subways was directly before the Court of Appeals of New York in In re Board of Rapid Transit Commissioners, 197 N. Y. 81; 90 N. E. 456. The issue was whether the city was liable in damages resulting from the construction and operation of its subways. In holding that it was, the court said in part:

Was the action of the city in building the subway governmental or proprietary in character? The city owns the subway, and it is a railroad corporation so far as the construction, operation, and leasing thereof is concerned. It was not required but simply permitted, to build and operate the road. It is authorized to lease its railroad, either for “a specified sum of money or a specified proportion of income, earnings or profits,” or it may operate the road itself, and charge such rates of fare for the transportation of persons and property as may be fixed by its own boards and officers. Laws 1909, c. 498, Sections 27 and 30. In other words, the subway is a business enterprise of the city, through which money may be made or lost, the same as if it were owned by an ordinary railroad corporation. It was built by and belongs to the city as a proprietor, not as a sovereign. MaxMilian v. Mayor, etc., of New York, 62 N. Y. 160, 20 Am. Rep. 468; Missano v. Mayor, etc. of New York, 160 N. Y. 123, 54 N. E. 744; South Carolina v. United States, 199 U. S. 437, 26 Supt. Ct. 110, 50 L. Ed. 261. [Italics supplied.]

In Flint v. Stone-Tracy Co., supra, the Supreme Court considered the taxability of the Interborough Rapid Transit Co., the operating company of one of New York City’s subways. It claimed to be exempt from an excise tax laid upon corporations. The Court, denying the exemption, stated: “It is no part of the essential governmental functions of a state to provide means of transportation, supply artificial light, water and the like.”

The Circuit Court of Appeals for the Second Circuit recently had before it a case analogous to the case at bar, Brush v. Commissioner, 85 Fed. (2d) 32. The petitioner had been employed by the city of New York for many years as engineer in charge of its water supply. His duties required him to make surveys, plans, and reports relative to the improvements and enlargements of the system, and to maintain in good condition the reservoirs and mains. He held a statutory office for which he had duly qualified. The court denied the contention that his salary was exempt from the Federal income tax, holding that it “was not part of the expense attendant upon the exercise of what may be said to be usual governmental powers * * * or in the doing of what the states have traditionally engaged”, citing Helvering v. Powers, supra, and United States v. State of California, 297 U. S. 175.

In Helvering v. Powers, supra, the Supreme Court stated it saw “no reason for putting the operation of a street railway in a different category from the sale of liquors.” The same may be said of a subway. Nor can it make any difference that the construction and operation of the subway were undertaken because of the state’s or city’s “conception of public advantage.” The fact remains that the enterprise undertaken is “of a sort that is normally within the reach of the Federal taxing power and is distinct from the usual governmental functions.” Such an activity on the part of the city is not exempt from the Federal tax and the compensation received by this petitioner is taxable.

The cited cases compel the same conclusion with reference to the compensation received by petitioner from the city of Chicago. In addition, the compensation received by petitioner from this city was received by him as an independent contractor. His duties and compensation were fixed by contract, and even though the board or committee employing him were engaged in a governmental function, his compensation is not exempt. Commissioner v. Modjeski, 75 Fed. (2d) 468; Metcalf & Eddy v. Mitchell, supra; John R. Spelman, 18 B. T. A. 313; Edward M. Lynch, 30 B. T. A. 727; Donald Francis Campbell, 33 B. T. A. 101; Harry Goldstine, 33 B. T. A. 173.

We sustain petitioner’s contention with reference to the deduction of the loss of his investment in the Kreuger & Toll American certificates. We are satisfied that such certificates were worthless in 1932. They had for their basis the debentures issued by the Swedish company. This company became bankrupt in 1932. Four years thereafter, at the time of the hearing before us, petitioner, as an investor in such certificates, had received no part of his investment and the evidence tended to establish the fact that he never would receive any part of it. He concluded in 1932 that his investment was worthless, listed the securities in his memorandum book “at zero”, and testified before us that in that year he “had no hope of recovering” any part of his investment.

It is settled that if an investment becomes wholly worthless, its cost or other applicable basis may be deducted by a taxpayer from his gross income in the year in which it actually became so; and it is not necessary that there be a sale, or an attempted sale, within such taxable year. DeLoss v. Commissioner, 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840; Royal Packing Co. v. Commissioner, 22 Fed. (2d) 536; Dalton v. Bowers, 56 Fed. (2d) 16; affd., 287 U. S. 404; Burns Manufacturing Co. v. Commissioner, 59 Fed. (2d) 504; Forbes v. Commissioner, 62 Fed. (2d) 571; Paul Pryibil, 31 B. T. A. 164; Alfred Hafner, 31 B. T. A. 338; Alfred K. Nippert et al., Executors, 32 B. T. A. 892; article 174 of Regulations 77 (1932) and Regulations 74 (1928).

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Steknpiagen :

text:
    Van Landingham Western Sales, Inc., Formerly Canada Dry Western Sales, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75391.
    Promulgated December 3, 1936.

      Harry 'William Elliott, Esq., and W. H. Teasley, C. P. A., for the-petitioner.

      Franh M. Thompson, Esq., for the respoixdent.
   OPINION.

Steknpiagen :

The petitioner claims a deduction in 1931 for loss of $10,000, adopted by it as the cost in 1925 of the agency contract. It says it lost the contract in that year.

Really it lost nothing but its non juristic hope of renewal. The contract lived its full life of a year, and expired in- accordance with its own terms. jSTo oral assurance by Canada Dry officers is important in the face of the express terms of the written contract. One of the purposes served by putting a contract in writing is to avoid any dispute which might have been engendered by the more informal conversations of the parties; it leaves them free to talk with each other without fear of inadvertent commitments. The habit i-n the trade of renewing satisfactory distribution contracts has'no greater significance. Even if there had been in the writing an option to renew, it would not operate to establish a single contractual term from 1925 to 1931. Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, 383; certiorari denied, 284 U. S. 690; this is-especially so since each year had its separate and complete contract.

Petitioner argues that 1931 is the only year it could claim the loss, since nothing terminated in 1925 to give it a deduction then. This assumes that surely a deductible loss occurred some time, an assumption by no means irresistible. The petitioner issued shares for Van Landingh anrs assignment and measures its cost of the contract by his payments to Eastman for his interest in the earlier organization and to the Canada Dry corporation of the amounts embezzled by the former employees. Irrespective of whether this reasoning would have been valid to support a deduction in 1925, it does not establish the deduction in 1931.

Upon no theory has the petitioner established the deduction claimed. The respondent’s disallowance was correct.

Judgment will ~be entered for the respondent.


author: TurneR:

text:
    Caroline C. Spalding, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70262, 77218.
    Promulgated Dec. 4, 1936.

      Joseph D. Peeler, Esq., for the petitioner.

      John H. Pigg, Esq., and Arthw Claris, Esq., for the respondent.
   OPINION.

TurneR:

The first issue raised by the petitioner has previously been considered by the Board, in Bankline Oil Co., 33 B. T. A. 910. In that case, as in this, the petitioner relied on Burnet v. Coronado Oil & Gas Co., 285 U. S. 393, to sustain the proposition that income derived from the development and operation of an oil lease obtained from the State of California was exempt. The lease in that case was made under authority of the same California statute and the lands covered by the lease were located in the same county as in this case. We held, under authority of Burnet v. Jergins Trust, 288 U. S. 508, that the income was taxable. The first issue is accordingly determined for the respondent, and it becomes necessary to consider the petitioner’s alternative contention.

In determining- the deficiencies heroin, the respondent computed the depletion deduction by eliminating from petitioner’s gross income the amounts received by the Oil Co. under the agreement of December 19, 1929. The petitioner contends that this was error. It is her position that she was the sole owner of lease No. 93 and is entitled, under section 114 (b) (3) of the Revenue Act of 1928, to a depletion deduction computed on the total gross income from the lease. She insists that under the agreement the Oil Co. acquired no interest in the lease or the production therefrom, and that the amounts received by it were received not as income from any operation of the property on its own account, but from her as compensation for services performed in her behalf.

In support of her contention that the development and operation of the lease was her individual enterprise and that the Oil Co. was employed for a cash compensation and had no interest in the production from the lease, the petitioner places great reliance in recurrent recitals in the agreement designating her as the “Owner” and the Oil Co. as the “Contractor”, and the further provision to the effect that all of the oil and gas, when produced, belonged to her. Mere assertion, however, that the legal effect of a contract is thus and so is not sufficient to make it so, where the provisions of the contract itself show it to be otherwise. Here the Oil Co. by the terms of the agreement relieved the petitioner of all risks and burdens connected with the development and operation of the lease. For a right to two-thirds of the proceeds from the sale of oil and gas, it agreed to do and perform all acts required of her under lease No. 93, which she had received from the state, while the petitioner, for merely holding title to the lease in her name and without financial outlay on her part, was to receive and retain one-third of the proceeds, subject only to payment of one-third of the taxes on the property and production and one-third of the cost of manufacturing casinghead gasoline. There is some reference to an obligation on her part to stand the cost of selling and marketing the production of tlie lease, but a closer inspection of tlie contract and the stipulation of facts filed herein discloses that these expenditures were to be made out of proceeds from such sales before division thereof between the parties. It does not even appear that the petitioner actively took any part in the marketing of the production, and, as a matter of fact, we might well be justified, on the record before us, in concluding that this function was also performed by the Oil Co.

Any doubt that the development and operation of the lease was the enterprise of the Oil Co. and not of the petitioner is removed by the supplemental contract between the parties, also executed on December 19, 1929. That contract discloses that the only cash investment in the venture was made by the Oii. Co. and by that contract the Oil Co. released the petitioner from any obligation to reimburse it for any part of the sums previously expended and carried on its books as investment expenses. The schedule of these expenditures shows that a substantial portion thereof was used in effecting compromises and settlements with adverse claimants to the title, which was held in the name of the petitioner. In a subsequent paragraph, the Oil Co. agreed to reimburse the petitioner for all amounts expended by her in the acquisition of the lease. These expenditures amounted to $176,043.84 and covered, among other things, legal and engineering fees.

The California statute very likely supplies the reasons for the repeated assertions by the parties that the petitioner retained ownership of the lease and that the Oil Co., the “Contractor”, was receiving a cash compensation from her for services rendered in her behalf. In one clause of the lease granted by the state the petitioner specifically agreed to observe the provisions of section 12 of the act under which the lease was granted. That section provides in part that “no person, association or corporation, shall take or hold, under the terms of this Act, more than one oil or gas permit or lease.” It further provides that any interest held in violation of the act shall be forfeited by appropriate proceedings in the superior court for the county in which the property is located. The agreement between the parties discloses that the Oil Co. was already the holder of lease No. 92, and, under the section just referred to, could not have obtained or held in its own name the lease involved in this case.

Under the circumstances and facts of this case, it might well be argued that, while the petitioner obtained and held the legal title to the lease, she at all times was acting for the Oil Co. It is apparent from the supplemental agreement that the Oil Co. and not the petitioner, prior to the contract of December 19, 1929, had expended $256,874.39 in prospecting and proving the property, in drilling the first well and in settling adverse claims to the title. It also agreed to reimburse the petitioner in full for all expenditures made by her in obtaining the lease. We are further of the opinion that if it be conceded that the petitioner obtained the lease from the state for her own account, a very strong argument could be made that the contract of December 19, 1929, was in effect a sublease of her interest in the property, under which she retained for herself only a right to share in the proceeds from the sale of the oil' and gas produced.

We are not here concerned, however, with a particular designation of the respective interests of the petitioner and the Oil Co. in the property in question, nor with any question as to whether or not the agreement between the parties is within or without the spirit and letter of the lease and the California statute, but with a determination of the depletion deduction allowable to the petitioner in respect of the interest, whatever it may be called, of the petitioner in the lease. In Palmer v. Bender, 287 U. S. 551, the Supreme Court, in considering the interest necessary as the basis for a depletion deduction, said: “The language of the statute is broad enough to provide, at least, for each case in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of oil, to which he must look for a return of his capital.” See also San Martinez Oil Co., 25 B. T. A. 218, and W. S. Green, 26 B. T. A. 1017. In Helvering v. Twin Bell Oil Syndicate, 298 U. S. 312, the Supreme Court, although dealing there with apportionment of the depletion allowance between lessor and lessee, clearly indicated that the total depletion allowance of all parties who own interests in any oil property may not exceed 27% percent of the gross income from the property, and that the deduction permitted to any one party is limited to a proportionate part of the total allowance based on his interest in the total production. In our opinion, it is definite, and clear that the petitioner and the Oil Co., under the contracts between them, provided for the development and operation of lease No. 93 and for definite interests to each in the production therefrom. These interests were to be one-third and two-thirds, respectively, with certain minor adjustments prescribed by the terms of the agreement. We accordingly hold that the petitioner may not include in her gross income, for the purpose of computing her depletion deduction in respect of lease No. 93, any amounts received by the Oil Co. as its share in the proceeds from the sale of oil, gas, and casinghead gasoline in accordance with the terms of the agreement of December 19, 1929.

Since the second issue has been determined for the respondent, the alternative issue raised by his answer need not be considered.

Reviewed by the Board.

Decision will be entered under Bule SO.

      SeC. 114. (b) Basis for depletion.—
      ****** *
      (3) Percentage depletion for oil and gas wells.- — In the case of oil and gas wells the allowance for depletion shall he 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.


author: MoRRis:

text:
    George S. Towne and Josephine Johnson Milton, Executors of the Will of William Pierce Johnson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Josephine Johnson Milton, Petitioner, v. Commissioner of Internal Revenue, Respondent. George S. Towne and Josephine Johnson Milton, Executors of the Will of Florence Lindsay Johnson, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sophia Gleason Pierce Brownell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sally McKee Spens Black, Petitioner, v. Commissioner of Internal Revenue, Respondent. George S. Towne and Josephine Johnson Milton, Executors of the Will of William Pierce Johnson, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54083, 54092, 57890, 53637, 53636, 53634.
    Promulgated December 4, 1936.

      Felix T. Smith, Esq., Oscar Sutro, Esq., and Richard E. Dwight, Esq., for the petitioners.
    IF. Frank Gibbs, Esq., for the respondent.
   OPINION.

MoRRis:

We must first determine whether the sale of the Maine corporation stock under the proposal of November 21, 1925, in so far as these petitioners are concerned, was made by Johnson, Inc., and Pierce, Inc., as the holders and owners of 29,946 and 10,000 shares, respectively, or whether what transpired constituted a sale of those shares to the said Delaware corporation by the individual stockholders of Johnson, Inc., and Pierce, Inc.

One factor is clear and that is that the proposal of November 21, 1925, was originally made to Johnson, Inc., as the stockholder of the Maine corporation and not to its stockholders, and that it continued a party to the proposal until January 8, 1926. In fact there was no time prior to dissolution and distribution of such stock by Johnson, Inc., on January 8 when its stockholders had any power to negotiate the sale or exchange of that stock. Our inquiry, therefore, is whether what transpired between November 21,1925, the date of the proposal, and January 8, 1926, when Johnson, Inc., dissolved and distributed the stock of the Maine corporation to its stockholders, was sufficient to constitute an executed sale of the Maine corporation stock under that proposal.

Johnson, Inc., and Pierce, Inc., joined in a power of attorney to Bloch on November 30,1925, to accept the proposal for the purchase of their shares of common stock of the Maine corporation. On December 10, 1925, Bloch notified the stockholders of the Maine corporation that 99 percent of such stockholders had authorized him to accept the proposal. Indicative of the fact that the transaction was still in an executory state he said, in that communication, that if tho proposal should not be carried out by the purchasers the certificates of the stockholders would be returned to them. On December 16, 1925, Bloch advised the bankers that the proposal was acceptable, with three noted exceptions of, what appears to have been, a substantive nature. Again, on January 2, 1926, Bloch sought the approval of a further modification of tlie original proposal. Johnson, Inc., gave its approval of this modification on January 4, 1926, but what action other stockholders took respecting that we do not know.

Then came the dissolution of Johnson, Inc., on January 8, 1926, which had been in contemplation since December 4, 1925 — -application for voluntary dissolution having been filed at or about that time— and the appointment of its directorate as “trustees for the stockholders of said dissolved corporation.” Although the record does not entirely clear up a dispute between the parties about the matter of the transfer of the Maine corporation shares owned by Johnson, Inc., on January 8 to its stockholders, it seems reasonably clear that the shares, which had been placed in escrow, were “retrieved” therefrom and that the cancellation of those shares and the issuance of new shares actually took place on January 8, 1926.

On the same date that dissolution of Johnson, Inc., took place the individual stockholders, according to their then respective shareholdings in the Maine corporation, empowered Bloch to accept the proposal of November 21, 1925, in their behalf, and they extended him full power to agree to all modifications of the original proposal as he should deem reasonable and proper. After the dissolution and on January 9, 1926, the bankers notified Bloch that the Delaware corporation had been organized; referred him to his letter of December 16, 1925, noting three exceptions to the original proposal, and informed him of their satisfaction therewith, at the same time making a further slight proviso that the new corporation take over the assets of the Maine corporation “as of” January 1, 1926. Bloch noted his acceptance to this further proviso on the same date. On January 11,1926, the proposal, in response to a communication from the bankers, was accepted by the Delaware corporation pursuant to resolution on that same day.

On February 4, 1926, Bloch, acting as attorney for the stockholders of the Maine corporation, having received funds from the Delaware corporation, issued checks payable to the individual stockholders of Johnson, Inc., and the certificates of stock of the new Delaware corporation were issued in their names in payment for the 29,952 shares of stock of the Maine corporation formerly owned by Johnson, Inc.

The respondent argues that “where the sale of corporate assets has been agreed upon before dissolution of the corporation and before the creation of a trust, a sale by the trustee is a sale by the corporation”, citing Commissioner v. Lexington Ice & Coal Co., 62 Fed. (2d) 906; Fred A. Hellebush et al., Trustees, 24 B. T. A. 660; affd., 65 Fed. (2d) 902; S. A. MacQueen Co., 26 B. T. A. 1331; affd., 67 Fed. (2d) 857; Nace Realty Co., 28 B. T. A. 467; Frank Kell, 31 B. T. A. 212. The answer to this argument is twofold — first, in our opinion-the sale of these shares had not been agreed upon before the dissolution of Johnson, Inc., and, secondly, the trustees, after dissolution, in so far as we are informed, had nothing to do with the sale of the shares distributed to stockholders of Johnson, Inc., on January 8, 1926. The transaction, in so far as those shares were concerned, was carried on by Bloch, a third party, under power of attorney running directly from the individual stockholders of Johnson, Inc. For those reasons we are not here concerned with the statutes of California governing the period during which the trustees may act either for the corporation or- for the stockholders themselves. Therefore, McPherson v. Commissioner, 54 Fed. (2d) 751, has no application.

Furthermore, even if we were convinced that Johnson, Inc., and Pierce, Inc., were, for tax purposes, upon the accrual basis of accounting, we, nevertheless, would hold that sufficient had not been done prior to the dissolution of Johnson, Inc., to constitute a sale which would result in a taxable profit to that company during the period January 1 to January 8, 1926.

Respecting Pierce, Inc., however, a different conclusion must be reached for the reason, in our opinion, that sufficient had been accomplished in its behalf prior to dissolution on January 25, 1926, to render the profit derived from the sale of its 10,000 shares taxable to it. If it should be assumed that the company’s' return for the final period of its existence was properly prepared and filed on the cash receipts and disbursements basis we would, nevertheless, be of the same opinion — believing as we do that a binding contract was entered into prior to its dissolution to sell the 10,000 shares of stock of the Maine corporation, which it then owned — for the reason that a return purporting to be final, in order to be valid, must include in such final period all known items of income. A corporation may not effect a transaction on one day, out of which a known profit has resulted, and by reason of the fact that actual payment will not be forthcoming until after such dissolution takes place, a day or so later, exclude that income from its said final return, notwithstanding its basis of accounting may be cash receipts and disbursements. In our opinion, as to Pierce, Inc., everything necessary had been done prior to its dissolution in order to compel the payment of the consideration.

Having found that the deficiency asserted against Johnson, Inc., was erroneous there is, of course, no transferee liability against those alleged transferees. As to the liability of the alleged transferees of Pierce, Inc., the respondent, having the burden of proof, has failed to show the transfer of any assets to the petitioner in Docket No. 53687 from the estate of Sophia Gleason Pierce, who was a stockholder and received assets upon the liquidation of that company. Therefore the proposed liability against her can not be sustained. The same conclusion must be reached in Docket No. 53634 on the authority of DeForest Hulburd et al., Executors, 27 B. T. A. 1123; affd., 296 U. S. 300. As to the petitioner in Docket No. 53636, the evidence shows that Pierce, Inc., was dissolved, its assets distributed; it was left without funds to pay the asserted deficiency; and, since she received $413,371.48, she is liable therefor under section 280 of the Revenue Act of 1926. Grand Rapids National Bank, 15 B. T. A. 1166.

Reviewed by the Board.

Judgment will be entered for the petitioners in Docket Nos. 5Jfi83, 5Jfl9%, 67890, 69687, and 5363J¡., and for the respondent in Docket No. 63636.


author: Hill:

text:
    Annie Louise Van Aken, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76894, 79334.
    Promulgated December 4, 1936.

      E. C. Kilpatrick, Esq., for the petitioner.

      B. P. Hertzog, Esq., and Conway N. Kitchen, Esq., for the respondent.
   OPINION.

Hill:

The first issue in this case involves the question whether petitioner is taxable upon her distributable share of the net operating income derived in the taxable years from the so-called dower lands. Petitioner contends that the principal agreement of July 16, 1931, entered into between her and the testamentary trustee, did not create a trust, but effected a sale of her life estate in the dower lands for a consideration payable partly in installments, and that since the aggregate amount received in the taxable years did not exceed the basis of üie property rights sold, no part of such amount constitutes taxable income to her. Respondent determined and here contends that the agreement referred to created a trust, of which petitioner is the income beneficiary, and that her distributable share of the net operating income is taxable to her as such.

Upon the filing by petitioner of the dissent to decedent’s will, she thereby became endowed of a life estate in one-half of the Alabama realty and of one-half of the Maine realty in fee. This included her right to the possession, management and control of her share of all the realty, as well as the income therefrom. Obviously, it was impracticable to divide the realty into two equal parts by metes and bounds, so that petitioner might have her dower interest in kind. Hence, the agreement in question was voluntarily worked out to define and provide for the rights of the respective parties in an equitable and satisfactory manner.

Under the agreement, the testamentary trustee conveyed to petitioner by quitclaim deed the estate’s one-half interest in the Maine realty, and executed a license permitting petitioner to occupy the Birmingham residence for life. The value of the interests thereby conveyed to petitioner was $7,257.23. Petitioner purported to convey to the trustee by quitclaim deed all of her right, title and interest in the other dower lands, having a value of $593,233.28, but this conveyance was subject to and limited by the terms of the agreement pursuant to which the deed was executed and delivered.

The agreement gave to the trustee the right, during the term of petitioner’s life, to “possess, manage and control the dower lands” and required the trustee to “account to Mrs. Woodward for one-half of the net operating income from the same as herein defined, payments to be made monthly.” The agreement provided that petitioner should be “entitled to a lien on the dower lands of the same force and effect as a decree of the Chancery Court awarding dower based on the rental value of the land”, to secure payment by the trustee of her distributable share of the net operating income. The agreement also provided that petitioner should pay a proportionate part of the cost of any addition or betterment increasing the cubic content or substantially changing the character of the building, and in the event of an operating deficit, the amount thereof should be charged against the net income next thereafter maturing or petitioner’s proportionate part be otherwise paid by her.

All of these provisions negative the idea that petitioner sold her dower rights for a stated consideration, but, on the other hand, strongly support respondent’s contention that, under the agreement, petitioner transferred only the legal title to the trustee, reserving the beneficial interest in the property or right to i’eceive the income for life.

By transferring to the trustee the legal title to her life estate in the dower lands, petitioner vested in the trustee the light to che possession, management, and control of her one-half of such lands. This latter right was undoubtedly of considerable value to the testamentary trustee, since the trustee was thereby vested with the exclusive and unrestricted control and management of all the dower lands, having a value of more than one million dollars. In exchange for such right of control the trustee transferred to petitioner the estate’s interests in other properties of a value slightly in excess of seven thousand dollars. But the transfer by petitioner of the legal title to the life estate in the dower lands was specifically subject to her right to receive one-half of the net operating income therefrom for life, a right which she possessed prior to the agreement and transfer. The effect of the transaction, then, was merely to transfer the legal title to the trustee, leaving in petitioner the right to the income. The entire beneficial interest in the transferred property was retained by and remained in petitioner.

Furthermore, we think it is made plain by the thirteenth paragraph of the agreement that the beneficial interest in the transferred property remained in petitioner. That paragraph provided that petitioner should be entitled to a lien on the dower lands “of the same force and effect as a decree of the Chancery Court awarding dower based on the; rental value of the lands,” to secure the payment of petitioner’s distributable share of the income. Certainly, a decree awarding dower would have vested in petitioner an equitable or beneficial interest, and the mortgage lien retained by petitioner had the same force and effect.

The agreement between the parties also provided that the trustee should “account to Mrs. Woodward for one-half of the net operating income,” payments to be made monthly. This provision, in our opinion, clearly created a trust relationship between the testamentary trustee and petitioner. The testamentary trustee was thereby made a trustee for petitioner, obligated to account for and pay over to petitioner her share of the income computed as provided for in the agreement.

While it may be true, as argued by the petitioner, that the word “trustee” as used in the instrument was merely descriptive and referred to the testamentary trustee, such fact does not render the testamentary trustee any the less a trustee for petitioner. Failure to designate the testamentary trustee as a trustee for petitioner, or to use particular words of trust in the instrument, is immaterial if the instrument by its terms did in fact impose a trust relationship.

It has been said many times that no particular form of words is required to create a trust, 26 R. C. L. 1180; Chew v. Brumagen, 13 Wall. 497, and the use of the word “trust” or “trustee” is not essential, Colton v. Colton, 127 U. S. 300. A trust exists where the legal title is in one person and the equitable or beneficial interest in another, or as sometimes otherwise stated, where there are rights, titles, and interests in property distinct from the legal ownership. Seymour v. Freer, 8 Wall. 202; Love v. Clayton, 134 Atl. 422, 426.

The fact that the quitclaim deed transferring the legal title and the agreement establishing the trust were separate instruments does not affect the conclusion we reach that the two instruments construed together constituted a single transaction which resulted in the creation of a trust rather than a sale of property rights. In O’Meara v. Commissioner, 34 Fed. (2d) 390, 394, the court pointed out that,

The declaration of trust need not be contained in the instrument which transfers the legal title. It may be set forth in a separate instrument or in several instruments, provided they are related to and connected with each other, and, when construed together, establish the existence of the trust (citing authorities). Therefore, as between, the parties and the corporation, the proposal, the resolution of acceptance, the assignments, and the certificate of stock constituted one transaction, and the intent of the parties must be gathered from an examination of all of these instruments.

Petitioner cites Robert Hoe Estate Co., 32 B. T. A. 903; affd., 85 Fed. (2d) 4, and urges that the decision in that , case is controlling here. We can not agree. The cited case is distinguishable on the facts, as is made clearly apparent in the opinion of the Circuit Court of Appeals. In that case the widow of' the decedent released and transferred to a corporation her dower consummate in consideration of an agreement on the part of the corporation to pay her “annually for and during the period of her natural life, an amount * * * . equal to one third share *. * * of the net annual income received annually by the corporation from the several plots * * * as long as the corporation shall continue to remain the owner.” In the event of sale the corporation agreed to pay the widow a gross sum in lieu of her dower. The court held that by the agreement the widow made a sale of her dower, and did not retain any interest in the lands, saying:

That she certainly did not do; the promise was not to pay her one-third of the profits in hind, to say nothing of giving her any right in the land itself; it was general and created a general obligation; had the company lost the money, even after the utmost diligence to heep it, it would still have been liable; payment and payment alone would be a discharge. The iirofits therefore belonged to the taxpayer, though they measured its performance to the last cent; for good or ill the parties meant the widow to part with all interest in the land and its usufruct; she was to be content with the promise alone.

In the case at bar an entirely different situation is presented. Here the widow did not exchange her dower interest for the promise of the testamentary trustee to pay “an amount equal to” one-half of the net operating income; she transferred the legal title on condition that the trustee should account for and pay over to her each month one-half of the net operating income derived from the dower lands. She was entitled to one-half of the profits in kind. The income when received by the trustee belonged to her. If the income after receipt had been lost, through no negligence of the trustee, it would have been petitioner’s loss. The agreement of the parties plainly indicates that it was not intended that petitioner should part with all interest in the land and its usufruct; on the contrary the beneficial interest was vested in her and she was given a specific lien on the property of the same force and effect as a decree of the Chancery Court awarding dower to safeguard her interest and enforce an accounting and payment over of all the reserved income. The trustee could not sell the property except subject to her equitable interest, since it was provided that the agreement should be binding upon any assignee of the trustee.

However, petitioner argues that even if the principal agreement of July 16, 1931, created a trust, the income distributable thereunder to petitioner is nevertheless not taxable to her, under the doctrine of Douglas v. Willcuts, 296 U. S. 1; Helvering v. Stokes, 296 U. S. 551; Helvering v. Schweitzer, 296 U. S. 551; and Helvering v. Blumenthal, 296 U. S. 552. The decisions of the Circuit Courts in the three cases last cited were reversed by the Supreme Court, per curiam without opinion, on authority of Douglas v. Willcuts.

In Douglas v. Willcuts, the trust income was payable to the wife of the grantor in lieu of alimony. In the Stokes and Schweitzer cases the trusts were established to provide income for the support, maintenance, and education of the minor children of the grantors, and in the Blumenthal case the settlor directed that the income of the trust be applied in discharge of a bank loan. In each case the income was held taxable to the grantor, because it was used for the direct benefit of the grantor in satisfying his preexisting legal obligation. See also Albert G. Whitaker, 33 B. T. A. 865, and Louis W. Hill, 33 B. T. A. 891.

In the instant case, petitioner was the grantor, as well as beneñ-ciary, oí the trust, and if the income were taxable to the grantor under the doctrine of the cited cases, it would be taxable to petitioner. But there was no preexisting liability of the grantor which the income of the trust was used to satisfy. Hence, the income is not taxable to petitioner as grantor. And certainly the income is not taxable to the trustee, nor is any such contention made, since it was distributable currently to petitioner as beneficiary. Sec. 162 (b), Bevenue Acts of 1928 and 1932. If petitioner’s contentions on this point should be sustained, it would result in the income in controversy escaping tax altogether, a result not contemplated by the statute. By express direction of the statute, distributable income of a trust must be included in computing the net income of the beneficiary, whether distributed or not. The distributable income involved here, is, therefore, taxable to petitioner as beneficiary of the trust created by the agreement of July 16, 1931. Cf. Helvering v. Butterworth, 290 U. S. 365. Respondent’s determination on.the first issue is approved.

The second issue raises the question whether petitioner is entitled to reduce her distributable shares of the net operating income from the dower lands on account of any deduction for depreciation. This question must be considered in the light of materially different facts and circumstances existing during the periods prior and subsequent to July 16,1931, embraced within the taxable years.

The first period extends from November 18, 1930, the date of decedent’s death, to July 16, 1931, the date of the agreement between petitioner and the testamentary trustee. By the filing of a dissent to decedent’s will petitioner’s dower rights became dower consummate, and included the right to the possession, control and management of, as well as the income derived from, one-half, of the Alabama realty for life. During such period petitioner owned a life estate in the lands; she and the testamentary trustee were tenants in common, having equal rights in the property during that time. As such life tenant during the period mentioned, petitioner is entitled to the deduction for depreciation at the stipulated rate applicable to one-half of the dower property in which she owned the life estate, under the following provisions of section 23 (k), Revenue Act of 1928: “In the case of property held by one person for life with remainder to another person, the deduction [for depreciation] shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.”

The second period referred to above embraces the portion of the calendar year 1931 subsequent to July 16, and the calendar year 1932. Under tlie first issue we Rave found that pursuant to the principal agreement of July 16, 1931, petitioner transferred to the trustee the legal title to her interest in the dower lands, retaining the beneficial interest or right to receive the income therefrom for life. The question of petitioner’s right to any deduction for depreciation subsequent to the creation of the trust is governed by the provisions of section 23 (k), supra, and similar provisions of the same numbered section of the Revenue Act of 1932, reading as follows:

In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.

This statute has been construed as entitling the beneficiary to the depreciation allowance, to the exclusion of the trustee, where the trust instrument provides that the income, computed without regard to depreciation, shall be distributed to a named beneficiary; and as requiring that the allowable deduction be granted in full to the trustee where the trust instrument provides that in determining the distributable income due allowance shall be made for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose. See Article 201 of Regulations 74; Spalding Trust, 34 B. T. A. 762.

The trust instrument in this case contains no provision empowering the trustee in determining the distributable income to make allowance for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose. In other words, the trust instrument makes no provision for the creation of a depreciation reserve. On the other hand, it specifically provides that in determining the distributable income no deductions shall be allowed for depreciation and obsolescence as such.

It is true that the trust instrument provides that certain expenditures of a capital nature shall be deducted in determining the distributable income, but such deductions are contingent upon the making of such expenditures and only to the extent thereof. It does not appear that any such expenditures or deductions were made in either of the taxable years herein involved. The distributable income having been computed without regard to depreciation, it is our opinion that under the facts in this case and under the statute and respondent’s regulations petitioner is entitled to a deduction for one-half of the total agreed depreciation on the basis of the trust income allocable to her.

On this issue respondent’s action is reversed.

Reviewed by the Board.

Judgment will be entered wider Rule 50.