author: Hakeon:

text:
    James C. Webster and Baronig Baron, as Executors of the Estate of Lisa W. Sandford, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83466.
    Promulgated August 9, 1938.

      James 0. Webster, Esq., for the petitioners.

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

Hakeon:

The petitioner alleges that the Commissioner erred in including in the value of the gross estate all of the items referred to above and in allowing a deduction of only $1,614.50 for funeral expenses.

(1) Trusts created December 31, 1929, and July 12, 1932. — The decedent executed a trust December 31, 1929, and conveyed to the trustee, the Guaranty Trust Co. of New York, securities of a total par value of $122,000. This trust will be referred to as the 1929 trust. Paragraph 4 of the 1929 trust reserved to the grantor the right to withdraw not in excess of 50 percent of the total amount of securities and properties comprising the corpus of the trust. The decedent exercised the right to withdraw securities and in June 1932 withdrew 50 percent of the original amount of securities and properties placed in trust according to market values of July 7, 1932, directing that the securities be turned over to Baronig Baron, her attorney in fact. Thereafter, on July 12, 1932, decedent executed a trust indenture pursuant to which she conveyed to Baronig Baron as trustee the securities withdrawn from the 1929 trust. This trust will be referred to as the 1932 trust. The decedent did not make any additional withdrawals from the 1929 trust and it remained in force up to the time of her death, consisting of the original securities and properties minus the 50 percent amount of securities withdrawn in 1932. Decedent reserved the right to receive the income of each trust during her life.

From December 31,1929, to July 12,1932, the Guaranty Trust Co., trustee of the 1929 trust, was not called upon to make any payments out of principal of the trust for the grantor except in the one instance when decedent withdrew 50 percent of the securities. In the 1932 trust indenture it is stated, in explanation of some of the provisions, that Baronig Baron, the adopted son, “has, from time to time, to make certain expenditures of principal as well as interest for her [decedent’s] support, maintenance and comfort and the providing to the said grantor living expenses and luxuries including the maintenance and care of automobiles.” It is provided in paragraph 9 that the trustee, Baronig Baron, shall have power to withdraw from the principal of the (1932) trust such sums as shall be necessary for the best interests of the grantor in his own discretion or on the request of the grantor. It also appears that decedent considered that the 1932 trust would serve such purposes, for an intent is expressed in the trust that it would run “smoothly” if its terms could be carried out without the formality of decedent’s giving receipts for money or securities to Baronig Baron, trustee, and if he should not he required to render accountings to any person.

With this brief reference to the terms of the two trusts, we turn to consideration of some of the contentions of the parties. It is the contention of petitioner’s counsel that the 1932 trust was but a “continuation” of the 1929 trust, so that the 1932 trust does not come within the amendments of section 302 (c) of the Revenue Act of 1926 effected in 1931 and 1932. Petitioner’s counsel offers little to support this theory. We think that this contention is not sound. The 1929 trust differed somewhat in its terms from the 1932 trust, as indicated by the respective paragraphs of the trusts quoted in the findings of fact. The decedent did not reserve any power to amend the 1929 trust, so that it would be difficult to construe the 1932 trust as an amendment of the 1929 trust. The trustee appointed under the 1932 trust was not a joint trustee with the trustee under the 1929 trust. The Guaranty Trust Co. did not join in the execution of the 1932 trust, which was executed only by the grantor and the new trustee, Baronig Baron. When decedent withdrew securities from the 1929 trust they became her property to do with as she desired. The property withdrawn was conveyed to a new trust. Whatever remainder interest Baronig Baron had received in these securities under the 1929 trust when it was created was divested when decedent withdrew the securities from the 1929 trust. It is immaterial that Baronig Baron, the beneficiary of the 1929 trust, was made the beneficiary of the 1932 trust. He might not have been made the beneficiary and might not have received again a remainder interest in the securities that had been withdrawn from the 1929 trust. We hold that the 1932 trust was a new trust, created July 12,1932. Congress, by Joint Resolution, March 3, 1931, amended the provisions of section 302 (c) of the Revenue Act of 1926 so as to include in the gross estate of a decedent the value, at the time of death, of property to the extent of any interest which the decedent had transferred by trust during life, if the decedent retained the right to receive income from the property transferred. Clearly, the 1932 trust, involving transfers made subsequent to March 3, 1931, comes within the provisions of the amendment to section 302 (c). Security First National Bank of Los Angeles, Executor, 36 B. T. A. 633. We hold, therefore, that the value of the 1932 trust at the date of decedent’s death, $38,051.38, is properly included in the gross estate of decedent and respondent is sustained.

Turning now to the 1929 trust, it is clear that the amendments to section 302 (c) effected by the Joint Resolution of March 3,1931, and section 802 (a) of the Revenue Act of 1932 are not applicable to the 1929 trust with respect to decedent’s right to receive the income of that trust for life. The Supreme Court has held in Hassett v. Welch, 303 U. S. 303, that these amendments “are prospective in their operation and do not impose a tax in respect of past irrevocable transfers with reservation of a life interest.”

To include the 1929 trust in the decedent’s gross estate under section 302 of the Revenue Act of 1926 it is necessary to find that (1) the transfers were made in contemplation of death, or, (2) that they were intended to take effect in possession or enjoyment at or after death, or (3) that the decedent had an interest in the corpus of the trust at the date of death. Respondent urges that all of the above propositions be found to exist. It is one of the chief contentions of respondent that decedent reserved the right to withdraw the principal of the 1929 trust in excess of 50 percent of the original amount of the properties placed in trust by making request to the trustee to make payments out of principal for illness and emergency and any other unusual expenses. In other words, respondent contends that decedent could have revoked the .entire trust. It is argued that there is an ambiguity in paragraphs 4 and 5 of the 1929 trust. This same question has been considered by the Court of Appeals of the State of New York in, In the Matter of the Appraisal of the Estate of Lisa W. Sand ford, Deceased, 14 N. E. (2d) 374. In this opinion the Court of Appeals stated as follows:

If an ambiguity arises by reason of an apparent conflict between paragraph 4 and paragraph 5 of the agreement of December 31,1929, the practical construction given to that instrument by the parties during the years 1930 and 1931 up to July 12,1932, would be quite persuasive in ascertaining intent. The trust of December 31, 1929, may, therefore, be interpreted as irrevocable up to fifty per cent of the corpus.

The New York Court of Appeals held the trust irrevocable up to 50 percent of the trust corpus in an appeal by the New York Tax Commission.

We are of the same opinion and independently we conclude that by the terms of the trust the grantor’s (decedent’s) reserved power to withdraw from the corpus was limited to the right to withdraw only 50 percent thereof. Paragraph 4 states plainly that “the aggregate of such withdrawals shall not at any time exceed fifty per cent (50%) of the total of the original amount of securities and properties placed in trust.” (Italics ours.) This restriction applies to paragraph 5 which is a provision for withdrawals for the grantor’s own uses upon which paragraph 4, in its generality, was silent. The words in italics above, “at any time”, are determinative. They cover times of “illness” and “unusual expenses” and provide the support for our conclusion as to the limitation.

In 1932 decedent withdrew securities from the 1929 trust to achieve a more satisfactory handling of her investments. The parties have stipulated that this was “the immediate purpose and one of the objectives in revoking the trust of 1929 to the extent of fifty per cent.” It is stated as a preamble to the 1932 trust, executed by decedent: “Whereas, the said Lisa Winchester Sandford had the power under the said trust agreement [1929 trust] to withdraw up to fifty (50%) per cent of the original amount of securities and properties placed in trust.” (Italics ours.) If the trustee of the 1929 trust had been called upon to make withdrawals from the 1929 trust corpus in excess of 50 percent for “other unusual expenses” under paragraph 5, the above statement, executed by decedent, removed all possible doubt as to the limitation existing in paragraph 4 of the 1929 trust.

We therefore hold that decedent made an irrevocable, inter vivos transfer in 1929 of the property comprising the corpus of the trust to the extent of the 50 percent here under consideration and she had no power to revoke what remained. It follows that in 1929 Baronig Baron received a vested remainder interest in the corpus of the trust subject to being divested of 50 percent. In re Barstow’s Estate, 230 App. Div. 371; sec. 40, New York Real Property Law (McKinney, vol. 49); Elizabeth B. Wallace, Executrix, 27 B. T. A. 902; William B. Armstrong, 32 B. T. A. 1261. This transfer was complete when made and was not one intended to take effect in possession or enjoyment at death and is not testamentary in character merely because of the reservation of the life estate. Since the transfers were irrevocable and complete in 1929, decedent did not have an interest in the corpus of the 1929 trust at her death. In these respects the 1929 trust comes within the provisions of Nichols v. Coolidge, 274 U. S. 531; Reinecke v. Northern Trust Co., 278 U. S. 339; May v. Heiner, 281 U. S. 239; Burnet v. Northern Trust Co., 283 U. S. 782; Morsman v. Burnet, 283 U. S. 783; McCormick v. Burnet, 283 U. S. 784; Coolidge v. Long, 282 U. S. 582; Bullard v. Commissioner, 90 Fed. (2d) 144, and is not indudable in decedent’s gross estate.

There remains for our consideration the determination of the respondent that the transfers to the 1929 trust were made in contemplation of death. This contention is difficult in view of the stipulation of the parties that the decedent at the time she executed the 1929 trust was not contemplating imminent death nor was she then apprehensive of dying within the immediate or near future. Be-spondent points to the fact that the entire property conveyed originally to the 1929 trust, having a value of about $122,000, represented a substantial amount, if not nearly all of decedent’s estate. The transfers to the 1929 trust were made within five years of the death of decedent. These are the only circumstances remaining upon which respondent’s contention is based. Circumstances pointing to the conclusion that the transfers were not made in contemplation of death are that decedent was in apparent good health, was not contemplating imminent death, and was not apprehensive of dying within the near future when she executed the 1929 trust. Decedent did not execute her last will and testament until three years later, on June 30, 1932. Cf. Updike v. Commissioner, 88 Fed. (2d) 807. One of the purposes in creating the 1929 trust was to facilitate the buying and selling of securities for the decedent through her agent, Walter C. Baker, assistant trust officer of the Guaranty Trust Co. One of the stated purposes of executing the 1932 trust was to effect a more satisfactory handling of decedent’s investments, decedent having been dissatisfied with the manner in which her investments were being handled by Baker, which had resulted in substantial losses. The phrase “in contemplation of death” has been carefully considered by the courts. United States v. Wells, 283 U. S. 102. Briefly, the test of whether or not the transfer was made in contemplation of death is always to be found in the transferor’s motive and the circumstances must show that death was the motivating cause of the transfer. We do not find from the circumstances in this case that death was the motivating cause of decedent’s transfers to the 1929 trust. The facts that decedent was in apparent good health, did not execute a will at the time, and desired to provide a means for the management and making of investments, all militate against a presumption that the 1929 transfers were in contemplation of death. We do not find facts to show that there was a condition of mind or body which would naturally prompt the settlor to make a disposition of her property to the natural objects of her bounty. On the record before us we conclude and hold that the transfers to the 1929 trust were not made in contemplation of death. Estate of Emma B. Morse, 27 B. T. A. 1070; Estate of Walter P. Sharp, 33 B. T. A. 290; affd., 91 Fed. (2d) 804; Tail v. Safe Deposit & Trust Co. of Baltimore, 74 Fed. (2d) 851; United States v. Wells, supra; E. Pennington Pearson, 36 B. T. A. 5; Security First National Bank of Los Angeles, Executor, supra. Respondent relies upon Updike v. Commissioner, supra. We do not think the decision of the court in that case is determinative of the issues here. The circumstances in that proceeding were materially different from the circumstances involved in this proceeding. Respondent also relies on Commissioner v. Colorado National Bank of Denver, 95 Fed. (2d) 160, but we find that there was substantial evidence in that case that the motives of the grantor of the trust were associated with death and we do not find substantial evidence of such motives in this proceeding.

For all of the reasons above stated, it must be concluded that respondent erred in including in decedent’s gross estate the value of the corpus of the 1929 trust.

(2) The Duryea Trusts. — Ellen W. Duryea, sister of decedent, executed an inter vivos trust on June 2,1923, and created a testamentary trust by the second codicil to her last will dated February 16, 1927. In each trust petitioners’ decedent was given the trust income for life, with power to appoint by will the disposition of the corpus of the trust. Upon decedent’s failure to exercise the powers of appointment, the corpus of the inter vivos trust was to go to the children of Lisa W. Sandford (Lisa W. Heighe and Robert H. Heighe), and the corpus of the testamentary trust was to go to Lisa W. Sand-ford’s “heirs at law.”

Ellen W. Duryea died December 23, 1927. The petitioners’ decedent exercised both powers of appointment by codicil to her will dated September 1, 1933, whereby she bequeathed one-half of each trust fund to two persons, her daughter, Lisa W. Heighe, and her adopted son, Baronig Baron, both of whom survived her. The respondent has included in decedent’s gross estate the values of the entirety of the two Duryea trusts.

Section 302 (f) of the Revenue Act of 1926 requires that there be included in the gross estate of a decedent for Federal estate tax the value of property passing under a general power of appointment exercised by the decedent by will. Petitioners’ decedent had general powers of appointment under the will of her sister and exercised the powers of appointment in the following way: She appointed as a beneficiary her daughter, who was one of her “heirs at law”; she appointed as the other beneficiary her adopted son, who was not an “heir at law” under New York law. If decedent had failed to exercise the powers of appointment, then, under the terms of the will of Ellen Duryea the corpora of the trusts would have passed to Lisa W. Heighe and Eobert H. Heighe, the children of Lisa W. Sandford, and Baronig Baron, an adopted son, would not have been a beneficiary. See Domestic Delations Law of New York, sec. 114. In other words, Baronig Baron was a stranger who would not have taken property under the will of Ellen Duryea except by appointment by petitioners’ decedent in exercise of her powers of appointment. It is clear, therefore, that one-half of each of the Duryea trusts passed to Baronig Baron under exercise of the general powers of appointment by petitioners’ decedent and these transfers come within the provisions of section 302 (f) of the Eevenue Act of 1926. Baronig Baron’s interest in the corpora of the two trusts depended upon and sprang from the will of petitioners’ decedent. Cf. In re Delano’s Estate, 116 N. Y. 486; 68 N. E. 871. We hold that one-half of each of the Duryea trusts is properly included in the gross estate of petitioners’ decedent.

Petitioners’ counsel devoted a great part of their brief to the argument that none of the property in the Duryea trusts is includable in decedent’s estate because of their contention that all estate taxes were, by Ellen Duryea, directed to be paid from her residuary estate by paragraph nine of her will, and that Ellen Duryea intended that her residuary estate should be subject to a tax applicable to the estate of the donee of the powers of appointment. This argument is without merit in this proceeding. It goes to the matter of the manner of payment of the petitioners’ decedent’s estate taxes. The Federal estate tax liability involved in this proceeding attaches to the estate of petitioners’ decedent and determination of that tax liability is not affected by any provisions that may or may not have been made by Ellen Duryea in her will to pay petitioners’ decedent’s estate taxes.

There remains the question of whether the shares of the Duryea trusts that Lisa W. Heighe received should be included in decedent’s estate. Decedent exercised the powers of appointment and respondent contends that by virtue of the exercise of the powers of appointment property passed under the powers to Lisa Heighe and her shares in the trusts should be included in decedent’s estate under section 302 (f).

The Supreme Court has considered a question similar to that involved here in Helvering v. Grinnell, 294 U. S. 153. The Court has construed the meaning of section 302 (f) and has approved the reasoning of the New York Court of Appeals on principles which go- to the essence of the applicability of section 302 (f). It is necessary to consider first the applicability of the rule set forth in the Grmnell case to the question involved here.

In Helvering v. Grinnell, supra, the facts were similar to the facts in this proceeding except that in the Grinnell case the persons named as beneficiaries under exercise of a power of appointment renounced in writing their right to receive property under the appointment and elected to take the property under the will of the donor of the power. Analysis of the situation in the Grinnell .case shows that the appointees had vested remainder interests in the property involved under the will of their father, the donor of the power. It is clear that the appointees had “a distinct and separate title” in the property in question and elected to take the property under that title. It is also clear that the appointees, who were remaindermen under the donor’s will, had a perfect title without the appointment under which they would have received the same property in the same amount if the general power of appointment had not been exercised. The exercise of the power did not complete or consummate their title. The expiration of the intermediate life estate was the event that ripened the vested interest into a right to possession of the property.

In the Grinnell case, it was the contention of the Government:

* * ⅜ that the tax (under section 302 (f) of the Revenue Act of 1926) is imposed upon the power to transmit or the transmission of property by death; the shifting of the economic benefits in property is the real subject of the tax.

The Government argued that the property in question passed to the sisters under the general power of appointment exercised by the decedent by will within the meaning of the statute.

The Court did not agree and stated:

⅜ * * The tax here does not fall upon the mere shifting of the economic benefit in property, but upon the shifting of those benefits by a particular method, namely, by their “passing under a general power of appointment”, and not otherwise. Acceptance of the Government’s contention would strip the italicized word of all meaning.

Passing to the question whether the property involved had passed by the “particular method”, i. e., under a general power of appointment, the Court held that the property did not pass under the power and pointed out that the power might have been exercised so as to have left the appointee no title at all; but that the power was exercised so as to leave the beneficiaries the same title they had without the exercise of the power. In so holding, the Court approved the reasoning of the New York Court of Appeals in the Matter of Lansing's Estate, 182 N. Y. 238; 74 N. E. 882, and quoted a paragraph from the opinion in Lansing's Estate, which we quote here:

Her rights were fixed by the will of her grandfather, and, unless changed pursuant to its provisions, her estate in expectancy would become an estate in possession upon the death of her mother. * ⅜ * Although the power was exercised in form, her title was perfect without it, and she derived no benefit from it. The power was to “dispose of the remainder”, and the remainder was not disposed of, but continued where it was. The attempt to execute the power was not effective, because it did nothing. The exercise of a power which leaves everything as it was before is a mere form, with no substance.

This Board has previously held that property subject to a general power of appointment should be included in gross estate under section 302 (f) where the power is exercised and where the appointees, under local law, had a vested remainder interest in the property and would receive it under the will of the donor of the power. See Mary M. Lee, 18 B. T. A. 251; affd., 57 Fed. (2d) 399; certiorari denied, 286 U. S. 563; Joseph Walker Wear et al., Executors, 26 B. T. A. 682; affd., 65 Fed. (2d) 655. The court in the Wear case stated that “the tax is not upon the property of the power but is upon the exercise of the power itself." (Italics ours.) The Supreme Court has overruled the Wear and Lee cases in the Grinnell case where it stated that:

* * * The reasoning of those courts and of the court below (N. Y. Court of Appeals) cannot he reconciled. We are of the opinion that to the extent of the conflict, the view of the former is wrong and that the court below is right and we hold accordingly.

We understand the rule now expressed by the Supreme Court to be that property is not to be included in a decedent’s estate under section 302 (f) unless the exercise of a general power of appointment effectuates the passing of the property and consummates the passing of title.

We are concerned with what we perceive to be the only difference between this case and the Grinnell case, namely, the matter of what is termed election. Lisa Heighe did nothing in this respect, i. e., she did not renounce the right to receive under the appointment and elect to take under the will of the donor. The Supreme Court did not have to consider the materiality of “election” except where it had been made so as to reject or refuse the taking of property under appointment. However, we come to the conclusion that “election” is not material and that the rule of the Grinnell case is to be applied by a disregard of what is termed an “election” where the beneficiary-appointee is given the same interest in property (or less) under the power as he has as a vested remainderman under the will of the donor of the power. What has been termed “an election” is a formal matter. As we see it, where a person has a vested remainder interest under the will of the donor of the power of appointment subject only to being divested by exercise of the power, and where the general power is exercised so as to leave the appointee’s rights just as they were before (the same or less), then it adds nothing to the property rights vested under the will of the donor of the power for the remainderman to make a formal declaration that he takes under the will of the donor of the power. If he takes under the will of the donor he does so because of property law without express election to so take. It may be said that his title is perfect without his formally saying so. It is a different matter to refuse a devise. An “election” is a method of avoiding title against one’s will and is recognized as an effective method of refusing to take title. We conclude that the reasoning approved in the Griimell case applies here where there was no “election.” Cf. Matter of Chauncey, 102 Misc. 378; 168 N. Y. S. 1019, and In the Matter of the Appraisal of the Estate of Ellen Duryea, 14 N. E. (2d) 369. We are unable to find any evidence in the Lee and Wear cases that there was an “election” under the situations there involved and the matter is not discussed by the courts.

We turn now to the particular facts relating to Lisa Heighe’s property interests involved in this proceeding. We understand the rule of the GrinneTl case to require consideration of the property laws of the state where property transfers take place. Lisa Heighe had a vested remainder future estate in the Duryea trusts under the will of Ellen Duryea and the existence of the unexecuted power of appointment did not prevent the vesting of the future estate. See section 41, Real Property Law of New York (McKinney, vol. 49). Cf. William Korn et al., Executors, 85 B. T. A. 1071; Lansing’s Estate, supra; Chauncey’s Estate, supra. The facts show that if the power of appointment had not been exercised one-half of the trusts would have gone to Lisa Heighe and one-half to Robert Heighe under the will of the donor of the power, Ellen Duryea. Under the rule of the Grinnell case, as applied to this particular proceeding, the shares in the Duryea trusts taken by Lisa Heighe did not pass to her under the exercise of the power if the exercise of the power left everything as it was before, i. e., if she received no more under the power than under the will of the donor of the power. Just what Lisa Heighe received under the power has been determined by the New York Court of Appeals in the Estate of Ellen Duryea, supra. The court in that case had before it as appellants both Robert H. Heighe and the New York Tax Commission. Robert Heighe was a remainderman whose remainder interest was divested by exercise of the power. The court was adjudicating a matter relating to the right to taxes. The situation was peculiar. The court considered the property interests involved carefully. The appellants contended that Lisa Heighe took more under the power of appointment than she would have taken by an election to take under the will of Ellen Duryea. The court stated one of the questions to be “whether the transfer in each instance is one properly held taxable to the estate of the donee under established principles of law.” (Italics ours.) We regard the conclusion of the New York Court of Appeals as determinative of property rights “under established principles of law” and as controlling here on the point of whether Lisa Heighe received the same property rights under the power as under the will of the donor of the power. Cf. Freuler v. Helvering, 291 U. S. 35. The New York Court of Appeals held as follows:

* * * It must therefore be held that Lisa W. Heighe takes no more under the appointment than she would have taken had no appointment been made.

The court stated in support of its holding, as follows:

* * * The donee of the power might have said, “I give to Lisa W. Heighe the share which she would have taken under the will of Ellen W. Duryea and to Baronig Baron the share which Robert H. Heighe would have taken.” That would have been a good appointment, would have precluded Robert H. Heighe from taking a share in the trust estate under the Duryea will and would have given to Lisa W. Heighe exactly what she would have taken under the Duryea will had no appointment been made. While the donee of the power did not mention the fact that such was the disposition she was making of the fund, it is entirely clear that such was the intent and effect of the appointment made. * * *

In other words, Lisa Heighe would have taken one-half of the trusts under the will of the donor of the power if the power had not been exercised and the New York Court of Appeals has held that it is clear that the intent and effect of the appointment made by decedent was to give Lisa Heighe the same share she would have taken under the will of the donor of the power. As stated above, we regard this as settling a question of property rights and this construction is controlling here.

We conclude, therefore, that no property passed to Lisa Heighe when decedent exercised the power of appointment because the exercise of the power left her property rights just as they were before. Under the rule of Helvering v. Grinnell, supra, there was no passing of property upon which the tax provided for under section 302 (f) can attach. We hold that the shares of Lisa Heighe in the corpora of the Duryea trusts are not includable in decedent’s gross estate.

(3) The Winchester Trust. — In the pleadings, petitioners allege that respondent erred in including in decedent’s estate the value of the corpus of the Winchester trust because at the date of Thomas B. Winchester’s death in 1904 there was no Federal estate tax. Thomas B. Winchester, by his will and codicils thereto, bequeathed the corpus of the trust established for Lisa W. Sandford to her “then living issue” in default of her exercise of the power of appointment over the trust corpus he gave her. Decedent exercised the power of appointment by directing that the principal of the trust be used for the payment of twelve legacies, aggregating $16,500, to named legatees, and that, in so far as possible, administration and funeral expenses, as well as expenses in connection with the erection of a tomb at a cost not to exceed $15,000 be paid out of the principal of said trust and that any residue of said trust be divided equally between Lisa Heighe and Baronig Baron.

Lisa Heighe was in being before the power of appointment was exercised. Under the laws of Massachusetts, Lisa Heighe took a vested remainder interest in the corpus of the trust created undei the will and codicil thereto of Thomas B. Winchester defeasible on a condition subsequent, i. e., the exercise of the power of appointment. Blanchard v. Blanchard, 1 Allen, 227; Moore v. Lyons, 25 Wend. 119; Ray v. Enslin, 2 Mass. 554; Welch v. Stevens (Mass.), 104 N. E. 726. Cf. Emmons v. Shaw, 171 Mass. 410; 50 N. E. 1033; Doe v. Considine, 73 U. S. 458; Coolidge v. Long, 282 U. S. 582; Saltonstall v. Saltonstall, 276 U. S. 260. Although it appears doubtful, under the facts, whether there will be any residue in this trust for Lisa Heighe to take, whatever she does take will be part of her vested remainder interest under the will of Thomas Winchester, the •donor of the power. Upon the same reasoning set forth above relating to the Duryea trusts under the apparent rule of Helvering v. Grinnell, supra, the exercise of the power by the decedent did not consummate the property rights of Lisa Heighe because they had already vested in her under the will. We hold, accordingly, that the share of the Winchester trust received by Lisa Heighe did not pass to her under the power and therefore it is not includable in decedent’s estate under section 302 (f).

As for the rest of the transfer’s of the Winchester trust to strangers, including Baronig Baron, and to decedent’s executors for stated uses, we conclude that such shares of the corpus of the trust are properly included in decedent’s estate because all these gifts passed under a general power of appointment. We arrive at this conclusion even though the power of appointment was created prior to the enactment of the Federal estate tax legislation. Thomas Winchester, in 1904, left the property in question subject to the power. The transfers to these beneficiaries were incomplete as to Winchester. The appoint-, ment by decedent made the transfers complete. The exercise of the power of appointment after the effective date of the pertinent Federal estate tax law requires that the value of the part of the trust corpus so passing be included in decedent’s gross estate. We so hold. Edward J. Hancy, Executor, 17 B. T. A. 464; Chanler v. Kelsey. 205 U. S. 466; Saltonstall v. Saltonstall, supra. Cases cited by petitioners, including Coolidge v. Long, supra; Nichols v. Coolidge, supra; May v. Heiner, supra; Burnet v. Northern Trust Co., supra; United States v. Field, 255 U. S. 257, may be distinguished upon their facts and upon differences in the status of the Federal estate tax law now and at earlier dates.

(4) Expenses of the Estate. — In determining the deficiency here in question, the respondent allowed only $1,614.50 as a deduction on account of funeral expenses. On the basis of the facts stipulated, the estate is entitled to a total deduction of $6,221.50. We hold accordingly.

Keviewed by the Board.

Decision will be entered u/nder Rule 50.

       Joint Resolution of Congress of March 3, 1931:

        “Resolved, * * * That the first sentence of subdivision (c) of section 302, of the revenue act of 1926, is amended to read as follows:
      “(e) 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, including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of or the income from the property, or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth.” [See also sec. 803 (a), Revenue Act of 1932.]

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — ■
      (a) To the extent of the interest therein of the decedent at the time of his death;
      * * * * * * *

      (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 talee effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * * [Italics supplied.]

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (A) the possession or enjoyment of, or the right to the income from, the property, or (B) 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; * * * [As amended by section 803 (b) of the Revenue Act of 1932.]


source: Caselaw Access Project

author: Ttson:

license: Public Domain

text:
    Cook Drilling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82231.
    Promulgated August 9, 1938.

      W. M. Shaw, G. P. A., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Ttson:

The respondent has determined a deficiency of $5,548.04 in the petitioner’s income tax for the year 1982.

The petitioner reported the amount of $1,893.11 as its income derived from certain oil payment contracts, arrived at (1) by including in gross income only the amounts collected in 1932 under drilling contracts completed in that year and under a contract of sale of two leases, and (2) by deducting the drilling cost of wells completed in 1932 as an expense, and the cost of the leases sold. The respondent determined that the petitioner derived an income of $46,302.59 during 1932 under its oil payment contracts.

The petitioner alleges that the respondent erred (1) in including in its income for 1932 the fair market value of future oil payments to be received under contracts for drilling oil wells and a contract of sale of two leases, minus the drilling cost of wells completed in 1932 and the cost of the leases sold; (2) in including in its income for 1932 that proportion of the oil payments collected in 1932 represented by the ratio between the fair market value of the oil payment contracts and the face amount thereof, and (3) in failing to allow a deduction for depletion.

By amended answer the respondent alleges that if he erred in his determination, then, in the alternative, the petitioner derived income, under its oil payment contracts, in the amount of $39,451.59, based upon the inclusion in income of oil payments collected during 1932, less an allowance for depletion. The petitioner’s reply denies that it derived income in such alleged amount from that source and denies the correctness of respondent’s computation of the allowance for depletion.

This proceeding has been submitted upon a stipulation of facts which, together with the several exhibits attached thereto, is adopted as our findings of fact and included herein by reference. A brief resumé of the facts will suffice for the purpose of this opinion.

The petitioner, an Arkansas corporation organized in 1925, is, and was during the calendar year 1932, engaged in the business of operating oil and gas wells and in drilling oil and gas wells for others under contract. On its books, kept on the accrual basis, the petitioner accrued the total contract price receivable out of oil, as gross income in the year its drilling contracts were completed. Also, it accrued the total drilling costs paid or incurred as an expense in the year the drilling contracts were completed.

On October 10,1931, the petitioner entered into a contract with the Sonbar Corporation for the drilling of not less than four and not more than six oil wells on the Finney lease, embracing land located in Texas. The contract provided that the petitioner would be paid the sum of $11,200 “as compensation for its services in drilling each well” and that such sum “shall be paid from, and only from, the proceeds of seven-sixteenths (⅞-ths) of the first oil and/or gas produced, saved and marketed from the Finney lease.” The contract did not provide for the execution by the Sonbar Corporation of an assignment or conveyance to petitioner of a fractional interest in the Finney lease or the oil and gas in the described premises. Under that contract wells Nos. 1 and 2 were completed prior to December 31, 1931, and wells Nos. 3 to 6 were completed during the calendar year 1932.

On April 12, 1932, the petitioner entered into a contract with the Bussa Co. for the drilling of an oil well by petitioner on the W. P. Brett farm situated in Texas and the drilling of that well was completed prior to December 31, 1932. The contract provided that the contract price for the petitioner’s services “shall be paid by an assignment of oil in the amount of Eleven thousand five hundred ($11,500) dollars * * *; the said payment to be made out of twenty-one-one hundred twenty-eighths (21/128ths) of all of the oil and gas produced, saved and sold from the premises hereinabove described.” The stipulated facts disclosed the amount of money collected by the petitioner under that contract during 1932. The record does not disclose whether the Bussa Co. ever executed an assignment to petitioner of an interest in the oil and gas in the described premises.

Under the terms of their respective contracts no personal liability to pay petitioner its agreed compensation in the event no oil was produced was imposed either on the Sonbar Corporation or the Bussa Co.

In the early part of 1932 the petitioner acquired two oil and gas leases known as the Alford and Shaw leases, embracing land situated in Texas. On August 1, 1932, the petitioner entered into a contract by the terms of which it sold those two leases to the Central Oil Corporation, for a total consideration of $65,932.12 to be paid by and only by the proceeds from “an undivided three-fourths of % of the oil and gas * * * when, as and if * * * produced, marketed and sold”, from the lands described in the contract. The contract imposed no personal liability on the Central Oil Corporation for the payment of the agreed purchase price, except such liability as might arise out of the exercise by petitioner of an option to declare any remaining amount unpaid to be due and payable upon the breach of any of its covenants by the Central Oil Corporation, such as the payment of taxes, the proper operation and maintenance of the leases, and compliance with lawful rules and regulations imposed by any lawful authority as regards the operation and development of the leases. Such contingent personal liability is not material to the question here involved. The contract required the Central Oil Corporation to execute, in favor of petitioner, an assignment to enforce and carry out the agreement as to petitioner’s right to receive the specified oil payments from tbe date of the contract until full payment of the agreed purchase price. The sale and transfer by petitioner of those leasehold interests to the Central Oil Corporation was effective as of August 1, 1932, but for certain reasons, not material here, the formal assignment by the latter in favor of petitioner, as required by the contract, was not executed until November 30, 1932. Such formal assignment recited that the interest in the oil and gas therein conveyed by the Central Oil Corporation to petitioner, “shall be absolute” and that the petitioner “shall be entitled to all of said interest in the oil and gas so produced, saved and marketed until” the petitioner “shall have received from the sale of said oil and/or gas so produced, saved and marketed the full sum of * * ⅛ $47,736.08, * * * whereupon the interest of” the petitioner “therein shall cease and terminate.” The difference between that sum of $47,736.08 and the agreed consideration of $65,932.72, or the amount of $18,-196.64, represented proceeds received by petitioner out of oil runs from August 1, 1932, the effective date of the contract of sale to the Central Oil Corporation, to November 30, 1932, the date of the formal assignment to petitioner by that corporation. The assignment imposed no personal liability on the Central Oil Corporation for the payment of the agreed purchase price except such as is hereinabove set out as being provided in the contract of sale.

The stipulation sets forth tabulations which show, as to each of the six wells drilled on the Finney lease, the one well drilled on the Brett farm, and as to the sale of the Alford and Shaw leases, respectively, (A) the contract price, plus extras, for drilling the wells and for the sale of the leases, (B) the cost to petitioner of drilling the wells and the cost to petitioner of the leases sold, and (C) the agreed fair market values of the future payments out of oil under the drilling contracts and under the contract of sale of the leases at the time of their acquisition by petitioner, as of the dates of the completion of the wells and the sale of the leases. The stipulation also sets forth a tabulation which shows, as to each of the seven wells and as to the Alford and Shaw leases, respectively, the amounts of money received by petitioner during 1931 and 1932, under those contracts for drilling the wells and the contract for the sale of the leases.

The petitioner contends (1) that it realized no taxable income in 1932, based upon the fair market value of the future oil payments to be received under its drilling contracts and its contract of sale and assignment, (2) that it is entitled to deduct in 1932 the drilling costs as an expense when incurred and also the cost of the leases sold in that year, and (3) that, having acquired an economic interest in tbe leasehold, it is entitled to depletion on oil payments when received.

The contracts for drilling the seven oil and gas wells and also the contract for the sale of the two oil and gas leases provided for future payments payable only out of the proceeds of oil if, as, and when produced. The petitioner’s right to receive such future oil payments was wholly contingent upon the happening of unpredictable future events which might never occur. In 1932 the amounts which would be received by petitioner under those contracts were not certain or ascertainable and the petitioner was not required to accrue as income for 1932 amounts which it might never receive. Burnet v. Logan, 283 U. S. 404; North American Oil Consolidated v. Burnet, 286 U. S. 417; Edwards Drilling Co., 35 B. T. A. 341; affd., 95 Fed. (2d) 719; Willis R. Bearing, 36 B. T. A. 843. Following these controlling authorities, we hold that the respondent erred in including in the petitioner’s gross income for 1932 the fair market value of the above mentioned contracts for future oil payments; and we further hold, upon authority of Edwards Drilling Co., supra, and Willis R. Dearing, supra, that all the amounts actually received by petitioner during 1932, under its drilling contracts, the contract of sale, and the assignment, constituted gross income for that year, notwithstanding that the parties have stipulated what the fair market value was of the future payments out of oil to be made under the contracts and assignment.

Upon authority of Edwards Drilling Co., supra, we hold that the petitioner properly deducted, as a business expense for 1932, the costs incurred in drilling wells completed during that year.

The petitioner contends that it is entitled to the statutory allowance for depletion, under section 114 (b) (3) of the Revenue Act of 1932, based upon its proportionate share, pursuant to its oil payment contracts, of the proceeds derived from the production of oil and gas from the properties embraced in its drilling contracts as well as from the properties embraced in its contract of sale and the assignment with regard to the Alford and Shaw oil and gas leases.

With respect to petitioner’s income from oil payments under its drilling contracts with the Sonbar Corporation and the Bussa Co., respectively, such, contention can not be sustained. The statutory allowance for depletion is predicated upon the receipt of gross income from the operation of oil and gas wells, by one who has a capital investment in the oil and gas in place and may not be allowed to one who has no such capital investment but only an income derived from production, through a contractual relation or personal covenant with the owner of the mineral deposit. Helvering v. Bankline Oil Co., 303 U. S. 362; Helvermg v. O'Donnell, 303 U. S. 370; Helvering v. Elbe Oil Land Development Co., 303 U. S. 372.

Prior to the execution of its drilling contracts with the Sonbar Corporation and the Bussa Co. the petitioner owned no interest in the oil and gas in place or the leases embracing the premises described in those contracts, and, accordingly, unless under such contracts the petitioner became the owner of such an interest, it is clear that under the above cited authorities, petitioner is not entitled to the deduction claimed for depletion. The petitioner did not acquire such an interest under its drilling contracts, since both of those contracts called for the performance of certain services by the petitioner in consideration of a specified compensation to be paid out of the proceeds from the production of oil and gas, and established merely a contractual relation with the owners of the leases and did not purport to grant or convey to petitioner an interest in the leases themselves.

In Edwards Drilling Co., supra, we said:

The completion of producing wells results in the acquisition by the lessees of capital assets, the cost of which is recoverable through depletion deductions. United States v. Dahota-Montana Oil Co., 288 U. S. 459. But it does not necessarily follow that expense incurred by the petitioner in drilling the wells resulted in the acquisition by it of a like asset. The petitioner undertook to drill the wells not for itself, but for the lessees; hence upon their completion it had nothing as the result of its expense other than a claim for the contract price, payable out of the proceeds of oil and gas marketed from the wells.

In the instant case the owners of the oil and gas in place, the Sonbar Corporation and the Bussa Co., respectively, with whom petitioner entered into its drilling contracts, did not execute to petitioner an assignment of an interest in the oil and gas in place, as was the fact in Willis B. Dearing, supra, which case, for that reason, is distinguished from the instant case.

With respect to petitioner’s income from oil payments under its contract of sale of the Alford and Shaw oil and gas leases to the Central Oil Corporation and the latter’s assignment to petitioner, we hold, upon authority of Thomas v. Perkins, 301 U. S. 655, that the petitioner withheld and reserved an undivided ¾ of ⅞ of the oil and gas in place and to be produced, marketed and sold up to an amount sufficient to yield $65,932.72, and, further, that petitioner is entitled to the depletion allowance provided by section 114 (b) (3), supra. See Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312; Commissioner v. Fleming, 82 Fed. (2d) 324—327; Commissioner v. Williams, 82 Fed. (2d) 328.

Petitioner in its 1932 return deducted the entire cost of the Alford and Shaw leases, $34,115.90, from gross income. Manifestly, that was improper. If petitioner were entitled to deduct its entire cost of the leases, there would be nothing to deplete in 1932 as to the “in oil” payments from these leases. The amount received from such payments was only $21,514.75 and if petitioner had the right to deduct the entire cost of the leases, there would be a minus quantity in its income, so far as these leases are concerned.

When a taxpayer reserves an interest in oil in place, as did petitioner when it sold the Alford and Shaw leases for $65,932.72 to be paid “out of an undivided three-fourths of seven-eighths of the oil and gas produced, marketed, and sold from the leases, etc.”, it is entitled to recover its cost by way of depletion and not by way of deduction of the cost of the leases from gross income. Of course, under percentage depletion a taxpayer may recover, in some instances, much more than cost. For example, the lease may have cost the taxpayer but little, if anything, yet if he retains such an interest as entitles him to depletion, he is entitled to his 27½ percent of the gross income of the property, as a deduction, subject to the limitations provided in section 114 (b) (3), supra, even though that may be much greater than cost. On the other hand, a taxpayer is entitled to a return of his full cost by way of depletion, even though depletion figured on the percentage basis will not yield him that much. Cf. Mountain Producers Corporation, 34 B. T. A. 409; affd., 303 U. S. 376. Transcalifornia Oil Co., Ltd., 37 B. T. A. 119. The last clause of section 114 (b) (3), supra, makes certain that result.

Depletion on the $21,514.75 “in oil” payments received by petitioner in 1932 from the Alford and Shaw leases should be computed in accordance with the views herein expressed.

[Reviewed by the Board.

Decision will be entered under Bule BO.

      Sbc. 114 (b) (3) — Percentage Depletion for Oil and Gas Wells.- — In tbe ease of oil and gas wells the allowance for depletion shall be 27⅜ per centum of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. 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 legs than it would be if computed without referepqe to ⅞⅛ paragraph,


author: Kern:

text:
    Harry J. Brown, Ralph Skidmore and C. W. Skowlund, as Executors of the Will of Maggie Hodgins, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91233.
    Promulgated August 10, 1938.

      Perry J. Stearns, Esq., for the petitioners.

      B. F. Staubly, Esq., for the respondent.
   OPINION.

Kern:

The principal question presented in this proceeding is whether the power of appointment which was received by petitioners’ decedent under the trust created by Isaac Stephenson in 1911 and was exercised by her in her will, was a general power of appointment within the meaning of section 302 (f) of the Eevenue Act of 1926, set out in the margin. This question was considered in the case of J. Earl Morgan, Executor, 36 B. T. A. 588, which involved a similar power of appointment arising under the same trust. Upon the authority of that decision, we hold that the power of appointment exercised by petitioners’ decedent was a general power. The opinion in the case cited did not discuss the effect upon the character of the power of appointment of the “spendthrift” provisions contained in paragraph 15 of the trust instrument executed by Isaac Stephenson in 1917, which are set out above. These provisions do not make the power of appointment special rather than general. By the terms of the trust instrument, they apply only to the portions of the trust property going to any beneficiaries under the trust, which might well be construed as meaning those beneficiaries expressly named therein. However, assuming that these provisions might apply to payments made to persons not expressly named as beneficiaries under the trust, but who were merely those designated by the beneficiaries pursuant to the power of appointment of which they were donees, we are still of the opinion that they do not render special a power of appointment otherwise general, since they are concerned only with the method of payment of income and principal, and do not withdraw or alter in substance the beneficial enjoyment of the income or principal by the person or persons designated pursuant to the power of appointment.

Also, there is nothing in the record to indicate that these “spendthrift” provisions were ever availed of by the trustees with reference to any payments to petitioners’ decedent or her appointee.

Petitioners contend further that, since the Isaac Stephenson trust took effect by trust indenture dated May 12, 1917, before the Eevenue Act of 1926 was enacted, no part of this trust estate should be included in decedent’s gross estate in computing the estate tax thereon. They also contend that, should a part of such trust estate be thus included in decedent’s gross estate pursuant to.section 302 (f) of the Revenue Act of 1926, this section would be contrary to the Fifth Amendment to the Constitution of the United States.

Both of these arguments seem to be predicated on a contention that the person taking property pursuant to the exercise of a power of appointment by a donee of such power takes such property as from the donor of the power rather than from the donee. The only case cited by petitioner which is relevant to this contention is United States v. Field, 255 U. S. 257. That case arose under the Revenue Act of 1916, which did not have any section therein similar to section 302 (f) of the Revenue Act of 1926. The Court, in that case, indicated clearly that if there had been a section in the Revenue Act of 1916 which specifically provided, as section 302 (f) of the Act of 1926 does, that property passing under a general power of appointment exercised by the decedent should be included in decedent’s estate for Federal estate tax purposes, such a tax would be upheld. This inference may be justifiably made by reason of the fact that the Court, in holding in that case that property passing under a general power of appointment exercised by a decedent should not be included in decedent’s estate, gave as one of the reasons for the decision the failure of the Revenue Act of 1916 to specifically provide for such inclusion, whereas the Revenue Act of 1918 did provide for its inclusion. This case and the case of Helvering v. Grinnell, 294 U. S. 153, in which the Court assumed the validity of this section in holding that it did not apply to the facts of the case, would indicate that, where the appointee under a general power of appointment takes property pursuant to the exercise of such power by the donee thereof by will, the value of the property thus taken is includable in the estate of the donee for estate tax purposes, pursuant to the provisions of section 302 (f), regardless of the fact that the power was created by the donor thereof prior to the enactment of this section of the act, since the property was transmitted to the appointee by the donee by the exercise of the power of appointment, and such transmission is subject to the Federal estate tax. Stratton v. United States, 50 Fed. (2d) 48, decided by the Circuit Court of Appeals for the First Circuit some four years prior to the decision of Helvering v. Grinnell, supra, is squarely in point. In that case the court used the following language:

The appellants’ contention that, under the law of Massachusetts, the property passing under the decedent’s exercised powers of appointment was no part of her estate, and therefore, not taxable, while possibly logically sound, is not practically tenable. Compare United States v. Field, 255 U. S. 257, 41 S. Ct. 256, 65 L. Ed. 617, 18 A. L. R. 1461. The federal p'ower to tax is not thus limited. The decedent had, to repeat, not only the income during her life, but full power to dispose of it at her death. She actually transmitted the property by exercising the granted powers. Congress might tax such transmission. Tyler v. United States, 281 U. S. 497, 50 S. Ct. 356, 74 L. Ed. 991, 69 A. L. R. 758. The fact that the decedent’s appointees took, technically, from the donor of her power, is, for present purposes, immaterial. Compare Third Nat. Bank & Trust Co. v. White (D. C.) 45 F. (2d) 911.

See Fidelity Philadelphia, Trust Co. v. McCaughn, 34 Fed. (2d) 600; James C. Webster et al., Executors, 38 B. T. A. 273; Edward J. Haney, Executor, 17 B. T. A. 464; cf. Saltonstall v. Saltonstall, 276 U. S. 260.

Decision will be entered for the respondent.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case pf a bona fide sale for an adequate and full consideration in money or money’s worth.


author: AruNdell :

text:
    F. S. Stimson Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83705.
    Promulgated August 10, 1938.

      Charles H. Paul, Esq., and Charles T. Donworth, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

AruNdell :

The petition contains five assignments tsi error. One, which relates to a disputed depreciation claim amounting to $197.73, has been abandoned. Others, numbered 1, 2, 3, and 4 in the petition, remain in issue, and are controlled by provisions of the Revenue Act of 1932, reading as follows:

SEO. 22. GROSS INCOME.
(a) General Definition. — “Gross income” includes gains, profits, and income derived from * * * dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * *
SEC. 23. DEDUCTIONS EROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. — Ail the ordinary and necessary expenses paid or incurred during the taxable year * * * including a reasonable allowance for salaries or other compensation for services actually rendered * * *.
*******
(f) Losses by Cobpobations. — * * * losses sustained during tlie taxable year and not compensated for by insurance or otherwise.

Assignment of error No. 1 is based upon respondent’s rejection of a deduction from gross income of the amount of $8,419.66 which petitioner paid as its part of the rental obligations of Hollywood, Inc. Petitioner claims this sum represented a loss under subdivision (f), supra. We think the petitioner wrong in this claim. The record shows that the Delaware corporation and not petitioner was guarantor for the rents of Hollywood, Inc. The Delaware corporation’s liability, however, was no longer contingent, but an acknowledged loss when the petitioner’s incorporators accepted their ratable part and agreed to pay it. The Stimsons did pay a part of the debt before petitioner was incorporated and stood bound to pay the fixed ratable portions of the balance to the end of the lease. They paid $2,000 on March 18, 1931, before petitioner’s incorporation, which amount petitioner entered in its ledger account as a charge against Hollywood, Inc. The petitioner concedes that the only reason why the entire obligation was not made a matter of record when it took it over was due to the fact that the full amount of it was then unknown. We think the amount was reasonably ascertainable at that time, but in any event, it was a fixed liability, primarily of the Delaware corporation, and, secondarily, to the part agreed upon, a debt of petitioner’s incorporators. The petitioner’s payment of its incorporators’ part of these debts, if voluntary as respondent contends, was a distribution to them. If paid because it was bound under the transaction through which it acquired its assets, such payments must be regarded as part of the cost of the assets and therefore a capital expenditure. In either view the petitioner’s claim on this item must be denied.

In assignment of error No. 2 petitioner complains of respondent’s having reduced the amount claimed for officers’ salaries from $12,600 to $7,000. Deductions claimed under this class are allowable only to the extent that they are shown to be reasonable and for services actually rendered. The evidence fails to convince us that either of the petitioner’s two officers, who shared in the payments involved, performed services of greater value to the corporation than the sums allowed by the respondent for their compensation, and his determination on this item is therefore sustained.

Assignment of error No. 4 relates to claims made for “miscellaneous expenses”, the amounts of which the respondent allocated to capital expenditures in reacquiring leased property. The gross sums rejected by the respondent on this account amount to $2,059.65. The respondent determined that the expenditures claimed were part of the cost of repossessing the property leased to the Center Investment Co. and treated them as reduction of the profit realized on the repossession. Evidence was offered as to two items making up the total amount claimed. One of the items is in the amount of $500 and the other is in the amount of $582.90. Both are identified by the testimony as incurred in connection with negotiating a 15-year lease of the repossessed property for the period beginning August 1, 1933. Consequently, the respondent erred in his classification of these two items, but was correct in his disallowance of them as expenses. Expenditures in connection with long term leases are not deductible as current expenses but are to be spread over the life of the lease. Central Bank Block Association, 19 B. T. A. 1183; affd., 57 Fed. (2d) 5; Sigmund Spitzer, 23 B. T. A. 776; Andrew J. Pembroke, 23 B. T. A. 1176. Under the rule of the cited cases the sum of the two items, $1,032.90, should be amortized oyer the 15-year life of the lease and the part allocable to the period August 1 to December 31, 1933, allowed as a deduction for the year 1933.

The respondent determined that the petitioner realized a profit from the cancellation of its 99-year lease in the amount of $143,479.21, which sum he added to its 1933 income. In a recomputation set forth in his brief the respondent now determines the profit attributable to cancellation of the lease to be the net sum of $101,845.78. The petitioner argues that the present case is controlled by the decision in Louise C. Slack, 35 B. T. A. 271; petition for review dismissed, 91 Fed. (2d) 1011, in which we held that repossession of leased premises did not result in income to the lessor. The respondent, on brief, admits some similarity between the cases. The principles announced in the Slack case are, in our opinion, controlling here and it must be held that the repossession did not result in income to the petitioner. If a distinction between the Slack case and this one can be spelled out of the fact that the petitioner was not the lessor of the premises when the building was erected by the lessee, such distinction makes no difference in the result. A predecessor of the petitioner was the owner-lessor of the premises when the building was erected by the lessee in 1930. If there was gain at the time of erection, cf. Miller v. Gearin, 258 Fed. 225, it was not the gain of this petitioner. After improvement of the premises by the lessee the petitioner acquired the property by purchase. There was no gain to the petitioner on the purchase even if the price was less than value. Palmer v. Commissioner, 302 U. S. 63. When the petitioner acquired possession in 1933 it acquired nothing except possession of property previously acquired by purchase and in this there is no element of income. Accordingly, we hold that the respondent erred in his determination that petitioner realized income upon the cancellation of the 99-year lease.

The petitioner offered evidence of the value of its building on lot 2 at the date of acquisition and at the time of cancellation of the lease. In view of our conclusion on this issue we have omitted any findings on the matter of value.

Decision will be entered under Bule 50.


author: Keen:

text:
    Constance McCormick, the Duly Appointed and Qualified Executrix Under the Last Will and Testament of L. Hamilton McCormick, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88951.
    Promulgated August 10, 1938.

      J. Francis Dammann, Esq., and Sttiart J. Templeton, Esq., for the petitioner.

      B. F. Staubly, Esq., for the respondent.
   OPINION.

Keen:

This proceeding arises on respondent’s determination of a deficiency in Federal estate taxes of $247,200.86. Part of this deficiency has been consented to by the petitioner. Under the original determination respondent included in the gross estate only one-half of the corpus of the trust created by decedent on April 28, 1923, the portion set aside for the decedent’s wife, on the ground that it was a transfer intended to take effect in possession or enjoyment at or after death under section 302 (c) of the Revenue Act of 1926, set out in the margin. Conceding now, however, that there are no grounds for such an inclusion under the Supreme Court’s construction of the provision applied in May v. Heiner, 281 U. S. 238; and that the section of the 1926 Revenue Act, as amended by the Joint Resolution of March 3, 1931, can not be applied retroactively, Hassett v. Welch, 303 U. S. 303; respondent in his amended answer pleads affirmatively that the whole trust corpus is includable as having been transferred in contemplation of death, and in his brief relies solely on this ground.

The burden of proof of the issue which respondent has affirmatively raised rests, of course, upon him. Security-First National Bank of Los Angeles, Executor, 36 B. T. A. 633, 637; Mamie S. Hammonds, 38 B. T. A. 4, see page 10.

The facts were stipulated, the original trust instrument, its amending instrument, and decedent’s will being entered under the same stipulation, and are incorporated here by reference. We need do no more than relate those facts which are material to decision of the case.

On April 28, 1923, decedent made a transfer in trust for the benefit of his wife and children, and a year and eight months later, on December 29, 1924, amended it. Its significant provisions will be set out hereinafter. The corpus consisted of property which decedent had received from his father through a spendthrift trust terminating in 1920, and had a value at the time of decedent’s death of $1,118,611.45.

Decedent died on February 2, 1934, at the age of seventy-four, survived by his widow, then sixty-eight, and three sons, aged forty-six, forty-five, and forty-two, respectively. At the time of the transfer decedent was sixty-three, and, in the words of the stipulation,

* * * was ⅛ good health for a man of his years. The execution of the trust was not prompted by a condition of body or mind which would have led him to believe that death was imminent or near at hand.
* * * * * * *
The decedent’s wife prior to April, 1923, had no independent means, and, although all his children were adults, the decedent had been in the habit of contributing substantial amounts to their support yearly.

Decedent transferred certain property to his wife in trust, dividing the fund into four trusts, one-half for the benefit of his wife and one-sixth each for his three sons (art. 3), the net income from each trust being paid over to the beneficiaries or to their issue, but the amount was to be limited to specific sums if there were any outstanding encumbrances on the trust property, the balance of the income being applied in discharge of the encumbrances (art. 4). Some check was retained by the settlor in the original trust instrument over payment of part of this residue to his wife, but his power was removed by the amendment of December 29, 1924. The trust was to terminate upon the death of the last survivor of the settlor and his beneficiaries (art. 5), but this provision was changed by the amendment of 1924 so that the death of the last survivor of the beneficiaries should terminate the trust. On termination the principal was to be distributed to the beneficiaries’ heirs of the body, with a gift over to charity on default of issue. Amendment or cancellation of the trust could be effected by any four of the five persons constituting the settlor and the beneficiaries or their representatives (art. 6), but this was also altered by amendment so as to deprive the settlor of any power to amend. Other provisions are not here pertinent. The stipulation continues:

The declared purposes and intentions of the decedent in making the trust agreement were: (1) to provide for his Wife and his three sons independent yearly incomes, and for the purposes otherwise disclosed by the context of the trust deed; and (2) to reduce his own income taxes.

Income was in fact accumulated by the trustee, the amounts being stipulated; and the Federal income taxes of the settlor were in fact materially decreased after the transfer in trust, the sums paid by the settlor and the beneficiaries both before and after the transfer being stipulated.

Decedent by his will left certain Chicago real estate to his wife, and transferred all the residue of his estate to his wife and three sons in trust for their benefit.

On these facts respondent grounds his contention that tire trust transfer of 192B was made in contemplation of death. The contention rests apparently on what is urged as a necessary inference from the facts, that decedent was sixty-three at the time of the trust transfer, and thereby parted with approximately 50 percent of his estate to the natural objects of his bounty. Certain special considerations urged by the respondent, based on provisions in the original trust indenture by which the settlor retained control over the income, are inapplicable in view of the amendment of a year and a half later by which the settlor divested himself of all power. But even if these provisions had been retained they would not affect the question in issue. There is no question of a transfer made after the effective date of the Revenue Act of 1926, and within two years of death, as to which a rebuttable presumption of contemplation of death may be raised, section 302 (c). On the contrary, as we have said, respondent has the burden of proof, and his contention amounts to little more than that we should infer that contemplation of death was the impelling cause of the transfer from certain merely eviden-tiary facts, such as decedent’s age, the amount of the trust fund, and the relation to him of the beneficiaries. This we can not do, and it does not require extended discussion to state the reason why,

In United States v. Wells, 283 U. S. 102, the Supreme Court said:

* * * The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. ⅜ * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must he found in the transferor’s motive. Death must be “contemplated,” that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. ⅜ * ⅜ The question, necessarily, is as to the state of mind of the donor. * * *
* * ⅜ Yet age in itself cannot be regarded as furnishing a decisive test, for sound health and purposes associated with life, rather than with death, may motivate the transfer. The words “in contemplation of death” mean that the thought of death is the impelling cause of the transfer, ⅜ * ⅜.
If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. * * * As illustrating transfers found to be related to purposes associated with life, rather than with the distribution of property in anticipation of death, the Government mentions transfers made “for the purpose of relieving the donor of the cares of management or in order that his children may experience the responsibilities of business under his guidance and supervision.” * * *

These passages have become the locus elassicus on the subject, and are quoted (in part) with approval by the Supreme Court in Becker v. St. Louis Union Trust Co., 296 U. S. 48.

The situation in the Wells case involved gifts by a father to his children, which the Court thought, despite the fact that the decedent was then in his seventies, were made to afford his children independence and to give them experience in the handling of money, motives associated with life and not with death. In the St. Louis Union Trust Co. case, supra, the Supreme Court said:

* * * qijje oircuit Court of Appeals reached the opposite conclusion. It found on the evidence that the decedent, in making the trusts, was actuated by two motives: (1) To make his children independent; (2) to avoid high surtaxes on his income; and that both of these motives were associated with life. Evidence that the decedent was in any way influenced in what he did by the thought of death, that court said, was entirely lacking.
It is true that the decedent at the time of making the trusts was 70 years of age. But the evidence shows clearly that he was in excellent health, attending regularly to business, apparently was not looking forward in any way to his death ⅜ * *. The beneficiaries were all past 21 years of age, and the record shows only that the grantor’s objects were to make them allowances in order to get rid of the nuisance of treating them as children, make them independent so they would know what they were to get each year, and, as he had ample income of his own, to avoid the high surtax and make each of his children pay a tax on the independent income received.
We are unable to find anything in the record which conflicts with the statement of the court below that evidence that decedent was in any way influenced by the thought of death was wholly lacking. * *

The circumstances afforded by these two cases parallel to those of the instant case need no further emphasis, and citations need not be multiplied. Neither the motive of providing independent incomes for his wife and sons, nor that of reducing his income tax, cf. Robert Todd Lincoln Estate, 24 B. T. A. 334, indicate in any way that the decedent’s thought of death was the impelling cause of the transfer. We hold, therefore, for the petitioner.

Decision will be entered under Rule 50.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (e) 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, including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth, where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. 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 but prior to the enactment of this Act, 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: Opper:

text:
    T. Harvey Ferris and Elizabeth B. Ferris, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88214.
    Promulgated August 11, 1938.

      Henry T. Dorr anee, Esq., D. H. Blair, Esq., J. G. Korner, Jr., Esq., and George D. Brabson, Esq., for the petitioners.

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

Opper:

Although the deduction sought by petitioner was claimed on his original return as a bad debt, and although on oral argument petitioner’s counsel took the position that he was not required to and would not elect whether to make the claim on that ground or as a loss not compensated for, it now appears that the sole contention made on behalf of petitioner is that the deduction is allowable as a losa The only statutory provision cited in petitioner’s brief as being applicable is section 23 (e) of the Revenue Act of 1934, dealing with losses. Since, however, in our opinion the same result would follow on either theory upon the facts before us, it matters little which claim is urged.

This proceeding must, it seems to us, be disposed of upon the authority of Eckert v. Burnet, 283 U. S. 140. Petitioner seeks to avoid the controlling effect of that decision on two grounds, the first one being that the Court there treated the taxpayer’s claim as a bad debt and faded to pass upon it as a deductible loss.

It may be assumed — in spite of petitioner’s earlier position that it is the duty of the Board and the courts to determine cases on whatever theory is applicable, and to grant relief to a taxpayer if he be entitled to it on any appropriate ground — that it would be possible for the Supreme Court to disregard one principle favorable to the taxpayer and decide against him on another. Such an implication should, if at all, be sparingly resorted to, and particularly since both grounds were considered in the course of the proceedings. Eckert v. Commissioner, 42 Fed. (2d) 158. But be that as it may, the-opinion itself is here sufficient to controvert such an assumption. Mr. Justice Holmes, speaking for the unanimous Court, after disposing of the bad debt contention, says (p. 141): “The petitioner treats the case as one of an investment that later turns out to be bad. * * * We do not perceive that the case is bettered by the fact that some of the original notes years before were given for property turned over to the corporation by the partnership that formed it. For the purpose of a return upon a cash basis, there was no loss in 19MP (Emphasis added.) And in Frank Kuhn, 34 B. T. A. 274, 275, we referred to “the rule of Eckert v. Burnet, 283 U. S. 138, [sic] and other cases, that a taxpayer on the cash basis may not deduct, either as a sustained loss or a debt ascertained to be worthless, the amount of a note made by him as primary obligor in substitution for a note given by another upon which the taxpayer had theretofore been a secondary obligor, until he pays on the note * * (Emphasis added.)

Petitioner’s position seems in reality to be based upon a failure properly to analyze his contention. If his position be that an investment made many years before has turned out to be worthless and he has thereby suffered a loss, it would follow that the deduction could be allowed only in the year when the investment became valueless. Regulations 86, art. 43-2. Dixie Groves & Cattle Co., 5 B. T. A 1274; Charles M. Monroe Stationery Co., 15 B. T. A. 1227; Chickasha Cotton Oil Co., 18 B. T. A. 1144. Here there is no evidence of any investment, or whether or when it became worthless; and we may not assume that whatever loss there was did not occur long prior to 1934. That being the case, the only ground upon which petitioner could urge a postponement of the year of deduction would be that he had never paid for his investment and, being on the cash basis, he should be permitted to deduct the investment loss in the year when he paid it. It may be said in passing that this appears to be contrary to the view expressed in the very cases upon which petitioner relies, since there the deduction was permitted not because or in spite of the fact that the investment was paid for, but because in the year involved the investment became worthless. Crain v. Commissioner, 75 Fed. (2d) 962; A. W. D. Weis, 13 B. T. A. 1284; see also Burns Mfg. Co. v. Commissioner, 59 Fed. (2d) 504, 506. Cf. Morris Sass, 17 B. T. A. 261. But in any event, if petitioner contends that- his failure to pay for the investment justifies postponement of the deduction, it being clear that this is due to the fact that his investment was represented by his accrued but unpaid liability as an endorser on Guibord’s note, then the same result must follow when there is substituted for that liability another, also accrued but unpaid. That being so, no distinction from the Eckert case could be supported even if the decision there related solely to a bad debt, for that case clearly holds that a liability is not “paid” by a taxpayer on the cash basis by the mere substitution of another liability to the same creditor. The principle would appear self-evident even in the absence of that decision. It follows that even on petitioner’s theory the deduction if treated as a loss conld be taken only in some previous year when the loss was ascertained or in some subsequent year when the accrued liability representing his investment was paid in cash, unless the substitution of petitioner’s personal obligation for the one upon which he was liable as an endorser is, on the facts in this proceeding, such an “identifiable event”, so equivalent to payment in cash, that the year of that substitution may become the year of deduction. This brings us to a consideration of petitioner’s second contention.

The remaining ground advanced by petitioner for distinguishing the Echert case is that here petitioner gave his creditor a check drawn on an account augmented by the proceeds of a new note from petitioner to the creditor, whereas there the old obligation was directly exchanged for a new one. Perhaps recognizing that this distinction in fact will not advance his contention unless he also demonstrates a difference in principle, petitioner goes on to contend that the procedure adopted here resulted in a complete destruction of the original obligation and of any rights of the creditor under it, and a complete relegation of the creditor to recourse upon the new liability, with the clear result that as between the parties the original obligation must be regarded as “paid.” The difficulty is that, conceding everything that has been said, no distinction follows; for it is clear that no such narrow ground was the basis of the decision in the Eckert case. There “the petitioner * * * received the old notes, marked paid, and destroyed them.” If the Court had been of the opinion that it was of any materiality whether this was sufficient prima facie proof of payment as between the parties, it is inconceivable that some discussion of the point would not appear. See Uniform Negotiable Instruments Act, sec. 119. We did not regard the distinction as controlling in S. E. Thomason, 33 B. T. A. 576, for there we said (p. 585): “* * * petitioner substituted one promise to pay for another. In so doing, even though he extinguished his liability wider the first note for principal and interest, he ‘paid’ nothing in the sense in which this word is used in section 23 (b), supra.” (Emphasis added.) The important consideration is that, in dealing with the distinction under the revenue acts between accounting systems on the cash and accrual bases, rules of general law dealing with results as between the parties are of little benefit. See, e. g., Schlemmer v. United States, 94 Fed. (2d) 77. It seems to us that the doctrine of the Eckert case, and others dealing with similar questions, is that the substitution of one obligation for another, at least when the parties are the same, is not payment for tax purposes, regardless of its effect as between the parties. Frank Kuhn., supra.; Morris Sass, 12 B. T. A. 156; Edmond A. Hughes, 27 B. T. A. 1022, 1027; see Jacob F. Schoellkopf, Jr., 35 B. T. A. 855 Petitioner relies heavily upon Jenkins v. Smith, 21 Fed. Supp. 433. There, as appears from the facts stated by the court, the taxpayer’s decedent had “entered into a bond agreement with the other directors and the bank” (Merchants National Bank of New Haven). The funds used to discharge this obligation were borrowed from the First National Bank & Trust Co., to which new collateral was given. The court said this “was a new contract of a substantially different nature.” Without being required to determine whether upon such facts this Board would reach a similar conclusion, it is now sufficient to point out the distinction from the facts in the present proceeding, and to add that if the Jenkins case stands for any doctrine beyond that indicated we believe it to be inconsistent with Eckert v. Burnet, supra, and must respectfully decline to regard it as controlling.

As was said in S. E. Thomason, supra, “Petitioner * ⅜ * argues that, if he had gone to a * * * third party, borrowed the sum * * * and had paid his creditor, no question could be raised as to its deductibility. We need not determine the correctness of that contention. We are not concerned with what might have happened, nor need we decide whether, under a different set of circumstances, some other conclusion would be reached.” Here the second borrowing was for the express purpose, and on the specific condition, of a repayment of the first. The intermediate step of crediting petitioner’s account and checking against it was inconsequential and immaterial. Neither cash, nor the transfer of credit, nor their equivalent actually passed between the parties. We conclude that, on the facts here present, petitioner did not, within the meaning of the revenue act, “pay” the liability represented by the first note and is not entitled to deduct the amount thereof either as a bad debt or as a loss.

Decision will be entered for the respondent.

       The stipulation recites that it was taken as a loss, but we have refused to find this as a fact since the return, which is in evidence, shows the contrary.

       Sec. 23. (e) Losses by Individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business; or
      (2) if incurred In any transaction entered into for profit, though not connected with the trade or business; or

       Section 43, Revenue Act of 1934, provides: “The deductions and credits provided for in this title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed * * *.**


author: Leech:

text:
    William A. Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90703.
    Promulgated August 11, 1938.

      Edward J. Brunenkant, Esq., for the petitioner.

      Elmer L. Corbin, Esq., for the respondent.
   OPINION.

Leech:

The sole question for consideration is whether the transaction, upon which the disputed tax arises, was a sale of stock to the corporation or a distribution in partial liquidation by the corporation to the petitioner. If it was a sale, only 40 percent of the gain therefrom is taxable to petitioner under the provisions of section 117 of the Bevenue Act of 1934. If it constituted a distribution by the company in partial liquidation, the entire.gain is taxable to the petitioner under the provisions of section 115 (c) of the same revenue act.

Obviously, the transaction purported to be a sale. It was so designated by resolution of the corporation. Petitioner testified it was a sale. Apparently, all the elements of a sale were present. Thus, unless it actually constituted a distribution in partial liquidation, the transaction must have been a sale and the gain therefrom so taxable.

In W. E. Guilds 19 B. T. A. 1186, at page 1204, the Board states:

* * * Liquidation is not a technical status which can be assumed or discarded at will by a corporation by the adoption of a resolution by its stockholders, but an existing condition brought about by affirmative action, the normal and necessary result of which is the winding up of the corporate business.

Section 115 (i) of the Bevenue Act of 1934 defines the term “partial liquidation” as a “distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.”

Partial liquidation is merely liquidation less than complete. Whether the transaction in question constituted a distribution in partial liquidation is entirely factual. Gossett v. Commissioner, 59 Fed. (2d) 365; W. F. Kennemer, 35 B. T. A. 415; affd., 96 Fed. (2d) 177.

In Northern Trust Co., Trustee, 20 B. T. A. 866, the Board considered a somewhat similar question which arose on very different facts. There, pursuant to resolution authorizing the president to purchase, for the corporation, shares of outstanding capital stock for a price not exceeding that designated, the president acquired all the stock of four of the five stockholders and a part of the stock held by its president, rvithin two weeks after which, by proper resolution, the authorized capital stock of the company was decreased from 7,500 to 300 shares, consisting of that held by its president, and the remaining 7,200 shares were then retired and canceled. In its return for 1922, it was stated that the corporation was “now in process of liquidation.” In its return for 1924 it was stated that “This corporation was not engaged in business during the preceding year.”

The Board decided, on those facts, that the acquisition of this stock from the stockholders constituted a distribution by the corporation in partial liquidation. In that case four of the five stockholders of the corporation sold all of their stock to it and one retained only sufficient of his to represent the assets retained by the corporation. The stock thus acquired by the corporation was, by resolution, canceled. The outstanding capital stock was, by proper action, correspondingly reduced. The company was thus partially liquidated. It did not continue business but proceeded to wind up its affairs and so stated in its income tax return to the Government. The evidence, thus, clearly established that the intention of the corporation was not to purchase its stock but to liquidate it. That was what it did.

The evidence discloses the opposite situation here. The record convincingly supports the correctness of the designation of the transaction by the parties. The petitioner owned only 45 shares of the 1,000 outstanding shares of stock. That stock has never been canceled but has always been carried by the corporation as treasury stock since its acquisition. The two blocks of 20 shares, each, acquired from stockholders in 1936, were not canceled and were similarly carried as treasury stock, 20 shares of which were subsequently reissued. The dissimilarity of the consideration received by the petitioner and those who transferred their stock to the corporation in 1936 is not persuasive of anything here. The corporation has never reduced its outstanding capital stock. Its capital structure has never been changed. It has not, in fact, liquidated to any extent. Although in no sense controlling, the purchase of its stock by a corporation is legal in Ohio. General Code of Ohio, sec. 8623-41.

The distinction between the facts in the Northern Trust Co., Trustee, supra, and those here is pointedly drawn by the Seventh Circuit Court of Appeals in its opinion affirming that case in 54 Fed. (2d) 289. The court there said :

It is quite probable, as petitioners suggest, that the sale of stock to a corporation by one shareholder would be considered as a sale rather than as a liquidating dividend, for the act of one of several stockholders could not well be considered as evidence of an intention of all the stockholders; but in the instant case the Board evidently considered the concerted action of all the directors and stockholders in the disposition of practically all the stock as probative of the intention of the company to liquidate, and we think the Board was right in so considering it.

In short, there is not the slightest evidence that the corporation intended a liquidation of petitioner’s stock except a possible inference from the treatment on its books of the two similar transactions in 1936. In no event are these records controlling. Doyle v. Mitchell Brothers Co., 247 U. S. 179; C. M. Menzies, Inc., 34 B. T. A. 163.

We conclude that the acquisition of petitioner’s 45 shares of its stock by the Smith Incubator Manufacturing Co. was, as it was intended and purported to be, a purchase of that stock by the corporation and not a distribution in partial liquidation.

Decision luill he entered for the petitioner.