text:
    Sellar Bullard, Executor under the Last Will and Testament of Clara R. Smith, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77764.
    Promulgated April 3, 1936.

      Samuel 8. Holmes, Esq., Lorentz B. Knouff, Esq., and Harry Thom, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Van Fossan:

This proceeding was brought to redetermine a deficiency in the estate tax of the estate of Clara R. Smith, deceased, in the sum of $17,271.46.

The petitioner alleges that the respondent erred in including in the gross estate of Clara R. Smith the corpus of a trust created on February 17, 1932, consisting of securities having an aggregate value of $112,148.75.

The decedent, Clara R. Smith, was born in 1856. She married Albert Paul Smith, who died in 1890. Four children were born to the decedent and her husband: Edward A., Lora, Bessie, and a child who died in infancy. Edward A. Smith married Virginia Winslow in 1912 and died on December 16, 1928, leaving his widow surviving him. No children were born to them.

Lora Smith married Kennett Cowan, was divorced from him about 1915, and has two children: Kennett Cowan, Jr., who was about 27 years of age in 1931, and Lora Louise, who was about 24½ years of age in that year and was married to Alfred Ruehrdantz, Jr. Kennett Cowan, Jr., married Elwyn Hewett. They have one minor son. Lora Ruehrdantz and her husband have no children.

Bessie Smith married. Sellar Bullard. Three children were born to them: Caroline Marie, Barbara Sellar, and Clara Jean, now about 23, 22, and 17 years of age, respectively.

Clara It. Smith died testate on May 24, 1933, leaving a gross estate of over $650,000. Two of her sisters had been married to officials of the American Can Co. One sister gave to the decedent a large number of shares of the preferred stock of that company. Decedent thereafter (and prior to 1927) made direct gifts of approximately 1,000 shares of that stock to her three children.

On March 3, 1927, the decedent established a trust, irrevocable on its face. By it she transferred to her son, as trustee, with the Illinois Merchants Trust Co. as successor trustee, certain shares, common and preferred, in the American Can Co., the International Harvester Co., and five other well known corporations. The largest block was 1,824 shares of American Can Co. preferred stock. The trust agreement granted to the trustee broad powers of management and complete and exclusive authority and discretion to invest and reinvest the corpus of the estate.

The trust provided that the net income from the trust estate should be paid to the trustor during her lifetime and upon her death the trustee should set aside the sum of $300,000 in property or securities in three separate trusts of $100,000 each, the income from which should be paid to the trustor’s three children during their lifetime. After the respective deaths of the two daughters the income from their trusts was to be paid to their respective children until the youngest living at the time the trust was established should attain the age of 26 years or, if deceased, then when such child, if living, would have arrived at that age, at which time the principal of each trust was to be divided equally among the children entitled thereto.

Upon the death of Edward A. Smith, decedent’s son, the income from the corpus so set aside for him was to be paid to his widow during her lifetime unless a child or children survived him. In that event the income was to be paid to such child or children until the youngest became 20 years old, when the corpus was to be divided equally among such children. If any of Edward A. Smith’s children should die before the distribution of the corpus then the income was to be paid to the heirs at law until the time set for final distribution. If Edward A. Smith died leaving no child surviving, the corpus was to be paid to the children of his sisters, subject to the intervening life estate of his widow, Virginia Smith.

The corpus remaining after establishing the three $100,000 trust funds was to be divided into three equal parts upon the death of the trustor and to be paid to her three children, if living, but if any be deceased, the share of such deceased child was to be added to the $100,000 trust fund created for that child.

The decedent’s son Edward acted as ber business manager and adviser. She relied on bis judgment, suggestions, and advice. He died without issue on December 16, 1928. After bis death Sellar Bullard, the decedent’s son-in-law, acted in the same capacity as adviser. The decedent depended upon him and gave him her confidence. After Edward A. Smith’s death the Illinois Merchants Trust Co. became the successor trustee and upon its merger with the Continental Illinois Bank & Trust Co. the latter became the successor trustee.

In August 1929 the decedent executed a will giving- certain pecuniary bequests aggregating $63⅞000 to persons outside the immediate family and devised and bequeathed one-half of the remainder of her estate to Bessie Smith Bullard, absolutely, and the other half thereof to the Chicago Title & Trust Co. and Sellar Bullard, as trustees, with broad powers of management, to pay the net income therefrom to Lora Smith Cowan for her life and the remainder to her children when the youngest should become 25 years old.

In 1931 the decedent became dissatisfied with the trust created by her on March 3, 1927, because the trustee insisted that a part of the 1,824 shares of American Can preferred stock held in this trust be sold or exchanged for other securities in order to effect a greater diversification of investment. Due largely to her relationship to certain officers of the American Can Co., the decedent preferred to trust to the safety of the preferred stock of that corporation and to receive a higher income therefrom rather than to trust to the ability and judgment of the trustee to select the investments comprising the corpus of the trust. The daughters agreed with the decedent, and believed that if the trustee did not sell the stock before the decedent’s death, it would do so thereafter.

At the time of the execution of the trust of March 3, 1927, the decedent’s son told her that the trust was revocable and that she could do what she pleased with the trust funds and securities. However, some time after her son’s death she was advised by her attorney and her son-in-law, Sellar Bullard, that the trust was irrevocable and that, if possible, it should be terminated and a new trust executed. Her attorney also advised her that a friendly dissolution of the old trust could be made if all adult parties in interest would join in the court action which would be necessary, due to the interests of minors as future beneficiaries of the trust. Various family conferences were held and the decedent decided that the proper procedure was to recall into her control the greater part of the preferred shares of the American Can Co. which had formed a part of the corpus of the old trust and thereafter make a new trust.

Virginia Smith, widow of the decedent’s son, Edward A. Smith, refused to consent to the cancellation and termination of the old trust. Thereupon the decedent instructed her attorney to prepare a bill praying that the trust be declared void on the ground of misrepresentation and fraud on the part of her son. Such a bill was prepared and presented to the decedent and her two daughters for approval. The daughters became alarmed because Virginia Smith would oppose any such action and the family discord would become public. The bill was never filed. The decedent’s attorney suggested that a decree declaring the trust void on the ground that certain of its provisions violated the rule against perpetuities, might be entered. Such a bill was filed, but Virginia Smith denied that the trust was invalid and refused to consent to the entry of any decree declaring it so. Later, however, she agreed to consent to the entering of such a decree on the sole condition that her rights and interests should be preserved exactly as they were set forth in the trust of March 3, 1927.

Thereupon, for the purpose of avoiding a family quarrel and preventing unpleasant litigation with its consequent undesirable notoriety, an oral family agreement was entered into. This agreement provided that upon the entering of the decree terminating the old trust a new trust would be created and become operative. The corpus of that trust would be the portion of the securities representing Virginia Smith’s life estate created by the old trust. It was also agreed that the new trust would grant to her the identical interest which she possessed under the old one. The income was to be payable to decedent for life. The agreement further provided that the decedent would execute a new will bequeathing enlarged interests to the minor beneficiaries and making adequate provision for the adult beneficiaries. Virginia Smith further stipulated that the proposed new trust should be executed prior to the entry of the decree dissolving the old trust.

Pursuant to that agreement the new trust was executed on February 17, 1932. A new will was prepared eliminating $53,000 from gifts to persons other than the immediate family, bequeathing certain definite sums to the decedent’s grandchildren, establishing two $100,000 trusts for the benefit of her daughters for life, with remainders to their respective children, and bequeathing the residue of her estate to her two daughters equally.

On February 17, 1932, the decedent sent the following letter to the Continental Illinois Bank & Trust Co., the trustee under both the old and the new trusts:

As you are aware, I have filed my bill in the Superior Court of Cook County to cancel a voluntary settlement in trust and for an accounting, in a certain cause entitled Clara R. Smith, Complainant, vs Continental Illinois Bank and Trust Company, as Successor Trustee, et al, General No. 547563, the purpose of which is to cause to be declared void,' inoperative and ineffective because in violation of the rule against perpetuities, a certain trust agreement executed by me on the 3rd day of March, 1927, under which agreement 1 conveyed to my son, Edward A. Smith, as Trustee, certain securities to be held thereunder, reserving to myself a life estate in the income of the said trust estate and making further provision for my two daughters and my son, or in the event of his death for his widow, containing other provisions as set forth in the said agreement which is set forth in full in my said bill of complaint. In that bill of complaint I further prayed for a decree by the court that by reason of the violation of the rule of perpetuities the whole of the trust arrangement so created should be destroyed and rendered void, that the trust by said agreement should be ended and terminated in toto, and that Continental Illinois Bank and Trust Company, Successor Trustee to my said son Edward A. Smith, now deceased, be ordered to account for and assign, transfer and set over to me all of the assets and property held by it in trust, and that I may thereupon hold and possess the same as my own absolute property free and clear of any trust declared in said trust agreement and free and clear of any right, claim or demand of any of the defendants in said suit, or of any person claiming by, through or under the provisions of said trust agreement.
One of the defendants in the said suit is Virginia Winslow Smith, who, as the widow of my said son Edward A. Smith, under the terms of the said trust agreement as it now stands would, after my death, be entitled to a life estate in the income from one-third (%rd) of the said trust property. In consideration of the said Virginia Winslow Smith consenting to a decree in accordance with the prayer of the bill in the said suit, I have agreed with her that upon such a decree being entered by the court, setting aside the said trust agreement and ordering Continental Illinois Bank and Trust Company to account for and to transfer ail of the assets and property held by it as Successor Trustee under the terms of the said instrument to me, that I will forthwith set up and create for her benefit a new trust containing the provisions set forth in the draft of the trust agreement attached hereto, marked Exhibit “X” and now by reference made a part hereof as fully to all intents and purposes as though here set forth in full, and transferring to you, Continental Illinois Bank and Trust Company, as Trustee under the said instrument, the securities set forth in Schedule “A” attached to the said trust agreement, said securities being approximately one-third (%rd) of the securities now held by you as Successor Trustee under the trust agreement first aforesaid, after deducting, however, from such third a proportional part of such of the shares now held by you as Successor Trustee as shall be necessary to sell and dispose of in order to pay the expenses of the said proceeding, the shares so to be set over unto you as Trustee under the trust agreement, draft of which appears as Exhibit “X” attached hereto, being as follows:
[List of securities.]
Accordingly, upon the delivery to you of this instrument, which delivery is to take place simultaneously with the entry by the court of such consent decree in the above entitled matter, I hereby sell, assign, transfer, convey and deliver to you the securities and property above described, such delivery to you to be effective at once upon the entry of such decree by its terms ordering you to assign, transfer and set over unto me all of the assets held by you in the trust first above referred to, and I hereby instruct you to cause to be transferred into your name as Trustee under the said trust agreement, draft of which is set forth in Exhibit “X” attached hereto, without first causing the same to be transferred into my name, the securities and property above listed, being the same as the securities and property referred to in Schedule “A” attached to the said trust agreement which is attached hereto as-Exhibit “X”, the cost of which transfer, if any, to be paid by me; and I further direct you to hold said securities under the terms of the said trust agreement, draft of which is attached hereto as Exhibit “X”, the original of which trust agreement I am delivering to you simultaneously with the delivery of this instrument, the same to be held by you and administered under the terms thereof, and I further direct that you cause to be transferred into-my name all other securities and property, except that above listed, the cost of which transfer shall be paid by me, and deliver the same to me.
It is my intention herein that without the lapse of any period of time between, the entry of such decree setting aside the trust agreement first above referred, to, and the creation of the new trust, copy of the instrument creating which is attached hereto, marked Exhibit “X”, the said new trust shall be immediately-set up upon the dissolution of the old one so that the rights possessed by me to receive the income therefrom during my life and the right possessed by said Virginia Smith after my death to receive the income therefrom during her life, shall arise immediately upon the extinguishment of the similar rights,, respectively, which I and the said Virginia Winslow Smith possess under the former trust agreement first above referred to.

The instrument was duly signed and acknowledged by the decedent.

The court decree was entered on February 27,1932. By that decree the court found the following facts material to the issue:

That said trust agreement, by reason of said violation of said rule against perpetuities, was and is wholly inoperative and ineffective as to one-third of said trust fund; that said complainant intended and conceived the disposition of the whole of said trust fund as one single and connected distributive scheme and would not have created said trust and provided for the payment of either income or principal of any part of said fund to said Edward A. Smith or to any other beneficiary named in said instrument if she had known or had been advised that the provisions therein for distribution to the children of her son Edward surviving him were void, or that the further provisions for the distribution of shares designed for such children effective in the event he should leave no child surviving him were void, and that by reason of the ineffectiveness of said provisions disposing of the corpus of said share so set aside for said Edward A. Smith the whole of said scheme and trust arrangement is destroyed and rendered void:
That all assets and property held by the said Continental Illinois Bank and Trust Company as such successor trustee in said trust are the complainant’s own absolute property free and clear from any trust declared in said trust agreement and free and clear of any right, claim or demand of the defendants herein or any of them, or any persons represented in this suit by said defendants or any of them, or any persons claiming by, through, or under the provisions of said trust agreement; * ⅝ *

The court decreed as follows:

It Is Therefore Ordered, Adjudged, and Decreed that the said trust agreement entered into on March 3, 1927 by and between the complainant, Clara R. Smith, as depositor, and her son, Edward A. Smith, as Trustee, and the trusts ■thereby declared, are wholly inoperative, void, and of no effect, for the reasons ■hereinbefore stated and the said trust agreement and the trusts thereby attempted to be created, and' each and every of the same, are hereby declared to be wholly inoperative, void, and of no effect.
It Is Further Ordered, Adjudged, and Decreed that all the assets and property held by said Continental Illinois Bank and Trust Company as such successor trustee in said trust are the complainant’s own absolute property, free and clear from any trust declared in said trust agreement, and free and ■clear of any right, claim, or demand of the defendants herein or any of them, or any persons represented in this suit by said defendants or any of them, or any person claiming by, through, or under the provisions of said trust agreement.
⅜ :⅜ sji ⅜ ⅜ ⅜ jfc
It Is Further Ordered, Adjudged, and Decreed that said Continental Illinois Bank and Trust Company, as such successor in trust, forthwith assign, transfer, ■and set over to the complainant, Clara B. Smith, all the assets and properties hereinbefore found to be held by it now as such successor trustee.

The new will contemplated by tne family agreement was executed on March 8, 1932, in California and an identical will was executed in Illinois on September 10, 1932, the will of March 8, 1932, being ■destroyed. The Illinois will was made to facilitate probate. The decedent released her interest in the corpus of the March 3, 1927, trust, the benefits from which accrued to Virginia Smith during her lifetime with the remainder to the decedent’s two daughters, but retained the net income therefrom for her own life by executing the trust of February 17, 1932. The decedent made immediate gifts of $10,000 to each of two grandchildren as advances on her bequests to them.

The material provisions of the trust of February 17, 1932, are as follows:

⅜ * ⅜ the Trustor * * ⅜ has sold, assigned, transferred, conveyed and delivered and by these presents does sell, assign the securities and property described in Schedule A hereto attached * * *.
First: (a) During the lifetime of the Trustor, but only after the death of Virginia Winslow Smith, the Trustor may, at any time and from time to time by a further or supplemental instrument by her signed and acknowledged and delivered to the Trustee, (1) alter, change, or amend this agreement and the terms of the trust hereby created; (2) change the beneficiaries under this trust; (3) withdraw and receive all or any portion of the corpus of the trust estate; (4) wholly or partially revoke and annul the provisions hereof, Provided that the duties and responsibilities or the compensation of the Trustee shall not be changed or fixed without the consent of the Trustee; and (5) remove the Trustee and appoint a successor.
⅜ ⅜ ⅜ ⅜ ⅜ ⅜ ⅜
Sixth: The income from the trust estate and the principal thereof shall be distributed as provided in Schedule B hereto attached, signed for further identification by the Trustor and by an officer of the Trustee, and made a part hereof as though at length fully set forth herein.
Schedule A
[A list of securities deposited.]
Schedule B
# & ⅜ ⅝ ⅜ ⅜ ⅝
Providing for the Distribution of Principal and Income of tbe Trust Estate.
‡ ⅜ ⅜ ⅝ ⅜ ⅜ ⅜
Tbe said Trustee shall pay all tbe net income arising from said trust estate to tbe Trustor, Clara R. Smith, for and during ber natural life. Upon tbe death of said Trustor, Ciaba R. Smith, said Trustee shall pay the entire net income thereafter arising from said trust estate to Virginia Winslow Smith (daughter-in-law of said Trustor) for and during her natural life. Upon the death of both said Clara R. Smith and Virginia Winslow Smith said Trustee shall pay over and distribute all the principal of said trust estate, together with any accumulated and undistributed income thereon, to Lora Smith Cowan and Bessie Smith Bullard, (daughters of said Trustor) in equal- parts, share and share alike. The income provided hereunder to be paid to the above named beneficiaries shall be paid in monthly installments.

During her lifetime the decedent received the income according to the provisions of schedule B. On February 17, 1932, the property described in schedule A was the same property and approximately one-third of all the property constituting the corpus of the trust of March 3, 1927. Pursuant to the direction contained in decedent’s letter of February 17,1932, to the trustee, the securities transferred by the trustee of the trust of March 3, 1927, were transferred directly to the trustee of the trust of February 17, 1932, without being transferred to the decedent or passing into her possession.

All the property comprising the second trust came out of the property comprising the first trust. The securities held under the first trust which were not transferred and delivered by the trustee into the second trust or transferred and delivered to the decedent’s grandchildren were transferred to the name of the decedent.

The trust under which the property in controversy was held at the date of the decedent’s death (May 21, 1933) was executed on February 27, 1932. At that time the joint resolution amending section 302 of the Revenue Act of 1926 was in effect. This provision was further amended by section 803 of the Revenue Act of 1932, passed before the decedent’s death.

The petitioner contends that even though the cited statute does apply to the situation before us, the facts bring it within the exception. He asserts that the consideration for which the trust was established was the execution of the family agreement and that the transfer “amounted to a bona fide sale for an adequate and full consideration in money or money’s worth.”

It is a well established principle, particularly in Illinois, that a family settlement agreement constitutes a valid consideration for the conveyance of property. Hall v. Hall, 125 Ill. 95; 16 N. E. 896; Cole v. Cole, 292 Ill. 154; 126 N. E. 752; Hagen v. Anderson, 317 Ill. 173; 147 N. E. 791; Stedman v. Tate, 326 Ill. 442; 158 N. E. 97. But a valid consideration is not necessarily “an adequate and full consideration in money or money’s worth” as specifically required in the statutory exception. We have so held in cases involving similar consideration. Lillian T. Latty, Executrix, 23 B. T. A. 1250; affd., 62 Fed. (2d) 952; Central Union Trust Co. of New York et al., Executors, 24 B. T. A. 296. See Prewit v. Wilson, 103 U. S. 22,

The facts in the case at bar bring it precisely within the purview of the statute. By the trust of February 27, 1932, the decedent transferred certain stock, the right to the net income from which she retained during her natural life. The petitioner seeks to avoid the application of the statute on the theory that it was impossible for Clara R. Smith to transfer the corpus of the trust because she had parted with the ownership of it under the old trust and had never regained it; furthermore, that she had executed the new trust by virtue of the family agreement under which the rights of herself and Virginia Smith were preserved exactly as they had existed under the old trust.

Even if we give full faith and credence to the family agreement, as we construe that arrangement we can not agree with the petitioner’s argument. The execution and performance of the terms of that agreement created a valid consideration for all the transactions and acts done pursuant to it, but the several portions of the agreement must be examined to determine exactly what the various parties were to do. Moreover, we must consider what was actually done.

The old trust was being subjected to attack and litigation was threatened. In order to prevent such an undesirable procedure, the adult members of the family agreed to extinguish the old trust by means of a friendly court action and to create a new trust which would grant Virginia Smith rights identical with those she had enjoyed under the old trust. Her old rights were extinguished with the death of the old trust and a similar new interest rendering her position equivalent to that which she had previously enjoyed was created. The rights of others were substantially altered. In order to accomplish this result the parties to the contract agreed to procure the cancellation of the old trust on the ground that it violated the rule against perpetuities.

The notice given by the decedent on February 17, 1932, to the trustee contains a comprehensive and exact picture of the status of the old trust as seen by the decedent, Virginia Smith, and the other members of the, family. The letter states that it is the decedent’s intent that the right of herself and Virginia Smith to receive the income from the corpus during their respective lives shall arise under the new trust immediately upon the extinguishment of similar rights under the old trust. The decree of the court declared the old trust void and ordered the property transferred to decedent, its absolute owner.

Thus, in contemplation of the parties at the time the new trust was executed and by the very terms of the decree of the court, tke complete and exclusive ownership and control of the stock which the respondent proposes to tax as a part of the decedent’s estate was restored to her. Indeed, it was a recognized and essential part of the agreement that she should acquire full possession of, title to, and power of disposition over the property in order that she might re-convey a portion of the same property in trust for the benefit of Virginia Smith and others.

The decedent then proceeded to carry out her part of the family agreement by creating the new trust, retaining the income to herself, making immediate gifts, altering bequests, and executing a new will. The intervention of the quoted statute rendered such property subject to tax at her death.

The petitioner stresses the fact that the trust corpus passed directly from the trustee of the old trust to the trustee of the new trust. He overlooks, however, the further fact that this procedure was adopted, obviously as a convenience, by the express authority and direction of Clara R. Smith contained in her letter of February 17,1932, to the trustee. • She received the title to and, constructively, the possession of the property in accordance with the terms and purposes of the family agreement.

We can see no inharmony in holding that the trust of February 17, 1932, is entirely separate and distinct from the trust of March 3, 1927. On the contrary, the establishment of the later trust was the outcome of and consonant with the family agreement. It became an independent instrument and the parties thereto so intended. All adult members of the family joined in the rearrangement of the decedent’s estate. The interests of the infant members were protected by the customary legal safeguards. The decree of the court declared in plain and emphatic language that the decedent was the absolute owner of the property and ordered it transferred to her. The adult parties consented to the entry of that decree. Therefore, they can not now be heard to deny its plain and unequivocal effect.

The parties stipulated that on the presentation of proper proof of payment the petitioner should receive credit in the computation under Rule 50 for inheritance taxes paid to the State of Illinois.

Reviewed by the Board.

Decision will be entered v/nder Bule 50.

       Public Resolution — No. 131 — 71st Congress (H. .1. Res. 529)
      Joint Resolution to amend Sect. 302 of the Rev. Act of 1926.

        Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That the first sentence of subdivision (c) of sect. 302 of the Revenue Act of 1926 is amended to read as follows:
      “(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the trans-feror 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 case of a bona fide sale for an adequate and full consideration in money or money’s worth.”
      Approved March 3, 1931.

       Sac. 302. The value of tlie gross estate of the decedent shall be determined by including the value at the time of bis death of all property, real or personal, tangible or intangible, wherever situated—
      ■* ⅜: ⅜ * # ⅜ #

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


source: Caselaw Access Project

author: Tyson:

license: Public Domain

text:
    Planet Line, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70699.
    Promulgated April 3, 1936.

      Frank V. Bams, Esq., for petitioner.

      Harry F. Morton, Esq., for respondent.
   OPINION.

Tyson:

The income tax deficiency in the amount of $9,031.75 here in controversy has been asserted by respondent due to his disallowance of a claimed deduction of $90,765.96 as interest paid in 1930, based upon his determination that such interest was incurred in prior years and petitioner kept its books of accounts and made its returns upon the accrual method of accounting. Petitioner assigns error in such determination.

The facts are not in dispute and the sole issue presents the question of whether petitioner kept its accounts and filed its tax returns on a cash receipts and disbursements basis or on the accrual basis. Por the purposes of this opinion we do not deem it necessary to make a detailed finding of fact of the numerous accounts maintained in the two sets of double entry books of account, each comprising a cash book, journal, and journal ledger, set up to record the various and sundry items peculiar to petitioner’s business. We will confine ourselves to a statement of the method of accounting employed.

Petitioner was incorporated under the laws of New York in 1923, for the purpose of entering into and carrying out a joint operating agreement between the petitioner and the Planet Steamship Corporation covering the operation of a fleet of seven chartered cargo vessels. Such agreement was entered into in March 1923, and the performance thereof by petitioner was guaranteed by the Seas Shipping Co., Inc., which owned the entire capital stock of petitioner. Under the terms of the agreement petitioner was to receive a manager’s commission of percent of the gross freight of each cargo loaded, moneys received from charter hire, dead freight, and demurrage. Out of such receipts petitioner was to pay all of its expenses as “charterer” for management, overhead, husbanding, solicitation of freight, brokerages, agency fees and commissions at any and all ports, insurance on each vessel, etc. The net profits, if any, shown by the liquidation of accounts of completed voyages within each calendar six-month period were to be divided equally between petitioner and the Planet Steamship Corporation. Petitioner did not engage in any other business. The operating agreement was terminated in 1930 and since that time petitioner has not been engaged in any business except that of winding up its affairs.

Throughout each of the years 1923 to 1930, inclusive, petitioner consistently followed one method of accounting and set up on its books to record in great detail the numerous items in the various accounts necessarily maintained to reflect the transactions carried out under its joint operating agreement. The whole system of accounting revolved around the completed voyage basis for determining profits and losses from its operation of steamships. At the end of each calendar six-month period the accounts of all voyages completed within that period were “liquidated” and closed out to profit and loss. All items of income accrued and all items of expense incurred and accrued in connection with such completed voyages were taken into account in determining the profits or losses on such voyages, irrespective of actual cash receipts or disbursements pertaining thereto. Current cash receipts and disbursements applying to incompleted voyages in any current six-month period were not included in the computation of profits or iosses for such period, but were carried as deferred items of income or expense until such voyages were completed. Prepaid insurance premiums were carried as a deferred item until the completion of a voyage, at which timé that portion of the premiums applicable to such completed voyage on a per day basis was charged to that voyage account as an expense of operation. Petitioner managed its vessels and secured cargoes through agents at various ports and it paid to such agents commissions at the rate of from 2½ to 5 percent of the freight. Petitioner’s agents’ accounts, whether paid or accrued, either as to balances due petitioner or due the agents, were reflected in the liquidated completed voyage accounts. Petitioner credited as income to itself for a particular six-month period only that portion of its 7½ percent manager’s commissions applicable to voyages completed within that period, whether actually received or not, and it charged against such income all expenses applicable to such voyages, whether paid or not. Commissions actually received in cash but applicable to incompleted voyages were carried as deferred items until such voyages were completed. Petitioner’s one-half of the net operating profits or losses was also determined only upon completed voyages within the particular six-month period, irrespective of whether the profits were actually received or the losses actually paid in cash. Office salaries and office rental were charged to expense as paid during any current period.

At various times during the years 1923 to 1930 petitioner borrowed from the Seas Shipping Co., Inc., various sums of money used in carrying out the operating agreement. The amounts of such loans were set up on petitioner’s books, but no items of interest thereon were entered until the actual payment thereof in the total amount of $96,948.46 in 1930, when the balance due on the loans was repaid. On account of such loans, the principal amount due from petitioner to the Seas Shipping Co., Inc., and the interest due thereon at the close of each year was as follows:

For each of the calendar years 1923 to 1929, inclusive, petitioner made its income tax return on the above outlined method of accounting for its income and deductions for a whole calendar year and stated on each return that it was made on the accrual basis. It did not claim a deduction in any of those years for the interest due on its indebtedness to the Seas Shipping Co., Inc. For the calendar year 1930 petitioner made its return on the basis of the same method of accounting as to income and deductions applicable to its operation of steamships. In addition to gross income items designated “Profit from Voyages” and “Commission Earned”, it also reported as gross income the sum of $16,012.44 as the net amount received in connection with the cancellation of the operating agreement. In addition to other deductions petitioner deducted the amount of $96,948.46 as interest paid in that year. The space provided on the return for a statement of the “Basis of Beturn” was left blank.

Bespondent allowed as an interest deduction for the year 1930 the sum of $6,182.50 which became due in that year, but disallowed the deduction of $90,765.96 on the ground that it had accrued in prior years.

Pursuant to the provisions of sections 41, 42, and 43 of the Beve-nue Act of 1928 (set out in the margin), petitioner’s net income must be computed in accordance with its method of accounting regularly •employed in keeping its books, and deductions provided for by the statute, including the item of interest here in controversy, may betaken only for the taxable year in which “paid or accrued” or “paid or incurred”, dependent upon petitioner’s method of accounting. The statute does not prescribe any particular method of accounting, but whatever system is adopted by a taxpayer must meet the statutory requirement that it clearly reflect income, and it must be consistently followed. Alfred E. Badgley, 21 B. T. A. 1055; affd., 59 Fed. (2d) 203; Melville W. Thompson, 18 B. T. A. 1192; Ribbon Cliff Fruit Co., 12 B. T. A. 13.

It is clear that petitioner’s method of accounting ignored current cash receipts and disbursements for the purpose of determining profit and loss from its business operations for each of the calendar years 1923 to 1930, inclusive, and therefore it was not on a cash basis of accounting. In “liquidating” completed voyage accounts to profit and loss account, petitioner’s books reflected all accrued and incurred receipts and disbursements pertaining to such completed voyages for the purpose of determining profit and loss from its steamship operations. Such accounting employed the accrual method as applied to the completed voyage system, which, in our opinion, clearly reflected petitioner’s profits and losses from the operation of its particular type of business enterprise. Cf. Falketind Ship Co., 6 B. T. A. 44, and Kahuku Plantation Co., 12 B. T. A. 977, 984. Accordingly, aside from the fact that petitioner carried into its profit and loss account for a particular calendar year only the profit or loss on voyages completed within that year, petitioner’s profit or loss from its principal, if not only, source of income, has been consistently determined upon the accrual basis. In our opinion petitioner should have also accrued on its books, in each calendar year, all items of receipts and disbursements accrued or incurred in those respective years that were not allocated as an expense of a particular completed voyage, such as the incurred interest liability here in controversy, which did actually pertain to the business carried on and the income produced in each of those years. Cf. Kahuku Plantation Co., supra. The failure to do so did not have the effect of placing petitioner on a cash basis of accounting. Cf. C. C. Harris Oil Co., 13 B. T. A. 937, 939. Petitioner may not, for the year 1930, change to a different basis of accounting solely for the purpose of securing an offset against income for that year. Cf. Russell G. Finn, 22 B. T. A. 799. To allow as a deduction in 1930 the amount of $90,765.96 interest incurred as a liability in prior years and pertaining to the operation of petitioner’s business in those years, would be not only contrary to its accrual method of accounting as applied to its completed voyage system of determining income for those prior years, but would clearly distort petitioner’s net income for the year 1930.

The respondent’s determination is approved.

Decision will be entered for the respondent.

       SEC. 41. GENERAL RULE.
      The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. ,(ITor use of inventories, see section 22 (e).)
      SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.
      The amount of all items of gross income shall he included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.
      SEC. 43. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.
      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, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.


author: Murdock:

text:
    Catherine LaBrum, et al., Executors, Estate of Thomas J. Foley, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67217.
    Promulgated April 7, 1936.

      George E. Beeclmood, Esq., and J. Harry LaBrwn, Esq., for the petitioners.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined the following deficiencies in the income tax of Thomas J. Foley, who is now deceased:

1927_ $706. 93
1928_ 9,202. 05
1929_ 13,555.50

The parties have entered into a stipulation which disposes of all of the issues raised in regard to the tax liability for the year 192T and disposes also of a number of items affecting the tax liability for 1928 and 1929. The following assignments of error are left for decision by the Board:

1. The Commissioner has erroneously determined the cost of 650 shares United Gas Improvement Company common (old) sold for $95,487, in October and December 1928, as $63,747.50, whereas the correct cost basis is $84,243.75.
2. The Commissioner has erroneously included as income of the deceased taxpayer the following items in connection with deceased taxpayer’s margin account with F. B. Keech & Co., for the calendar year 1929:
Interest on credit balances_ $102. 99
Dividends- 10,335.00
Profit on 1797 U. G. I. old_ 110, 538. 02
Total- 120, 976. 01 for the reason that the alleged profits were not available to the deceased taxpayer in 1929 by reason of the taxpayer’s account being held as collateral security for undermargined, guaranteed accounts deficient in the amount of $192,529.90.
3. The Commissioner has erroneously disallowed a deduction in the amount of $192,529.90 from income for the calendar year 1929, being loss by way of embezzlement or fraudulently obtained pledge of deceased taxpayer’s securities to secure the account of Edward Foley with F. B. Keech & Co.
4. The Commissioner has failed to allow a deduction in the amount of $14,512.50 for the year 1929 covering embezzlement of the proceeds of 100 shares of United Gas and Improvement Company stock from decedent in 1929, which shares had a cost basis to decedent of $14,512.50.

The facts have been stipulated.

The following statement of the stipulated facts relating to the first issue will be sufficient for a decision of that issue. The decedent made the following purchases and sales of United Gas & Improvement Co. stock through Ware & Co.:

Seven hundred shares of United Gas & Improvement Co. stock, representing the net balance in the above account, were delivered by-Ware & Co., either directly to the decedent and, thereupon, by him to Hano, Wasserman & Co., or directly by Ware & Co. to Hano, Wasserman & Co. upon the decedent’s order. The decedent at that time opened a new margin account with the latter firm and became indebted to the firm in the amount of $83,525.98. His indebtedness to Ware & Co. in this same amount was liquidated at that time. The decedent’s account with Hano, Wasserman & Co. thereafter shows the following transactions in United Gas & Improvement Co. stock:

The amount realized from the sale of 650 shares in 1928 was $95,487. Those shares “are incapable of identification.” “The 1,000 shares [delivered to the decedent on September 24, 1928] can not be identified.” The Commissioner determined that the cost of the 650 shares sold in 1928 was $63,747.50, which represented the cost of 300 shares purchased on December 20, 1926, 200 shares purchased on June 28, 1927, and 150 shares purchased on August 9, 1927.

Tire question for decision is the amount of gain which the decedent realized from the sales in 1928 of 650 shares of United Gas & Improvement Co. stock. The parties are in agreement as to the amount realized from those sales. They disagree as to the basis for computing the gain on the sales. They agree that the “first in, first out” rule must be applied in order to determine the cost basis of the 650 shares sold. It is apparent that the “first in, first out” rule must be applied since the parties have stipulated that the 650 shares sold are incapable of identification and since the decedent made no designation to his broker which might in any way serve to identify the shares sold with any particular lot or lots purchased. The so-called “first in, first out” rule is stated as follows in article 58 of [Regulations 74:

Art. 58. Sale of stock and rights. — When shares of stock in a corporation are sold from different lots purchased at different dates and at different prices and the identity of the lots can not he determined, the stock sold shall be charged against the earliest purchases of such stock.

The 650 shares in question were sold from different lots purchased at different times and at different prices, and the identity of the lots can not be determined. Therefore the stock sold must be charged against the earliest purchases of such stock. The stipulation shows the cost to the decedent of the various lots of stock which he purchased. Apparently the 800 shares sold prior to the taxable year, while the decedent had his account with Ware & Co., were charged against the earliest purchases. Both parties accept that as a proper step. The Commissioner has charged the 650 shares sold in 1928 against the next earliest purchases which the decedent made. Thus he has done exactly what his rule requires and we are unable to find that there is any error in his computation.

The petitioner argues that the 1,000 shares delivered to the decedent by Hano, Wasserman & Co., on September 24, 1928, should be charged against and should absorb the cost of the remaining 700 shares purchased through Ware & Co. and the first 300 shares purchased through Hano, Wasserman & Co., and, therefore, the 650 shares thereafter sold should be charged against the cost of the next 650 shares purchased through Hano, Wasserman & Co. This argument would be sound if the decedent had sold the 1,000 shares which were delivered to him out of his brokerage account. It might also require some modification of the Commissioner’s computation of the cost of the 650 shares if immediately after the delivery the account had contained less than 650 shares, because, in that event, it could be successfully argued that some of the 650 shares thereafter sold through that broker must, of necessity, have been shares acquired after September 24-, 1928. However, it appears that the 1,000 shares delivered to the petitioner were not sold by him. Article 58 of Regulations 74, according to its terms, applies only to stock sold, and the petitioner, therefore, finds no support in the terms of the rule for her argument that the rule should be applied first to the stock which the decedent removed from this particular brokerage account. It further appears that on September 24, 1928, when the 1,000 shares were delivered to the petitioner, there were 1,7'50 shares in the account; after the 1,000 shares were removed, 750 shares remained; and it is entirely possible that the 650 shares later sold came from this remainder of 750 shares. The decedent made no designation as to which shares he was removing, and the stipulation is that the 1,000 shares can not be identified. Thus the facts of this case do not require that any cost be allocated to the 1,000 shares removed from the Hano, Wasserman account and held by the decedent. Nor is there any inconsistency in the Commissioner’s determination that the 650 shares sold in 1928 should take the cost of the 650 shares purchased through Ware & Co.

The petitioner correctly states that on September 24, 1928, there were in the decedent’s account with Hano, Wasserman & Co. the first 700 shares delivered into that account from Ware & Co. and also 800 shares subsequently purchased. But she fails to state and take into consideration the fact that at that time there were also 250 additional shares in the account which had been placed there by the decedent on February 15, 1928, as collateral. These 250 shares were not different from the other shares in the account and can not be distinguished or disregarded. The petitioner argues that the 1,000 shares delivered to the decedent on September 24,1928, removed from the account the 700 shares originally purchased through Ware & Co. and 300 shares subsequently purchased through Hano, Wasserman & Co., and left in the account the 250 shares. She also assumes that the 650 shares later sold did not come from the 250 shares. But there is no reason to assume that the delivery of 1,000 shares removed from the account the 700 shares originally purchased through Ware & Co. Such an assumption would be inconsistent with the Commissioner’s determination. Since his determination is presumed to be correct, and since it is possible to assume that the 1,000 shares came from other than the 700 shares acquired through Ware & Co., there is in this record on this point no sound reason for rejecting the Commissioner’s determination.

The petitioner cites the case of J. T. Hedrick, 24 B. T. A. 444, as authority for the proposition that when stock is taken out of a particular account for any purpose whatsoever, there must he allocated to it the cost of the earliest purchases of that stock in that particular account by reason of the “first in, first out” rule, and subsequent sales through that account take as a basis the next earliest costs which remain. The respondent attempts to distinguish that case and cites W. A. Forrester, 32 B. T. A. 745, as some authority for his action. The Hedrick case may be contrary to the later decision of the Supreme Court in Helvering v. Rankin, 295 U. S. 123. It was decided on its own facts without the benefit of the later decision of the Supreme Court in the Rankin case. If it still stands as authority for any proposition that is contrary to the views herein expressed, then to that extent it must be disregarded, for here the Commissioner correctly applied the “first in, first out” rule to the facts as stated.

The three, remaining assignments of error in the determination of the deficiency for the year 1929 are more or less related. All of the stipulated facts have, of course, been considered, but only such facts will be stated as are necessary for understanding the questions involved. The decedent, prior to January 11, 1929, had controlled and directed the transactions in a margin account carried with Hano, Wasserman & Co. in the name of Charles F. Foley. He had a son named Charles F. Foley. The son was employed by F. B. Keech & Co. as a customer’s man, from J anuary 1929 until October 9, 1930. The decedent on or about J anuary 11,1929, opened a margin account in his own name with F. B. Keech & Co., stockbrokers, and on the same day he ordered that the Charles F. Foley account be transferred from Hano, Wasserman & Co. to F. B. Keech & Co. His order in regard to the transfer of the Charles F. Foley account was not carried out but, instead, contrary to his directions, the account was opened with F. B. Keech & Co. in the name o.f Edward Foley, a fictitious name. This account was owned and managed by Charles F. Foley. The decedent at that time was about seventy-four years of age, was extremely illiterate, and was unable to read or write anything except his own name. The decedent, on January 10, 1929, signed a letter addressed to F. B. Keech & Co., the body of which was as follows:

I beg to advise you that any security I may have on deposit with your company can be used by you as collateral and security for the accounts of Mrs. Ellen Kerrigan, Mrs. Catherine LaBrum and Edward F. Foley.

The name “Edward F. Foley” was added to the above letter without the knowledge or consent of the decedent.

The decedent signed a letter on October 9,1930, addressed to F. B. Keech & Co., the body of which is as follows:

I hereby authorize you to open a Guarantee Account under my name to be known as the T. J. Foley Guarantee Account; for the purpose of guaranteeing the accounts carried in this office of:
Kathryn La Brum
Ellen Kerrigan
Edward Foley
Thomas J. Foley, Jr.
F. H. Foley
I further authorize you to withdraw collateral funds from the T. J. Foley Account at any time and transfer them to the T. J. Foley Guarantee Account to take care of the debits in any of these accounts mentioned above that I am guaranteeing.
I will also continue to guarantee the accounts named above with my regular account carried in your office, and known as the T. J. Foley Account, Philadelphia #258.

The decedent received a letter from F. B. Keech & Co. on October 11, 1930, dated the previous day, stating:

At the close of market today your account needs $80,500.00 to meet our marginal requirements. Kindly let us have your check to cover this amount by return mail.

The sole reason for the call for additional margin was that F. B. Keech & Co. believed that the transactions made in the Edward Foley account, which had resulted in losses of $292,000, were duly authorized by the decedent. It was the first claim for additional security ever made in connection with the accounts. The decedent learned of the irregularities for the first time as a result of having received that notice.

¡The decedent filed a bill of complaint on October 13, 1930, and thereafter temporary restraining orders were issued against F. B. Keech & Co. restraining it from disposing or attempting to dispose of any securities or collateral pledged in the personal account of Thomas J. Foley, Sr., the accounts of Catherine LaBrum, Ellen Kerrigan, Thomas J. Foley, Jr., Florance H. Foley, and Edward Foley pending hearing and disposition of an application for a preliminary injunction. One proceeding was instituted in the state court and one was instituted in the Federal court. The contentions of the decedent and of his representatives after his death in the suits which were brought were, in general, that William A. Quigley, the manager in charge of the Philadelphia office of F. B. Keech & Co., and Charles F. Foley had made transactions in the Edward Foley account without the knowledge, consent, or approval of Thomas J. Foley, had used the collateral pledged in the latter’s name as security therefor, and. had concealed the transactions from Thomas J. Foley; they had caused the name of Edward Foley to be included in the letter of January 10, 1929, with the intent to make Thomas J. Foley personally liable for any losses sustained in that account; they had wrongfully withdrawn money from that account; they procured the execution by Thomas J. Foley of the letter dated October 9, 1930, purporting to contain a guarantee of the Edward Foley account by misrepresenting to Thomas J. Foley that it related only to other accounts which he intended to guarantee; and, as a result of their actions, the Edward Foley account on the books of the partnership showed debit balances ranging from a low of about $59,000 at the end of February 1929 to a high of about $614,000 at the end of July 1929, from a low of about $201,000 on January 31, 1930, to a high of about $405,000 on June 30, 1930, and, finally, a debit balance of about $312,000 on October 10, 1930, with securities worth about $40,000 pledged as collateral. The partners of F. B. Keech & Co., in the proceedings brought against them, denied any knowledge of or responsibility for the unlawful acts of Quigley and Charles F. Foley, and contended that Charles F. Foley was fully authorized to trade and deal in the account in the name of Edward Foley. The suit in the United States District Court was dismissed on April 13, 1931, for lack of jurisdiction. Thomas J. Foley died on January 10, 1932. The suit in the Common Pleas Court of Philadelphia was settled by the parties on September 1, 1932, before trial.

The settlement provided, among other things, that Keech & Co. would deliver to the estate of Thomas J. Foley 6,100 shares of United Gas & Improvement Co. common stock, together with a dividend thereon payable to stockholders of record on August 31, 1932, and was to retain as its own property 10,796 shares of United Gas & Improvement Co. stock as well as all other securities in the six accounts, after canceling all debit balances in those accounts. The estate of Thomas J. Foley received on September 1, 1932, from F. B. Keech & Co., in settlement of the suits, 6,100 shares of United Gas & Improvement Co. stock of the total value at that time of $124,287.50, and $1,830 in cash representing the dividends on the stock. F. B. Keech & Co. recovered from a surety company on a fidelity bond insuring it against loss due to the fraud of William A. Quigley, Philadelphia manager, in connection with the Edward F. Foley account.

The record contains a photostatic copy of the decedent’s account and also of the Edward Foley account with F. B. Keech & Co. for 1929. Drafts for a total amount of over $250,000 were debited to the decedent’s account at various times during 1929. The total debit balances in accounts with F. B. Keech & Co., other than the Edward Foley account for which the decedent’s securities were a guarantee, amounted to approximately $222,000 as of October 9, 1980, while the collateral in the accounts, including the decedent’s own account, was worth approximately $555,000.

The decedent filed his income tax returns for 1928 and 1929 with the collector of internal revenue for the first district of Pennsylvania, at Philadelphia, Pennsylvania. They were on the basis of cash receipts and disbursements. The petitioner concedes that the decedent realized gains or other income through his account with F. B. Keech & Co. in 1929, as determined by the Commissioner, unless the facts and circumstances related herein operate to eliminate or reduce the income or to create a deductible loss or other allowable deduction. The Commissioner in determining the deficiency added to the decedent’s income for 1929, as reported on his return, $102.99 as interest received through F. B. Keech & Co., $10,335 as dividends received through F. B. Keech & Co., $9,665.06 as “additional profit” “The United Gas Improvement Company”, and $86,146.08 as capital net gain on the sales of rights and various kinds of shares of the stock of “The United Gas Improvement Co.” He also increased the deduction of $6,000 claimed on the return for interest to $18,516.73, which included $5,225.24 of interest paid to F. B. Keech & Co.

It should be borne in mind that the three remaining issues relate to the year 1929 and that the year 1930 is not before the Board. The petitioner contends that “by reason of larceny, embezzlement, fraud and trickery there were no profits or income available to the decedent from his transactions in his account with F. B. Keech & Company during the calendar year 1929.” The Commissioner has determined that the decedent received certain income in 1929 through his account with F. B. Keech & Co. An examination of the account shows that the interest, dividends, and proceeds from the sales of United Gas & Improvement Co. stock were credited to the decedent in this account at various dates during the year 1929. The account also shows that drafts on the account were honored and charged at various times during the year 1929. The total amount withdrawn from the account through drafts exceeded $250,000. The fact that these drafts were drawn and honored indicates clearly that the decedent was not only free to withdraw cash from his account, but he actually did withdraw cash far in excess of the total of the items in controversy. Furthermore, the account at most times during the year showed a debit balance, and the credits for interest, dividends, and proceeds of sales served to reduce the debit balance and immediately benefited the decedent. The wrongful acts of Charles F. Foley and Quigley did not prevent the decedent from realizing the income in question from his own separate account with F. B. Keech & Co. Thus, there is obviously no merit whatever in the petitioner’s argument that the decedent did not constructively receive all of the amounts credited to his account during the year 1929, and the Commissioner did not err in including the items in question in the decedent’s income for 1929.

This point probably deserves no further discussion. However, it is a fact that the letter of January 10, 1929, is the only document executed by the decedent in 1929 which might have made F. B. Keech & Co. think that any property of the decedent could be held in connection with the Edward Foley account. Not only was the insertion in that document of the name “Edward F. Foley” a fraud upon the decedent, but the document itself merely provides “that any security I may have on deposit with your company can be used by you as collateral and security for the accounts.” “Any security” may perhaps refer to bonds and shares and not to amounts credited to the decedent’s account as interest, dividends, or proceeds of sales. But in any event, that document in no way prevented the decedent from realizing income through his account from interest, dividends, and sales. In so far as the document served to pledge the decedent’s securities as collateral and security for the accounts of his two daughters, that is, Mrs. Kerrigan and Mrs. LaBrum, it evidenced a voluntary act upon his part which did not serve to prevent him from realizing income through his own account. These circumstances further demonstrate that there is no merit in the petitioner’s contention that the Commissioner erred in including in the decedent’s income the items in question.

The petitioner next argues for “a deduction for 1929 in the amount of $192,529.90 on account of losses arising from theft, larceny, embezzlement, or fraudulent misappropriation of decedent’s securities and the unlawful pledging of them as collateral in the fictitious marginal account with F. B. Keech & Company in the name of ‘Edward Foley.’ ” The figure of $192,529.90 is shown only in Exhibit I. The stipulation states that that exhibit is a “copy of letter from Harriman & Keech dated March 8, 1935, showing the status of the account carried in the name of Edward Foley as of December 31, 1929.” The letter is on the stationery of Harriman & Keech and is signed “F. B. Keech & Co. in Liquidation” by an auditor. It contains the following statement relating to the Edward Foley account:

The status of the account of Edward Foley on December 81, 1929 was as follows:
300 Tobacco Products, 2½_ $750.00
100 Lehigh Coal & Nay., 105_ 10, 500.00
300 Pennroad, 18⅛_ 4,050.00
600 Indian Terr Oil, 19½_ 11,700.00
Market Value_=_ 27,000. 00
Debit Balance_212,217. 90
185,217. 90
Margin Reqt_ 7, 312.00
Under Margin_ 192,529.90
The above is figured at 25% margin requirement, except on 300 Tobacco Products. 1

Apparently the petitioner’s argument is that the decedent had a loss of $192,529.90 because the Edward Foley account at the end of the year 1929 was undermargined by that amount. The stipulation clearly shows that some dishonest acts were committed and that advantage was taken of the decedent, but it does not show that he sustained a loss in 1929 of $192,529.90. If the Edward Foley account had been closed out at the end of 1929, and if the securities of the decedent in his own account could have been lawfully taken by F. B. Keech & Co. to cancel that debit balance, the decedent’s loss would not have exceeded $185,217.90. But, as a matter of fact, the Edward Foley account was not closed out at the end of 1929. No securities of the decedent were taken at that time to pay the debit balance in the Edward Foley account, and the decedent sustained no loss in 1929.

The pertinent provision of the Revenue Act of 1928 is section 23 (e) (3), which allows an individual a deduction for “losses sustained during the taxable year and not compensated for by insurance or otherwise * ⅜ * of property not connected with the trade or business, if the loss arises * * * from theft.” The respondent concedes that a loss from embezzlement would be deductible under the above quoted provision. Furthermore, if property is stolen in 1929, the loss is deductible in that year even though the owner of the property is not aware of the fact that it has been stolen and that he has thereby suffered loss. Nevertheless no part of the loss which the decedent has apparently sustained as a result of the alleged unlawful acts of Quigley and Charles F. Foley, and the transactions which they made through the Edward Foley account, was sustained by the decedent in 1929. The fraudulent addition of the name of Edward F. Foley to the letter of January 10, 1929, did not occasion the decedent any immediate loss. The fraud, embezzlement, or whatever it may properly be called, which was being perpetrated through the Edward Foley account, was .incomplete at the end of 1929 and remained incomplete until the de1-cedent put a stop to it in October 1930. The Edward Foley account was still an open account at the end of 1929. It is not the petitioner’s contention that the Edward Foley account was the decedent’s account, therefore his loss did not occur at the time that any particular transaction in that account was closed at a loss. Instead, the petitioner’s contention is that the decedent’s loss is represented by the liability of his securities as collateral and security for the Edward Foley account as a result of the letter of January 10, 1929. Since that letter was a fraud upon the decedent, it is at least doubtful whether the securities in his account could lawfully be used as collateral and security for the Edward Foley account. F. B. Keech & Co., of course, claimed that they could, but the decedent never admitted that they could, and their differences were settled without that point ever having been decided. The terms of the settlement have been set forth in the stipulation, but they do not indicate to what extent the claims of the various parties were sustained. F. B. Keech & Co. was required to cancel all debit balances in the various accounts and was required to surrender shares and cash worth about $126,000, but it was permitted to retain all other securities in the six accounts. Was the decedent’s ultimate loss “compensated for” in that settlement? Before the amount of a deductible loss for any year could be determined, the amount of the compensation, if any, which was ultimately received would have to be determined and deducted. This would present an insurmountable practical difficulty to the computation of a deduction for 1929, even if there had been a loss for 1929. But at best for the petitioner, the situation at the close of 1929 was that the securities in the decedent’s account were being held as collateral and security for the deficit in the Edward Foley account. It might have appeared at that time that the de^ cedent was likely to suffer a loss of some amount, then unknown, because F. B. Keech & Co. might sell some of his securities. But, as a matter of fact, it had neither taken nor sold any of his securities and, consequently, he suffered no loss in 1929. There was also at the close of 1929 the possibility that he might eventually sustain no loss, since the deficit in the Edward Foley account might subsequently be wiped out, or reduced, by profitable transactions or by an increase in the value of the securities belonging to the account. Losses to be deductible under the statute must be sustained. Ko deduction is allowed for anticipated losses even though they may appear to be imminent.

The decedent, on January 17, 1929, transferred 100 shares of United Gas & Improvement Co. stock to F. B. Keech & Co. for use as collateral for the account in the name of Charles F. Foley. The decedent had purchased these shares on May 10, 1928, at a cost of $14,512.50. This stock, contrary to his instructions, was placed in the Edward Foley account and was sold on January 28, 1929, for $17,673. The proceeds of the sale were credited to the Edward Foley account. The petitioner claims a deduction of $14,512.50, representing a loss on this stock in 1929, but concedes that any deduction allowed in this connection would reduce the amount of the loss claimed in the preceding assignment of error.

If there had been an account in the name of Charles F. Foley, and if the shares had been sold in that account, the decedent might not be entitled to any deduction for loss. Cf. J. Edgar Davidson et al., Executors, 26 B. T. A. 754. But there was no Charles F. Foley account and the shares were diverted to and sold in the Edward Foley account. The stipulation is that this account was owned and run by Charles F. Foley for his own benefit. The decedent did not intend to give the shares to his son nor did he intend that they should be sold and the proceeds retained by his son. The evidence establishes a loss which is deductible under section 23 (e) (3) to the extent that it is not compensated for by insurance or otherwise. The fair inference from the entire stipulation is that the decedent was not compensated for-his loss by insurance or otherwise. The Commissioner erred in not allowing the deduction claimed in the amount of $14,512.50.

Reviewed by the Board.

Decision will be entered under Bule 50.

Smith and Matthews dissent.


author: Aenold :

text:
    Elias Mallouk, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lulu Mallouk, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph Mallouk, Petitioner, v. Commissioner of Internal Revenue, Respondent. Katherine Mallouk, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74613-74616.
    Promulgated April 7, 1936.

      Boss M. Baeon, Esq., for the petitioners.

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

Aenold :

In these proceedings, duly consolidated for hearing, respondent determined deficiences in income tax for the year 1930 as follows:

Petitioners duly appealed to the Board for redetermination of the deficiencies, and assigned as error the action of the respondent in refusing to allow as credits against the tax, in lieu of allowing as deductions from gross income, certain taxes paid by petitioners to the Government of the Philippine Islands during the taxable year.

The parties stipulated the facts substantially as follows:

The petitioners are citizens of the United States and were members of a domestic partnership, Elias Mallouk & Brother, New York City, each having an interest in the partnership of twenty-five per cent, in 1930.
The partnership of Elias Mallouk & Brother during all years material to the issue here involved, was engaged in the sale of lingeries and embroideries which it manufactured in its own plant in the Philippine Islands and shipped to its selling organization in the United States.
The partnership kept its books of account and records on the accrual basis.
On goods manufactured in the Philippine Islands and shipped abroad, the Philippine Government levied a tax based on the sale price of the goods for sale, or if not sold in the Philippines as in the instant appeal, a tax based on the value of the goods consigned.
A statement from the Department of Finance, Philippine Islands, relative to the payment of the 1930 tax reads as follows:
“This is to certify that Elias Mallouk and Brother, holders of privilege tax-receipt No. C-l-755, 1930 have paid the taxes corresponding thereto as detailed herein below:
Amount Date of
Quarter Paid Payment
First-Pesos 3,122.17 April 16, 1930
Second- 2,103.59 July 18, 1930
Third- 1,894. 73 October 20, 1930
Fourth- 1,793. 48 January 6, 1931.”
The aforesaid payments are equivalent to $4,456.98.
The amount of the taxes here involved applicable to each of the petitioners is as follows:
Elias Mallouk-$1,114.25
Katherine Mallouk- 1,114.24
Joseph Mallouk_ 1,114. 25
Lulu Mallouk_ 1,114.24
A merchant who manufactures his product in the Philippine Islands has to obtain a privilege tax-receipt for which a certain payment is required prion .to commencing the manufacture of his product. After obtaining the privilege tax-receipt the recipient thereof can begin business and the tax payments thereon are based on gross sales or in case of exported consignments on the value of the goods shipped as in the instant case.
The total amount of $4,468.98 paid by the partnership to the Philippine Islands was based on the value of goods shipped to the partnership during the year 1930.
On the determination of the deficiencies appealed from, the amounts here in controversy were allowed as deductions from income of the petitioners.
In the event that the Board holds that any of the amounts here in controversy are allowable as credits against the income tax paid by these petitioners to the United States, it is stipulated that the amounts determined to be allowable as a credit will be added to the net income of the petitioners.
The net income from the Philippine Islands and from all sources is as follows:

The law imposing the taxes here in controversy was first enacted by the Philippine Legislature in 1914 as a part of Act 2339. Pertinent provisions of this Act are as follows:

“Article 1. Section 21. — Sources of taxes — The following taxes, fees and charges in the nature of tax are deemed to be internal revenue taxes:
“(a) The cédula tax;
(b) The documentary tax;
(c) The privilege taxes on business and occupation;
(d) Specific taxes on manufactured products;
(e) Taxes on resources of banks, receipts of insurance companies, and receipts of corporations paying a franchise tax;
(f) Charges for forest products;
(g) Pees for testing and sealing weights and measures;
(h) Internal revenue, including the income tax collected in the Philippine Islands under laws enacted by the Congress of the United States;
(i) Taxes on signs, signboards and billboards.”
Article IY
Privilege Tames
“Section 34. Privilege taxes on business and occupation.' — A privilege tax must be paid before any business or occupation herein specified can be lawfully begun or pursued. * * *. On some sorts of business the tax is in a fixed amount while on other sorts of business it is reckoned at a certain rate per cent on the amount of business transacted.
“Section 39. Payment of percentage taxes, quarterly reports of earnings.— The percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter. * * *.
“Section 40. Percentage tax on merchants sales. — All merchants not herein specifically exempted shall pay a tax of one-third of one per cent on the gross value in money of the commodities, goods, wares, and merchandise sold, bartered or exchanged by them, such tax to be based on the actual selling price or value at which the things in question are disposed of, whether consisting of raw material or of manufactured or partially manufactured products, and whether of domestic or foreign origin.
“Section 41. Sales not subject to merchants tax. — In computing the tax above imposed transactions in the following commodities shall be excluded.
“(a) Merchandise actually exported by the vendor:
“(Public Laws of the Philippine Islands, (Yol. 9.))”
“Section 40 of Article IV Act No. 2339 was amended by Act No. 2541 enacted December 18, 1915 by increasing the rate of tax to one per cent and eliminating the exemption of the tax on goods consigned abroad. Section 41 (a) was eliminated. (Vol. 11 Public Laws of the Philippine Islands.)
“At a special session of the Philippine Legislature in 1923 the following Act Was passed:
“No. 3065 — An Act to establish a percentage tax on the business of the' merchants, manufacturers and commission merchants and for other purposes.
“Section 1. All merchants, manufacturers and commission merchants not otherwise specifically exempted according to the provisions of the present Internal Revenue Law shall in addition to similar taxes heretofore imposed pay an additional tax of one-half of one per centum on the gross value'in money of the commodities, goods, wares and merchandise sold, bartered, exchanged or consigned abroad by them, such tax to be taxed on the actual selling price or value of the things in question at the time they are disposed of or consigned, whether consisting of raw material or of manufactured or partially manufactured products, and whether of domestic or foreign origin. The tax upon things consigned abroad shall be refunded upon satisfactory proof of the return thereof to the Philippine Islands unsold.
“The life of Act No. 3065 which expired December 31, 1924, was extended to December 31, 1925, by Act No. 3183 approved November 27, 1924, and on November 25, 1925, effective as of January 1, 1926. Act No. 3065 was reenacted as Act No. 3243, Section 1 of which reads as above quoted. The latter act was in effect for the entire year 1930.”
The Philippine Islands have had an income tax law since 1919 which has since been amended by Acts 2633 and 2936, the latter enacted in 1922 and in effect through the year here involved.
Section 8 (a) of Act 2926 reads as follows:
“The tax shall be computed upon the net income, as ascertained in accordance with the foregoing provisions, of each person subject thereto received in each preceding calendar year ended December 31.”

The Revenue Act of 1928, section 23 (c), provides, in so far as material here, that in computing net income there shall be allowed as deductions, among other things, taxes paid or accrued within the taxable year except (1) income, war profits and excess profits taxes imposed by the authority of the United States, and (2) so much of the income, war profits and excess profits taxes imposed by the authority of any foreign country or possession of the United States as is allowed as a credit against the tax under section 131. And section 131 provides that in the case of a citizen, the income tax imposed by the act shall be credited with the amount of any income, war profits and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States.

In computing the deficiencies involved in this case respondent allowed as deductions from gross income under section 23 (c), sivpra, the Philippine taxes above mentioned, on the theory that such taxes were not income, war profits or excess profits taxes. Petitioners contend that the taxes paid to the Philippine Government should be allowed as a credit against their respective Federal income taxes instead of deducted from gross income. Thus, the issue is resolved into a single question whether the Philippine taxes may properly be classified as income or profits taxes. To resolve this question we must determine the nature of the controverted taxes as indicated by the Philippine statutes.

At the outset we find that the law imposing these taxes, first enacted in 1914 as Act No. 2339, states that they are “deemed to be internal revenue taxes”, and later therein they are more specifically described as “privilege taxes.”

Act No. 2339 was amended by Act No. 2541 in 1915 by increasing the rate of tax and in other particulars. In 1923 Act No. 3065 was passed “establishing a percentage tax on the business of merchants”, etc. This act expired at the end of 1924, and was renewed and later reenacted as Act No. 3243 in effect during 1930. The nature of the tax imposed by these various acts appears to be substantially the same as in the original enactment, namely, a privilege or excise tax. It was not a tax imposed upon income or profits, either gross or net, notwithstanding the amount of the tax was determined or measured by a percentage of the gross value in money of the goods, wares, and merchandise exchanged or consigned abroad. The amount of the tax was computed on the basis of the “actual selling price or value.” Where goods were exported, as in the instant case, the tax was computed on the value of the goods shipped. Whether the goods were ultimately sold at a profit or loss, therefore, did not affect the amount of the tax. Such a tax is in no sense an income or profits tax.

On the evidence before us we can reach no other conclusion than that the tax in question was in fact what it was designated in the taxing acts, namely, a privilege tax. Not being an income or profits tax, it is not allowable as a credit against the Federal income tax due from petitioners. They are only entitled to deduct the Philippine tax from their gross income. Such deductions respondent has already allowed. His action is approved. Eitingon-Schild Co., 21 B. T. A. 1163; cf. Havana Electric Railway, Light & Power Co., 29 B. T. A. 1151.

Judgment will be entered for the respondent.


author: Sternhagen :

text:
    Frank Kuhn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73265.
    Promulgated April 7, 1936.

      Louis G. Wurzer, Esq., for the petitioner.

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

Sternhagen :

Although the petitioner states his familiarity with the rule of Eckert v. Burnet, 283 U. S. 138, 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, he urges that this rule is inapplicable where the new note given by the taxpayer is collaterally secured by his pledge of property. His argument treats the pledge as if it were a loss of the property. This clearly is not correct. Title to the property continues in the pledgor, and by paying the debt he may retake possession. During the pledge the property is so clearly his that it would be within his gross estate upon his death, City Bank Farmers Trust Co. v. Bowers, 68 Fed. (2d) 909, 913; certiorari denied, 292 U. S. 644; Fredrick Rodiek, Ancillary Executor, 33 B. T. A. 1020, 1044. Thus the loss is no more realized in this case because the taxpayer has deposited collateral than in the Eckert case, where collateral was not mentioned.

As to the second note, upon which petitioner was endorser, it can be said here, as it was in the Eckert case, that the petitioner “merely exchanged his note under which he was primarily obligated for [Mercier’s] note under which he was secondarily obligated, without any outlay of cash or property having a cash value.” As to the first note, upon which petitioner was not an endorser but only furnished the collateral, he might have permitted the pledgee to realize upon Mercier’s obligation by liquidating the pledge. Thus he might have sustained a loss. Instead, however, he elected to save himself from the immediate realization of loss by giving his successive promissory notes. In both cases, being on the cash basis, he sustained no loss in 1930 beyond the cash payments which he made and which he has been allowed to deduct.

The petitioner relies upon A. W. D. Weis, 13 B. T. A. 1284, but that case stands for an entirely different principle, namely, that a taxpayer whose investment is lost in the taxable year is not to be deprived of the deduction therefor merely because the lost investment was derived from borrowed capital. The distinction between that case and Eckert v. Burnet, supra, appears in Burns Manufacturing Co. v. Commissioner, 59 Fed. (2d) 504, in which it is also said that the Weis case must be regarded, in so far as it considers the cash basis, as overruled by the Eekert case. Cf. Crain v. Commissioner, 75 Fed. (2d) 962; Menihan v. Commissioner, 79 Fed. (2d) 304. Petitioner cites John C. Hermann, 27 B. T. A. 409, but that case supports the deduction of interest which was paid with the proceeds of a new note for a principal amount large enough to include both the interest and principal of an earlier note. This is consistent with the Commissioner’s allowance in the present case of the interest and part payments actually made.

The Commissioner correctly disallowed the deduction in 1930 of the amount in excess of the actual payments.

Judgment will be entered under Rule 50.

         S. R. Davis, 9 B. T. A. 755 (reversed on mandate, C. C. A., 7th Cir., without opinion); Morris Sass, 12 B. T. A. 156; 17 B. T. A. 261; Edmond A. Hughes, 27 B. T. A. 1022.

       See Law of Federal Income Taxes, Paul and Mertens, vol. 3, § 2C.58.


author: Leech :

text:
    Percy H. Johnston, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78682.
    Promulgated April 7, 1936.

      W. W. Spalding, Esg., for the petitioner.

      Gerald W. Brooks, Esg., for the respondent.
   OPINION.

Leech :

Only $512.68 of the total income of the partnership distributable to petitioner was reported by the latter on his return. This resulted from petitioner’s reducing his distributable share shown on the partnership return by using $2,147.89 of a loss of $2,431.25, sustained by him personally upon sale of noncapital assets consisting of securities, to reduce, to that extent, his income from the partnership. This was done on the theory that the partnership income contained an item of gain of $4,295.78 from the sale of similar non-capital assets and that one-half, or $2,147.89, of this amount pertained to petitioner’s partnership interest, and, consequently, was subject to offset by a similar loss sustained by him individually.

Though a partnership is not a taxpaying entity, it is a separate and distinct entity for the computation of the income. And “its non-taxation carries no implication of the measure of its income or that of its individual partners.” Edward B. Archbald, 27 B. T. A. 837; affd., 70 Fed. (2d) 720.

So, an individual on the cash basis, who is a member of a partnership on the accrual basis, is taxable on his share of the accrued distributable partnership income. Percival H. Truman, 3 B. T. A. 386; Truman v. United States, 4 Fed. Supp. 447.

Nor may he deduct, on his individual return, partnership expenses paid out of his withdrawals from the partnership, since they were deductible on the partnership return filed on the accrual basis. Shearer v. Burnet, 285 U. S. 228; Samuel Kurzman, 8 B. T. A. 412; Charles Colip, 5 B. T. A. 123.

Section 23 (r) of the Revenue Act of 1932 provides:

(r) Limitation on Stock Losses.—
(1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations).

Petitioner, under the quoted section, seeks to deduct his personal loss on sale of noncapital assets from one-half of a similar gain by the partnership* and, in this way, reduce the amount included on his return as his share of the partnership income. The question appears to be original here. However, it has been considered by the Commissioner and a conclusion reached contrary to petitioner’s contention. G. C. M. 14012, C. B. XIV-6, p. 4; I. T. 2892, C. B. XIV-20, p. 10.

Section 183 of the Revenue Act of 1932 provides:

SEO. IS3. COMPUTATION OE PARTNERSHIP INCOME.
The net income of the partnership shall be computed in the same manner and on the same basis as in the case of an individual, except that the so-called ^charitable contribution” deduction provided in section 23 (n) shall not be allowed.

Under the theory advanced by petitioner, the last quoted section •of the act would seem to be without real meaning or effect. To accept that theory we must • conclude that Congress provided for the separate computation of partnership net income, but intended that the total so reached would be discarded and the individual items of gain or loss, income or deduction, would then be separated and each brought forward into the returns of the several partners, in the proportionate amounts of these partners’ individual interests in profits, and there combined, in each case, with nonpartnership income and deductions, to arrive at the partners’ net taxable income.

That conclusion necessarily rests upon the unreasonable assumption that the purpose and intent of Congress in the enactment of the last quoted section was to compel the doing of something wholly without significance in the computation of the tax imposed. That such assumption is unreasonable is supported by the fact that the taxing act has specifically provided that certain items of the partnership income be reflected in the partners’ individual returns as if directly received by the latter. Thus section 184 of the Revenue Act of 1932 provides:

SEC. 184. CREDITS AGAINST NET INCOME.
The partner shall, for the purpose of the normal tax, be allowed as a credit against his net income, in addition to the credits allowed to him under section 25, his proportionate share of such amounts of dividends and interest specified in section 25 (a) and (b) as are received by the partnership.

If the position of petitioner be correct, the rights expressly granted by the quoted section would have existed even without this section. The provision would be mere statutory surplusage.

The applicable revenue act likewise expressly provides that other items of partnership income shall be accounted for, unaffected by interposition of the partnership return. These items include “earned income” under section 185, “capital gains and losses” under section 186, and “taxes of foreign countries and possessions of the United States” under section 187. Those specific grants of rights as to certain items of partnership income indicate that Congress intended the “General Rule”, set out in sections 182 and 183, to be an exclusive method aside from the exceptions mentioned. As the Court said in Botany Worsted Mills v. United States, 278 U. S. 282: “When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode.” See also Paso Robles Mercantile Co. v. Commissioner, 33 Fed. (2d) 653; certiorari denied, 280 U. S. 595.

Section 182 (a) of the Revenue Act of 1932 was amended, effective January 1, 1933, by section 218 (d) of the National Industrial Recovery Act, approved June 10$ 1933', by the provision: “No part of any loss disallowed to a partnership as a deduction by section 23 (r) shall be allowed as- a deduction to a member of such partnership in computing net income.” This provision covers the converse of the situation here shown, but, in view of its background, just discussed, we think it only a clarification of then existing law. Cf. Tiger v. Western Investment Co., 221 U. S. 286; Cope v. Cope, 137 U. S. 682.

Reviewed by the Board.

Decision will be entered for the respondent.

Van Fossan and Seawell dissent.