author: Ahundell : Trammell,

text:
    Henry Adams Ashforth, Frederick H. Ecker and Henry L. Servoss, Executors of the Estate of Elizabeth Milbank Ashforth, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67654.
    Promulgated July 27, 1934.

      Clarence Castimore, Esq., and Thomas B. Gilchrist, Esq., for the petitioners.

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

Ahundell :

This is a proceeding for the redetermination of a deficiency m estate tax in the amount of $113,201.18. Seven assignments of error were set forth in the petition and amendments thereto, upon which issue was joined, but all of these issues have been settled by the parties, except one. The issues so settled will be given effect in the redetermination of the deficiency under Rule 50, in accordance with the agreement of the parties filed at the hearing.

The parties also stipulated certain facts, in addition to which petitioners offered the testimony of two witnesses and certain documentary evidence. The stipulation in full is here adopted as a part of our findings of fact, and so much thereof as is deemed pertinent, as well as other facts established by proof, will be set forth in connection with our discussion of the issue.

The sole issue submitted for decision is whether or not respondent erred in including in the gross estate of the decedent, at a valuation of $766,000, certain real estate situated in the town of Greenwich, Connecticut, known as “ Milbank.”

The decedent, Elizabeth Milbank Ashforth, died testate on March 8,1930, and the petitioners herein are the duly appointed and qualified executors and ancillary executors of the last will and testament of the decedent.

At the time of her death the decedent was about 25 years'of age, and had been in excellent health prior to her last illness, which was of only three or four weeks duration. She was married in 1925 at the age of 20, and had two children. Thereafter, in 1928, she consulted her lawyer in reference to making a gift to her husband. She had considerable income from certain trust funds, while her husband’s income was small. This situation required her to pay most of the bills, which was humiliating for her husband, and she wanted him to have an independent income. She had no income-producing property in her own right except about $100,000 in stocks and bonds. She did not desire to give these securities to her husband, because they were the only assets she had upon which she could readily realize cash if occasion arose. In view of these facts, she was advised by her lawyer that the only thing she could give her husband that would create an independent income for him was a mortgage on the real estate in Greenwich, and she expressed her willingness to do this.

The effect of the proposed transaction was fully explained to the decedent by her attorney, who told her that she was making a gift of property of the value of $700,000, which she could not recover without paying the full sum of $700,000 for it, and that she was committing herself to the payment of interest in the annual sum of $42,000. Decedent stated that she understood all this, and that it was satisfactory to her.

Decedent then signed a demand note for $700,000, bearing interest at 6 percent per annum and executed a mortgage deed in the same amount on the real estate, and delivered these instruments to her husband at his office in the presence of her attorney on April 28, 1928. A few days later the attorney sent the mortgage to Greenwich, Connecticut, to be recorded, but the instrument was thereafter returned to him and not recorded at that time for the reason that the amount of the mortgage was in excess of the assessed value of the property and recording would have had the immediate result of raising the assessment. The mortgage was recorded on April 8, 1931, after decedent’s death.

Decedent’s husband was also informed of the effect of the transaction, and he accepted the note and mortgage and placed them in a safe-deposit box to which his wife had no access during her lifetime. Decedent regularly paid to her husband the interest specified in the note and mortgage, from the date of delivery thereof to the date of her death.

In the preparation of her will decedent took into consideration the fact that she had already given her husband the mortgage for $700,-000, and she made him the residuary legatee in her will, conditioned upon his release of the mortgage and note. She stated definitely to her lawyer, who prepared the will, that she did not want her husband to have both the mortgage and the residuary estate. After the death of decedent her husband elected to take the residuary estate under the will, and he thereupon canceled the note and executed and delivered to the trustee under the will a quitclaim deed to the property. There was no agreement or understanding between decedent and her husband that the mortgage would be canceled at any time at her request, nor was there any understanding that the husband would cancel it after her death.

The fair market value of the “ Milbank ” property was $766,000 on March 8, 1930.

No monetary consideration for the note and mortgage deed passed from decedent’s husband to the decedent during her lifetime.

The executors of the decedent’s estate, in the estate tax return filed, listed as an asset the “ Milbank ” property at a value of $766,-000, and claimed a deduction for the unpaid note and mortgage in the amount of $707,933.33. Presumably $7,933.33 of this amount represented accrued interest. The respondent disallowed the entire amount of the deduction so claimed.

The provisions of the Revenue Act of 1926, pertinent here, are as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
*******
Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to property, * * * to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth, * * *

Petitioners do not now claim to be entitled to deduct from the gross estate the face amount of the mortgage under section 303 (a)(1). They claim that under section 302 (a) the extent of the interest of the decedent in the “ Milbank ” property was not more than the value of her equity of redemption, $66,000, and no more than that sum should be included in the gross estate.

It is contended by petitioners that the legal effect of a mortgage in Connecticut is to vest legal title to the land in the mortgagee, and to leave the mortgagor with no legal title therein until performance of the condition of the mortgage. There are cases containing language which supports that view, one of which, McKelvey v. Creevey, 72 Conn. 464; 45 Atl. 4, cited by petitioners, reads in part:

The mortgagee is the owner of the land, while the mortgagor has no legal estate therein until he performs the condition. If he fails to do so, all his-right to the land is gone.

But the same opinion continues as follows:

In substance and in fact, however, and except for a very limited purpose, a mortgage is regarded as mere security for the performance of the duty described in the mortgage deed; and the mortgagor is for most purposes regarded as the sole owner of the land, “ as well after forfeiture as before execution of the deed, and the mortgagee has rather a power than an interest, the use of which is strictly limited to the collection of the debt or enforcement of the duty which the mortgage was intended to secure.” * * * In this view of the matter, the “ equity of redemption ” is regarded as the land, and its owner as the owner of the land, for most purposes; while the “ estate in fee ” of the mortgagee is, except for a limited xmrpose, regarded as personal estate and mere security. [Citing authorities.] In accordance with this view it has been held, in the following cases, that the estate of the mortgagor is subject to dower; descends to heirs; may be attached and set off on execution; may, as real estate, confer rights of settlement; is devisable and taxable as real estate; and is based upon a title sufficient to maintain ejectment, — while to the estate of the mortgagee none of these incidents attach, save the right to maintain ejectment. [Citing authorities.] As between mortgagor and mortgagee, however, it is the law of this state that the latter is regarded as having the legal title to the land * * * but he is so regarded, as appears from the eases cited, only to a limited extent and for a limited purpose. He is regarded as having the legal title, and therefore is legal owner, mainly for the purpose of obtaining, by ejectment or otherwise, the possession of the land, and holding it, in order to mate his security available in payment of his debt. * * * He has title and ownership enough to mate his security available, but for substantially all other purposes he is not regarded as owner; but the mortgagor is so regarded, — always subject, of course, to the mortgage. * * * The real interest of the mortgagee in the land is measured by the amount of his debt, and not by his deed.

See also Downing v. Sullivan, 64 Conn. 1; 29 Atl. 130; Ensign v. Batterson, 68 Conn. 298; 36 Atl. 51; Cion v. Schupack, 102 Conn. 644; 129 Atl. 854.

Under the above quoted decision we must deny the contention of the petitioners that the value of the land in question should be excluded from the gross estate up to the amount of the mortgage on the theory that the only interest which decedent had in the land was an equity of redemption. It seems to be settled under Connecticut law, except as between mortgagor and mortgagee, that the former is regarded as the owner of the land; that the latter has a power rather than an interest; that the mortgage is mere security for the debt; and that the mortgagee’s power may be exercised only to secure payment of his debt.

Aside from these considerations, it is now the unquestionable rule that “taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid.” Corliss v. Bowers, 281 U.S. 376, an income tax case, but equally applicable to excise taxes; Burnet v. Guggenheim, 288 U.S. 280. The practical concept is that the holder of title to realty is the owner of the land regardless of the extent to which it is mortgaged; he is so treated for local tax purposes.

Moreover, it has recently been held by the Circuit Court of Appeals for the Second Circuit that securities pledged to secure loans may not be excluded from the gross estate. City Bank Farmers Trust Co. v. Bowers, 68 Fed. (2d) 909. The opinion of the court reads in part:

The statute, Sec. 403 (a) (1), plainly meant the opposite; among the deductions allowed were “ unpaid mortgages ”, an impossible item unless the whole value of the mortgaged property is to be included in the gross estate under Section 402 (a), as an “interest * * * subject to tbe payment oí charges against bis estate.” Tbe regulations under tbe Act of 1918, (Art. 15, Regulations 37), specifically so provided; and their successors as well. Section 402 (a) was reenacted in 1921 and 1924 without change, though under a different section number; it is most unlikely that a contrary intent should have escaped expression for so long.

We accordingly hold that it was the intent of Congress as expressed in the statute to include in decedent’s gross estate the full value of her real estate, undiminished by the amount of the mortgage. The intent to allow deductions for only those mortgages “ contracted bona fide and for an adequate consideration in money or money’s worth ” is clearly expressed and it is plain that the mortgage here does not come within the class described.

There still remains the question of the power of Congress to include the value of property, in respect of which a mortgage has been given, as a measure of the excise tax. “ The thing taxed is the transmission of property from the dead to the living.” Heiner v. Donnan, 285 U.S. 312. Completed irrevocable transfers are not subject to death duties. Reinecke v. Northern, Trust Co., 278 U.S. 339. Petitioners’ view is that the execution and delivery of the mortgage was a completed transfer by way of gift inter vivos, consequently there was no transfer at death. There are cases sustaining the validity of mortgages executed and delivered as gifts, Goethe v. Gmelin, 256 Mich. 112; 239 N.W. 347; Cooklin, v. Cooklin, 260 Mich. 69; 244 N.W. 232; but there are other cases holding such mortgages to be unenforceable. See Baird v. Baird, 145 N.Y. 659; 40 N.E. 222, in which it is said: “ It is the debt which gives the mortgage vitality as a charge upon the land, and generally, where there is no debt or obligation, there is no subsisting mortgage.” Also Sheehy v. Kane, 235 N.Y.S. 882, holding that a mortgage given without consideration was “ a voluntary and unenforceable promise of an executory gift.” Whatever may be the local rules in such cases, in construing the provisions of the successive Federal estate tax acts “ there has been a steady widening of the concept of a transfer.” Burnet v. Guggenheim, supra. This is illustrated by such cases as Tyler v. United States, 281 U.S. 497, dispelling the doubt that previously existed as to whether upon the death of a spouse there was a taxable transfer in respect of property held by the entirety, and Chase Nat. Bank v. United States, 278 U.S. 327, holding that the termination by death of a power of disposition may be the legitimate subject of a transfer tax. Upon the death of petitioner’s decedent there was a transfer of her interest, which was that of owner in fee. True, the value of that interest had been diminished by the giving of the mortgage, but not irrevocably so. The diminution was conditional and the value was subject to restoration in the mortgagor in full by performance of the condition of the mortgage. The statute gives recognition to the existence of situations where there has been a diminution of value through bona fide encumbrances and allows deductions therefor. The allowance of deductions is a matter of legislative grace. New Colonial Ice Co. v. Helvering, 292 U.S. 435; Helvering v. Independent Life Ins. Co., 292 U.S. 371, and a claim for deductions must come clearly within the conditions prescribed. The mortgage here does not meet the statutory condition of having been contracted “ for an adequate and full consideration in money or money’s worth.” Cf. Latty v. Commissioner, 62 Fed. (2d) 952. Gifts in contemplation of death reduce the amount and value of property passing at death, but the statute not only does not allow any deduction therefor, but treats such gifts as taxable transfers* and this has been sustained as a permissible measure “ to secure equality of taxation, and prevent evasion of estate taxes.” Milliken v. United States, 283 U.S. 15. To allow deductions for mortgages given without monetary consideration to those who would be the natural objects of a decedent’s bounty would afford an easy means of escaping death duties, and we think it was within the power of Congress to refuse deductions in such cases.

The case of City Bank Farmers Trust Co. v. Bowers, supra, involved the estate of a nonresident alien and in such cases the Revenue Act of 1918 allowed deductions for expenses, mortgages, etc., not in excess of 10 percent of that part of the gross estate situated in the United States. The court intimated a doubt as to the validity of such limitation if it were applied to residents. But that question was not directly involved and the court did not specifically decide it. Moreover, the debts which were there under consideration appear to have been contracted bona fide and for an adequate, and full consideration, which is an important distinction between that case and this. It may be confessed that the question presented here is not entirely free from doubt, but in view of the considerations above set out, the statute is not so cleaxiy arbitrary and capricious that we are prepared to say it violates the Fifth Amendment without more direct authority than we now have. The inclusion of the full value of the property in the gross estate and the respondent’s refusal to allow a deduction for the mortgage are accordingly sustained.

Reviewed by the Board.

Decision will be entered wider Bule 60.

Trammell,

dissenting: I am unable to agree with the conclusion reached in the majority opinion for the reason that if a valid, completed gift of the mortgage in question was made by the decedent to her husband prior to death and not in contemplation of death, then the result is to construe the statute as requiring the inclusion in the gross estate of the value of property which did not belong to the decedent ,at the time of her death and was not transferred or affected thereby.

This case presents two fundamental questions, namely (1) whether or not the execution and delivery of the note and mortgage by decedent to her husband constituted a valid, completed gift, and, if so, (2) whether or not such transfer was in fact made in contemplation of death.

If a valid gift was made, respondent does, not contend-that it was in fact made in contemplation of death, nor would the facts support such a contention. Decedent was then a young woman in good health, and might reasonably have been expected to live for many years. She desired for sufficient reason to provide her husband with a permanent, independent income, and to that end executed and delivered the instruments in controversy. Plainly she was not moved by contemplation of death.

That she intended to and did make a valid, irrevocable gift must be conceded, we think, unless her acts, as a matter of fact of law, fell short of the intended goal. Whether decedent succeeded in her intention depends upon whether a mortgage, with the accompanying note representing the indebtedness secured thereby, may be the subject of a gift under the facts of this case.

It has been held that a mortgage resting upon a consideration of love and affection may be enforced where the relationship between the parties is such as would support an absolute deed, and it is well settled by the weight of authority that a conveyance from one spouse to the other requires no pecuniary consideration to make it valid; that their relationship is sufficient to render love and affection between them a good consideration. Monroe v. Page, 111 U.S. 117; Atwater v. Seely, 2 Fed. 133; Hellyer v. Hellyer (Ia.), 112 N.W. 196; Fitzgerald v. Fitzgerald (Mass.), 47 N.E. 431; Woodsworth v. Tanner (Mo.), 7 S.W. 104; Fretz v. Roth (N.J.), 64 Atl. 152; Morris v. Patterson (N.C.), 105 S.E. 25; Kent v. Tallent (Okla.), 183 Pac. 422; Arbaugh v. Alexander (Ia.), 146 N.W. 747. Where a conveyance is made by one spouse to the other a valuable consideration is necessary only when the rights of third persons otherwise would be prejudiced. Koopman v. Mansolf (Mont.), 149 Pac. 491; Acker v. Pridgen (N.C.), 74 S.E. 335. “ It is elementary that the consideration of love and affection will support a deed by á husband to his wife, there being no rights of third persons intervening.” Paulus v. Reed (Ia.), 96 N.W. 757. And a presumption of fraud does not arise from a gift by a wife to her husband of real property in testimonial of love and affection. Donlon v. Donlon, 138 N.Y.S. 1039.

The mortgage in this case, then, can not be said to have been invalid merely because it was given by the wife to her husband, without pecuniary consideration. But may such a mortgage be the subject matter of a gift? Does it represent an executed gift, or, prior to payment, is it merely in the nature of a voluntary executory agreement to give in the future ?

A mortgage given without valuable consideration is invalid if the parties never intended that it should be enforced, Colt v. McConnell (Ind.), 19 N.E. 106, or if it was fraudulently obtained, Moffet v. Parker (Minn.), 73 N.W. 850, but the authorities are in agreement that a mortgage may be the subject of a gift if the parties so intend, and is enforceable, irrespective of money consideration, where the rights of third parties are not infringed.

In Campbell v. Tompkins, 32 N.J.Eq. 170; 172 (aff'd., 33 N.J.Eq. 362), the doctrine is stated by the court as follows:

It can not be doubted that even now a valid mortgage may be given where no valuable consideration exists. Otherwise the absolute control o£ the owner over his property is taken away, for he would not be permitted to give it away In his lifetime by deed. The mere fact that there was no consideration would not now render the mortgage invalid. A mortgage may be sustained as against all except creditors whose claims existed at the time of giving it, although it was intended merely as a gift; and, when executed and delivered, it is as valid as if it were based upon a full consideration, and it is not open to the objection that it is a voluntary executory agreement, but it may be enforced according to its terms as an executed conditional transfer of the real estate mortgaged [Citing authorities]. [Emphasis supplied.]

In Betts v. Betts, 41 N.Y.S. 285 (aff'd., 159 N.Y.S. 547; 54 N.E. 1089), the court held that a husband could malee a valid gift to his wife of mortgages on property owned by him, saying:

That the mortgages could be made the subject of a gift from the husband to the wife appears to be settled by authority. Bucklin v. Bucklin, 1 Abb. Dec. 242; Van Amburgh v. Kramer, 16 Hun. 205; Bolen v. Bolen, 44 Hun. 362. In the case first cited a mortgage by a father to a trustee, in order to make a voluntary provision for his infant child, was upheld as being as valid in every respect as would be a transfer for a full pecuniary consideration, the contract being executed, and there being no intervening rights of creditors. Chief Justice Denio, who wrote the opinion of the court, said: “There are cases in which a voluntary executory gift will not be enforced by the courts, but an executed one is as valid as though based on a full pecuniary consideration.” In the second ease, which arose in this department, Gilbert, J., said: “ The evidence in this case merely shows that the bond and mortgage in suit were not made upon a valuable consideration. But there are other considerations which are sufficient in equity to support transactions between husband and wife, when the claims of creditors do not interfere. Indeed, it has been held that a bond and mortgage may be made by way of a gift.” In the third case, which was also decided by the general term of the second department, the facts were distinguished from those of Bucklin v. Bucklin, supra, but the authority of that decision was fully recognized. It seems to us that it must be deemed controlling here in support of the validity of the gift of the mortgages in suit.

While it is true in the instant case that decedent executed and delivered to her husband both a promissory demand note and a mortgage, the note alone was not the subject of the gift. The note represented merely the obligation secured by the mortgage. The note itself was an executory agreement to pay in the future, and, so far as it involved personal liability apart from the mortgage, did not constitute an executed gift, but, as stated by the court in Campbell v. Tompkins, supra, the mortgage constituted “ an executed conditional transfer of the real estate mortgaged.” And see Bucklin v. Bucklin, 1 Abb. Dec. 242, where it was also stated that “A mortgage is an executed conditional transfer of the real estate mortgaged.”

This point was considered by the Supreme Court of Michigan in Goethe v. Gmelin, 239 N.W. 347, in which state the theory of the law of mortgages is substantially the same as in Connecticut. It is said in the court’s opinion:

Tbe trial court found that the mortgage was given to secure a note executed by the mortgagors without consideration therefor. This holding is supported by the evidence. Based upon the holding of this court in Graham v. Alexander, 123 Mich. 168, 81 N.W. 1084, he held that the note was but a promise to mate a gift in the future, and such gift not having been executed during the lifetime of the donor, it is not valid as a contract to be executed. * * * Were the claim here made against the estate of the mortgagors based upon the note, the rule as stated would apply. We find no authority extending this rule to a mortgage, although it be security for the payment of a note.

On the question whether a voluntary mortgage may be the subject of a gift, the court further stated:

In Brigham v. Brown, 44 Mich. 59, 62, 6 N.W. 97, 98, it was said: “ Nevertheless, a man may give a voluntary mortgage if he chooses, and it is fraudulent only as to those who are or would be defrauded by it (Gale v. Gould, 40 Mich. 515); and no one would be defrauded in contemplation of law, who was merely a subsequent mortgagee with notice, actual or constructive, of the voluntary instrument.”
The rule thus stated has been accepted by text-book writers.
“A mortgage may be made by way of a gift, when the rights of creditors are not thereby interfered with.” Aldrich, Beal Property Mortgages, §180.
“A mortgage may be made by way of a gift, when the rights of creditors are not thereby interfered with. When executed and delivered it is as valid as if it were based upon a full consideration. It is not open to the objection that it is a voluntary executory agreement, hut may he enforced according to its terms as an executed conveyance.” 2 Jones on Mortgages (8th Ed.), §756. [Emphasis supplied.]

See also the decision of the same court in Cooklin v. Cooklin, 244 N.W. 232, where it was pointed out that it is not even necessary that a mortgage be accompanied by a note, provided the mortgage itself contains a promise to pay.

. By execution and delivery of the mortgage in controversy, decedent definitely decreased the value of her estate to the extent of $700,000, and her husband acquired unconditional ownership of property of that value as effectively as if the subject matter of the gift had been tangible property. She could not recover the mortgage except by payment in accordance with its terms. It was a presently executed gift, not intended to and did not in fact take effect in possession oxen joyment at or after the donor’s death. The transfer was complete upon delivery of the instrument, and no incident of ownership was affected by her death, nor was there any shifting of economic benefit in the property which was the subject of the gift, as a result of death. It is true that under the mortgage decedent had a right to redeem the real estate, which right had a value of $66,000, aixd this equity of redemption passed to her estate upon her death, but such transfer or shifting of that property right did not pertain to nor affect the ownership and rights of the husband in the $700,000 mortgage. Admittedly the property right so transmitted from the dead to the living as a result of decedent’s death is includable in her gross estate at its agreed value of $66,000, but death was not the “ generating source ” of the gift of the mortgage. Such gift bore no relation whatever to death.

In Heiner v. Dorman, 285 U.S. 812, the Court held that section 302 (c) of the Revenue Act of 1926, in so far as it required that certain transfers made without consideration within two years of the donor’s death should be deemed made in contemplation of death, was void under the due process clause of the Fifth Amendment, and that transfers inter vivos, not in contemplation of death, can not be made subject to a death duty, though the donor’s death occurs thereafter. The question considered by the court in that case was substantially the same as is presented here, and the principles applied there, it seems to me, are equally applicable here. In pertinent part the Court said:

Sec. 301 (a) of tlie Revenue Act of 1926 * * * imposes a tax “upon the transfer of the net estate of every decedent ” etc. There can be no doubt as to the meaning- of this language. The thing taxed is the transmission of property from the dead to the living. It does not include pure gifts inter vivos. The tax rests in essence “ upon the principle that death is the generating source from which the particular taxing power takes its being, and that it is the power to transmit, or the transmission from the dead to the living, on which such taxes are more immediately rested. * * * It is the power to transmit or the transmission or receipt of property by death which is the subject levied upon by all death duties.” * * * The value of property transferred without consideration and in contemplation of death is included in the value of the gross estate of the decedent for the purpose of a death tax, because the transfer is considered to be testamentary in effect. * * * But such a transfer, not so made, embodies a transaction begun and completed wholly by and between the living, taxable as a gift * * * hut obviously not subject to any death duty, since it bears no relation whatever to death. The “ generating source ” of such a gift is to be found in the facts of life and not in the circumstance of death. And the death afterward of the donor in no way changes the situation; that is to say, the death does not result in a shifting, or in the completion of a shifting, to the donee of any economic benefit of property, which is the subject of a death tax * * *; nor does the’ death in such case bring into being, or ripen for the donee or anyone else, so far as the gift is concerned, any property right or interest which can bo the subject of any form of death tax. * * * Complete ownership of the gift, together with all its incidents, has passed during the life of both donor and donee, and no interest of any kind remains to pass to one or ceases in the other in consequence of the death which happens afterward.
V ‡ -I* ¥ ^* ¡!* ^*
That a federal statute passed under the taxing power may be so arbitrary and capricious as to cause it to fall before the due process of law clause of the Fifth Amendment is settled. Nichols v. Coolidge, 274 U.S. 531, 542* * *
* * * * *
Moreover, under the statute the value of the gift when made is to be ignored, and its value arbitrarily fixed as of the date of the donor’s death. The result is that upon those who succeeded to the decedent’s estate there is imposed the burden of a tax, measured in part by property which comprises no portion of the estate, to which the estate is in no way related, and from which the estate derives no benefit of any description. Plainly this is to measure the tax on A’s property by imputing to it in part the value of the property of B, a result which both the Schlesinger and Hoeper Cases condemned as arbitrary and a denial of due process of law. Such an exaction is not taxation bur, spoliation.

That the statute involved here is arbitrary, capricious, and confiscatory, when applied to the facts of the instant case, is easily demonstrable. It measures the tax on property of the decedent’s estate by imputing to it in part the value of property belonging to decedent’s husband, which he acquired by gift from his wife during her lifetime and in respect of which property no interest of any kind, in so far as concerns the gift, remained to pass to the one or ceased in the other in consequence of decedent’s death.

The statute also, in the circumstances here, is unreasonably discriminative. If A die leaving an estate of $800,000, without debts, and B die leaving an estate of the same amount, against which there is a mortgage for $700,000, given without money consideration and therefore not deductible under the provisions of the statute, each estate would pay the same tax, notwithstanding B during his life had made a completed and valid gift of the mortgage, the value of which belonged to and inevitably went to the donee, leaving only $100,000 of property belonging to B’s estate or in which the estate had any interest. Or, if A die leaving an estate of $800,000 but having debts contracted or mortgages given for money consideration in the amount of $700,000, A’s estate would pay a tax on the basis of a net value of $100,000, while B’s estate would pay a much larger tax on the basis of a net value of $800,000, yet in each case the net value of the property transmitted to his estate by the decedent would be the same.

And, further, it is apparent that cases might well arise where the value of the property remaining over and above the amount of the nondeductible mortgage would not be sufficient to pay the tax imposed by the statute, leaving nothing for distribution. Such a situation, where an excise tax is imposed on the transfer of property and no property is transferred as a result of death, would indeed be anomalous. This would be true in the instant case if the gross value of the decedent’s estate had not exceeded $750,000. As stated by the Court in Nichols v. Coolidge, 274 U.S. 531:

Certainly Congress may lay an excise upon the transfer of property by death reckoned upon the value of the interest which passes thereby. But under the mere guise of reaching something within its power Congress may not lay a charge upon what is beyond them.
. * * * * * * *
The statute requires the executors to pay an excise ostensibly laid upon transfer of property by death * * *■ to them but reckoned upon its value plus the value of other property conveyed before the enactment in entire good faith and without contemplation of death. * * *
Under the theory advanced by the United States, the arbitrary, whimsical and burdensome character of the challenged, tax is plain enough. An excise is prescribed, but the amount of it is made to depend upon past lawful transactions, not testamentary in character and beyond recall. Property of small value transferred before death may have become immensely valuable, and the estate tax, swollen by this, may leave nothing for distribution.

The case at bar, I think, is readily distinguishable from Tyler v. United States, 281 U.S. 497, where it was held that statutes requiring the inclusion in the gross estate, for estate tax purposes, of the value of property held by tenants by the entirety were not unconstitutional as imposing a direct tax without apportionment, nor so arbitrary and capricious as to result in deprivation of property without due process of law. In that case the court pointed out that as a direct result of the death of one spouse there passed to the survivor substantial rights in respect of the property, including exclusive possession, use, and enjoyment, and the power, not theretofore possessed, of disposing of the property unconditionally. “Thus the death of one of the parties to the tenancy became the generating source ’ of important and definite accessions to the property rights of the other.”

Here the death of the decedent was not the “ generating source ” of any accession to the property rights of the husband in respect of the gift, and as a result of her death he did not acquire the exclusive possession, use, and enjoyment of the property, nor did he acquire thereby the power not theretofore possessed of disposing of the property according to his sole will. On the contrary, he possessed all of those things prior to the death of his wife.

For the reasons hereinabove indicated, it is my opinion that the statute under consideration is ineffective to require the inclusion in decedent’s estate, subject to tax, of the real estate referred to at a valuation in excess of $66,000, which represents the value of the interest of the decedent therein which was transmitted as a result of death.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    St. Louis Mutual Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61006.
    Promulgated July 31, 1934.

      Earl W. Shinn, Esq., for the petitioner.

      John D. Foley, Esq., James K. Polk, Jr., Esq., Walter W. Mahon, Esq., and H. F. Noneman, Esq., for the respondent.
   OPINION.

Leech:

This proceeding seeks redetermination of a deficiency of $1,12T.51 asserted by respondent for the calendar year 1929. The facts are that petitioner, a life insurance company with home office at St. Louis, Missouri, owned at the close of the calendar year 1929, the building in which its home office was located, this building on that date having a cost of $112,500. For that year the rents from tenants amounted to $750, taxes paid amounted to $1,573.65, and the expense of operating and maintaining the building during the year was $5,555.30. A reasonable allowance for depreciation on this building for the year in question was $1,761.21. For that year petitioner did not include in income in its return any sum representing the rental value of office space which it used in this building.

During the calendar year 1929 petitioner sustained depreciation on furniture and fixtures used in the investment department of its business in the sum of $217.95 and in the underwriting department of such business in the sum of $577.20.

In computing the deficiency here appealed from respondent disallowed the deductions taken by petitioner representing depreciation on its home office building, the taxes paid on such building and the expense of operating the building as above set out. Furthermore, respondent allowed the deduction representing depreciation of petitioner’s furniture and fixtures used in the investment department of its business, but disallowed the depreciation of $577.20 sustained upon furniture and fixtures of the underwriting department of such business.

This proceeding was considered by us and a memorandum opinion entered September 21, 1933, holding upon authority of Independent Life Insurance Co. of America, 17 B.T.A. 757, and Reserve Loan Life Insurance Co., 18 B.T.A. 359, that petitioner was entitled to the deduction asked for taxes, operating expenses, and depreciation with respect to its home office building and that on authority of Lafayette Life Insurance Co., 26 B.T.A. 946, petitioner was entitled to the deduction of the depreciation sustained upon furniture and fixtures used in the underwriting department of its business. The decision under that opinion was entered December 9, 1933.

On March 9, 1934, respondent filed a motion asking that the decision entered December 9, 1933, be vacated, the memorandum opinion entered be recalled, and that the proceeding be reconsidered by the full Board. Petitioner on March 19, 1934, filed its motion to strike respondent’s motion.

These two motions by respondent and petitioner were heard together on March 21, 1934, and taken under advisement.

Petitioner’s motion to strike is upon four grounds. The first is that the motion was filed too late, as it is shown to have been filed after 3: 30 p.m. on March 9, 1934, whereas the decision of the Board must be considered as rendered at 9 a.m. ion December 9, 1933, and consequently it became final not later than 9 a.m. on March 9, 1934.

This contention requires little discussion. We do not agree with petitioner’s theory that our decision entered upon a certain date must be considered as having been entered at 9 a.m. on that date. Respondent filed his motion on March 9, 1934, which was the last day of the period at the expiration of which the Board’s decision would become final and the proceeding no longer be subject to our consideration. We hold that the motion in question was timely tiled. Section 906 (d) of the Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926; cf. United Telephone Co., 1 B.T.A. 450.

The other three grounds asserted in petitioner’s motion to strike, namely, that the motion was not seasonably filed; that it failed to allege legal grounds for the relief sought; and that it was dilatory, were not pressed, and, in any event, in our opinion, not sustained. The motion to strike is accordingly denied.

Although neither party has raised it, the record suggests the question that, since the jurisdiction of the Board is wholly statutory and its control over its decisions thus limited to the period of three months following the entry thereof (sections 1101 (a) and (b) of the Revenue Act of 1932) during which petitions for their review maybe filed (section 1005 (a) of the Revenue Act of 1926), where, as here, more than three months have elapsed since entry of its decision though a motion for vacation thereof was properly filed within such three months, is the Board functus officio as to the motion to vacate such decision ? So far as we know, the decisions of the courts uniformly support our negative answer to this query. Helvering v. Continental Oil Co., 68 Fed. (2d) 750 (C.A., D.C.); Burnet v. Lexington Ice & Coal Co., 62 Fed. (2d) 906 (C.C.A., 4th Cir.); Griffiths v. Commissioner, 50 Fed. (2d) 782 (C.C.A., 7th Cir.); cf. Garden City Feeder Co., 27 B.T.A. 1132.

Following the hearing upon respondent’s motion for vacation and reconsideration and while that motion was under consideration by us, the United States Supreme Court, on May 21, 1934, handed down its decision in Helvering v. Independent Life Insurance Co., 292 U.S. 371, reversing the decision of the Circuit Court of Appeals, 67 Fed. (2d) 470, which had affirmed our decision in Independent Life Insurance Co. of America, 17 B.T.A. 757. By its decision the Supreme Court sustained the constitutionality of section 245 (b) of the Revenue Act of 1926. It was held that insurance companies must include in income the rental value of space which they occupy in their own buildings as a condition of their right to deduct depreciation, taxes, and expenses in respect to such building. The Supreme Court also, on May 21, 1934, in Rockford Life Insurance Co. v. Commissioner, 292 U.S. 382, held an insurance company not entitled to deduct depreciation on furniture and fixtures- used in the underwriting department of its business. This decision overrules our holding on this question in Lafayette Life Insurance Co., supra.

In view of the decision of the Supreme Court upon these questions it is apparent that the conclusions reached by us in the memorandum opinion entered herein on September 21, 1933, were in error. The decision entered herein December 9, 1933, is accordingly vacated and set aside and our memorandum opinion of September 21, 1933, is hereby recalled.

We hold upon authority of Helvering v. Independent Life Insurance Co., supra, that petitioner is not entitled to the deductions claimed for taxes, operating expenses, and depreciation with respect to its home office building. We further hold, upon authority of Rockford Life Insurance Co. v. Commissioner, supra, that petitioner is not entitled to the deduction sought of $577.20 as depreciation sustained upon furniture and fixtures used in the underwriting department of its business.

Reviewed by the Board.

Judgment will be entered wider Rule 50.


author: Arundell:

text:
    A. S. Eldridge, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alice H. Eldridge, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64778, 64779.
    Promulgated July 31, 1934.

      Thomas N. Fowler, Esg., for the petitioners.

      Warren F. Wattles, Esg., for the respondent.
   OPINION.

Arundell:

In their income tax returns for 1929 the petitioners claimed deductions for losses sustained on the sale of Carnation Co. and Fox Theatres stock. The deductions were disallowed by the respondent on the ground that the transfer of those stocks was not a bona fide transaction. The shares of stock were community property and were transferred by the husband, A. S. Eldridge, to a corporation in which he owned all the stock except qualifying shares and they were owned by members of his family. There is no question as to the formality of tbe transfer. The certificates were delivered up and new certificates issued in the name of the transferee corporation. The question for decision is whether, in view of the circumstances surrounding the transfer, recognition should be given to it as a bona fide transaction resulting in a realized loss to petitioners.

The respondent’s argument against recognizing the transaction as a bona fide sale is based on Eldridge’s ownership of stock in the transferee corporation. Because of this stock ownership, it is argued, Eldridge had no one to deal with but himself.

It has been emphasized of late by the highest authority we have that the general rule, and the rule for tax purposes, is that corporations and their stockholders are to be treated as separate entities. Burnet v. Clark, 287 U.S. 410: “A Corporation and its stockholders are generally to be treated as separate entities. Only under exceptional circumstances * * * can the difference be disregarded.” Dalton v. Bowers, 287 U.S. 404: “ Certainly, under the general rule for tax purposes a corporation is an entity distinct from its stockholders, and the circumstances here are not so unusual as to create an exception.” Burnet v. Commonwealth Improvement Co., 287 U.S. 415; “ Counsel for respondent concede that ordinarily a corporation and its stockholders are separate entities, whether the shares are divided among many or are owned by one.” Klein v. Board of Supervisors (a state tax case), 282 U.S. 19: “But it leads nowhere to call a corporation a fiction. If it is a fiction it is a fiction created by law with intent that it should be acted on as if true. The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members.” See also Edward Securities Corp., 30 B.T.A. 918; Jones v. Helvering, 71 Fed. (2d) 214. In the Jones case, four brothers owning all the stock of a corporation transferred to it certain bonds at the then market price, which was less than cost to them, and claimed deductions in their income tax returns. The court held that the deductions were allowable, saying in part:

That the result of this was to enable taxpayers to claim a deductible loss in their income and at the same time, by reason of control of the corporation, to retain an indirect interest in the bonds is undoubtedly true, but it is for the legislature and not the courts to find a way of taxing such a transaction. As the matter now stands, inequitable as it may appear, there is no statute condemning it.

In this connection it is noted that in the Kevenue Act of 1934, section 24 (a) (6), deductions are not allowable for losses on the sale or exchange between an individual and a corporation in which he owns more than 50 percent of the outstanding stock. But prior to the 1984 Act there was no such statutory restriction. Under the earlier acts the general rule was to recognize gains or losses on all sales or exchanges and it was only in cases specially excepted — for example, in the reorganization cases — that gain or loss was not recognized.

The weight of authority thus requires the recognition of the separate entities of corporations and their stockholders, and consequently effect must be given to gain or loss transactions between them in the absence of resti'icting statutes or unusual circumstances or peculiar facts which “ may require disregard of corporate form.” Burnet v. Commonwealth Improvement Co., supra. We see nothing so peculiar about the facts in this case as to warrant a holding that Eldridge and the corporation were one. The corporation was an entity of substance and the evidence indicates that it had been a going concern for some years. It was not, as in Helvering v. Gregory, 69 Fed. (2d) 809, created and utilized solely for the purpose of reducing taxes. Nor do we have here any evidence of a persisting intention on the part of Eldridge to hold title to the stocks, as in Sydney M. Shoenberg, 30 B.T.A. 659. The evidence here is that Eldridge had made a definite decision to sell and it was only on the advice of his accountant that he transferred the shares to the corporation in which he was interested rather than to outside interests. Upon the evidence we are of the opinion that the transfer by Eldridge to the Eldridge Buick Co. was a bona fide transfer to a separate entity, and as such it resulted in a loss deductible under the taxing statute.

The other question is whether dividends declared by the Eldridge Securities Corporation were income in 1929 or 1930. The dividends were declared on December 17, 1929, a check transferring funds to the corporation’s dividend account was issued on December 27 and cleared through the bank on December 28, and the individual dividend checks were drawn and mailed on December 31, 1929. The checks were received by Eldridge on January 2,1930, and cashed the following day.

This question is controlled by the opinion of the Supreme Court in Avery v. Commissioner, 292 U.S. 210. In both thait case and this it was the practice to mail out checks on the last day of the year so as to reach stockholders on the first business day of the following year. It does not appear that the petitioner could have obtained payment in 1929, and the practice of the corporation shows that it was not intended that stockholders should receive their dividends until the year following declaration. The case here is even stronger for the petitioner than was the Avery case, for here the resolution did not fix a date of payment, while in the Avery case the dividends were declared payable on or before December 31. We accordingly hold that the dividends here involved were not income to petitioners in 1929.

Decision will be entered under Rule 60.


author: Black : McMahoN,

text:
    Charles J. O’Laughlin, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. J. O’Laughlin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55739, 55740.
    Promulgated July 31, 1934.

      Raymond H. Schmitz, Esq., for the petitioners.

      Nathan Gammon, Esq., and Vernon F. Weehley, Esq., for the respondent.
   OPINION.

Black :

The problem presented in these proceedings is whether the respondent erred in including in gross income and disallowing as deductions therefrom the six amounts set out in our findings, totaling $91,048.86. The position of the petitioners is that they derived no gain or income from tile receipt of the several amounts in question, for the reason that, as petitioners contend, such amounts were the property of the particular corporation which advanced them, and were received by each petitioner merely as the agent for such corporation. On that ground petitioners contend they should never have reported the amounts in question as income or claimed them as deductions in their 1927 and 1928 income tax returns, and that whether such amounts constituted deductible expenditures of the corporation is not before the Board. The position of the respondent is that petitioners have failed to overcome the prima facie correctness of his determination that the amounts in question were income to petitioners and not deductible as claimed by them on their returns.

In view of the facts recited in considerable detail in our findings of fact, we must conclude that respondent was justified in including in petitioners’ gross incomes amounts which they received during the taxable years from corporations by which they were employed and which were charged on the books of the corporations as commissions paid to petitioners. We do not think petitioners have offered sufficient evidence to justify us in taking these amounts out of gross income. The burden rests upon the petitioners to prove either that these amounts were not income to them or that they were entitled to take them as deductions from their gross incomes. This is true regardless of the fact that the Commissioner may have proceeded upon a wrong theory in arriving at his determination (Edgar M. Carnick, 21 B.T.A. 12, 24; Altschul Tobacco Co. v. Commissioner (C.C.A., 5th Cir.), 42 Fed. (2d) 609, 610; Reinecke v. Spalding, 280 U.S. 227), or that he used incorrect methods of computation or incorrect methods or hypotheses in arriving at his determination, Bishoff v. Commissioner (C.C.A., 3d Cir.), 27 Fed. (2d) 91; Helen Pitts Parker, 14 B.T.A. 1185, 1197; Jacob F. Brown, 18 B.T.A. 859, 867; Uncasville Mfg. Co., 19 B.T.A. 920, 927; Atlantic Casket Co. v. Rose (C.C.A., 5th Cir.), 22 Fed. (2d) 800; Anderson v. Farmers Loan & Trust Co. (C.C.A., 2d Cir.), 241 Fed. 322; Benedict Crowell v. Commissioner (C.C.A., 6th Cir.), 62 Fed. (2d) 51.

The testimony of petitioner Charles J. O’Laughlin is to the effect that the resolutions set out in our findings were passed by the several boards of directors on the dates indicated; that the amounts of $19,438.76 and $48,165.41 were furnished him by the Central Lime & Cement Co. to promote new business and to maintain good will ”; that he paid out all of those sums for that purpose; that he did not retain any of this money for himself; that some of the money was spent for or donated to Christmas basket funds, labor unions, prize fights, football games, banquets, and political organizations for campaign purposes; that he kept no record or list of any expenditure ; that he did not know to whom he made any of the payments, or the amounts or dates thereof; that it was all spent for the benefit of the Central Lime and Cement Company ”; that he made such expenditures merely as the agent for the Central Lime & Cement Co.; and that he “ never paid anything over $1,500 or more in any one year to any one man.” The testimony of petitioner John J. O’Laughlin was substantially the same as that of petitioner Charles J. O’Laughlin, except that it dealt with the amounts received by him from the other two corporations. We quote a part of the testimony of John J. O’Laughlin, as follows:

Q. Tell the Court as much as you can remember of the various classes and types of payments made by you and the method of making those payments.
A. The sales of this company were made within a radius of 150 miles from Chicago. The major portion of them was in the northern tier of counties of Indiana known as the Calumet industrial district. For the most part, expenses in connection with promotion of those sales were confined to politics, political contributions, entertainment of customers, directly and indirectly, and service in the way of expediting shipments. In this area there is a great number of political subdivisions, cities, towns, villages, counties and townships, and the officials are changed very rapidly, every two years in most cases. A considerable portion of this promotion money went for the election of those officials. Entertainments, such as road conventions, contractors’ conventions, and entertaining at various world series baseball games and football games and prize fights, and occasionally theatres and dinners. A small part was probably paid for services, but as I have mentioned — service in the way of special movement of cars and trains. I believe that covers about as much in a general way as I can recall.
* # * * * jfc *
Q. Are you able to state what portion of those amounts was paid for political campaign contributions and what proportion for Christmas presents, to expedite shipments, baseball tickets, or any other purpose?
A. No, I cannot. I would say that the political contributions was the greater amount. Further than that I could not say.
Q. You would not attempt to segregate those from the amounts paid for entertainment or expediting shipments?
A. No. I could not establish the ratio there.
Q. Were any of those amounts paid for commissions?
A. No, I think not.

On this showing petitioners ask us to hold in their favor. Of course if petitioners had made a proper showing that, after receiving certain commissions due others, they in turn paid them out to other individuals as commissions for sales which such other individuals had actually made for the companies, there would have been no justification for including the amounts in petitioners’ income. Under such circumstances they would have been merely the conduit through which such payments passed. Dubiske v. Commissioner, 58 Fed. (2d) 51; Herbert Choynski, 14 B.T.A. 9. But they made no satisfactory showing of that kind. It is clear that the money was not disbursed by them as commissions to others.

Petitioners at the hearing and in their briefs laid a great deal of stress on the fact that the reason they made out their income tax returns the way they did, reporting the amounts received as commissions paid to them and taking equal amounts of deductions for commissions paid out by them, was because they were instructed by a representative of the collector of internal revenue to do it that way. No representative of the collector of internal revenue was present at the hearing and testified that he gave any such instructions, but, assuming that he did so, it seems clear that it was upon a representation made to him that these amounts were paid to petitioners as commissions, to be paid in turn by them to other individuals as commissions for sales made by them for the companies.

All the documentary evidence in these proceedings seems to make it clear that the corporations represented all along to the Government that these amounts were paid to petitioners as commissions and disbursed by them to others as commissions for sales made in behalf of the companies. In the first place the corporations charged the amounts on their books as commissions. The petitioners returned the amounts on their income tax returns as commissions received and then took deductions of equivalent amounts for commissions paid out to other individuals for sales made for the companies.

In a letter to the collector of internal revenue at Chicago, Illinois, shown in our findings of fact, one of the corporations, the Central Lime & Cement Co., represented that petitioner Charles J. O’Laugh-lin had used the money paid to him to pay “ to other individuals in amounts ranging from $10 to $500 for commissions on sales.” Was that true ? Evidently not, for Charles J. O’Laughlin testified at the hearing that the greater part of the amounts paid out by him was for very different purposes than commissions on sales.

When the Central Lime & Cement Co., of which petitioner Charles J. O’Laughlin was the secretary, wrote to the collector of internal revenue at Chicago, Illinois, as shown above, concerning these payments, it did not inform the collector that the money was disbursed by O’Laughlin for Christmas basket funds, labor unions, prize fights, foot ball games, political organizations, campaign expenses, and the like, as testified to at the hearing. What the letter did say was that the amounts were disbursed by O’Laughlin “for commissions on sales.”

If it was not the desire to conceal something from the Government, why was not a frank disclosure made ?

Petitioner John J. O’Laughlin testified at the hearing, as we have already pointed out, that so far as he recalled none of the amounts paid him by the companies were paid out by him as commissions on sales.

In view of this testimony it is our conclusion that the evidence is not sufficient to overcome the prima facie correctness of the Commissioner’s determination.

Reviewed by the Board.

Decision .will be entered for the respondent.

Morris, AruNdell, and VAN FossaN dissent.

McMahoN,

dissenting: The decision in these proceedings should be for the petitioners.

I quote from the opinion of the majority as follows:

The testimony of petitioner Charles J. O’Laughlin is to the effect thai the resolutions set out in our findings were passed by the several boards of directors on the dates indicated; that the amounts of $19,438.76 and $48,165.41 were furnished him by the Central Lime & Cement Co. “ to promote new business and to maintain good will ”; that he paid out all of those sums for that purpose; that he did not retain any of this money for himself; that some of the money wag spent for or donated to Christmas basket funds, labor unions, prize fights, football games, banquets and political organizations for campaign purposes; that he kept no record or list of any expenditures; that he did not know to whom he made any of the payments, or the amounts or dates thereof; that “ it wag all spent for the benefit of the Central Lime and Cement Company ”; that he made such expenditures merely as the agent for the Central Lime & Cement Co., and that he “ never paid anything over $1,500 or more in any one year to any one man.” The testimony of petitioner John J. O’Laugh-lin was substantially the same as that of petitioner Charles J. O’Laughlin, except that it dealt with the amounts received by him from the other two corporations. We quote a part of the testimony of John J. O’Laughlin, as follows:
Q. Tell the Court as much as you can remember of the various classes and types of payments made by you and the method of making these payments.
A. The sales of this company were made within a radius of 150 miles from Chicago. The major portion of them was in the northern tier of counties of Indiana known as the Calumet industrial district. For the most part, expenses in connection with promotion of those sales wei'e confined to politics, political contributions, entertainment of customers, directly and indirectly, and service in the way of expediting shipments. In this area there is a great number of political subdivisions, cities, towns, villages, counties and townships, and the officials are changed very rapidly, every two years in most cases. A considerable portion of this promotion money went for the election of those officials. Entertainments, such as road conventions, contractors’ conventions, and entertaining at various world series baseball games and football games and prize fights, and occasionally theatres and dinners. A small part was probably paid for services, but as I have mentioned — service in the way of special movement of cars and trains. I believe that covers about as much in a general way as I can recall.
* * * * * * *
Q. Are you able to state what portion of those amounts was paid for political campaign contributions and what proportion for Christmas presents, to expedite shipments, baseball tickets, or any other purpose?
A. No, I cannot. I would say that the political contributions was the greater amount. Further than that I could not say.
Q. You would not attempt to segregate those from the amounts paid for entertainment or expediting shipments?
A. No. I could not establish the ratio there.
Q. Were any of those amounts paid for commissions?
A. No, I think not.
On this showing petitioners ask us to hold in their favor. Of course if petitioners had made a proper showing that, after receiving certain commissions due others, they in turn paid them out to other individuals as commissions for sales which such other individuals had actually made for the companies, there would have been no justification for including the amounts in petitioners’ income. Under such circumstances they would have been merely the conduit through which such payments passed. Dubiske v. Commssioner, 58 Fed. (2d) 51; Herbert Choynski, 14 B.T.A. 9. * * *

Thus, the majority opinion rejects undisputed testimony of two unimpeaehed witnesses, which clearly establishes that the petitioners were “merely the conduit through which such payments passed"

The test here set forth by the majority opinion is whether the petitioners received from and paid out for the corporation “ commissions ” due others for sales already made by others. This test is too restricted. The true test' is whether the amounts in question constitute income of the petitioners. In Ford v. Commissioner, 51 Fed. (2d) 206, the court laid down a test as follows:

* * * The true normal criterion to be applied in this class of case is the actual receipt and- retention during the year in question of what was then considered to be income, not whether the taxpayer exposed himself to possible personal liability. [Emphasis supplied.]

In the instant proceedings, under the undisputed, unimpeached, unequivocal proof, none of the ampwnts in question or any part thereof was retained by petitioners d/wring the years in question or at any time and none of it “ was then considered to be income.” There is no evidence in the record in these proceedings to sustain a finding or a conclusion to the contrary.

The majority opinion, in the last analysis, commits error in grounding with undue stress its holding upon the use that was made of the term “ commissions ”, and more emphatically upon the use that was made of that term in the book entries of the corporations, which are entities separate, apart, and distinct from the petitioners. The majority opinion, under all the facts and circumstances, would be in error even if it had been shown that the term “ commissions ” had been used by the petitioners in personal book entries of their own, rather than in the book entries of the corporation shown by the proof.

In Doyle v. Mitchell Bros. Co., 247 U.S. 179, the United States Supreme Court said:

* * * nor is the result altered by the mere fact that the increment of value had not been entered upon plaintiff’s boots of account. Such boohs are no more than evidential, being neither indispensable nor conducive. The decision must rest upon the actual facts, which in the present case are not in dispute. [Emphasis supplied.]

In James William Everhart, 26 B.T.A. 318, we said:

The petitioner purchased an interest or participation and set up the investment on his own records as a personal investment of $20,000 in behalf of his father, his brother and himself. He testified that he did not raise any question about the propriety of the amount of $10,000 being treated as a commission on the memorándum sent to him by the company because he presumed he was only being charged for the amount he had paid for the interest.
We have no information as to whether or not the memorandum sent to the petitioner by the company, as well as the information certificate Form 1099, reflected the company’s booh entries. However, even if so, booh entries a/re not conclusive and income is to be determined from actual facts. B. B. Jones, 18 B.T.A. 1225, and cases cited therein.
In Luther Elkins, 12 B.T.A. 1058, the petitioner, a member of a joint adventure in the development of certain oil wells, purchased 100 units, each unit representing an undivided 1/5000 interest in land. These units had been sold for $100 per unit to others, but the cost of selling was equal to 50 per cent of the selling price. The petitioner tendered his chech for $5,000 in payment of the 100 units, but the boohheeper admsed-hi/m that it would be better to have the boohs show a purchase at $100 per unit and that the petitioner should offer Ms chech for $10,000 and the boohheeper would immediately return $5,000. TMs was done and reflected on the boohs as commissions paid. The Board in that case held that such boohheeping transaction did not give rise to income or change the true facts of the case. [Emphasis supplied.]

Thus, the entry in hooks of account of items as Commissions when they are, in fact, not “ commissions ”, like other shortcomings or errors in book entries, are not indispensable or conclusive/ and hook entries are open to explanation and must yield to the facts as to what actually happened as appears from the undisputed, unim-peached evidence such as we home here, and this is especially true where the books in question are, as here, not the books of the persons producing the evidence in explanation of the book entries. It follows that what is hei’e said in this respect applies with even greater force to other records such as corporate minutes or resolutions.

What then are the undisputed, actual facts of these proceedings in reference to the use of the word “ commissions ” in the books of the corporations, corporate minutes or otherwise, in so far as they bear on this question before us as to whether the amounts in question are income of the petitioners? As appears from the resumé of testimony of the petitioners and from the testimony of John J. O’Laughlin herein quoted from the majority opinion, and from other parts of the majority report, a small portion of the amounts in question was “ commissions ” in the most restricted sense and all of them were received from the corporations by the petitioners and by them paid out to others for and in behalf of the corporations to promote the sales of the corporation by creating good will and otherwise as detailed in the evidence.

In Black’s Law Dictionary (2d ed.), at p. 5, the term “commissions ” is defined as follows:

Commissions. The compensation or reward paid to a footer, broker, agent, bailee, executor, trustee, receiver, etc., when the same is calculated as a percentage on the amount received or expended. [Emphasis supplied.]

All the amounts in question were by the resolution of the corporation authorizing the expenditures limited to a specified “ percentage ” or proportion of the volumes of sales and when an amount was thus paid out it was used as or for something in the nature of a “ reward ” to others for past, present, or prospective performance. It is apparent that the term “ commissions ” was used for lack of a better term and no harm was done to anyone. Everyone concerned understood the use that was being made of it. No one was misled. It is elementary that taxation is eminently practical; and hence practical considerations must control in dealing with it. Notwithstanding the use made of the term “ commissions ” in the book entries and otherwise, we now know just what was actually done with the amounts in question and that they were not income to the petitioners. In any event, the use which was made of the term “ commissions ” as appears from all of the proof in these proceedings cannot create income to the petitioners.

It must be borne in mind that the amounts in question in these proceedings consist of money or its equivalent. In reality we are concerned with money. Whether it be labeled “ commissions ” or something else is not controling. Money was in fact received and paid owt by petitioners. This is demonstrated by the proof when we look beyond the mere term “ commissions ” which was used. None of this money was retained by petitioners or “ was then considered to be income.” It was all paid out by them for and in behalf of the corporations. Hence, they were “ merely the conduit through which such payments passed.” All of the “ showing ” made in these proceedings is of that kind; and the respondent has made no showing whatever to the contrary.

The petitioner J. J. O’Laughlin, testified in part as follows:

Q. I would like to ask two more questions. You testified that you paid out in 1927 $16,577.43 received from the A. C. O’Laughlin Company and §2,117.13 received from the Limestone Products Company, and that you paid out $2,161.30 received from the A. C. O’Laughlin Company during the year 1928 and $2,483.75 received from the Limestone Products Company during 1928; were all of those amounts paid out by you for and on behalf of the respective companies?
A. Yes.
Q. Were any of those amounts paid out by you for your own personal benefit?
A. No.
Mr. Schultz. That is all.
The Member. Were any of them retained by you for your personal benefit?
The Witness. No.

The petitioner, Charles J. O’Laughlin, testified in part as follows:

Q. You testified, did you not, that you received from the Central Lime & Cement Company in 1927 $19,438.76 and from the same company in 1028 $48,165.41?
A. That is right.
Q. Were all of those amounts paid out by you for and on behalf of the company?
A. Yes, sir.
Q. Were any of those amounts paid out by you for your own benefit?
A. No, sir.
Q. Did you retain any of those amounts?
A. No, sir.

This and other testimony of the petitioners, including that stated or quoted in the majority opinion, is corroborated as follows. In the report of the internal revenue agent in charge, dated September 29, 1930, approved by respondent and attached to and made a part of his notice of deficiency dated February 7, 1931, addressed to and received by the petitioner, J. J. O’Laughlin, which is the basis of the petition in Docket No. 55740, there is contained a statement with reference to the year 1927 in part as follows:

(a) Deductions for commissions as shown on line 16 of return has been disallowed in full amount of $18,694.56.
This amount represents various amounts paid at various dates to various pe>-sons, and in currency, * * *
$16,577.42 of this amount was received by the taxpayer from A. C. O’Laugh-lin Co. and $2,117.13 from Limestone Products Co. to- be disbursed for them by the taxpayer. [Emphasis supplied.]

Statements of similar character and import, covering in the aggregate all of the other amounts in question in these proceedings, and all of the years before us, were thus approved by the respondent and incorporated in his notices of deficiency issued to the petitioners.

The letter dated December 3, 1928, from the Central Lime & Cement Co. to the collector of internal revenue at Chicago, in reference to the amount of $19,438.76 paid by it to Chas. J. O’Laughlin in 1927, states in part as follows:

This amount was in addition to his salary and was of no benefit to Mm as it was disbursed by Mm to other individuals in amownts ra/nging from $10.00 to $500.00, * * * [Emphasis supplied.]
The income tax returns of the petitioners contain statements, covering in the aggregate all of the amounts in question, in part as follows: “ * * * this amount was paid to me and was disbursed by me for them [the corporation] * * [Emphasis supplied.]

The resolution adopted by the board of directors of the Central Lime & Cement Co. on February 3,1927, authorizing the expenditure of some of the amounts in question, is in part as follows:

Resolved that an amount equivalent to one-fourth of one per cent of the total sales for the year 1927 be appropriated to be used in payment of Commissions on various sales made by individuals other them the Company’s regular salesmen.
Resolved Eubther that the Treasurer be authorized to have checks drawn from time to time during the year to M. J. O’Laughlin and Chas. J. O’Laughlin who ‘loill in turn make payments to the proper parties in connection with each sale. [Emphasis supplied.]

Resolutions similar in character and import were adopted by the directors and stockholders of both corporations, covering in the aggregate all the other amounts in question.

In passing it may be added that the notices of deficiency issued to the petitioners by the respondent, together with the statements of the revenue agent, which were approved by respondent and attached to and made a part of such notices, were properly received in evidence as admissions by the respondent against interest. Davison v. Commissioner, 60 Fed. (2d) 50.

All of the written evidence, set forth here, not only corroborates the testimony of the petitioners to the effect that the amounts in question were not income to them, but it is wholly inconsistent with the theory that they constituted income; and all of the evidence in the record is reconcilable with the view that these amounts were not income to the petitioners. All of the evidence is not open to any other inference and does not sustain any other conclusion of fact or law. The use of the term “ commissions ” in the book entries and otherwise has been adequately explained in the evidence as a whole. The undisputed, unequivocal, positive testimony of petitioners and the evidence in the record corroborating it should not be rejected or disregarded; and it requires findings and conclusions, which have not been made by the majority, to the effect that the amounts in question were not income taxable to the petitioners for the years before us.

The proceedings of this Board are conducted in accordance with (he rules of evidence applicable in courts of equity of the District of Columbia. Sec. 907 (a), Kevenue Act of 1924, as amended by sec. 601, Kevenue Act of 1928.

In Brown v. Peterson, 25 App. D.C. 359, the Court of Appeals for the District of Columbia stated:

* * * The law is that positive testimony uncontradicted and not inherently improbable, is prima facie evidence of the fact which it seeks to establish, and the jury is not at liberty to disregard it. Crane v. Morris, 6 Pet. 598, 8 L. Ed. 514; Kelly v. Jackson, 6 Pet. 622, L. Ed. 523; Quock Ting v. United States, 140 U.S. 417, 35 L. Ed. 501, 11 Sup. Ct. Rep. 733, 851; The City of New York (Alexandre v. Machan) 147 U.S. 72, 31 L. Ed. 84, 13 Sup. Ct. Rep. 211.

To the same effect is Walker v. Warner, 31 App. D.C. 76.

In Epremiam v. Ward, 169 Fed. 691, it was stated:

The court is bound to give credence to uncontradicted testimony even from interested persons when it is substantiated as it was here, and is not inconsistent with well-known facts, experience, and reason.

In Blackmer v. Commissioner, 70 Fed. (2d) 255 (C.C.A., 2d Cir.), the court said:

* * * When the evidence before the Board, as the trier of the facts, ought to be convincing, it may not say that it is not. Sioux City Stockyard Co. v. Commr., 59 Fed. 2, 944 (C.C.A. 8); Conrad & Co. v. Commr., 50 Fed. 2, 576 (C.C.A. 1); Chicago Ry. Equipment Co. v. Blair, 20 Fed. 2, 10 (C.C.A. 7). Awl the Board may not arbitrarily discredit the testimony of an unimpeached taxpayer so far as he testifies to facts. (Emphasis supplied.]

To the same general effect as the foregoing cases are Planters Operating Co. v. Commissioner, 55 Fed. (2d) 583 (C.C.A., 8th Cir.) and Citrus Soap Co. of California v. Lucas, 42 Fed. (2d) 372 (C.C.A., 9th Cir.). See discussion at page 472 of the opinion in Jewett & Co. v. Commissioner, 61 Fed. (2d) 471 (C.C.A., 2d Cir.).

There is no inherent or other improbability in the statements of the witnesses and there is nothing in the record to discredit their testimony. The evidence fully and satisfactorily explains everything that occurred in so far as explanation is essential to decision here. The manner of the petitioners in testifying did not give rise to doubts of their sincerity or create the impression that they were giving a wrong coloring to the facts. At the hearing the petitioners appeared to be intelligent, earnest, candid witnesses. They produced all the proof they had. The respondent has not impeached or rebutted the testimony of the petitioners and there is no reason why it should not be accepted at face value. Furthermore, it is corroborated by evidence in writing. Hence, the evidence of these petitioners does not come within the exception to the general rule as laid down in Quock Ting v. United States, 140 U.S. 417, the exception being to the effect that there may be such an inherent improbability in the statements of a witness as to induce the court or jury to disregard his evidence, even in the absence of any direct conflicting testimony, and to the further effect that his manner of testifying may give rise to doubts of his sincerity and create the impression that he is giving a wrong coloring to material facts.

It is well settled that money received by a person as agent or representative of another is not income to such person. Jane B. Coates, 3 B.T.A. 429; Herbert Choynski, 14 B.T.A. 9; and Nelson B. Updike, 22 B.T.A. 12. Likewise, amounts received by a person as reimbursement for expenditures by such person on behalf of another do not constitute income to such person. Edgar P. Haney, 5 B.T.A. 1039.

Upon the authorities cited in the majority opinion, the burden of proof was, as there set forth, at the outset upon the petitioners, and a duty rested upon them to overcome the presumption that the deficiencies asserted by the respondent were correct. But, as appears from the discussion herein, they met the burden of proof and thereby overcame this presumption in favor of the respondent. Then the burden of proof shifted to the respondent and the duty devolved upon him to go forward with his proof and overcome the proof offered by the petitioners. This the respondent failed to do. He called no witnesses.

This presumption in favor of the respondent is a rebuttable presumption. It is merely a rule of evidence which puts the burden upon the petitioners to go forward with their proof at the outset. It is not proof. It is merely a substitute for proof and it is open to challenge and disproof. Heiner v. Donnan, 285 U.S. 312, 329. It was challenged, rebutted, and disproved. The least that can be said in the instant proceedings is that the petitioners made out a prima facie case and that the respondent failed to overcome it.

I quote further from the statement of the revenue agent in charge, approved by the respondent and made part of his notice of deficiency dated February 7, 1931, in part as follows: “ * * * but no data has been produced to show to whom, in what amounts or date these items of payments were made.” This is substantially the same and the only reason which he gave for all of his determinations which are before us in these proceedings. This is nullified in each instance by his findings in the same statement heretofore set forth to the effect that the amounts were not income to the petitioners; and the evidence shows that respondent was correct in such findings to the effect that the amounts were not income. There is sufficient data in the evidence to demonstrate this. Lack of more data does not prove income. Furthermore, it should be borne in mind that the corporations are not before us and we are not here concerned with issues between them and the respondent as to whether they are entitled to take deductions of the amounts in question for the years before us. Whether more data, as outlined in the above quotation, would be required for the allowance of such deductions by the corporations need not be decided in these proceedings, in which are presented only issues between the petitioners before us and the respondent. Cf. Cohen v. Commissioner, 39 Fed. (2d) 540; Blackmer v. Commissioner, supra; and Julius Forstmarm, infra (first item). Obviously issues in other proceedings involving the right of the corporations to take such deductions, if before us, would call for a type of evidence different from that called for by the issues which are before us in these proceedings. However, in passing, it may be said that the corporations did keep records of all the amounts in question in these proceedings which were paid by them to the petitioners to be paid out by the latter for and in behalf of the corporations; and the undisputed, corroborated evidence shows that all of the amounts thus received by the petitioners from the corporation were thus paid out.

In Ford v. Commissioner, supra, the court, in laying down the true test to be applied in this class of cases, among other things said, as heretofore pointed out, that such test is “ not whether the taxpayer exposed himself to possible personal liability*.” [Italics supplied.] So, in these proceedings, we are not concerned with any issue as “ to possible personal liability ” on the part of the petitioners to the corporations. Neither are we here concerned with any issue as to whether the corporations, which are not before us, should be denied the right to deduct any of the amounts paid to the petitioners upon the ground that expenditures were made by them for and in behalf of the corporations in contravention of some statute prompted by public policy prohibiting some act or commission and making the same punishable by fine or imprisonment or both upon conviction. Cf. Lawrence A. Wagner, 30 B.T.A. 1099. If, for the purposes of this discussion, we were to assume that the petitioners were convicted of such an offense in connection with the receipt and disbursement of the moneys in question for and in behalf of the corporations, such event would not make them income to the petitioners; and, if we were to thus assume that the petitioners are personally liable for the restoration to the corporations of any or all of the moneys in question because of some technical or other irregularity, we would have further demonstration that such moneys were not income to the petitioners.

I quote further from the letter of the Central Lime & Cement Co. to the collector, dated December 3, 1928, as follows:

He [taxpayer] is not in a position to iurnish a statement as to Whom this money was paid as the Company did not require a report from him and therefore no accurate record was kept. The amount in question was paid to him during the year, as follows, and our books will verify these figures:
1927:
March_ . _ $7,700.00
April_ 2,000.00
June_ 1,000. 00
Noy_ 6,43S. 76
Dec_ 2,300.00
$19,438.76
Before the return under examination was made last March, our Auditor called at your office and interviewed one of your representatives, Mr. Calvin J. Mabry, with reference to this item of Commissions, and the Company’s return as well as its Officers individual returns were prepared according to his instructions.

In passing it may be said that Charles J. O’Laughlin testified to the effect that the term “ commissions ” was adopted for use in the book entries of this corporation to conform to its resolutions. The corporate policy reflected in the resolutions is explained by this witness as follows:

Ours was a very close corporation. It was a family corporation. We did not want every employee we had working for us to know what we were doing.

Petitioners were members of the family and this explains, to some extent, the lack of more exactness, detail, and formality on their part in reporting the expenditures as made for and in behalf of the corporations.

This letter shows that the corporation is not questioning the amounts covered by the letter, of which it had a record in its books, and that it approves what was done as therein detailed, in addition to showing that the petitioner was not required to make a detailed itemized report to the corporation covering those amounts and hence did not personally keep a record from which such a report could be supplied, and that no one was misled by the petitioners or the corporations, and in addition to corroborating the testimony of the petitioners to the effect that they put all of the amounts in question in their taxable incomes and took them out as deductions because of the direction of the internal revenue agent in charge that this should be done.

Charles O’Laughlin testified in part as follows:

Q. Did you take these specific items as a deduction in your returns for 1927 and 1928?
A. I did.
Q. Explain to the Court how you happened to treat those items in that manner.
A. I went over to the Internal Revenue Department with our auditor and asked for a ruling on it, as I was told that I should report them and take the deduction. I believe his name was Marbury.
# s*s s-s # * *
Q. Did you discuss with him the nature of the disbursements concerning which you have testified here?
A. I did.
Q. Did he tell you you would be allowed to take those deductions without any corroborating evidence or records?
A. He told me I should put it in my income tax and take it out as ia. deduction.
Q. Did he tell you it would be unnecessary to have receipts or records to prove the deductions?
A. He did not say.
The petitioner, J. J. O’Laughlin, testified as follows:
Q. Did all of these sums you just testified to appear in your income tax returns for 1927 and 1928 as income to you?
A. Yes.
Q. Did those like sums appear in the respective income tax returns as deductions?
A. Yes.
Q. What caused you to treat those items in that manner?
A. Information that I had received from Charles J. O’Laughlin regarding some conversations he had with an internal revenue agent.

Apparently the Calvin J. Mabry mentioned in letter to the collector is mentioned in Charles J. O’Laughlin’s testimony as Marbury.

In accordance with this advice of the revenue agent, the petitioners included the amounts in question in their returns as income for the respective years, but such amounts were therein claimed as deductions, with the same net result as if they had been completely excluded therefrom; in each return a full explanation was made showing that these amounts were not received as income and they were therein fully described as having been paid out for and in behalf of each corporation from which received.

In fairness to the revenue agent it should be stated that at the time his advice was thus given there was published authority for such advice. Compare Julius Forstmann, 6 B.T.A. 21 (first item), under the holding of which the petitioners would be entitled to deduct these amounts because the evidence shows they were never income to them in the first place. However, the correct view, as herein set forth, is that the amounts in question were never income to the petitioners and should not be included as such. Julius Forstmarm, supra (second item). The net result is the same. In any event, an error of inclusion of this character should be corrected at the first opportunity.

I quote from the majority opinion further as follows: “No representative of the collector of internal revenue was present at the hearing and testified that he gave any such instructions, but, assuming that he did so, it is plain that it was upon a representation made to him that these amounts were paid to petitioners as commissions, to be paid in turn by them to other individuals as commissions for sales made by them for the companies.”

The fact that the revenue agent was not produced by petitioners as a witness or present at the hearing can not operate to the disadvantage of the petitioners. If their testimony in this regard was not acceptable to respondent there was nothing, so far as we know, to prevent him from producing the revenue agent to rebut their testimony. It is more accurate to say that the fact that the revenue agent was not thus produced lends support to the testimony of the petitioners to the effect that he did give them such advice. Nor is there any evidence in the record to sustain the statement in the majority opinion that the revenue agent’s advice was given upon a representation made to him that the amounts were paid to the petitioners as commissions, to be paid in turn by them to other individuals as commissions for sales made by them for the companies. The evidence is to the contrary and, as appears from the foregoing quoted testimony, to the effect that Charles J. O’Laughlin, before receiving these directions from the revenue agent, discussed with the revenue agent “the nature of the disbursements concerning which ” he testified before the Board. The only inference which can be properly drawn from this testimony and from the whole record is that Charles J. O’Laughlin discussed “ the nature of the disbursements ” in question here in the same way that he “ testified ” “ concerning ” their “ nature ” before the Board.

Since I presided at the hearing of these proceedings, I feel impelled to thus fully set forth my views.

Trammell agrees with the conclusion reached in this dissent.