text:
    Paul F. Hill, Raymond C. Hill, Frank C. Hill and Ada M. Hill, Executors, Estate of D. F. Hill, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29399.
    Promulgated December 11, 1931.

      George 8. Hupp, Esq., for the petitioners.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Matthews:

The executors of the will of D. F. Hill in filing a return for Federal estate tax claimed a deduction in the sum of' $307,285.12 representing “net .community interest of surviving spouse.” Such a deduction is allowable for tfie purpose of computing, the State inheritance tax. See, the .Act of 1917 of the California Legislature which amended the inheritance tax law and which reads, in part as follows: .

* * * that tor the purpose of this act the one-half of the community property which goes to the surviving wife on the death of the husband * * * shall not be deemed to pass to her as heir to her husband, but shall, for the purpose of this act, be deemed to go, pass, or be transferred to her for a valuable and adequate consideration, and her said one-half of the community shall not be subject to the provisions of this act; * * * (Statutes of 1917, p. 880,. 881).

Prior to the enactment of this statute- exempting the wife’s succession from the state inheritance tax, the courts of California had held that the nature of the succession was such as to make it subject, to an inheritance tax. The effect of this statute on the determination of the gross estate of a deceased husband in California for the purposes of the Federal estate tax was considered by the Attorney General of the United States in an opinion dated June 24, 1926, 35 Op. A. G. 89; T. D. 3891, C. B. V-2, p. 232, and it was held that the California Act of 1917 did not operate to prevent the imposition of a Federal estate tax on the transfer to the wife of a one-half interest in the community estate. . It was stated that the succession was in its essential nature properly subject to an inheritance tax and that inasmuch as the California Legislature, by the Act of 1917 which exempted such succession from the , state inheritance tax, did not make any change in the nature.of the wife’s interest, her succession to an interest in the community estate upon her , husband’s death was left a proper subject of a Federal estate tax. The regulations of the Treasury Department are in aeccordance with this opinion.

In Griffith Henshaw, Executor, 12 B. T. A. 1441; affd., 31 Fed. (2d) 945; certiorari denied, we held that the interest of the surviving wife in community property of the deceased husband and herself, both domiciled in California, is subject to the Federal estate tax imposed by the Revenue Act of 1921, citing Talcott v. United States, 21 Fed. (2d) 493; affd., 23 Fed. (2d) 897. The following quotation is taken from the opinion of the Circuit Court, of Appeals in the Talcott case:

“ * * * 'w'e are therefore clearly of the opinion that the amendments to the Civil Code adopted in 1917 did not operate to change such rule to the extent of creating in the wife a present vested interest in the property of the community during the continuance of the marriage relation.” In brief, the status of the wife’s interest in community property as defined in In re The Estate of Moflitt, remains the law of California and is unaffected by the fact that in 1917 by an act of the legislature the wife’s estate on the death of her husband was relieved from the burden of the state inheritance tax. We see no escape from the conclusion that the interest of the surviving wife, as it is finally determined by the ■ Supreme Court of Californiá, is of a nature that renders it subject to taxation under the plain terms of the Federal Revenue Act.

See also Mary Brent, Executrix, 6 B. T. A. 143; John W. Preston, 21 B. T. A. 840.

The respondent denied the petitioners in the instant case the right to eliminate for Federal estate-tax purposes the wife’s interest in community property and determined the deficiency which is the basis of this proceeding. The petitioners protested the.elimination of this item on the ground that although the return set out the value of the wife’s interest in community property, the entire estate of the decedent was jointly owned by the decedent and the surviving widow. It is claimed by the petitioners that the wife acquired her interest in the decedent’s estate by purchase instead of by inheritance and that such interest should be excluded in computing the Federal estate tax.

The Commissioner has accepted .as correct the figures set out in the return for Federal estate tax which was filed by the executors and has held the wife’s one-half of the net estate of. the decedent to represent her interest in community property which is subject .to the Federal estate tax. The sole question presented is whether the widow was the joint owner of the property left by the decedent, or whether the property was community property acquired under the laws of California, the entire value of which should be included in the gross estate of the decedent for the purposes of the Federal estate tax.

A great deal of the confusion and uncertainty which, have attended the question of the interest of a wife in the community property under the laws of the State of. California has been' dispelled by the enactment of section 161 (a) (1927 amendment to the Civil Code of California) which provides that the respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and- equal interests under the management and control of the husband. It has been held, however, by the Supreme Court of California in Stewart v. Stewart, 204 Cal. 546; 269 Pac. 439, that section 161 (a) can not in any manner relate to or govern the ownership of property acquired prior to that amendment. It is to be borne in mind.that the decedent in the instant case died in November, 1923, and that subsequently enacted statutes, such as the 1927 amendment to the code which is incorporated in the Civil Code of California as section 161 (a), and decisions construing the same, are not determinative of the issue involved herein.

In support of his determination that the entire estate of the decedent was community property under the laws of California which were in existence at the time of decedent’s death in 1923, the respondent introduced in- evidence the will of the decedent and the estate-tax return which was filed by the executors.

It is elementary that the determination of the respondent is prima facie correct and that the burden is on the petitioners to overcome this presumption. The petitioners rely upon the testimony of the widow and the sons of the decedent to show that the widow’s interest in the decedent’s estate was in fact that of a joint owner.

It was testified that the decedent and his wife orally agreed, shortly after they were married in Iowa in 1876, that all the property acquired by them should be the joint property of both. At the time of their marriage neither had any property. The first investment made by the couple after they were married was the purchase of a rooming house, title thereto being taken in both their names. The cash payment was made out of the wife’s inheritance of $400 from her father’s estate. This property was sold for $3,000 and with this sum they bought a store in Stanbury, Mo. For business reasons title to the store was taken in the name of the husband only. It is not disputed that the wife’s labor and efforts materially increased the profits. Various other investments were made out of their savings and the profits from the husband’s business. All these investments were made in the husband’s name. In or about the year 1900 the couple moved to California, where the husband engaged in the real estate business. The wife testified that the husband was a good buyer, but a poor seller, and that she played an important part in the management of their affairs. One of the sons testified that the decedent relied upon his wife for counsel and generally followed her advice. Decedent’s business prospered and he acquired a considerable amount of property. The evidence establishes that the estate left by the decedent was built up by the combined efforts of himself and his wife. These facts do not present a case of joint ownership of the husband’s entire estate. Under the California law earnings acquired by the industry and skill of either husband or wife are to be credited to the community. Estate of Pepper, 158 Cal. 619; 112 Pac. 62; 31 L. R. A. (N. S.) 1092; In re Caswell's Estate, 105 Cal. 475; 288 Pac. 102. It may be here noted that the decedent did not appear to keep any records or accounts to indicate joint ownership. On the contrary, so far as the record discloses, the decedent received the entire income from the property and exercised all the rights of ownership. He disposed of the entire estate in his will, devising one-half thereof to his wife and directing that the remaining one-half be divided equally between their three sons. The widow and the sons of decedent did not contest the provisions of the will, but accepted the same and duly qualified as executors thereof. The wife thereby received the same proportion of her husband’s estate which she would have received as a joint owner. It clearly appears that the greater part of the decedent’s estate represented income and profits from his real estate business. We conclude that under the California law relating to community property, and for the purposes of the Federal estate tax, the property standing in the name of the husband at the time of his death was not jointly owned by the decedent and his wife.

In view of the testimony that the wife inherited from her father and from her two sisters certain sums of money, which inheritances constitute her separate property under the California law, it will be necessary also to determine whether any part of the property devised by the husband represented the separate estate of the wife.

Until the decedent and his wife moved to California there was no community property. They brought with them property which they had acquired in another state. In Abraham B. Johnson et al., 7 B. T. A. 820, it was pointed out that when property is brought from one state to another, rights vested by the law under which it was acquired are recognized and protected. See also Julius and Rebecca B. Shafer, 2 B. T. A. 640; T. C. Phillips, 9 B. T. A. 153. Thus, if it can be shown that either the husband or the wife acquired personal property in a foreign jurisdiction which is by law of the place where acquired the separate property of one or the other of the spouses, such property continues to be the separate property of that spouse when brought within the State of California and property received in exchange for it, or purchased by it, is -also the separate property of such spouse.

There is no question that the sum of $400 which the wife inherited more than 20 years before the couple moved to California constituted her separate property, but it does not appear that she had any separate property which was capable of identification at the time they took up their residence in California. We have found that the $400 was invested in a rooming house which was owned jointly by^ the wife and her husband and that the rooming house was sold for $3,000, which latter amount was invested in a store in Missouri. It is impossible to trace the inheritance further, because title to the store was taken in the name of the husband only, and thereafter all investments were made by him individually, and the profits were likewise reinvested. The store was purchased about the year 1878 and the couple did not move to California until in 1900. The evidence does not disclose how much money the decedent and his wife brought with them to California. The record indicates that the greater part of the decedent’s estate was acquired after moving to California and that it was acquired by the community through the labor and industry of the decedent and his wife, and through the investment and reinvestment thereof after being so acquired. Under these circumstances we hold that the wife’s inheritance of $400 lost its identity in Missouri and the extent of the separate estate at the time they took up their residence in California is not shown.

The wife testified that the sums of $28,000 and $3,500 which she inherited from her sisters while she was living in California, were turned over to her husband to be invested in real estate or to be applied toward paying off indebtedness on real estate to which he held title. Section 162 of the Civil Code of California provides that all property of the wife, owned by her before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with the rents, issues and profits thereof, is her separate property. The above-mentioned amounts inherited by the wife come within the language of this section and constituted her separate property at the time she received them. These sums were invested in real estate. It is a well established rule that where real property is purchased in part with the wife’s separate funds and in part with the community funds of husband and wife, the property so acquired becomes in part the separate property of the wife and in part the community property of both spouses in proportion to the separate and community funds invested in it. In re Bauer’s Estate, 19 Cal. 304; 21 Pac. 759, citing Schuyler v. Broughton, 70 Cal. 282; 11 Pac. 719; Jackson v. Torrence, 83 Cal. 521; 23 Pac. 695; Flournoy v. Flournoy, 86 Cal. 286; 24 Pac. 1012.

There are well defined lines which mark the separate property of each spouse as distingushed from the community property and it is the policy of the law to protect, so far as consistent with the transaction of the business of the family, the integrity of each of the three funds. Where the separate property or capital of one spouse and the labor and skill of both spouses have combined to produce profits, and it can not be determined what proportion is attributable to each factor, the owner of the separate property or capital is entitled to have his or her separate property back either in specie or through compensation for its use, and the balance will be given to the active factor, the toil and talent of the spouses. In Pereira v. Pereira, 156 Cal, 1; 103 Pac. 488; 23 L. R. A. (N. S.) 880; 134 Am. St. Rep. 107, the husband with his separate property and funds operated a saloon and cigar business which produced an annual net income of about $5,000. The court below held the net profit of the business was community property. The Supreme Court of California held that the capital which the husband had invested in the business at the time of the marriage was his separate estate, and that such proportion of the profits derived from the business as was justly due to the capital invested should be considered to be his separate estate. The court said:

The ftmfl [the husband's separate property] remained in the business after marriage and was used by him in carrying it on. The separate property should have been credited with some amount as profit on this capital. It was not a losing business, but a very profitable one. It is true that it is very clearly shown that the principal part of the large income was due to the personal character, energy, ability, and capacity of the husband. This share of the earnings was, of course, community property; but without capital he could not have carried on the business. In the absence of circumstances showing a different result, it is to be presumed that some of the profits were justly due to the capital invested. There is nothing to show that all of it was due to defendant’s efforts alone. The probable contribution of the capital to the income should have been determined from all the circumstances of the case, and, as the business was profitable, it would amount at least to the usual interest on a long investment well secured. * * * We think the court erred in refusing to increase the proportion of separate property and decrease the community property to the extent of the reasonable gain to the separate estate from the earnings properly allowable on account of the capital invested.

Upon a rehearing, the court further held:

The defendant introduced no evidence to show that the capital invested was entitled to a greater return than legal interest, and, in the absence of such evidence, the burden of proof being upon him, that would be the utmost he could claim.

Although the Pereira case involved a division of community property in a divorce proceeding, this case has been cited with approval and followed in a number of subsequent decisions by the California courts, including cases involving the determination of property rights upon the death of one spouse. See Lenninger v. Lenninger, 167 Cal. 297; 139 Pac. 679; In re Gold's Estate, 170 Cal. 621; 151 Pac. 12; In re Caswell's Estate, supra; In re Fellows’ Estate, 106 Cal. 681; 289 Pac. 887.

In the instant case we do not know what specific parcels of real estate were purchased with the sums inherited by the wife. The husband’s business was dealing in real estate. He bought property and divided it into lots and sold them. He also made improvements on real estate and received income therefrom. We know that the wife’s separate funds were applied in carrying on the husband’s business, which was a profitable one, and it is not necessary to trace the specific property in which the wife’s separate funds were invested. We have found that the greater part of the decedent’s estate was acquired by the community through the labor and industry of both spouses and through the investment and reinvestment of the profits of decedent’s business. The decedent never had any separate property and the evidence is clear that the wife made no gifts to the husband. Under these circumstances and in the absence of evidence that the capital invested by the wife is entitled to a greater return, we hold that the wife’s inheritances in the respective amounts of $28,000 and $3,500, with interest thereon at the legal rate from the dates such amounts were turned over by her to her husband, represent the separate property of the surviving wife, and should not be included in the decedent’s gross estate. The balance of the property which was owned by the decedent at the time of his death is held by us to constitute community property, within the meaning of section 164 of the Civil Code of California, and is subject to the Federal estate tax.

Reviewed by the Board.

Judgment mil T)e entered under Bule 50.

Black concurs in the result only.

LaNsdoN , Muedock, and Seawell dissent.


source: Caselaw Access Project

author: Maeqttette :

license: Public Domain

text:
    Anna L. Dirksen, Executrix, Estate of Theodore H. Dirksen, Petitioner, v. Commissioner of Internal Revenue, respondent.
    Docket No. 17717.
    Promulgated December 15, 1931.

      Hugh J. Graham, Esq., and O. B. Irwin, Esq., for the petitioner.

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

Maeqttette :

In 1919 the A. Dirksen & Sons Corporation dissolved, having first liquidated by distributing its assets to its stockholders in exchange for their shares of stock. At the time of distribution the assets had a fair market value of $142,086.64. The par value of the company’s capital stock was $100,000, and the exchange resulted in gain or profit to the stockholders. The amount of such gain or profit was taxable income to the distributees of the assets, under the provisions of section 201 (c) of the Eevenue Act of 1918.

Theodore H. Dirksen was a stockholder in the company at the time of dissolution, received his proportionate share of the assets, and thereby derived taxable gain. The respondent’s determination of deficiency is based on the theory that Dirksen owned 999 shares of the company’s stock and that the'inventoried value of the assets is the proper basis upon which to compute the taxable gain.

We think the respondent is in error in both particulars. Concerning the stock ownership, the evidence establishes, the fact that in 1918 and 1914 Theodore Dirksen assigned to his wife a total of 543 shares of stock in the Dirksen corporation, in exchange for which she assisted him financially in his purchase of 456 shares from another stockholder. The stock assigned to Anna L. Dirksen was transferred to her on the books of the company and a new certificate for 543 shares was issued to her. It is also established that twice each year the company allocated to Anna L. Dirksen upon its books proportionate amounts of the dividends earned upon his shares, and, at her request, credited such amounts to her husband’s account. In her separate income-tax returns she reported as income to her the amounts of dividends allocated to her by the company. These facts, we think, establish Anna L. Dirksen’s ownership of and dominion over the shares in question; and their effect is not overcome nor nullified by the fact that she did not vote at stockholders’ meetings. The company was a close corporation, owning a business which was managed by Mrs. Dirksen’s husband, in whose integrity and business ability she had complete confidence. She was not a business woman and had no experience or training in the company’s affairs. Under such circumstances her failure to vote at stockholders’ meetings is neither a strange nor a suspicious circumstance.

As to the proper valuation of the company’s assets, section 202 (b) of the Eevenue Act of 1918 provides that:

When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any ⅜ *

This provision is directly applicable in the present proceeding. See also W. S. Forbes, 7 B. T. A. 611.

We conclude, therefore, that at the time A. Dirksen & Sons corporation was dissolved, and for several years prior thereto, Theodore H. Dirksen was the owner of only 456 shares of its capital stock. For that stock he received assets of the company amounting to $64,893.04, based upon the fair market value of the assets at the time, and as his stock cost him $54,000, his taxable gain amounted to $10,893.04.

Decision will be entered under Bule 50.


author: Tkammell:

text:
    Elida B. Langley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56830.
    Promulgated December 17, 1931.

      Henry J. Richardson, Esq., for the petitioner.

      James K. Polla, Jr., Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

Tkammell:

The only matter presented for our determination is whether the income for 1928 from the 'four trusts set'out in our findings of fact is taxable to the petitioner.

With respect to revocable trusts, section 166 of the Revenue Act of 1928 provides as follows: ...

Where the grantor oí a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the- power to revest in himself title to- any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

The petitioner contends that the above section of the act includes only such revocable trusts as those in which the grantor may revest in himself, during the taxable year, title to the trust property; that, since she could have revested in herself title to the property of the. trusts here involved only upon the expiration of twelve months and a day after notice of revocation, she could not have revested in herself during the taxable year title to the property of the trusts; that the trusts, therefore, do not come within the provisions of the section and consequently the petitioner may not be taxed on the income therefrom. The respondent contends that, since the petitioner had during the taxable year the power to revest in herself title to the trust property, the trusts come;within the provisions of the-section and that it. is immaterial whether the revesting takes place during the taxable year. The petitioner contends that the time limitation relates to the revesting of the ,title, whereas under the respondent’s contention it relates to. the existence of the power of revesting of the title.

The provisions of section 166 of the Revenue Act of 1928 are identical with those of section 219 (g) of the Revenue Acts of 1924 and 1926.

In sustaining the constitutionality of section 219 (g) of the Revenue Act of 1924 of the Supreme Court, in Corliss v. Bowers, 281 U. S. 376, said:

* * * Still speaking with reference to taxation, if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate, it does not matter whether the permission is given by assent or by failure to express dissent. The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.

In Clapp v. Heiner, 34 Fed. (2d) 506; affd., 51 Fed. (2d) 224, the court was called upon to decide whether under section 219 (g) of the Revenue Act of 1924 the income from a trust revocable by the grantor giving six months notice to revoke was taxable to the grantor. There the court said:

The plaintiff contends that, even if this act is constitutional, it is not applicable to a trust created under the trust instruments involved in this suit, for the reason that by the terms of each instrument, six months’ written notice is required for the revocation of the trust. There is nothing to this point. The statute prevails where the grantor of a trust has, at any time during the taxable year, the power to revest himself of the title to any part of the corpus of the trust. That power is not dependent at all upon the notice which must be given before the revocation becomes effective. It deals only with the power of revocation. The power .of revocation during both of the taxable years in question fully resided in the plaintiff, and the fact that he had to give to the trustee six months’ notice of intention to revest would not withdraw the case from the application of the statute.
The plaintiff contends also that, if this proposition is resolved against him, he would be liable to income tax for one-half of each taxable year. There is nothing to this proposition. The power of revocation rested in the plaintiff. The fact that he had to give six months’ notice in order to exercise that power of revocation did not change the status of the income as taxable under this statute for the entire period. Where the settlor of a trust estate reserves in himself the power of revocation, the income of that trust estate is taxable to him, irrespective of the period of notice which he binds himself to give to the trustee in ease he exercises the right of revocation.

We think the rules set forth in the above decisions are sound and are applicable here. It is not denied that the petitioner in the instant case had, in 1922, the power to revest in herself of the trusts, but it is contended that she did not have the power to revest it in herself in 1928 since notice of twelve months and a day was prerequisite to re-vesting. In our opinion it is not necessary under section 166 that the grantor be able actually to revest the trust property in himself during the taxable year, but only that he have during the taxable year the power to revest it in himself. We think that so long as he has, during the taxable year, the power to revest, this is all that is necessary to bring the case within the statute. The fact that the petitioner bound herself to give to the trustees notice of twelve months and one day in case she exercised the right of revocation is immaterial. The contention of the respondent is sustained.

Judgment will Toe entered for the respondent.


author: McMahon :

text:
    Amsterdam Theatres Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43624.
    Promulgated December 17, 1931.

      J. M. Kelly, Esq., for the petitioner.

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

McMahon :

It is alleged that the respondent erred in disallowing as a deduction in each of the years 1925 and 1926, an amount of $5,000, representing exhaustion of a Keith franchise valued at $50,000, for which stock was issued. Section 234 (a) (I) of the Revenue Act of 1926 provides:

.Sec. 234. (a) In computing tbe net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* ⅜ s¡t * ⅜ * :];
(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade of business, including a reasonable allowance for obsolescence.

Section 204 (a) of the Revenue Act of 1926 provides as follows:

Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that — [Exceptions not material.]

Section 204 (c) of the Revenue-Act of 1926 provides:

Seo. 204. (e) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that — [Exceptions not material.]

It will be seen from the above statutes that the basis to be used in the allowance of depletion, exhaustion, wear and tear is the cost of such property to the taxpayer. In the instant proceeding witnesses for the petitioner gave opinion testimony as to the value of the franchise in question as of the date it was acquired by the petitioner, but we must, if possible, determine its cost to petitioner. From the evidence it appears that petitioner acquired this franchise in consideration of its issuance of capital stock, and the burden is upon petitioner to show the value of the stock issued, or, in other words, the cost of the franchise. There is some evidence in the record as to sales of stock of petitioner upon which a valuation per share of the stock of petitioner might be based, but from the evidence it is impossible to determine the number of shares or amount of stock issued for the franchise. It will be readily seen that since we can not. determine the value of all of the stock, which was the consideration for the franchise, or the cost of the franchise, we are unable to determine the basis upon which exhaustion deductions are properly allowable.

Leslie E. Thompson, president of the petitioner, testified at the hearing that 1,480 shares of stock of the petitioner were issued to him and his associates for the franchise and whatever labor he and his associates performed in obtaining the léase and certain personal property appertaining to some theatres. However, the minutes of a meeting of the board of directors of the petitioner held on March 29 and 31, 1921, state that such 1,480 shares of capital stock of petitioner were to be issued “ as full payment for said property and financing good will, leases, franchises and business.” Furthermore, statements made by Thompson in a protest filed with the respondent on December 20, 1926, indicate that $15,000 par value of petitioner’s capital stock was issued for the Keith franchise and certain personal property. Since the petitioner has not shown the basis to be used in the determination of exhaustion deductions, the respondent’s determination in this regard must be approved. See Conley Tin Foil Corporation, 17 B. T. A. 65.

The petitioner also contends that the respondent erred in disallowing as deductions in the year 1925 the amounts of $2,114.17 and $2,419. The former amount was spent in 1925 upon the Strand Theatre, principally for putting in new supports for the floor in place of those supports which had rotted out. This expenditure also covered amounts for removing ashes from the cellar, but there is no allocation of the amounts spent for each purpose. In his direct examination Thompson testified that the amount of $2,419 was expended for repairs upon the Ni alto Theatre. However, in his cross-examination it developed that this expenditure was made for renovating the roof of the Strand Theatre. This work consisted of rebuilding about 40 or 50 per cent of the roof and covering it with tar paper. The Strand Theatre was not owned by petitioner, but was leased for a period of 10 years from March 25, 1921, or thereabouts. The evidence discloses that the useful life of these improvements would extend at least to the date of the expiration of the lease.

Section 234 (a) (1) of the Bevenue Act of 1926 provides:

Sec. 234.' (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid' or incurred during the taxable year in carrying on any trade or business, * * *

Section 215 (a) (2) of the Bevenue Act of 1926 provides:

■ Sec. 215. (a) In computing net income no deduction shall in <ny case be allowed in respect of— . . .
(2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase tbe value of any property or estate.

See also section 235 of tbe Revenue Act of 1926.

Can it be said that these expenditures constituted ordinary and necessary expenses incident to the petitioner’s business? We believe not.

In Black Hardware Co., 16 B. T. A. 551, there was involved a somewhat similar situation. There the taxpayer had made expenditures to raise its floor level. In disallowing a claimed deduction on account of such expenditure in that case, it was said:

Tbe allocation of expenditures of tbe kind under consideration, as between capital and current expense accounts, often presents more difficulties in practice than in theory, for the reason that the line between repairs and. main-tenances, and betterments and improvements, is shadowy and indistinct. However, we are satisfied that the expenditures in question should be capitalized. It appears to be clearly established by the evidence that they did not prolong the life of the petitioner’s building, and there is testimony to the effect that they did not increase its value, although it seems unreasonable that a building so located as to be free from the menace of storms and floods is not ■ more valuable than the same building, or the same kind of building, not so favorably situated. However, conceding that they did not prolong the life of the building, and assuming that they did not increase its value, they nevertheless were for alterations which were, as we conceive them, permanent betterments and improvements that rendered the building better suited to the purpose for which it was used. * * *

Black Hardware Co., supra, was affirmed in Black Hardware Co. v. Commissioner, 39 Fed. (2d) 461; certiorari denied, 282 U. S. 84.

See also News Leader Co., 18 B. T. A. 1212; Crocker First National Bank of San Francisco, 22 B. T. A. 1159; and Parkersburg Iron & Steel Co., 17 B. T. A. 74; affirmed in Parkersburg Iron & Steel Co. v. Burnet, 48 Fed. (2d) 163.

The case of E. L. Potter, 20 B. T. A. 252, cited by petitioner is not in point. In that case it did not appear that the expenditures in question resulted in a permanent betterment or improvement, extending beyond the taxable year in question.

The determination of the respondent will not be disturbed.

Judgment will be entered for the respondent.


text:
    Julia Dahl, Harry Dahl, and Chester Dahl, Executors, Estate of Andrew H. Dahl, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44845.
    Promulgated December 17, 1931.

      Arthur T. Holmes, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

McMahon :

On his income-tax return for 1923 decedent deducted $900, and on his income-tax return for 1925 he deducted $1,292.90, as a business expense for the respective years. No canceled checks, receipts or bookkeeping entries of any kind were presented in evidence. The testimony relating to these items is uncertain, indefinite and unsatisfactory. However, witnesses testified that the amounts in question were spent for entertainment for business purposes, and that decedent visited his places of business at least six times a year, each trip costing approximately $25 to $75.

Under the decision of Cohan v. Commissioner, 39 Fed. (2d) 540, which requires the making of as close an approximation as can be where the evidence discloses an allowable deduction, although no records are kept and a mere estimate of the amount so expended is made, we hold that the respondent erred in disallowing such deductions in toto, and that an amount of $750 was properly allowable as a deduction from gross income in each of the years 1923 and 1925. R. P. Shea, 24 B. T. A. 798. See also A. F. Rees, 21 B. T. A. 698.

It is alleged in the petition that in the income-tax returns of both 1924 and 1925, the decedent deducted as a business expense an item of $400 alleged payment of compensation insurance premium and that the decedent received a dividend of $84 in 1924 and a dividend of $56.25 in 1925. A. J. Dahl, who testified that he was familiar with the books of account, stated that the debit item of $400 in each of the years 1924 and 1925 was a deposit paid to the insurance company to apply on the annual premium and that a rebate was paid by the insurance company at the end of the year upon ascertainment of the correct amount of premium due, and that no id art of such premium was paid by or collected from the employees of the decedent. In 1924, as shown on the insurance account, a total of $714.51 was paid as premium on compensation insurance, and in 1925, a total of $643.33. In 1924 a dividend of $84 was received by the decedent and a rebate of $11.80, although this apparently was a rebate on 1919 and 1920 premiums. In 1925 a dividend of $56.25 was received.

The respondent in his brief calls attention to entries on the insurance account shown as credits from employees, and states that the record does not show what agreement the decedent had with employees relative to reimbursing him for this insurance. It was testified that no part of the compensation insurance premium was paid by employees, and it is to be noted that the insurance account discloses that the decedent paid amounts to the Aetna Life Insurance Company as premiums on “ employees’ insurance.” In view of the positive and undisputed testimony and such account, in our opinion, these credits from employees were not credits against the debits representing compensation insurance premiums. The amount deducted for insurance on the 1925 income-tax return of the decedent, when compared with the account, discloses that he deducted the net premium paid on all insurance, thus allowing for such credits.

In his brief the respondent states that an entry on the insurance account in 1923 shows that the premium of $248 paid in that year covered' a period ending October 1, 1924, and that on an accrual basis the decedent would be entitled to deduct only premiums paid for insurance applicable to the taxable year. No issue was raised as to this item in 1923. No evidence was presented to show on what basis the books of account of the decedent were kept. The deduction of “ Notes Receivable and Accounts Receivable ” as listed in the bad debt schedule attached to the taxpayer’s 1925 income-tax return indicates an accrual basis of accounting. Bartles-Scott Oil Co., 2 B. T. A. 16. The payment of premium in October each year and the entry in 1923 indicate that the premium covered a period from October 1 to the last day of September of the next year. The insurance premium, together with dividends and rebates, should therefore be adjusted accordingly and deduction of net amounts of premiums applicable to the taxable years respectively should therefore be allowed.

Section 214 (a) of the Revenue Act of 1921 provides that in computing net income a reasonable allowance for salaries or other compensation for-personal services actually rendered may be deducted. In 1924 the decedent employed his two sons to conduct the Kenosha agency, agreeing to pay $300 a month and one-third of the net profits to each. One son, Victor Dahl, received $3,600 as salary, and $7.-603.22, being one-third of the net profits. The other son, A. J. Dahl, did not arrive in Kenosha until the latter part of May and received $300 for seven months, or $2,100, and one-third of the net profits, or $7,603.22. Whether or not an actual contract existed and whether or not the contract of employment was legally enforceable against the decedent, does not determine the reasonableness of the compensation. The testimony relative to the nature of services, the prior experience of the sons as executives, and the ability of the sons generally, was meager, indefinite and uncertain. No testimony was given to show an increase in business in 1925 due to the efforts and services of the sons.

In view of the testimony presented, the respondent’s determination that $10,000 was a reasonable allowance for salary for the two sons in 1925 is approved.

Section 214 (a) of the Revenue Act of 1921 provides that debts ascertained to be worthless and charged off within the taxable year may be deducted in computing not income. In disallowing for the year 1925 a deduction in the amount of $2,514.14, representing alleged bad debts charged off at the Westby Garage, in our opinion, the Commissioner was correct. Harry Dahl was positive in his statements that the accounts were no good, of long standing, that the decedent knew they were no good prior to 1925, and that they should have been charged off prior to 1925. Where all the facts and circumstances upon which the determination of worthlessness could be based had existed without change for years prior to the taxable year and were fully known to the taxpayer, taxpayer is not entitled to the deduction claimed in the taxable year. Ralph H. Cross, 20 B. T. A. 929; Russo Fruit Co., 23 B. T. A. 1880. No testimony was given and no bookkeeping entries were presented to show that the accounts were actually charged off within the taxable year.

The determination of the respondent in disallowing the deduction of this item ⅛ therefore approved.

As to the items paid for improvements on the Market Street property in the total amount of $2,177.52, the testimony and" facts warrant us in holding that these items are capital expenditures, rather than current expense, and are depreciable over the life of the lease thereon.

As to the item of $250 paid in 1925 for moving into the building leased for five years and included in the amount of $2,427.52 alleged to represent items properly chargeable to rent, in our opinion it is a necessary business expense item and therefore is an allowable deduction.

There remains one more disputed item, the amount of $132.35 expended by the decedent in 1925 for equipment for a baseball team, known as the Dahl Fords, which provided a source of publicity for the Kenosha agency. Although part of the equipment was carried over from year to year, it appears that the amount carried over was negligible, the equipment in fact lasting only for a season. We are of the opinion that this item should be allowed as an ordinary and necessary business expense deduction in the year when expended.

Judgment will be entered under Rule 60.


author: Black :

text:
    Gross R. Scruggs, Petitioner, v. Commissioner of Internal Revenue, Respondent. Marian P. Scruggs, Petitioner, v. Commisioner of Internal Revenue, Respondent. Scruggs Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33610, 38711, 46270.
    Promulgated December 18, 1931.

      O. D. Brwndidge, Esq., and O. A. Fountain, Esq., for the petitioners.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Black :

The issues raised in these consolidated proceedings are entirely of fact and it is unnecessary to review or comment at length on the many authorities cited by counsel. There appears to be no issue of law between petitioners and respondent.

The claims for deduction of the debts of R. P. Caruth, $5,447.55, and O. F. Rawls, $900, are involved only in the cases of Gross R. Scruggs and Marian P. Scruggs, Docket Nos. 33610 and 38711. It appears that as to both debtors suits would have availed nothing. In that sort of a situation, in Roy Nichols, 17 B. T. A. 580, the Board said:

With reference to the bad debt claims, it may be pointed out that in two of the cases the money loaned to the debtor was loaned in a generous effort on (he part of the petitioner to help a person connected with him in business. The financial condition of such debtor was known by petitioner to be precarious at the time the loan was made and so remained at all times thereafter. Moreover, no suit was filed to collect these claims. However, the money was loaned under a promise to pay; it was not a gift. A suit would have been futile and, with an added outlay for expense. * * *
We believe that the evidence establishes the worthlessness of all those debts in the year in which the deductions were taken, and we therefore hold that for the year 1922 petitioner is entitled to deduct from gross income the following amounts * * *.

See also Edward K. Johnstone, 17 B. T. A. 366. We think that petitioners are entitled to the bad debt deductions claimed in their amended petitions, and respondent should allow such deductions in recomputing the deficiencies against petitioners, Gross R. Scruggs and Marian P. Scruggs.

The remaining issue to be discussed is the March 1, 1913, fair market value of the land and building known as the Insurance Building, located at Jackson and Browder Streets, Dallas, Tex., which was an office building of reenforced concrete and brick, 50 by 100 feet and having a basement and five stories.

As has already been stated in our findings of fact, we have found that the March 1, 1913, value of the land was $90,000. We believe this valuation is supported by the weight of the evidence. The evidence shows that beginning around July 1, 1912, two of the leading real estate firms in the city of Dallas began taking options on real estate in the vicinity of the Insurance Building. The purpose of securing these options was to secure land for the terminal of the Electric Railway Company, an extensive interurban system running into Dallas. Such purpose was not known to the public at that time, but became known prior to March 1, 1913, and there was great activity in the real estate market in that vicinity and all property located thereabout greatly increased in value. It was definitely known prior to March 1, 1913, that the interurban station and office building would be erected on land situated near the Insurance Building, and that Browder Street, adjoining the Insurance Building, would be opened through. All this added greatly to the value of the real estate in question and we think the valuation of $90',000 for the land as of March 1, 1913, as claimed by petitioners, is supported by the weight of the evidence.

Belative to the fair market value of the building, there is a wide difference of opinion between the expert witnesses who testified, ranging from $120,000, as fixed by the expert witness who testified for respondent, to $185,000, as testified by the expert witnesses for petitioners. After carefully weighing all the evidence, we have found the March 1, 1913, value of the building to be $120,000.

On July 6,1912, petitioners, Gross R. Scruggs and wife, Marian P. Scruggs, gave Murphy and Bolanz an option to sell the land and building for $185,000. On October 13, 1913, the petitioners executed a lease on said premises to Shuttle Bros. & Lewis, for a period of 25 years, at a gross' rental of $1,200 per month or $14,400 per annum. The lease provided that the lessors, the said petitioners, were to bear the ordinary operating expenses of the building, such as taxes, insurance, etc. The lease contained a clause which reads:

Clause (5) : In case of total destruction of the building on the leased premises by'fire, or tornado, during the first twenty years of this lease, lessor shall forthwith rebuild at their own expense, constructing five or more stories and basement under this lease; but if a building is constructed costing more than the present building, lessees rent for the basement and first five floors shall be increased, but in proportion only to the difference between the cost of const-meting the present building ($100,000.00) plus the present value of the land ($75,000.00)' and the then cost of constructing a building of the same size as the present building of the material or construction actually used, plus the present value of the land.

Petitioners introduced several expert witnesses, who testified that the building had approximately 375,000 cubic feet of office space on March 1, 1913, and that the cost of similar construction as of that date was approximately 50 cents per cubic foot, and that, based on these figures, the value of the building on March 1,1913, was $185,000. These witnesses also testified that the cost of construction of first-class office buildings in Dallas, Tex., at the time of the hearing in this proceeding, to wit, November 1, 1930, was between 50 and 60 cents per cubic foot, and was about the same as it was in 1913.

Respondent introduced evidence to show that in 1913 the cost of construction of office buildings such as the one in question was considerably less than it was at the time of the hearing, November 30, 1930, and that the value of the Insurance Building could not have been as high as that fixed by petitioners’ witnesses. Respondent’s evidence of value of the building appears to more nearly accord with the contemporaneous facts which took place around March 1, 1913, such as the execution by petitioners, on July 1, 1912, of an option to Murphy and Bolanz to sell the land and buildings for $185,000, and the statement in the lease to Shuttles Bros. & Lewis, dated October 13, 1913, that the cost of constructing the building was $100,000. Moreover, the gross rental agreed upon in the lease to Shuttle Bros. & Lewis, was $14,400, and this supports the view that the building did not have a greater value than $120,000 on March 1, 1913, and the land a value of $90,000. This $14,400 agreed upon in the lease to Shuttle Bros. & Lewis would be a gross return of approximately 7 per cent on the total amount of the investment, if fixed at the figure of $210,000, whereas all of petitioners’ expert witnesses testified that an office building of the kind in question would have to yield a gross return of between 8 and 10 per cent on the investment, in order to yield a fair net return on the owner’s capital investment.

The evidence shows that during the year 1913, the year prior to the lease to Shuttle Bros. & Lewis, the gross rentals from the Insurance Building were $18,700. This would be a gross return of slightly less than 9 per cent on the total amount of $210,000, the value of the land and building as of March 1, 1913, which we have fixed from the evidence. So, taking all the evidence into consideration, and giving weight to all elements of value, such as type of building, cost of reproduction, gross return on investment, suitability to the neighborhood in which it is located, and other factors, we think the valuation we have fixed, $90,000 for the land and $120,000 for the building, is just and -reasonable. Cf. Tracy v. Commissioner, 53 Fed. (2d) 575, affirming Thomas H. Tracy, 15 B. T. A. 1107.

The respondent fixed the cost of the addition made in. 1915 at $50,000, which petitioners urge should be $51,365.56. Petitioners did not present any itemized or satisfactory account showing those costs. We do not think petitioners have sustained the burden of proof and shown error on respondent’s part as to this item and his determination of $50,000 for the addition in 1915 is approved.

The cost of the addition made in 1920 was $98,720.01, as agreed by stipulation.

Depreciation on the building will be allowed to petitioners on the foregoing figures at 2 per cent per annum for each of the taxable years involved, and the profit of the Scruggs Investment Company resulting from the sale to the Great States Insurance Company in 1927 will be calculated according to the March 1, 1913, value, plus the cost of the two additions, all property depreciated to the date of sale.

Decision toill be entered under Rule 50.


author: Arundell: McMahon, Murdock,

text:
    Murry Guggenheim, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43698.
    Promulgated December 18, 1931.

      George E. Cleary, Esq., for the petitioner.

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

Arundell:

In 1925 the petitioner relinquished his power of revocation of two trusts established in 1917. This act is held by respondent to constitute a gift within the meaning of the gift-tax provisions of the Revenue Act of 1924, and he has asserted a deficiency in gift tax in the amount of $2,465,681.20.

A lengthy stipulation of facts was filed which is incorporated herein by reference as our findings of fact. A brief summary of the facts will suffice for the purposes of understanding and deciding the case.

The petitioner, at all times material hereto, has resided in New York, N. Y., and thus has been a resident of the United States. On June 28, 1917, he established two trusts in New Jersey; one for the benefit of his only son, Edmund,- and the other for the benefit of his only daughter, Lucile G. Gimbel. An individual and a trust company were the original trustees'. The trusts were to continue for ten years unless sooner terminated. A substantial amount was to be paid annually to the beneficiary of each trust and at the end of the ten-year period the principal of each trust was to be paid to the beneficiary, free of all restrictions.

There were provisions for the children of á beneficiary in case the beneficiary died within the ten-year period, and, in the event of the death of a beneficiary without surviving children, then the petitioner was to receive the principal and accumulations.

The petitioner retained the right to alter or revoke each trust except as to income received or accrued, and to direct the making of all changes in the securities included in the trust property. Subject to the petitioner’s approval, the trustees were authorized to do all things necessary in connection with the trust property. The trustees were given the custody of the trust funds and all1 securities were listed in their names or in the names of their nominees.

Various changes in the trust agreements were made from time to time. For example, in 1921 the petitioner gave to two individuals the power, formerly reserved to himself, of directing and approving the management of the trusts.

On July 13, 1925, the final change in the trusts was made, whereby the petitioner relinquished his power to alter, modify, or revoke the trusts.

The corporate trustee continued throughout the period, but there were changes in the individual trustees. The petitioner was never a trustee.

The petitioner delivered to the trustees the securities constituting the corpus of the trust on June 28, 1917, and the trustees have held all securities of the trust since that date. The trustees have collected all income and profits of the trust and have distributed a substantial part thereof to the two beneficiaries, as provided by the agreements. The petitioner has never received any income of the trusts nor had any of such income expended for his benefit. He substituted some securities for others in 1918 for the last time. As securities were delivered by the petitioner to the trustees, such items were eliminated from his accounts. He never used the trusts for personal loans or for personal credit in any way. The value of his separate property has at all times greatly exceeded the value of the trust property.

After May 5, 1921, he never exercised any rights of management or control over the trust property.

The corporate trustee was a regular trust company, doing other business. The petitioner was not interested in it financially.

The petitioner, his wife, and their two children were all living and of age during the period 1917 to 1925, inclusive.

The fair market value on July 13, 1925, of the securities constituting the corpus of these two trusts was $13,110,463.44, including $116,548.72 representing accrued interest not received and dividends declared but not received. The respondent agrees to eliminate the latter amount from the amount subject to gift tax.

The respondent has asserted the tax under section 319 of the Revenue Act of 1924, which, as far as material here, provides for the imposition of a tax:

For the calendar year 1924 and the calendar year 1925 * * * upon the transfer by a resident l>y gift during such calendar year of any property wherever situated, whether made directly or indirectly * * *. [Italics supplied.]

This statute, as applied to gifts made after its enactment, has been held valid in Bromley v. McCaughn, 280 U. S. 124, but invalid as to gifts made prior to June 2, 1924. Untermeyer v. Anderson, 276 U. S. 440.

The question here is whether the value of the corpus of the two trusts may be used as the measure of the gift tax asserted on the ground that the “ transfer * * * by gift ” occurred in 1925 when the settlor relinquished his reserved power to alter, amend, or revoke the trusts which were created in 1917, prior to the enactment of the statute imposing the gift tax. We think it must be conceded that the term “ gift ” as used in the statute merely designates the transfers selected for tax, i. e., only such transfers as are donative in character have been selected. The term designates the character of the transfer rather than the medium used in effecting it. The parties assume that “ transfer by gift ” as used in the statute includes all trusts created after the passage of the Act, and there can be no doubt of this if the statute is not to be completely nullified by so ready a means of evasion. Thus the tax is imposed upon transfers made directly or indirectly.” The fact that section 319 is broad enough to include the creation of a trust, donative in character, also finds support in subdivisions (a) (2) and (b) (1) of section 321, which allow certain deductions in computing the amount of the gifts subject to the tax imposed by section 319. Both of these subdivisions mention and allow the deduction of gifts made “ to or for the use of ” various corporations for political or charitable purposes and gifts made “ to a trustee or trustees ” for similar purposes. But counsel for the petitioner suggests that every essential thing was done in 1917 when the trusts were created. The property was then transferred to a corporate trustee and provision was made that all or some part of the income should go to petitioner’s children, merely the right being reserved to alter, amend or revoke the trusts, and it is said that the surrender in 1925 of this reserved right surely can not constitute a transfer within the meaning of the gift tax statute. But this reserved right which was relinquished in 1925 was the absolute right to control the corpus and the income of the two trusts. At a word from petitioner he was reinvested with the full and complete ownership of the corpus and the income and earnings therefrom on and after the date he might take such action. The rights of the children were complete only as far as income paid and accrued prior to the time petitioner exercised his reserved right to alter, amend or revoke the trusts. This reserved power may be, as petitioner says, the mere right to revoke, but it is the essence of ownership and control. Prior to 1925, when petitioner relinquished the right of revocation, the property, was his, not his children’s, and he alone could have withdrawn every right they had without legal redress on their part. That a gift by a deed of trust, in which the right of revocation is reserved to the grantor, does not become effective until the termination of the right, is held in numerous decided cases. See In re Hanna's Estate, 195 N. Y. S. 749; In re Schmidlapp's Estate, 196 N. Y. S. 108, citing Lines Estate, 155 Pa. 378; 26 Atl. 728; Matter of Bullen, 143 Wis. 512; 128 N. W. 109; Blodgett v. Union & New Haven Trust Co., 97 Conn. 405; 116 Atl. 909; Crocker v. Shaw, 174 Mass. 266; 54 N. E. 549.

This tax, like the estate tax, is on the “ transfer ” of property. In Chase National Bank v. United States, 278 U. S. 327, involving insurance policies, it was held that the transfer was uncompleted until the insured’s right to change the beneficiaries was terminated. The court said: - •

Such an outstanding power residing exclusively in a donor to recall a gift after it is made is a limitation on the gift which made it incomplete as to the donor as well as to the donee, and we think that the termination of such a power at death may also be the appropriate subject of ,a tax upon transfers.

The quoted language is particularly significant when it is recalled, that the Revenue Act of 1921 under which the Chase National Bank case was decided does not in terms purport to tax transfers or trusts in which the donor retains the power of alteration as do the later revenue acts. See section 303 (d),- Revenue Acts of 1924 and 1926. And the same reasoning was applied in Reinecke v. Northern Trust Co., 278 U. S. 339, in holding that the estate tax applied to the revocable trusts involved, the court saying: “a transfer made subject to a power of revocation in the transferor, terminable at his death, is not complete until his death.”

In Means v. United States, 39 Fed. (2d) 748; certiorari denied, 282 U. S. 849, the Court of Claims had facts on all fours with the present case and sustained the imposition of the tax, citing as authority Saltonstall v. Saltonstall, 276 U. S. 260; and Reinecke v. Northern Trust Co. and Chase National Bank v. United States, supra. In its opinion the Court of Claims said that the Supreme Court in the cases relied on determined the precise question of the effective date “ of the transfer of property where the donor in trust instruments had reserved to himself the unrestricted rights of revocation.” The petitioner contends that the Court of Claims misapprehended the scope of the Supreme Court ■ decisions. _ It is argued that the cases cited are not controlling as the Supreme Court was considering them solely from the standpoint of the constitutional power of Congress to tax as transfers the termination of reserved powers to alter the instruments there involved. It is true that in the cited cases constitutional questions were presented to the court. But in each case the decision turned upon the question of whether the termination of a power after the enactment of the taxing act constituted a transfer within the meaning of the act.

This is distinctly brought out in the Northern Trust Go. case, in which the settlor of two revocable trusts created in 1903 and 1910 died in 1922, while the Revenue Act of 1921 was in effect. At the time this case was under consideration Nichols v. Coolidge, 274 U. S. 531, had already held that the 1918 Act was invalid in so far as it attempted to tax “ transfers completed before any such statute was enacted,” and it was contended that the two trusts came within that rule. But the court held otherwise, on the ground that the reserved power in the settlor alone prevented the transfers from being complete until such power was terminated. The opinion reads in part:

But in No. 77, Chase National Bank v. United States, 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed.-, decided this day, the decision is rested on the ground, earlier suggested with respect to the Fourteenth Amendment in Saltonstall v. Saltonstall, 276 U. S. 260, 48 S. Ct. 226, 72 L. Ed. 565, that a transfer made subject to a power of revocation in the transferor, terminable at his death, is not complete until his death. Hence section 402, as applied to the present transfers, is not retroactive since his death follows the passage of the statute. For that reason, stated more at length in our opinion in Olíase National Bank v. United States, supra, we hold that the tax was rightly imposed on the transfers of the corpus of the two trusts * * *.

In the Chase National Bank case the court' states the question before it in this way:

The precise question presented is whether the termination at death of that power [to change the beneficiary] and the consequent passing to the designated beneficiaries of all the rights under the policies freed of the possibility of its exercise may be the legitimate subject of a transfer tax, as is true of the termination by death of any of the other legal incidents of property through which its use or economic enjoyment may be controlled.

In deciding the question the court held in part:

A power in the decedent to surrender and cancel the policies, to pledge them as security for loans and the power to dispose of them and their proceeds for his own benefit during his life * * * is by no means the least substantial of the legal incidents of ownership, and its termination at his death, so as to free the beneficiaries of the policy from the possibility of its exercise would seem to he no less a transfer within the reach of the taxing power than a transfer effected in other ways through death. [Italics supplied.]

This case is strikingly parallel to the Northern, Trust Co. case in so far as the so-called “ two trusts ” were involved. In that case the decedent had created two trusts, reserving to himself alone the power of revocation, and died in 1922 without having exercised the powers. The estate-tax statute imposed a tax “ upon the transfer of the net estate ” and provided for the inclusion in the estate of all property “ to the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust * * * intended to take effect in possession or enjoyment at or after his death * * In the instant case the taxpayer created trusts in 1917 wherein he reserved to himself alone the power to alter, amend, or revoke, and terminated that power in 1925 by relinquishing it. The applicable statute here taxes “ the transfer * * * by gift * * * of any property * * * whether made directly or indirectly * * If in the one case the termination of the power of revocation constituted a completed and taxable transfer, it seems to us that it does so in the other. We are accordingly of the opinion that the court of claims correctly construed the statute in the Means case and properly applied the reasoning of the supreme court in the cases cited by it.

The gift-tax act was designed primarily to prevent evasion of the estate-tax act and the surtax provisions of the income-tax laws. In introducing the gift-tax provisions on the floor of the House the then Chairman of the Ways and Means Committee stated [Congressional Record, 68th Cong., 1st sess., vol. 65, part 3, pp. 3119 and 3220] : “ The gift tax is a corollary to the estate tax. It is perfectly idle to attempt to raise the estate tax as we have done today, and make no provision with reference to gifts. The estate tax at the present time is being largely evaded by the splitting up of the large estates * * * .” See also Congressional Record, vol. 65, part 4, pp. 3172, 3173; part 8, p. 8095, and dissenting opinion by Justice Brandéis in Untermeyer v. Anderson, supra.

In view of the purpose for which the statute was enacted, and its language like that of the estate-tax provisions in taxing the “ transfer ” of property, it is our opinion that it should be construed in harmony with the construction placed on the estate-tax statute, and if this is done it follows inevitably that the transfer by means of trusts donative in character is not complete until the power of revocation is terminated.

The construction we place on the statute is the same as that of the respondent in Regulations 67, article 1, reading in part:

The creation of a trust, where the grantor retains the power to revest in himself title to the corpus of the trust, does not constitute a gift subject to tax, but the annual income of the trust which is paid over to the beneficiaries shall be treated as a taxable gift for the year in which so paid. Where the power retained by- the grantor to revest in himself title to the corpus is not exercised a taxable transfer will be treated as taking place in the year in which such power is terminated.

We think it is not without significance that while Congress amended the gift-tax sections of the 1924 Act as to rates by sections 824 and 825 of the Revenue Act of 1926, no change was made in the imposing section which prior thereto had been construed by the respondent as above set out.

In conclusion, it is our opinion that the transfers of property by means of the trusts herein were transfers by gift within the meaning of the statute; that the transfers were not completed until the settlor relinquished his power of revocation in 1925; and that the Means case correctly interpreted the statute and should be followed in this proceeding.

Reviewed by the Board.

Decision will be entered v/nder Rule 50.

McMahon,

concurring: The correct result has been reached in this proceeding.

A gift has been defined as follows:

The general rule deductible from the many and more or less variant statements found in the decisions is that to constitute a valid gift inter vivos there must be a donor competent to make it; freedom of will on his part; as intention on his part to make it, a donee capable of taking the gift; the gift must be complete and nothing left undone; the property must be delivered by the donor; and accepted by the donee; the gift must go into immediate and absolute effect; the gift must be gratuitous; the gift must T)e itrrevooahle. 28 C. J. 626. [Italics ours.]

See Copland v. Commissioner, 41 Fed. (2d) 501, 504, and Lee v. Lee, 5 Fed. (2d) 768.

Applying all these tests, there was a gift of the corpus of the two trusts. The real question is as to when this gift was made, whether in 1925 or previous thereto.

In the instant proceeding there were present all of the elements pointed out in these authorities essential to the making of a gift, of the corpus of the trusts, when, on July 13, 1925, the grantor relinquished his power to alter, modify or revolee the trusts. The transfer of the corpus of the trust was then and thereby completed. This relinquishment of this power was the final step of the grantor in the completion of the making of the gift. There was nothing further necessary, or that he could do, to complete the gift. There was nothing that he could thereafter do to defeat the gift. There was no completed gift of the corpus of the trusts previous to July 13, 1925. On that date the gift of the corpus of the trusts became effective immediately, upon the relinquishment by the grantor of his right to alter, modify or revoke the trusts.

There is no good reason why the making of a gift inter vivos can not be accomplished by a series of acts on the part of the grantor extending over a period of time; or, in other words, why all of them must occur simultaneously. Cf. Continental Life Ins. Co. v. Sailor, 47 Fed. (2d) 911.

In the instant proceeding we have a series of acts on the part of the grantor which commenced with the creation of the trusts on June 28,1917, and culminated in his relinquishment of his power of alteration, modification and revocation, on July 13, 1925, resulting in the making of a gift, all in conformity with a carefully formed intention on his part so to do, which intention is clearly reflected by his conduct consisting of these various acts.

Upon the foregoing authorities, construed in the light of what occurred here, the gift of the corpus of the trusts was completed on July 13, 1925.

Section 319 of the Revenue Act of 1924, as amended by section 324 of the Revenue Act of 1926, imposes a tax on a “ trcmsfer by a resident by gift * * * of any property wherever situated, whether directly or indirectly.” There is no ambiguity in this phraseology as applied to the facts in the instant proceeding. Regulations 67, article 1, promulgated by the Commissioner of Internal Revenue, as applied to these facts, are in harmony with the provisions of the statute and a correct interpretation of it. The gift in issue in this proceeding is clearly taxable under the statute.

Murdock,

dissenting: The Commissioner has held the petitioner liable for a gift tax on the theory that on July 13,1925, the petitioner made a transfer by gift of the then corpus of the two trusts, because on that date he relinquished his retained power of revocation. The Court of Claims sustained the Commissioner in a parallel case. Means v. United States, 39 Fed. (2d) 748; certiorari denied, 282 U. S. 849. Now the Board, employing and approving the reasoning of the Court of Claims in the Means case, again sustains the Commissioner. The Board and the Court of Claims rely upon Saltonstall v. Saltonstall, 276 U. S. 260; Chase National Bank v. United States, 278 U. S. 327, and Reinecke v. Northern Trust Co., 278 U. S. 339, and the reasoning of the Supreme Court in deciding those cases. In my opinion the Board and the Court of Claims have not given due- consideration to the fact that the solution of the only question presented in these cases depends upon a proper interpretation of the statutes to see whether or not the gift-tax provisions impose a tax under the facts.

In the three Supreme Court cases relied upon, the court took occasion to point out in each that there was no question of statutory construction, and a constitutional question only was involved.

In Saltonstall v. Saltonstall, supra, the Supreme Court accepted the state court’s interpretation that a tax had been clearly imposed and it considered only the right of the legislative branch of the state government to impose such a tax. It held that a reserved power of appointment left the transfer incomplete and subject to tax.

In Reinecke v. Northern Trust Co., supra, there were seven trusts involved, which the court divided into two groups; one of two trusts, and the other of five. The decision of the court in regard to the two trusts is relied upon in the prevailing opinion of the Board. Section 401 of the Revenue Act of 1921 imposed a tax upon the transfer of the net estate. Section 402 (c) provided that there should be included in the gross estate all property “ to the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust * * * intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this act).” The two trusts had been created before the passage of any statute imposing an estate tax. In these two trusts the settlor had reserved to himself the income for life and on his death the income of each was to be paid to a designated person until the termination of the trust, with remainders over. The settlor reserved to himself alone a power of revocation of the trusts. The only question which the Supreme Court considered was whether or not the taxing statute, if applied to these two trusts, was unconstitutional and void, because retroactive, within the ruling of Nichols v. Coolidge, 274 U. S. 531, in which it had held that a similar section of the 1918 Act was retroactive and unconstitutional as applied to transfers completed by the creation of trusts prior to the enactment of any such taxing statute. The court held:

A transfer made subject to a power of revocation in the transferor, terminable at bis death, is not complete until bis death. Hence section 402, as applied to the present transfers, is not retroactive since bis death follows the passage of the statute. For that reason stated more at length in our opinion in Chase National Bank v. United States, supra, we hold that the tax was rightly imposed on the transfers of the corpus of the two trusts ⅜ * *.

The court considered that these two trusts were intended to take effect in possession or enjoyment at or after the decedent’s death and thus they were covered by a specific provision of the statute. The only question was whether this provision could be constitutionally applied to trusts of this kind.

In the Chase National Bank case the only question involved was the constitutionality of section 401 as supplemented by that part of section 402 (f) of the Revenue Act of 1921 which provided that the value of the gross estate should include all property “to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.” Section 401 imposed a tax upon the transfer of the net estate of every decedent. The Supreme Court said:

The tax is plainly imposed by the explicit language of sections 401 and 402 (f) if those sections are constitutionally applied.
* * # * ⅜ ⅜ *
The precise question presented is whether the termination at death of that power and the consequent passing to the designated beneficiaries of all rights under the policies freed of the possibility of its exercise may he the legitimate subject of a transfer tax * ⅜ *. [Italics supplied.]

In that case the decedent had taken out several insurance policies on his own life, aggregating $200,000. In each he named his wife as beneficiaiy, but reserved to himself the right to change the beneficiary. He made no change up to the date of his death. The court held:

Such an outstanding power residing exclusively in a donor to recall a gift after it is made is a limitation on the gift which makes it incomplete as to the donor as well as to the donee, and we think that the termination of such a power at death may also he the appropriate subject of a tax upon transfers. [Italics supplied.]

Thus it appears that in each of these cases there were specific provisions clearly imposing the tax and the only question was whether these provisions were constitutional. Here the question is quite different. There is no express provision which clearly covers the present situation, and we are asked to hold that the general provision is sufficient. Cf. Tyler v. United States, 281 U. S. 497. If in the last two cases section 401 had stood alone without the specific provisions of section 402, a question like ours could have been raised. But section 401 did not stand alone and this question was never presented to the Supreme Court. In my opinion we can not decide the question of statutory interpretation here presented on authority of these decisions of the Supreme Court on a totally different question.

But it is argued that the reasoning of the Supreme Court in these three cases is decisive of the present controversy. I do not think so. It was only necessary for the Supreme Court to hold in each that the transfer was not complete until the termination of the power of revocation. The specific provisions were therefore not unconstitutional. Anything further which the court may have said was dieta which it is free to disregard if it ever has to decide the present case.

The petitioner is willing to concede that Congress had the power to impose a tax which would apply to a case such as this one. But the principal question which he raises is, Has Congress done so? He claims that there is at least doubt whether the words used should be interpreted as covering the present situation.

In section 819 of the Revenue Act of 1924, as amended by section 824 of the Revenue Act of 192G, a tax was “ imposed upon the transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly.” The act further provided that the amount of the gift to be taxed would be the fair market value of the property at the date of the gift. That the act taxes some transfers which occur through the medium of trusts must be conceded, in view of the provisions of subdivisions (a) (2) and (b) (1) of section 321. I will concede, for the sake of argument, that the logical time to tax a transfer such as was made here would be at the termination of the power. See, however, section 322. The petitioner assumes that “ transfer by gift ” as used in these acts includes trusts created after the passage of the Revenue Act of 1924. But, he- argues, it should not be applied where, as here, a trust was created prior to the passage of the Revenue Act of 1924 and the only thing that happened thereafter was the termination of a power to alter, amend, or revoke by voluntary relinquishment. He reasons that Congress had in mind “ relinquishment of powers to revoke trusts ” and distinguished such relinquishments from transfers by gift by providing for both where it so intended; in the estate-tax title of the Revenue Act of 1924 there appeared a new provision specifically including in the gross estate the value of property with respect to which the decedent had created a trust and reserved any power to himself to alter, amend, or revoke (section 302 (c)); no such elaboration appears in the gift-tax provision; if necessary in one place, it is necessary in the other (see also sections 402 (c) of the Revenue Acts of 1918 and 1921 and section 302 (c) of the Revenue Act of 1924, in all of which transfers, on the one hand, and creations of trusts on the other, are separately provided for); when the statute is read as a whole and the language of various sections is compared, it is clear that Congress did not intend the gift-tax provision to cover a case where in the year in question there was only a relinquishment of a power to alter, amend, or revoke a trust theretofore created; and, futhermore, since the relinquishment of the power to alter, amend or revoke a trust is not ordinarily regarded as a transfer of property by gift, the language of the statute must be clear if such an act is to be within the scope of the gift tax (cf. section 219 (g) of the Revenue Act of 1924). The Commissioner has failed to reply to these arguments of the petitioner, and the Board fails to dispose of them adequately. I think they have considerable persuasive force. Cf. Reinecke v. Gardner, 277 U. S. 239.

Mr. Justice Holmes, in speaking for one-half of the court in regard to the same provisions which we are here considering, said “ The Act should be read as referring only to transactions taking place after it was passed * * Blodgett v. Holden, 275 U. S. 142. The creation of this trust was a transaction which took place prior to the passage of the Act. The trust was valid even though the creator retained the power to alter, amend or revoke it. Stone v. Hackett, 12 Gray 227; Farmers’ Loan & Trust Co. v. Bowers, 29 Fed. (2d) 14; Hibbard, Spencer, Bartlett & Co., 5 B. T. A. 464. “ The right to revoke, unexercised, is a dead thing. Its presence in a deed does not alter the character of the instrument or estate granted.” In re Dolan's Estate, 279 Pa. 582. Power of revocation does not affect the legal title to the property. After the relinquishment of this power the trust was no more effective than formerly. Cf. J. T. Fargason, 21 B. T. A. 1032. Here the grantor did not retain the income to himself for life as in the Saltonstall and Beinecke cases, supra. The Act taxes a “transfer” “by gift” “of any property.” The relinquishment affected no physical transfer, no change in possession, and no change in the legal or equitable title to the trust res. The holder of the power was not technically the owner of the trust property at the time he relinquished the power. The power itself “ is not a property right nor an interest in property.” Farmers’ Loan & Trust Co. v. Bowers, supra. Cf. Jones v. Clifton, 101 U. S. 225. Technically, the relinquishment did not transfer but rather extinguished something. Cf. In re Hall’s Estate, 99 N. J. L. 1; affd., 100 N. J. 405. Thereafter, that which had vested could never be divested, the gift could no longer be recalled. Here only one thing happened after the passage of the Act, the relinquishment of the power. It was at most but the final step of the grantor. Alone and separated from the steps previously taken it certainly did not transfer anything. It merely completed the shifting of the economic benefits which had been at least partially accomplished prior to 1924. If the Act be held to impose a tax upon such a transaction, it must be read as referring not only to that part of the transaction which took place after it was passed (the relinquishment), but also to that part which took place before it was passed (the creation of the trust). But the Act applies only to transfers made during the taxable year.

Tax provisions must be strictly construed, and if there be doubt as to a proper construction, that doubt must be resolved in favor of the taxpayer. Gould v. Gould, 245 U. S. 151; United States v. Merriam, 263 U. S. 179; Reinecke v. Northern Trust Co., supra. The language used must be reasonably construed, but may not be extended by implication or otherwise. Smietanka v. First Trust & Savings Bank, 257 U. S. 602. The statute should be read as a whole. Hellmich v. Hellman, 276 U. S. 233. Yague or doubtful interpretations may never serve to impose a duty upon a citizen, but clear and express words are required for that purpose. Isham v. United States, 17 Wall. 496; Hartranft v. Wiegmann, 121 U. S. 609. Not only could Congress have easily expressed more clearly an intention to tax upon the termination of a power to revoke, but when it has had such an intention it has usually expressed it more clearly. Notwithstanding the administrative construction adopted by the Treasury Department, I think that there is at least doubt as to whether the gift-tax provisions, strictly construed and giving to the words used their ordinary meaning, impose a tax on the transfers here in question. Cf. United States v. Field, 255 U. S. 257. That doubt should be resolved in favor of the taxpayer.

Matthews and GoodRich agree with this dissent.