author: Opper:

text:
    Estate of Cora C. Reynolds, Doris R. May, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101034.

    Promulgated September 5, 1941.

      Edgar Allyn Buttle, Esq., and Alfred B. Van Houten, Esq., for the petitioner.

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

Opper:

Irrespective of the situation which existed prior to 1931, there can be no question that as of 1934, when this combined insurance and annuity contract came into being, and thereafter, when the trust of the “insurance” policies was created, the Congressional policy of taxing transfers of property in which the decedent had retained any interest during his lifetime had become firmly and unmistakably established. Nor can there be doubt that for purposes of the Federal estate tax a contract with an insurance company possessing the characteristics of the one here in controversy is to be considered a single inseparable arrangement in which insurance and annuity features are inextricably connected; that it was “an agreement which was entire in character, by which the [insurance] company promised him a small but sure income from the money by way of annuity, and the payment * * * at his death, and that the money was so paid at his death in fulfillment of the promise.” Helvering v. Tyler (C. C. A., 8th Cir.), 111 Fed. (2d) 422; affd., 312 U. S. 657, on authority of Helvering v. Le Gierse, 312 U. S. 531 (decided the same day).

The only question then that remains on the present issue is whether creation of an irrevocable trust and assignment to it of the portion of that contract promising to pay the stipulated sum at death is sufficient ground for excluding the value of that promise from decedent’s taxable estate. We are of the opinion that it is not.

It is true that in Helvering v. Le Gierse, supra, the decedent had retained, in the insurance feature of her contract, rights with respect to nomination of beneficiaries, and for borrowing upon and surrendering the policy, sometimes referred to as “property rights.” But if such interests were important to the decision in the Le Gierse case, it must have been because they were comparable to those powers in other property situations generally described by reference to the right to alter, revoke, or terminate. There is in section 302 (d) a provision unquestionably devised to cover that relationship to transferred property. Nevertheless, in passing from the question whether decedent’s contract in the Le Gierse case was insurance to the consideration of its taxability in the view that it was not, the Supreme Court relied not upon section 302, subdivision (d), but upon subdivision (c), saying:

* * * The only remaining question is whether they [the payments to the beneficiaries] are taxable.
We hold that they are taxable under section 302 (c) of the Revenue Act of 1926, as amended, as a transfer to take effect in possession or enjoyment at or after death. See Helvering v. Tyler, supra * * *.

In the latter case, from which we have quoted above, the Court of Appeals, following the portion of the opinion already set out, went on:

* * * As that was the real transaction between Mr. Tyler and the [insurance] company he must be held to have made a transfer of that amount intended to take effect at his death and his estate was taxable in respect to the money paid to the widow at his death pursuant to the transfer made by him.

We have here a situation in which a trustee has been interposed between the ultimate beneficiaries and the decedent. The fiduciary,however, does no more than represent and act for the ultimate beneficiaries. It obtains the legal title, but the equitable rights rest at all times in the persons for whose benefit the trust was in fact created, those, of course, for whom the decedent intended the enjoyment of the insurance company’s payment of the principal sum. True, the trust was irrevocable. But the effect of the arrangement was and could have been no different than if decedent had specified the beneficiaries in the policy, and renounced any rights of alteration, pledge or surrender. Reduced to its simplest terms, therefore, the question here is whether a decedent retaining for life the benefit of property transferred to an insurance company, may escape the provisions of section 302 (c) by reason of the irrevocability of the transfer, or through a procedure comparable to the renunciation of any power to alter or revoke by change of beneficiaries or surrender or pledge of the'policy.

We do not think that, consistent with the unmistakable mandate of the statute and with the cases prohibiting consideration of artificial or technical devices of conveyancing, this is a permissible result. Helvering v. Hallock, 309 U. S. 106. By a transfer of her property to the insurance company decedent obtained its agreement to return a roughly equivalent value in two interrelated stipulations. Payments tantamount to the income from the whole fund deposited were to go to her during her life. And upon her death, whenever that occurred, a fixed principal sum was to be paid to decedent’s estate or designees. By parting with the latter while retaining the right to receive the income for her life, petitioner effectively designated those who would succeed to the property upon her death. She did so, perhaps, in a manner so final as to be beyond her power of recall. But -it remains to be decided whether that arrangement for succession, accompanied as it was by retention of benefits during her lifetime, suffices to relieve decedent’s estate of liability for tax upon the value of the principal. We do not think that it does, “even though ownership of the fund vested in the children it once.” Estate of Mary H. Hughes, 44 B. T. A. 1196.

If it were possible for a decedent by means of anticipatory arrangements, however skillfully devised, to sever life interest from remainder and to dispose irrevocably of the latter while retaining the former until her death, the purpose of the amendment to section 302 (c) accomplished by the Revenue Act of 1932, section 803, could be completely stultified. Here the contract with the insurance company was one indivisible transaction. Helvering v. Le Gierse, supra; Helvering v. Tyler, supra. The right to receive the income in the form of annuity payments was inseparable from the arrangements made with respect to disposition of the principal in the form of insurance payments. It was with a part of that indivisible contract — that relating to the remainder payable at her death — with which decedent dealt when she assigned the insurance aspect to the trust. It was with respect to the balance, the life interest, that she acted when she retained for her remaining life the right to receive the annuity payments. Viewing the action taken as a whole, the effect must be that decedent made a transfer — or a series of transfers — of her property “intended to take effect in possession or enjoyment at or after his death” and “under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before bis death (1) the * * * enjoyment of, or the right to the income from, the property.” Commissioner v. Wilder’s Estate (C. C. A., 5th Cir.), 118 Fed. (2d) 281.

The correctness of this view may be supported by reference to one or two examples. Suppose that decedent had transferred to the trust her entire contract with the insurance company and had provided that through the annuities she was to be paid the income until her death and that the remainder, consisting of the payment of the principal sum at her death, was to go to the designated beneficiaries. Can it be doubted that such a trust would come within the express description of the statute? Again, suppose that in Estate of Mary H. Hughes, supra, decedent had transferred to a trust that part of her contract with the insurance company which stipulated for payment of the principal, retaining the right to receive the income payments for her life. Would a different result have been reached there merely because the decedent had created a trustee to stand in the place of the individual remaindermen ? To our mind the result required in the present situation is equally clear. It was accordingly proper for. respondent to include as part of decedent’s taxable estate the principal amount payable by the insurance company upon her death to the trust erected by her for the enjoyment of her beneficiaries.

Petitioner now concedes that an additional insurance policy payable specifically to decedent’s daughter is governed by the principle of Helvering v. Le Gierse, supra. The proceeds of that policy were also properly included without benefit of the statutory exemption.

The final question is whether fees and expenses of a proceeding to account for another trust may be deducted either as a charge against the estate or as an expense of administration. On the former ground, they are precluded since the proceedings followed decedent’s death, and compliance with the requirement that the debt exist at the date of death consequently fails. And they must also be disallowed as an administration expense. Estate of Frederick E. Baldwin, 44 B. T. A. 900.

Decision will be entered under Rule 50.

       Cf. Hassett v. Welch, 303 U. S. 303; May v. Heiner, 281 U. S. 238, with Estate of Mary E. Hughes, 44 B. T. A. 1196.

       Revenue Act of 1932—
      SEC. 803. FUTURE INTERESTS.
      (a) Section 302 (c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows :
      “(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.”

       Sec. 302. [Rev. Act of 1926.] 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—

        *******

      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

       In the Hughes ease, of course, the transfer having occurred prior to 1931, a more difficult question was presented, since the provisions of section 302 (c) had not at tnat time been changed.


source: Caselaw Access Project

author: Murdock :

license: Public Domain

text:
    Estate of George S. Fiske, George P. Davis and Edward F. McClennen, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103684.
    Promulgated September 5, 1941.

      Allison L. EL. Newton, Esq., for the petitioners.

      Martin M. Lore, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner recognizes the reasonableness of the termination charge and its validity as an obligation which had to be paid from the property included in the gross estate. He says it “is just another debt of the decedent, and would be deductible, were it not for the express provision in the Estate Tax Eegulations, Article 33, which specifically provides that trustees’ commissions are not deductible.” The regulation states that trustees’ commissions do not constitute expenses of administration and are not deductible. That regulation applies to commissions of trustees under the will of a decedent who perform some service separate from that of executors or administrators in the usual administration and settlement of an estate. It also applies to commissions of other trustees who perform services long after the death of the decedent. Adriance v. Higgins, 113 Fed. (2d) 1013; Central Hanover Bank Trust Co., Executor, 40 B. T. A. 1210; affd. 118 Fed. (2d) 270; Bretzfelder v. Commissioner, 86 Fed. (2d) 713. But it does not apply to a charge, such as this, which had to be paid to free the trust property and let it pass as a part of the decedent’s estate under the power exercised in his will. Such a charge is a proper charge against the estate, allowed by the laws of Massachusetts, and deductible under section 303 (a) (1) of the Revenue Act of 1926 as amended.

Decision will be entered under Bule 50.


author: Smith:

text:
    Houston Cotton Exchange Building Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103805.
    Promulgated September 5, 1941.

      Charles Dillingham, Esq., for the petitioner.

      Wilford H. Payne, Esq., for the respondent.
   OPINION.

Smith:

The petitioner claims that it is entitled, in computing the surtax on its undistributed profits for the fiscal year ended January 31, 1938', to a credit under section 26 (c) (1) or (2) of the (Revenue Act of 1936, the material provisions of which are as follows:

SEO. 2 6. CREDITS OP CORPORATIONS.
In tlie case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
***#:}:*#
(C) CONTRACTS RESTRICTING PAYMENT OF DIVIDENDS.-
(1) Prohibition on payment of dividends. — An amount equal to the excess of - the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. * * *
(2) Disposition of profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year for the discharge of a debt, irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.

The only written contract of the petitioner now before us which prohibited the payment of dividends or required the setting aside of earnings or profits to discharge a debt during the taxable year was the first mortgage indenture executed on February 1, 1937. Such a contract does not fall within the provisions of section 26 (c) because it was not executed prior to May 1, 1936. However, the petitioner asserts that we should carry forward into the 1937 indenture the provisions of the 1923 indenture and the supplement thereto, to hold that the payment of dividends and the setting aside of earnings were controlled by a written contract executed prior to May 1, 1936. The 1923 first mortgage and supplement and the 1923 second mortgage and supplement do not contain any provision expressly prohibiting the payment of dividends. It is, therefore, clear that no credit is allowable under section 26 (c) (1), even if petitioner should be sustained in its contention that we should carry forward the provisions of the old indentures. Respondent is sustained on this issue.

The petitioner’s second contention is that it is entitled to a credit under section 26 (c) (2) for the reason that it set aside its earnings and profits for the taxable year pursuant to the requirements of a written contract.

To bring itself within the grace of section 26 (c) (2) the taxpayer must prove a written contract, executed prior to May 1, 1936, which requires the payment or the setting aside of earnings to discharge a debt incurred on or before April 30, 1936. We may assume, without deciding the question, that this petitioner’s debt, in existence in the taxable year, was incurred on or before April 30, 1936. Sun Pipe Line Co., 42 B. T. A. 1413. However, the second condition imposed by the statute remains unsatisfied, for the contract here in question was executed after May 1, 1936.

The Board, in the Sun Pipe Line Co. case, supra, was called upon to construe the phrase “indebtedness incurred prior to January 1, 1934” in section 351 (b) (2) (B) of the Bevenue Act of 1936, as amended by section 355 (b) of the Bevenue Act of 1937. After the statutory date the petitioner had refinanced its old bonds by an arrangement substantially similar to that made by the present petitioner on February 1, 1937. The Board there held that the new debt was incurred prior to the statutory date, as it was not new in the economic sense, but merely replaced the old indebtedness. The statute there construed did not contain any reference to the execution date of a contract. It must be remembered that the debt and the contract mentioned in section 26 (c) (2) are two different and independent things, and Congress has set forth a separate date to be used in the treatment of each one. It would be unwarranted for us to disregard the plain meaning of the language used in the statute.

We do not find in either of the second mortgage agreements any provisions expressly dealing with the disposition of earnings and profits and requiring any portion thereof to be paid in discharge of a debt incurred prior to May 1, 1936, or to be set aside for that purpose. The 1934 supplemental second mortgage indenture provides that interest on the bonds shall be payable “if and when earned, under the terms * * * of the First Mortgage Supplemental Agreement.” This is the only clause to which petitioner has directed our attention in any of the second mortgage deeds, and clearly it does not expressly deal with the disposition of earnings and profits. It is not necessary to go into that question, however, because, as we said with respect to the first mortgage contracts, the provisions of the 1923 second mortgage deed, and its supplement, can not be carried forward into the 1937 second mortgage deed. Furthermore, no part of petitioner’s earnings were set aside in 1938 to pay principal on the second mortgage bonds.

We hold that in the taxable year the petitioner was not required by a written contract executed prior to May 1, 1936, to pay or set aside its earnings and profits, or any part thereof, to discharge a debt.

The petitioner has urged that its position is supported by Sutcliffe Co., 41 B. T. A. 1009. We do not agree, for the reason that the Sutcliffe case is distinguishable on its facts. There the original contract continued in effect, and was not discharged by a second contract which was executed after the statutory date and which merely modified the original contract. Haskelite Manufacturing Corporation, 44 B. T. A. 636, also involved a contract which, although executed after the statutory date, merely modified the original contract, which continued in full effect so that its restrictive provisions controlled rather than the provisions of the new contract.

Decision will be entered for the respondent.


author: Aknold :

text:
    Estate of Irwin A. Smith, Deceased, Lillian D. Curtis, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102271.
    Promulgated September 11, 1941.

      Allen G. Fletcher, Esq., for the petitioner.

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

Aknold :

Petitioner contends that at the time of decedent’s death, decedent and his wife each owned a one-half interest in the contract whereby they were to receive in installments the agreed purchase price for the royalty sold and that but one-half of the value of the contract at the time of decedent’s death should be included in gross estate.

Eespondent contends that the contract was held by decedent and his wife as joint tenants, or as tenants by the entirety, or that in any event the rights of decedent and his wife to receive the installment payments were acquired by them on the understanding and agreement that upon the death of either the legal interest of the deceased spouse in and to the right to receive such payments should pass to the survivor and that the entire value is includible in decedent’s gross estate under section 302 (a), (e) of the-Eevenue Act of 1926, as amended by section 404 of the Eevenue Act of 1934, the pertinent portions of which are set forth in the footnote.

Petitioner cites and relies upon Merry M. Dennis, Executrix, 26 B. T. A. 1120, as controlling. There the decedent and his wife sold certain New York real estate owned by them by the entirety and accepted in payment thereof purchase money, bonds, and mortgages made to “Frank H. Dennis and 'Merry M. Dennis, his wife.” The unpaid balance was included in the decedent’s gross estate. Decedent provided the funds for the purchase of the real estate. We there said:

* * * Upon tlie sale of the real estate held by the decedent and his wife as tenants by the entirety and the acceptance of parchase money mortgages and bonds made payable to both, the estate by the entirety ended (see In re Thompson, 142 N. Y. S. 1064), and since there is no estate by the entireties in personal property under New York law (see In re Baum, 106 N. Y. S. 113), and there was no express declaration that the decedent and his wife held the mortgages as joint tenants, the bonds and mortgages made payable to “Frank H. Dennis and Merry M. Dennis, his wife,” were held in common, and each had a similar share of ownership therein. * * *

See also Ada M. Slocum, Executrix, 21 B. T. A. 169, which involved a similar question arising under the laws of Michigan.

Joint tenancies have been abolished in the State of Oregon, sec. 63-207, Oregon Code, 1930, except as to trustees and executors, sec. 63-209. In Stout v. Van Zante, 109 Or. 430; 219 Pac. 804; on rehearing, 220 Pac. 414, the Supreme Court of Oregon held that, in the absence of a contract, joint tenancies are abolished not only in real property, but also in personal property. Subsequent decisions of the Supreme Court of Oregon adhere to the general rule without discussing the effect of the contract exception. Webb v. Woodcock, 134 Or. 319, 329; 290 Pac. 751, 757; Nunner v. Erickson, 151 Or. 575; 51 Pac. (2d) 839, 855; Holman v. Mays, 154 Or. 241, 249; 59 Pac. (2d) 392, 395; In re Edwards Estate, 140 Or. 431, 439; 14 Pac. (2d) 274.

Respondent cites, as the leading Oregon case on the subject, Stout v. Van Zante, supra, and relies upon the exception to the general rule therein set forth. He does not question that the contract constitutes personal property or that the Oregon law governs, but he asserts that the following facts and circumstances establish the existence of a contract and bring this case within the exception to the general rule there announced: That the royalty interest was held by decedent and his wife prior to the sale “as joint tenants with the right of survivorship”; that the purchase money installments were payable to them jointly by the terms of the contract of sale; that decedent provided the funds for the purchase of the royalty and no part thereof was ever the separate property of the wife; and that the installments received were deposited in their joint bank account, all of which he contends manifested an intention or understanding and agreement between decedent and his wife that upon the death of either the legal interest of the deceased spouse and the right to receive such payments should pass to the survivor. In that case the court held a tenancy by the entirety ended upon conveyance by the husband and wife; that purchase money obligations secured by mortgages on the land sold, payable to husband and wife jointly, in the absence of an agreement to the contrary, which was found not to exist in that case, created in them a tenancy in common and not a joint tenancy with the right of survivorship.

In Webb v. Woodcock, supra, the husband and wife, owners of real property by the entirety, sold it and took in return purchase money obligations payable to the husband and wife “or the survivor” and to the .husband and wife “as joint tenants with the right of sur-vivorship.” The court held, notwithstanding the language used in the purchase money obligations and notwithstanding the interest thereby indicated, that the husband and wife were tenants in common and each entitled to a one-half interest therein.

In Nunner v. Erickson, supra, the court said, at page 855:

The note, of course, was personal property. This state does not recognize joint ownership of personal property. Section 63-207, Oregon Code 1930; Stout v. Van Zante, 109 Or. 430, 219 P. 804, 220 P. 414. Although the farm was owned by the father and mother as an estate by the entireties, the note taken from the defendants in consideration thereof did not become their property by the entireties, because this state recognizes no such ownership of personal property. Upon the death of Joseph Erickson, his estate, therefore, became the owner of a one-half interest in the note, and his widow, Cora, became the owner of the other half. Stout v. Van Zante, supra.

In Holman v. Mays, supra, tbe court said: “It is quite well settled in the state of Oregon that under the law of this state an estate by the entirety in personal property cannot be created.”

By the contract the purchaser was to pay the purchase price in installments to the sellers, and it is silent as to any survivorship rights of the sellers therein or the proceeds therefrom. There was no agreement between the sellers as to the right of survivorship and none existed. The facts and circumstances here do not warrant a conclusion that a joint tenancy existed in the contract, or that the sellers had any right of survivorship therein, if such right could be created under the Oregon law. We are, therefore, of the opinion and hold that the decedent and his wife were tenants in common, that each owned an undivided one-half interest in the contract and the proceeds thereunder, and that only one-half the value thereof, or $34,442.94 should be included in decedent’s gross estate.

Adjustment under the issue decided and the issue waived by petitioner will be taken care of under Bule 50.

Decision will be entered u/nder Rule 50.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the united States—
      (a) To the extent of the interest therein of the decedent at the time of his death; *******
      (e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, * * * except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s worth: * * *


author: Leech :

text:
    Thomas H. Thatcher and Odille Fusz Thatcher, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103835.
    Promulgated September 12, 1941.

      J. /Spencer Wotting, Esq., for the petitioners.

      Felix Atwood, Esq., for the respondent.
   OPINION.

Leech :

There appears to be no question but that the St. Ferdinand sewer district was a so-called special benefit district. It was incorporated for the purpose of constructing and operating facilities for the benefit, only, of the lands within its boundaries. The assessments made were only upon those lands and not upon the general public. That the preliminary expense, to defray the cost of which the assessment here in question was made, was a necessary part of the cost can not, we think, be disputed.

In fact petitioners agree that, had the construction project gone through, the preliminary expense would necessarily represent a part of its cost and the payment of any assessment made against the property to defray its cost would not be deductible in view of section 23 (c) (4) of the Revenue Act of 1936. However it is contended by them that the project was abandoned and the law repealed; that the assessment was not against benefits, but merely against petitioner’s property, on a footage basis, without regard to benefits, and that it was merely to secure funds to pay for expenditures which had proved a total loss and could in no way tend to increase values.

We agree with petitioner. Section 23 of the Revenue Act of 1936 permits the deduction of taxes paid or accrued except:

(e) (4) taxes assessed against local benefits of a kind tending to increase tbe value of tbe property assessed; but tbis paragraph shall not exclude tbe allowance as a deduction of so much of such taxes as is properly allocable to maintenance or interest charges.

It is clear that by this exception Congress intended to preclude the deduction of a tax or assessment, the payment of which was in the nature of a capital expenditure because reflected by a corresponding increase in the value of the property. It is further clear that if the assessment is, in fact, against local benefits, a landowner, in an endeavor to secure a deduction from gross income of his individual assessment under section 23, supra, may not be permitted to raise the question that no actual benefit has in fact accrued to his property. Belfast Investment Co., 17 B. T. A. 213; F. A. Smith, 11 B. T. A. 301. The reasons for this rule are manifest.’ The competent taxing authority has determined a benefit as existing and has made the assessment against it. This determination must be held final as to the individual. The proper administration of income tax collection could not permit the delay in collection of the tax in numberless cases to await the result of a determination in each case of the question as to whether the individual taxpayer’s property had in fact been benefited. In other words, the benefit to the property of the taxing district having been determined and the assessment having been against that benefit, the exception provided by paragraph (c) (4) of section 23, supra, must apply because such benefits were “of a kind tending to increase the value of the property assessed.”

In the instant case the facts and conditions basing the application of the above rule are not present. Here it can not be said that the assessment is against a benefit when none has either been determined or is contemplated from the expenditure of the funds to be collected. Here the state had repealed the legislative authority to construct the facilities which would cause the benefit. In the repealing act it is provided that “the effect of this repeal as to each and every such district shall be the same as if the circuit court had, under the provisions of Section 11062, Revised Statutes of Missouri, 1929, found that the estimated costs of works and improvements exceed the estimated benefits ; * * In effect this enactment is a legislative determination that there were no benefits. And it is under the provisions of this repealing act that this assessment has been levied, not to acquire a benefit, nor to meet expenditures which can by any possibility increase the value of the property assessed, but has been levied merely to pay the cost of a mistake in judgment.

Respondent argues that the preliminary expenditures for the cost of which the assessment was made were in large measure for engineering services and that the plans and maps resulting from this work have a value for future use and constitute a benefit, but the record contradicts this conclusion.

We do not agree with respondent’s contention that the mere fact of the determination that the construction of a sewage system in the district was not feasible or too costly is a benefit. It may be a benefit to the present owner personally, in the sense that it will deter him from ever taking part in such a project again, but we can conceive of no reason for an increase in the value of the land by reason of a determination that it is not subject to sewage development except at a prohibitive cost. The natural effect of this, we think, is to decrease values.

Respondent calls attention to the decision of the Missouri Supreme Court in State v. Wellston Sewer District of St. Louis County, 58 S. W. (2d) 988, where the court, in holding that taxes assessed, as here, under section 11037, supra, by authority of the repealing act, were not in violation of sections 3 and 10 of Article 10 of the Constitution, because not general but special taxes, referred'to them as in the nature of benefit assessments. In this it is overlooked that there the question was whether the tax was general or special in its nature and the language used is merely to distinguish it from a general tax. There is no question in our minds that the assessment in question was special in character, but to deny its deduction here we must go further and find it to be one assessed against special benefits of a kind tending to increase the value of the property assessed.

The assessment in question, not having been made to provide a local benefit, much less a benefit “of a hind tending to increase the value of the property assessed”, its deduction is allowable under section 23 (c) of the Revenue Act of 1936.

As other adjustments made in determining the deficiency are not in issue,

Decision will be entered under Rule SO.


author: Tukner :

text:
    Winifred Wheeler McIntyre, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert T. Wheeler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 103221, 103222.
    Promulgated September 12, 1941.

      Egbert Robertson, Esq., for the petitioners.

      Leonard A. Spalding, Jr., Esq., for the respondent.
   OPINION.

Tukner :

The question presented is whether the payments received by the petitioners under the insurance contracts in question are to be excluded from their income under section 22 (b) (1) of the Revenue Act of 1936, which provides as follows:

(b) Exclusions from Gross Income. — Tbe following items shall not be included in gross income and shall be exempt from taxation under this title:
(1) Life insurance. — Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon the interest payments shall be included in gross income).

In making his determination the respondent relied on article 22 (b) (1)-1 of Regulations 94, which constitutes his interpretation of the above statutory provision and provides in part as follows:

* * * The amount exempted is the amount payable had the insured or the beneficiary not elected to exercise an option to receive the proceeds of the policy or any part thereof at a later date or dates. If the policy provides no option for payment upon the death of the insured, or provides only for payments in installments, there is exempted only the amount which the insurance company would have paid immediately after the death of the insured had the policy not provided for payment at a later date or dates. Any increment thereto is taxable. In any mode of settlement the portion of each distribution which is to be so included in gross income shall be determined as follows:
*#£*** *
(b) Proceeds payable in installments for a fixed, number of years. — If the proceeds are payable in installments for a fixed number of years, the amount that would have been payable by the insurance company immediately upon the death of the insured (if payment at a later date had not been provided for) is to he divided by the total number of installments payable over the fixed number of years for which payment is to be made, and the quotient represents the portion of each installment to be excluded from gross income. The amount of each installment in excess of such excluded portion is to be included in gross income. * * *
(c) Proceeds payable in installments daring the life of the beneficiary. — If the proceeds are payable in installments during the life of the beneficiary the amount of each installment that is to be included in gross income will be determined as in paragraph (b) of this article, except that the number of years to be used in the specified computation will be determined by the life expectancy of the beneficiary, as calculated by the table of mortality used by the particular insurance company in determining the amount of the annuity.
(d) Proceeds payable for a fixed number of years and for continued life. — If the proceeds are payable in installments for a fixed number of years and for continued life, the amount of each installment that is to be included in gross income will be determined either as provided in paragraph (b) of this article if the fixed number of years for which payment is to be made exceeds the life expectancy of the beneficiary, as calculated by the table of mortality used by the particular insurance company in determining the amount of the annuity; or, as provided in paragraph (c) of this article if such life expectancy exceeds the specified fixed period.
If a mode of settlement has been in effect prior to the first taxable year which begins after December 81, 1933 (or after December 31, 1935, in the case of a mode of settlement described in paragraph (d) of this article), the entire amount received and excluded from gross income in such prior years shall be deducted from the proceeds payable upon the death of the insured; the remainder shall be divided by the number of installments unpaid at the beginning of such taxable year (whether over the remaining portion of the fixed period or over the life expectancy as of that date, depending on the mode of settlement adopted) ; and that quotient shall be the excludible-portion of each installment. As soon as the aggregate of the amounts received and excluded from gross income under the methods of computation provided for in this article equals the amount of the proceeds payable upon the death of the insured, the entire amount received thereafter in each taxable year must be included in gross income.

The respondent, apparently applying that regulation to the instant facts, held that, of the payments received by the petitioners under the two policies, $793.64 was taxable to each of them as interest. That figure was arrived at by deducting from $41,885.92 (total installments received by Eustaeia C. Wheeler during her lifetime) the amount of $674.82 on which tax was paid by her executor, and, by subtracting the remainder, $41,211.10, from the lump sum face value of the policies ($50,000), leaving $8,788.90 as the net amount of the remaining installments to be received free from tax; then, by subtracting that amount from the aggregate of the commuted value payments received by the two petitioners ($10,376.18), he arrived at $1,587.28 which was to be treated as taxable interest, one-half to each petitioner, or $793.64.

The petitioners contend that the payments in question were amounts received under life insurance contracts paid by reason of the death of the insured and are to be excluded from their gross income under the first part of section 22 (b) (1), supra; that the respondent’s regulation as applied here has been held by this Board and the courts in substantially similar cases to be in conflict with the revenue act and invalid, Sidney W. Winslow, Jr., 39 B. T. A. 373; affd., 113 Fed. (2d) 418; and Commissioner v. Bartlett, 113 Fed. (2d) 766; and, further, that the respondent’s interpretation of the statutory provision, as set forth in his regulations and as applied here, would render the act violative of the Fifth Amendment to the Constitution, since it would deprive the taxpayers of property without due process of law in that it would impose upon them, a tax based upon income received by another, namely, their grandmother, Eustacia C. Wheeler.

Under the cases cited, the contentions of the petitioners must be sustained. Furthermore, except for certain of the items in the Bartlett case, it is our opinion that the petitioners here are in an even stronger position. In those cases the petitioners’ position was comparable to that of Eustacia C. Wheeler in the instant case, and the respondent argued in those cases that, since the insurance company withheld a portion of the proceeds of insurance and made use of it during the period in which installment payments were being made, a portion of such payments constituted interest for the use of the proceeds withheld. That argument was rejected. Here his argument is even less tenable, because the petitioners were not entitled to any payments whatever until the death of Eustacia C. Wheeler, and, if she had lived long enough to receive installments for ten years certain, they would not have received anything. Upon her death the remaining payments certain were commuted and paid to them in a lump sum in complete settlement of the obligation. Since it is apparent that no payments were withheld from these petitioners, we think the respondent’s contention here is even less meritorious than it was in the cases cited. Even if it be conceded that a portion of the installment payments of this character represented interest, which is contrary to the cases cited, it would seem to us that such interest was eliminated therefrom in the instant case by the very act of commutation. In fact, the respondent’s regulation in question does not seem to make provision for the precise factual situation existing in the instant case, and the commutation which was supposed to have been made thereunder appears to be a further extension of the rule there enunciated, which, in our opinion, is unwarranted.

We hold that the payments in question received by the petitioners under the life insurance contracts are to be excluded from their income under section 22 (b) (1), supra.

Decisions will he entered u/nder Buie 50.


author: Mellott :

text:
    Samuel Poorman, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102994.
    Promulgated September 12, 1941.

      Samuel Poorman, Jr., Esq., pro se.

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

Mellott :

Petitioner, in support of his contention that the $8,394.92 was a gift, relies principally upon Bogardus v. Commissioner, 302 U. S. 34. In that case, the taxpayer, prior to 1931, had been in the employ of the Universal Oil Products Co., the business and assets of which had greatly increased between 1922 and 1930. Early in 1931, its entire stock was sold to the United Gasoline Corporation for $25,000,000. Prior to the sale, and in contemplation of it, the Unopco Corporation had been organized for the purpose of acquiring, and it did acquire, certain assets of the Universal Co. of the value of over $4,000,000. All of the former stockholders of the latter company became stockholders of Unopco, with the same proportionate holdings. None of them, after the sale of the Universal stock, held any stock in the Universal Co., or in the United Gasoline Corporation. Under its new ownership, the Universal Co. continued to carry on the same business, retaining a large part of its assets. A few days after the sale of the Universal Co.’s stock, the former stockholders, then stockholders of the Unopco Co., held a meeting at which it was proposed that they show their appreciation of the loyalty and support of some of the employees of the Universal Co. by making them a “gift or honorarium.” At meetings of the board of directors and stockholders of Unopco resolutions were adopted that $607,500 be appropriated, paid, and distributed as a bonus to 64 former and present employees of the Universal Co., in recognition of their valuable and loyal services. Bogardus continued to remain in the employ of the Universal Co. after the change of the ownership of its stock, and when the distribution was made by Unopco in 1931 he received $10,000. The-Supreme Court held that this payment was a gift and not additional compensation.

There are several differences between the facts in the Bogardus case and those presently before us. “The recipients of the bounty * * * were never employees of the Unopco Company, or any of its stockholders.” Petitioner and the other employees who received the payments from the corporation had been in its employ until the sale of the properties to the city. “Neither the Universal Company nor any one else was under any obligation, legal or otherwise, to pay any of the recipients, including petitioner, any salary, compensation, or consideration of any kind.” The Los Angeles Gas & Electric Corporation, however, was at least under a moral obligation to the employees whose services were being terminated through no fault of theirs. It had agreed with them “to provide and administer, at its own expense, the death and disability benefits” and to pay a portion of the net cost of securing a “retirement income.” Though the record does not disclose the exact amount which the company had contributed and which “once made, * * * [was to] be used for employees’ benefits and for no other purpose”, it must have been a considerable amount. Petitioner’s rights, for example, seem to have been to receive “retirement income” of at least $76 per month, insurance of at least $12,000, and disability benefits of $360 per month for 12 months and $300 per month for an additional 48 months. “It was recognized”, said the vice president of the company and chairman of the benefit committee, “that in accordance with the terms <Jf the pension plan, severance of employment meant sacrifice of pension rights except, I would say not only pension rights, but all rights under the pension benefit plan, with the exception that the life insurance in accordance with the regular provisions always continued for 31 days after termination of service. It was recognized that the employees were losing various rights in leaving the service of the corporation.” For this reason “consideration commenced among the company officials as to what, if anything, could be done for the employees who were transferred to the city with the property * * * in consideration of the fact that they were going to lose their pension rights by termination of service.” “Finally, after much discussion and study of the situation, the plan which was ultimately followed was worked out and a basis of compensation, additional compensation for past services, was formulated which, as stated in the President’s letter, was in consideration of past valuable services and was based upon the present attained age of the employees, their length of service with the company, and the rates of wages which they had received during their period of employment.”

In the Bogardus case the payments were charged “not to expense but to surplus.” In the instant proceeding the payments were charged to expenses in connection with the sale of the properties. Here again the record is not very clear; but inferentially it seems that the charge could properly have been so classified only if it had been necessary for the corporation to make the payments either to fulfill an obligation (even “a moral obligation, however slight”, Bogardus v. Commissioner, supra), or to regain possession of some of the money which had been put up with the understanding it would “be used for employees’ benefits and for no other purpose.” It is also not without significance that the payments in the instant proceeding were designated by the corporation “additional compensation” while those in the Bogardus case were referred to as part of a “gift or honorarium” to the employees. True, calling a payment a gift, bonus, honorarium, additional compensation, or anything else does not change, or establish, its true characteristic; but it is at least a circumstance to be considered in determining the intention of the parties. “Intention” said the Court in the Bogardus case, “must govern.” The Court was referring to the intention of the one making the payment. The Circuit Court of Appeals for the Ninth Circuit indicated in Botchford v. Commissioner, 81 Fed. (2d) 914, that it felt that the intention of the employer was particularly important— a view evidently shared by other Circuit Courts, Fisher v. Commissioner, 59 Fed. (2d) 192; Walker v. Commissioner, 88 Fed. (2d) 61; Levey v. Helvering, 68 Fed. (2d) 401; Bass v. Hawley, 62 Fed. (2d) 721, and also by this Board. Cf. e. g. N. H. Van Sicklen, Jr., 33 B. T. A. 544. Then, too, as the court pointed out in Botchford v. Commissioner, supra, as a general rule directors of a corporation, have no power or authority to give away any of its assets, cf. Noel v. Parrott, 15 Fed. (2d) 669; certiorari denied, 213 U. S. 754; and “if the directors could not give away this sum, and the books of the corporation show that it was not given away, it must be presumed that the payment was not a gift.”

Whether the payment to this petitioner was, or was not, a gift is a mixed question of law and fact. [Respondent determined that it was not a gift. Petitioner, undertaking to overcome the presumption attaching to this determination, Botany Worsted Mills v. United States, 278 U. S. 282, has shown and it has been found as a fact that he, previous to the receipt of the sum in issue, had received all of his agreed salary. He argues that the additional payment not only was not “additional” compensation, but that it could not even be “compensation”, since he had already been compensated in full. In Botchford v. Commissioner, supra, the court quoted with approval the following language used by the Circuit Court of Appeals for the Second Circuit in Fisher v. Commissioner, supra:

The doctrine that bonus payments and gratuitous “additional compensation” for past services may constitute taxable income has been frequently recognized in decisions of the lower Federal courts and of the Board of Tax Appeals.

We do not interpret the Bogardus case as laying down any different principle. Cf. Georgia S. Williams, 36 B. T. A. 974.

Petitioner also contends that, since the corporation saw fit to enter the payment made to him and to the other employees upon its books as an expense item in connection with the sale oí its electric properties, and since the evidence shows that they, and especially he, had nothing to do with making such sale, it follows that the corporation erred in characterizing the payment as additional compensation. There would be more substance to this contention if the respondent were required to prove that the payment was made in consideration of, and as compensation for, services rendered by petitioner in that particular transaction. But he has no such burden. He may rest upon the presumption of correctness attaching to his determination that the payment was not a gift, Botany Worsted Mills v. United States, supra; Reinecke v. Spalding, 280 U. S. 227; and petitioner must prove that this determination was erroneous. He has not sustained his burden merely by proving — if in fact he has proved — that it was improperly treated upon the books of the corporation. In other words, it was incumbent upon petitioner to prove that the corporation was not discharging some obligation to him by making the payment in question. The evidence indicates that the payments were made to compensate the employees for the loss of their rights under the “Uniform Pension and Benefit Plan” or to enable the company to withdraw the funds which had been put up with the insurance company in connection with such plan. This, in our opinion, was sufficient consideration to prevent the payments being absolute gifts. We therefore hold that the respondent committed no error in including the amount received by this petitioner in his gross income.

The only other error charged in the petition is the disallowance by the respondent of a deduction of $18.45. This is not discussed upon brief. The petition alleges that petitioner accidentally broke a pair of eyeglasses with their frame and replaced them during the taxable year at a cost of $18.45; that he had been unable to ascertain either the date of the acquisition of the glasses so broken or their cost; and that according to his best recollection the date of acquisition was within a year or two prior to their replacement, the cost being in excess of $18.45.

At the hearing petitioner admitted he did not have any “very satisfactory proof” that he had sustained a loss through casualty. (Sec. 23 (e) (3), Revenue Act of 1936.) He testified that he had paid $3,of the $18.45 to a doctor for examination of his eyes, $15 for new glasses, and 45 cents as-state tax. This was the sole evidence offered. The claim for the deduction has probably been abandoned; but, if not, this issue must be resolved against petitioner for failure of proof.

Decision will be entered for the respondent.


author: Kern : Smith, Van Fossan, MuRdock,

text:
    The E. B. Elliott Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97330.
    Promulgated September 12, 1941.

      H. A. Mihills, G. P. A., for the petitioner.

      F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Kern :

The first issue for our consideration is whether advance payments on advertising contracts to be performed after the taxable year are income to petitioner in the year of receipt. Petitioner contends that the prepayments represented advances for the purpose of defraying initial costs of erection of structures and were income only in the year petitioner performed the services for which the advance payments were made. Kespondent argues that petitioner was not restricted in its use of the prepaid amounts and that the payments were income to petitioner in the taxable year.

The contracts under which petitioner received the initial payments did not restrict the use of the prepaid funds by petitioner. Nor did the agreements contain any provision with respect to refund of the payments. The payments were in the nature of advance rentals and were income in the year of receipt. Edwin B. De Golia, 40 B. T A. 845; O'Day Investment Co., 13 B. T. A. 1230; Renwick v. United States, 87 Fed. (2d) 123. Where the initial payments may be used by the taxpayer without restriction, the fact that the taxpayer is on the accrual basis does not prevent the prepayments from being included in gross income in tlie„year of receipt. Commissioner v. Lyon, 97 Fed. (2d) 70. We hold that the initial payments in the sum of $2,570 which were carried on petitioner’s books as of December 31, 1934, as “deferred income” were income to petitioner in the-year 1934.

The second issue concerns the deductibility of the sum of $4,000 paid by petitioner in a compromise settlement of litigation. Petitioner contends that the amount paid is deductible as an ordinary and necessary expense of conducting its business. Respondent asserts that it was made in defense of petitioner’s title to property and should be treated as an addition to the cost basis of the property. Petitioner had bought part of the assets of a bankrupt corporation and the trustee in bankruptcy brought suit against petitioner to invalidate this transfer. Despite a judgment in petitioner’s favor by the U. S. District Court, which was affirmed by the Circuit Court of Appeals, the trustee renewed his attack on what he claimed to be a fraudulent transfer. To protect its credit, it is said, petitioner compromised the suit. But it was also to protect the assets which it had acquired, for its credit could not have been affected save through the questionableness of its title to the assets. Such an expense, as we have recently decided in Morgan Jones Estate, 43 B. T. A. 691, is a capital expense and its deduction from income must, therefore, be disallowed.

The third issue is whether or not petitioner is entitled to a bad debt deduction in the sum of $3,901.52. Petitioner claims the deduction on the ground' that the Red Cross Pharmacy account was uncollectible and was charged off on petitioner’s books during the taxable year. Respondent urges that a deduction for a bad debt is not allowable, since the account was not ascertained to be worthless in the taxable year.

Section 23 (k) of the Revenue Act of 1934 provides that deductible bad debts are “debts ascertained to be worthless and charged off within the taxable year.” Here, the account was charged off in the taxable year. In order to obtain the deduction, however, petitioner must show that the debt was reasonably ascertained to be worthless during the taxable year. Higginbotham-Bailey-Logan Co., 8 B. T. A. 566. Petitioner has not sustained the burden of proof on this point. While petitioner may have had reasons sufficient to it for not pressing legal action on the account, this fact does not demonstrate worthlessness and there can be little doubt that the account had considerable value. The evidence does not show that the debtor was insolvent or that the account could not have been collected if adequately pressed. We find no error in respondent’s denial of the deduction in the taxable year.

The final question before us is whether or not that portion allocable to 1934 of the refund made in 1939 by the Florida Power & Light Co. to petitioner by court order sustaining the city of Miami’s lower rate was income to petitioner in the year 1934. Petitioner had in 1934 claimed and been allowed as a deduction the full amount paid by it to the Light Co. It now claims that its gross income for that year should be increased by the amount of the refund allocable to that year, in correction of what now appears to have been an excessive deduction. Anything unusual in the taxpayer’s request to have its taxes increased for the taxable year 1934 is explained, obviously, by a desire not to have the entire sum refunded in 1939 treated as gross income received in that year. Petitioner relies on Elsie S. Eckstein, 41 B. T. A. 746, 751.

Strictly taken, our decision in that case is not authority, for the issue there was conceded by the taxpayer; but our reasoning does support the theory now relied on by petitioner. There the taxpayer had accrued and deducted certain state property taxes in 1932, but actually paid a lesser amount in 1934. Her contention was that the difference should be adjusted as of the earlier year and not treated as income in 1934. We pointed out that, where the earlier years were not open to adjustment by reason of the statute of limitations, so much of the refund as represented the excess over the accrued and deducted tax was “to be treated as taxable income in the year in which the refund is made.” The taxpayer, now taking a different tack, also assigned as error the disallowance in 1934 of the excess of taxes accrued and deducted in that year over the amount actually paid in 1935 and 1936. In other words, the taxpayer objected to the correction made by the Commissioner, where correction was possible under the statute of limitations. The taxpayer on brief conceded the correctness of the Commissioner’s action in this regard, but raised the question apparently to show inconsistency in the Commissioner’s method. Our opinion set forth the complete answer to this, for had the result of the taxpayer’s successful negotiations with the state tax authorities for a-reduction of her taxes transpired before the Federal statute of limitations had run, the Commissioner would have completely adjusted the 1932 taxes, as he had already done in part in 1934 on the basis of the facts then known to him. But her concealment of these facts allowed the statute to run, and the Commissioner had no recourse but to treat the refund as income in the year it was received. We said in that opinion that “we have consistently held that where in a given year a taxpayer takes a deduction which, prior to the final determination of his income tax liability for such year, is ascertained to be excessive, only the correct amount will be allowed in the final determination of his income tax liability.”

We are of the opinion that the rule thus stated in Eckstein’s case is that which the Board has consistently applied, with the exception of a few distinguishable cases and obiter dicta,. While that case and most of the cases thereafter discussed involve refunds of taxes previously deducted, the equitable principle which lies at the root of the rule is equally applicable to the. facts of the instant proceeding. We might have laid it down as a basic principle in the beginning that, when the taxpayer on the accrual basis has accrued a valid tax, he shall be entitled to the deduction in that year and any refund shall be treated as income in the year of receipt. That is the respondent’s contention here. He points out that the rates charged petitioner by the power company were an absolute obligation of petitioner when laid, and that petitioner was not even itself contestiag their validity. The conditions for accruing the obligation, it is said, were present, Helvering v. Russian Finance & Construction Corporation, 77 Fed. (2d) 324; and the mere contingency of the obligation’s later modification by a decision favorable to the city in its pending suit against the company should not postpone until that year final determination, by relation back to prior years, of the amount of deductions to be allowed in those years, North American Oil Consolidated v. Burnet, 286 U. S. 417. Each annual accounting period should constitute a closed transaction and refunds, or repayment of prior losses, Burnet v. Sanford & Brooks Co., 282 U. S. 359; which are made in later years should lie where they fall.

Much might be said for such a doctrine, but it is too late to advance it now. We have too long followed a different principle. As early as Inland Products Co., 10 B. T. A. 235 (1928); affd., 31 Fed. (2d) 867; the taxpayer raised the plea that a tax paid under mistake of law, having been paid voluntarily, was not recoverable in an action at law, and, therefore, was deductible in full in the earlier year, although re-fun ded in a later year. We held otherwise, saying that, the money having been refunded prior to a final determination of tax liability for the earlier year, it should not be allowed as a deduction in that year, and sustained the deficiency (arising from the excess deduction) for the year of payment. A little later in the same year we took the same view in Philip C. Brown, 10 B. T. A. 1122, and there held that a state inheritance tax paid by the taxpayer in 1922, which was later held unconstitutional and refunded before the proceeding for that year was brought before the Board, could not be deducted in the year when payment was made. In 1929, in Lehigh Valley Coal Sales Co., 15 B. T. A. 1401, we reached the same conclusion on similar facts against the Commissioner’s contention that the unconstitutional tax was income in the year of refund. We pointed out that “amended returns or additional assessments were available to correct the error” of the prior year. Likewise, in Mary W. Leach, 16 B. T. A. 781; affd., 50 Fed. (2d) 371, we held that a deduction of estate tax in 1922 which was later refunded in part should be adjusted as to the excess in 1922, the taxpayer being on the cash basis.

It will be observed that all of these cases support petitioner’s contention here, since in all we required readjustment of a later refunded deduction in the year in which it was taken. It should be noted that in none of them did the statute of limitations bar such a recomputation of the tax after the transaction was closed.

The validity of the rule laid down in these cases has been recognized either inferentially or explicitly in many of our more recent opinions, the majority of them involving deductions of taxes paid under unconstitutional statutes. Thus, in Charles F. Fawsett, 30 B. T. A. 908, we distinguished that case from the cases of Philip C. Brown, supra, and Inland Products Co., supra, because in those cases “the amounts illegally exacted were refunded to the taxpayers, and it was held that, having been made whole, they were not in a position to claim deductions,” whereas in Fawsetfs case “the same statute which imposed the levy prevents a recovery by reason of the limitation period it prescribes.” In Dixie Margarine Co., 38 B. T. A. 471, reversed on another point, 115 Fed. (2d) 445, we said: “In E. L. Bruce Co., 19 B. T. A. 777, and Charles F. Fawsett, 30 B. T. A. 908, we held that amounts paid as taxes under unconstitutional and void state statutes, where such amounts have not been later refunded amd refunds were barred by limitations or otherwise, were allowable deductions * * (Emphasis ours.) We also said: “Such amounts have been held not to constitute allowable deductions from gross income for the year in which paid only in those cases where refund was received prior to the final determination of the tax liability for the year in which the refund payment was made,” and cited as authority Inland Products Co., supra, and Mary W. Leach, supra. In Estate of David Davies, 42 B. T. A. 965, we said : “We have held that where taxes imposed by a statute later declared unconstitutional are paid by a taxpayer * * * and such taxes have not been refunded prior to a final determination of the tax liability for the year in which such payments were made, then * * * the taxpayer is entitled to a deduction * * * in the year of payment * * (Emphasis ours.) See also Suffolk Co., Ltd., 42 B. T. A. 994, 995.

In Eckert Packing Co., 42 B. T. A. 1000, we held that “A taxpayer is not entitled to deduct the amount of tax paid in a given year if, prior to the final determination of his tax liability for such year, the amount paid is refunded or recovered” and cited, inter alia, the cases of Leach v. Commissioner, supra; Inland Products Co. v. Commissioner, supra; Philip C. Brown, supra; and Lehigh Valley Co., supra. In that opinion we quote with approval the rule laid down in Elsie S. Eckstein, supra, which we have already set out, and also quoted with approval from an opinion of the Court of Claims in Bohemian Breweries, Inc. v. United States, 27 Fed. Supp. 588, as follows:

* * * So long as a ease involving the audit and determination of the correct tax liability of a taxpayer is open and under consideration by the Commissioner of Internal Revenue, it is his duty correctly to determine the income of the taxpayer and deductions to which the taxpayer is entitled. Lewis v. Reynolds, 284 U. S. 281; Illinois Terminal Co. v. United States, 73 C. Cls. 263, 53 F. (2d) 904. * * * This conclusion that plaintiff cannot recover because of the exclusion of these deductions is not inconsistent with the rule that an amount deducted and allowed from income in a certain year must be included in income when collected or recovered in a subsequent year when the correction of the return and the tax liability in a prior year is barred by the statute of limitations. * * * Wherever it is possible to do so, the taxing statutes require that the items of income subject to tax and the deductions to which the taxpayer is legally entitled for the years unde¡r consideration be correctly and legally determined by the Commissioner in his final decision, notwithstanding such decision may be made several years after the returns for the particular years involved were filed. Lewis v. Reynolds, supra. * * *' [Italics supplied.]

Four cases which are apparently contrary to the established rule are, in reality, distinguishable on their facts. In Houbigant, Inc., 31 B. T. A. 954; affd., 80 Fed. (2d) 1012, there was a refund of custom duties which we treated as income in the year of receipt, but we pointed out in our opinion that the statute of limitations had run for the years in which the duties were paid, and, therefore, any readjustment of the deductions in those years would have been impossible. In Victoria Paper Mills Co., 32 B. T. A. 666; affd., 83 Fed. (2d) 1022, we held that court judgments (which were entered in 1931 and assigned to a bank and credited to a taxpayer) of refunds of city property taxes paid in 1922 to 1930, inclusive, should be treated as income in 1931. Although the matter was not referred to in the opinion, it was evident that the statute of limitations barred adjustment in most of the years of payment. In M & N Cigar Manufacturers, Inc., 42 B. T. A. 1091, the facts showed that the refund in question was made pursuant to a compromise settlement and was in a lump sum considerably less.than the amount of taxes paid, and could not be allocated to the various years involved. In Estate of William H. Block, 39 B. T. A. 338, we specifically pointed out that it was too late to make any adjustment by reducing the deductions for the prior years. That being true, the result reached in that case was inevitable and refunds were taxable to the taxpayer in the year received by him.

We think it is clear that, despite some apparent departures from it, the rule to be drawn from our decisions is that all refunds of paid taxes are to be adjusted to the years in which the taxes were paid and deductions claimed, as the best method to reflect income; the only proper departure from the rule of adjustment of the refund in the years of payment is where the statute of limitations or some other consideration has made it impossible. In such cases it is obviously inequitable to allow the taxpayer the unjust enrichment which would result and the refund must- then be treated as income in the year of receipt. See Block's Estate, supra.

We are of the opinion that the rates exacted by the public utility company here were provisionally valid obligations, just as they would have been if enforced under a statute properly enacted but later held unconstitutional, and as such they justified the deduction of the amounts accrued and paid under them in the prior years. To the extent that these deductions may be adjusted in the light of our present knowledge of the invalidity of the rates and the consequent refund, this should be done; but where the statute of limitations sets up a bar to such correction, the refund for those years must be treated as income when received.

A concluding word will dispose of Commissioner v. Central United National Bank, 99 Fed. (2d) 568, affirming 33 B. T. A. 588, which we erroneously thought in M & N Cigar Manufacturers, Inc., supra, to support the view that any refund of an amount previously paid and claimed as a deduction constitutes income in the year of the refund regardless of whether the statute of limitations may bar readjustment of the tax for the year in which the deduction has been claimed. Examination of the peculiar facts of that case will show that it stands for no such doctrine. There a taxpayer enjoined the collection of personal property taxes by a county treasurer and decision on its case was deferred until decision of a parallel case. That decision proved favorable to the taxpayer, but appeal was taken by the county tax authority. Before that case was finally decided, however, the taxpayer in the principal case reached a compromise with the county treasurer which was made the basis of the court’s decree in another suit by the same taxpayer and of the same nature, under which the taxpayer in 1932 paid for taxes for the years 1928, 1929, and 1930 amounts considerably less than those originally claimed by the county and taken as deductions from Federal income in the taxpayer’s return to the Commissioner. The Circuit Court reversed the District Court in the parallel case, and thereupon the principal taxpayer reported as income in 1932 the amount it had saved by the compromise, or put otherwise, the difference between the deductions allowed it in prior years and the sum actually paid in 1932. The Commissioner contended, however, that its income for 1929 and 1930 should be adjusted. We overruled him and the Circuit Court affirmed.

The rationale of the Circuit Court’s opinion is that the deductions for prior years were closed because “all the events which rendered respondent [taxpayer] liable for the full amount of the taxes claimed had occurred”, citing United States v. Anderson, 269 U. S. 422. The court points out that the taxes were valid obligations and distinguishes the decisions of three other circuits on the ground that in those cases the tax was erroneously assessed and the deduction could not therefore be legally taken. Inland Products v. Blair, 31 Fed. (2d) 867; Leach v. Commissioner, 50 Fed. (2d) 371; Bergan v. Commissioner, 80 Fed. (2d) 89. This is a valid distinction, with the qualification we have already pointed out that even an unconstitutional statute has a provisional validity for tax purposes until otherwise construed by the Supreme Court, but it certainly does not justify the generalization sometimes drawn from these invalid tax cases that the refund of every valid tax will constitute income in the year of the refund; and it may be doubted whether the court so meant it. It should be noted that the taxpayer had effected a compromise with the local tax officers while litigation was still pending in 1932. In other words, he drove a bargain while the judicial outcome was still in doubt and by this agreement made a saving. The fundamental premise of the bargain was that the validity of the tax was doubtful. In this light the compromise can be regarded only in the light of a new transaction taking place in 1932, which, instead of bearing a definite relation to the validity of the tax and its refund in case of invalidity, put those questions out of consideration altogether. There was no reason for relation back to the original deduction here and the court properly disregarded it; In the circumstances the Circuit Court treated the new transaction, divorced as it was from the original deduction or later possible refunds, as single in itself, and, since it resulted in a gain to the taxpayer in the year in which it was effected, taxed the gain when made.

Obviously, then, Commissioner v. Central United National Bank, supra, is not in conflict with the view which we take of the instant case; and the course of our decisions is clear.

Reviewed by the Board.

Decision will be entered u/nder Rule 60.

Smith,

dissenting: Section 41 of the Revenue Act of 1934 provides:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the ease may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *

The petitioner kept its books of account upon the accrual basis and made its income tax returns in accordance therewith. In connection with such method of reporting, the United States Supreme Court, in United States v. Anderson, 269 U. S. 422, said that the accrual system was incorporated into the law:

* * * to enable taxpayers to keep their books and make their returns according to scientific accounting principles, by charging against income earned during the taxable period, the expenses incurred in and properly attributable to the process of earning income during that period; * * * [Italics supplied.]

It seems to me that, if the accrual method of accounting employed by the taxpayer for 1934 is given effect, the solution of the problem involved in this proceeding is very simple. The first three issues should be decided in favor of the petitioner and the last one against it. The only possible question relates to the second issue, viz., whether the $4,000 paid in 1934 in settlement of litigation is a capital expenditure or a deductible expense.

With respect to the first question, the majority opinion holds that moneys deposited by advertisers under advertising contracts are taxable income of the year in which the deposit is made. Petitioner takes such deposits into income as the contracts are performed. I think this method of reporting is proper under the accrual system.

The second question is whether the petitioner is entitled to deduct from gross income, the $4,000 which it paid in settlement of litigation. The total amount paid, including expenses, was $5,686.13. The respondent allowed the deduction of $1,686.13, but disallowed the balance. I think that the respondent erred in such disallowance.

In my opinion it is unreasonable to consider that the $4,000 was a capital expenditure. The amount was paid for the purpose of freeing the petitioner from the harassment of a suit. In substantially a similar case, International Shoe Co., 38 B. T. A. 81, 95, the Board held that an expenditure of the taxpayer in 1932 of $150,500 to settle embarrassing litigation was a deductible expense. That litigation did not involve title to property. Neither, I think, did this. In my opinion the deduction was proper.

The third question is whether petitioner is entitled to deduct from gross income a debt ascertained to be worthless and charged off during 1934. I think there is no question but that it was ascertained to be worthless in that year and there is no question as to the charge-off. When there was a collection of a portion of the debt in 1935 that amount constituted taxable income of that year.

The fourth question is whether the petitioner’s deduction for an electric light bill for 1934 should be adjusted by reason of a refund received in 1939. In my opinion there can be no question but that the amount charged for 1934 was an accruable item of that year. The refund received in 1939 accrued in 1939 and constituted income of that year. Under the rule of the Supreme Court in Burnet v. Sanford & Brooks Co., 282 U. S. 359, each tax year stands by itself. The tax liability for 1934 was not affected by what happened in 1939.

Van Fossan,

dissenting: I am unable to agree with the holding of the majority on the fourth stated issue.

On the question raised by the fourth issue, I recognize that there has not been entire consistency in the opinions of the Board. I believe, however, that correct principles were announced in Estate of William H. Block, 39 B. T. A. 338; affd., 111 Fed. (2d) 60, where we said:

Income tax liability must be determined for annual periods on tbe basis of facts as they existed in each period. When recovery or some other event which is inconsistent with what has been done in the past occurs, adjustment must be made in reporting income for the year in which the change occurs. No other system would be practical in view of the statute of limitations, the obvious administrative difficulties involved, and the lack of finality in income tax liability which would result. * * *

The majority opinion attempts to distinguish the Block case and the decision in Commissioner v. Central United National Bank, 99 Fed. (2d) 568, affirming 33 B. T. A. 588, but I believe the attempt futile. If correct principles were applied we would deny the request that an allocated portion of the refund be included in petitioner’s gross income for the taxable year. The entire refund Should be included in income in 1939, when it was actually received. The fortuitous circumstance that the year 1934 is still open should not be held to be a controlling fact. A pertinent inquiry would be — assuming that the years subsequent to 1934 are closed, the present record being silent on the point— Is the balance of the refund free of tax, or shall we construct and apply a different rule ?

SteRNhageN and Arnold agree with this dissent.

MuRdock,

dissenting: The petitioner accrued and paid in 1934 the full charge for electric current. It never contested the amount and had no way of knowing in 1934 that any of the amount paid would ever be refunded. The accrual, the deduction claimed, and the allowance thereof for 1934 were all in accordance with proper accounting principles and with the statute. The matter ought to end there. The issue of whether the taxpayer should be required, at its own instance, to pay more tax than the Commissioner seeks to collect, is a false issue and whatever is said in deciding it must necessarily be obiter. The real question which the petitioner wants us to decide is that the refund was not income when it was received in 1939. But- that question can not be decided here.

Furthermore, much that is said on this subject in the majority opinion is wrong. I dissent from the opinion that deductions and income should be permitted to depend upon the wholly unrelated circumstance that the statute of limitations has or has not run. The correct rule, that income tax liability must be determined for annual periods upon the basis of facts as they existed in each such period, is not only inconsistent with the rule favored by the majority, but it has been approved by the highest court and followed many times by the courts and the Board. Burnet v. Sanford & Brooks Co., 282 U. S. 359; North American Oil Consolidated v. Burnet, 286 U. S. 417; Central United National Bank, 33 B. T. A. 588; affd., 99 Fed. (2d) 568; Estate of William H. Block, 39 B. T. A. 338; affd., 111 Fed. (2d) 60; Dougherty’s Sons, Inc. v. Commissioner, 121 Fed. (2d) 700, reversing 42 B. T. A. 892 (a case in which the Board thought the rule required the opposite result). Thus, it is vacuous for the prevailing opinion to say, “Much might be said for such a doctrine, but it is too late to advance it now.” The advance took place some time ago and much has been said for the doctrine already. See, for example, Estate of William H. Block, supra.

The majority recognizes that the statement of any rule in Elsie S. Eckstein, 41 B. T. A. 746, was pure dicta, because the issue had been conceded. But it is wrong to say that the statute of limitations rule has been “consistently applied, with the exception of a few distinguishable cases and obiter dicta.” The Board has not been consistent. Moreover, some of the cases in which the statute of limitations has been mentioned did not depend upon that factor, mentioned it merely in passing, and would have been decided the same way regardless of whether or not the statute had run. See, for example, Estate of William H. Block, supra; Elsie S. Eckstein, supra; Houbigant, Inc., 31 B. T. A. 954, and many of the cases involving taxes later declared unconstitutional. Those cases are reconcilable with the strict annual period rule. So is Inland Products Co., 10 B. T. A. 235; affd., 31 Fed. (2d) 867. Lehigh Valley Coal Sales Co., 15 B. T. A. 1401, involved invested capital and is therefore not in point. However, I would not hope to reconcile all of the cases with my view, but, on the other hand, the prevailing opinion fails to distinguish satisfactorily Victoria Paper Mills Co., 32 B. T. A. 666; affd., 83 Fed. (2d) 1022; M & N Cigar Manufacturers, Inc., 42 B. T. A. 1091; Estate of William H. Block, supra; Central United National Bank, supra; Dougherty’s Sons, Inc. v. Commissioner, supra; Burnet v. Sanford & Brooks Co., supra; and a number of other cases cited in the Houbigant and Block cases. I prefer to adhere to the more practical rule approved and followed in those cases, when the question is next properly raised.

Sternhagen, Black, and Arnold agree with this dissent.

       The refund involved other years besides 1934 and, under this decision, parts may be income, parts may not, depending upon whether or not those years were closed when 1939 is being closed and, perhaps, upon how the Item was adjusted for those years.


text:
    Micajah Pratt Clough, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102138.
    Promulgated September 12, 1941.

      T. G. Riston, Esq., for tbe respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $492.86 in the income tax of the petitioner for 1937. The Roard adopts as its findings of fact the stipulation of the parties.

The petitioner is an individual who filed his return for 1937 in Massachusetts. The Commissioner, in determining the deficiency, increased income by $1,683.21, representing additional income for 1937 from the trust under the will of Harriet K. Clough. The latter, a resident of Massachusetts, died in 1935, possessed of an estate worth more than $1,500,000. Her estate was in process of settlement until December 31, 1936, when the executor closed the estate. The trust under the will was set up immediately out of the entire residue of the estate after the payment of specific bequests amounting to about $87,000. The Commonwealth of Massachusetts imposed an income tax of $8,207.30 upon the income of the estate for the calendar year 1936.' This tax was not due until and was paid by the trustee in 1937. It was deducted in computing the distributable income of the trust. The Commissioner disallowed the deduction. He thus increased the income of the petitioner, who was entitled to one-fourth of the income of the trust. The Commissioner explained that the income tax for 1936 was due from the estate, not the trust, and reduced the corpus rather than the income of the trust.

The petitioner contends that the Massachusetts income tax against the estate on 1936 income was a proper deduction for the trust in computing its 1937 income. Section 23 (c) of the Revenue Act of 1936 allows as a deduction “taxes paid or accrued within the taxable year.” The Commissioner argues that the deduction is allowed only for taxes' imposed upon the person who is claiming the deduction and these taxes were imposed upon the estate, a different “person” from the trust. Regulations 94, art. 23 (c)-l. The Massachusetts income tax was based upon income of 1936 belonging to the estate. A return and payment of the tax were required in 1937. The petitioner fails to mention any statutory provision or any authority to show that the tax on the income of the estate was imposed upon the trustee or that the latter was doing more than paying an obligation of the estate when it made the payment in 1987. The case of Hord v. Commissioner, 95 Fed. (2d) 179, and the case of Estate of John, Edgerly Morrell, 43 B. T. A. 651, are distinguishable because in each the state law made the beneficiary liable for the tax, whereas that is not so here and, furthermore, the beneficiary does not claim the deduction for himself, but only for the crust. The case of Junius Beebe, Trustee, 26 B. T. A. 190; affd., 67 Fed. (2d) 662, is not in point. There a Massachusetts inheritance tax imposed upon a trustee was properly deducted by the trustee under that part of section 23 (c) which allows inheritance tax to be deducted “only by the estate.” Here the trustee paid a tax imposed upon another “person”, a tax which had accrued prior to the creation of the trust and reduced the residue of the estate turned over to the trustee. Roy J. O'Neil et al., Administrators, 31 B. T. A. 727; Herbert G. Perry et al., Executors, 32 B. T. A. 513. Cf. Pyramid Metals Co., 44 B. T. A. 1087. Payment did not reduce the 1937 income of the trust.

Decision will be entered for the respondent.


author: Kern :

text:
    Hilda Kay, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102405.
    Promulgated September 12, 1941.

      Mark Eisner, Esq., for the petitioner.

      F. S. Gettle, Esq., for the respondent.
   OPINION.

Kern :

The first issue to be considered is whether the $28,281.25 received by petitioner during the taxable year is taxable income. Respondent asserts that a contract existed between Kleinschmidt and petitioner, and that any amounts received by reason thereof, whether in performance of the contract, by judgment of court, or by way of settlement, constitute income within the meaning of section 22 (a) of the Revenue Act of 1934. Petitioner, on the other hand, argues that a contract never existed between herself and Kleinschmidt; that Kleinschmidt’s offer was clearly to make a gift, and therefore, any stock or money received by her pursuant to his gratuitous promise was nontaxable. Consequently, our initial inquiry must be whether or not the negotiations between petitioner and Kleinschmidt constituted a contract.

It.is frequently a matter of the greatest difficulty'to clearly ascertain the dividing point between promises creating legal obligations and mere gratuitous agreements. As the courts have often said, each case depends so much on its own peculiar facts and circumstances that it is of little aid in determining later cases with differing facts. The promise or agreement, the relation of the parties, benefits to the promisor, detriment to the promisee, the circumstances surrounding the promise, and the intent of the parties as it may be deduced from all the facts in evidence, play important parts in the inquiry. If it can be ascertained that the sole purpose was to confer a benefit on the promisee merely from affection or generosity, the agreement is clearly gratuitous. But if the purpose is to obtain a quid pro quo, the promise is not gratuitous and becomes in time a legal obligation. Walton Water Co. v. Village of Walton, 238 N. Y. 46; 143 N. E. 786; Nikulnikoff v. Archbishop, 142 Misc. 894; 255 N. Y. S. 653.

Upon an examination of the facts in our instant case, we note that Kleinschmidt did not attempt to induce petitioner to come to Highland Park through any pity for her, nor can we conclude that it was merely affection or generosity which motivated his offer. His wife had just died and he needed someone to fill her place in the running of his household. If she came to Highland Park arid assumed this role, it would clearly be beneficial to Kleinschmidt. The fact that she was gainfully employed in New York, receiving $5,400 a year, and had good chances for advancement meant that she would have to forego this lucrative career if she accepted Kleinschmidt’s offer. This she ultimately determined to do. The intent of the parties is perhaps a trifle difficult to ascertain. Frequently Kleinschmidt spoke of the stock as a gift to petitioner and he even asked petitioner’s assistance in devising a plan to avoid payment of a gift tax. In his letter of January 9, 1933, he said that “there will be no strings to the transaction whatsoever”; and in his letter of January 19, 1933, he said: “So far as I can see we need nothing in writing. I want to give you the shares so that you will have sufficient income to be independent * * But in the January 9 letter he said: “I want to give you this stock * * * so that you will not have the feeling that you are being paid to take care of us.” We interpret this to mean: “Actually you are being paid to take care of us but I don’t want you to be constantly reminded of this fact by receiving monthly amounts from me, or the like.”

In the April 2, 1934, letter, writter when Kleinschmidt had determined that the set-up was not working well, he did not mention the stock at all, although he had never turned it over to petitioner. He merely said: “As regards the financial situation I will give you an amount that will take care of your expencesi [sic] until you can find a position again.” It would seem that Kleinschmidt felt that petitioner’s services did not merit the stock, even though he had told her in an earlier letter that, if for any reason the arrangement did not work out and petitioner decided to go on her own again after a few years, it would be entirely up to her as to whether the shares should be returned to him.

When petitioner verified her complaint in May 1934, she swore that her relationship with Kleinschmidt had been a contractual one and that, pursuant to the agreement between herself and her uncle, he was obligated to turn over the 300 shares of stock to her. Klein-schmidt formally denied that any contractual agreement had ever been entered into, but subsequently, and apparently under advice of counsel, he agreed to and did settle the dispute by payment of 250 shares of stock and $2,000 in cash to petitioner. While petitioner’s position at that time does not estop her now from asserting otherwise, it is strongly indicative of her conception of the purpose, intent, and effect of Kleinschmidt’s promise.

Upon all the facts in the case we are impelled to call the relationship between petitioner and Kleinschmidt a contractual one. Benefit to the promisor was anticipated and detriment to the promisee was inevitable. Under these circumstances it is a fair conclusion that a unilateral contract existed. Williston on Contracts, Rev. Ed. vol. 1, p. 380; Allegheny College v. National Chautauqua Bank, 246 N. Y. 369; 159 N. E. 173. Petitioner had a legal claim against her uncle for services rendered pursuant to this agreement. The fact that the amount petitioner eventually received resulted from a settlement of her suit can not alter the fact that, basically, the payment was a mere substitute for compensation under the agreement. Hort v. Commissioner, 313 U. S. 28. In the Hort case, the Supreme Court said:

That the amount petitioner received resulted from negotiations ending in cancellation of the lease rather than from a suit to enforce it cannot alter the fact that basically the payment was merely a substitute for the rent reserved in the lease.

Applying this theory in the present case, we see that, regardless of whether petitioner had prosecuted her suit to recovery or accepted, as she did, stock and money in settlement, the payment was merely a substitute for the payment provided in the agreement. This being the case, the total amount received is ordinary gross income, and taxable as such.

We can see no merit in petitioner’s contention that there was a symbolic delivery of the stock to her in 1933 by virtue of Klein-schmidt’s payment to her of an amount equal to the amount of the dividends due thereon April 15, 1933. In the first place, this contention is based on the premise that Kleinschmidt had an intention to make a gift of the stock, with which, as we have shown above, we can not agree. In the second place, even if he had an intention to make a gift, there is nothing in the stipulated facts to show that there was an intention to make a present gift rather than a gift in futuro.

The remaining issue concerns the 25 percent penalty provided by section 291 of the Revenue Act of 1934 for failure to file a return. Having determined that the deficiency exists, the penalty is mandatory. Douglas L. Edmonds, Administrator, 31 B. T. A. 962; affd., 90 Fed. (2d) 14; certiorari denied, 302 U. S. 713.

Decision will he entered for the respondent.