author: Aknold :

text:
    Herman M. Rhodes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100553.
    Promulgated February 28, 1941.

      F. E. Hagler, Esq., for the petitioner.

      J. R. /Stivers, Esq., for the respondent.
   OPINION.

Aknold :

The petitioner contends that the declaration of the dividend by the corporation created a debt of the corporation in his favor; that the right to receive such dividend constituted personal property, which he had a legal right to sell and assign, Matchette v. Helvering, 81 Fed. (2d) 73; that his right to receive the declared' dividend was a capital asset within section 117 of the Revenue Act of 1936; and that, by reason of the sale to Patton of his right to receive the dividend and the payment of the dividend to Patton, it was not taxable as such to petitioner, who never received it.

The respondent contends that a transaction entered into with no other purpose than that of tax avoidance is not a legitimate business transaction and should not be recognized, Gregory v. Helvering, 293 U. S. 465, and that the dividend was taxable to petitioner, because he remained the owner of the stock upon which the dividend was declared. Lucas v. Earl, 281 U. S. 111; Corliss v. Bowers, 281 U. S. 376; Burnet v. Leininger, 285 U. S. 136; Saenger v. Commissioner, 69 Fed. (2d) 631; H. Lewis Brown, 40 B. T. A. 565; affd., 115 Fed. (2d) 337.

We agree with the petitioner that his motive in making the assignment and sale is immaterial and that it is not unlawful or unethical for a taxpayer to avoid by legal means some portion of his tax. United States v. Isham, 17 Wall. 496; Marshall v. Commissioner, 57 Fed. (2d) 633; certiorari denied, 287 U. S. 621; Gregory v. Helvering, supra. Nor do we question his right to assign or sell his right to receive the dividend or that such right constituted personal property. Nevertheless, we must approve the action of the respondent in treating the dividend of $12,000 as taxable to him as ordinary income. Helvering v. Horst, 311 U. S. 112, reversing 107 Fed. (2d) 906, which had reversed 39 B. T. A. 757. The reasoning of the Supreme Court in that case is controlling herein. It follows that the exercise of his power to sell or assign his right to receive the declared dividend constituted a realization of income by petitioner taxable to him as ordinary income. See also Fred W. Warner, 5 B. T. A. 963; Alfred Le Blanc, 7 B. T. A. 256; Fremont C. Peck et al., Executors, 31 B. T. A. 87; affd., 77 Fed. (2d) 857; certiorari denied, 296 U. S. 625.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Kahuku Plantation Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. McBryde Sugar Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99916, 101307.
    Promulgated February 28, 1941.

      Montgomery E. Winn, Esq., B. A. Yitouseh, Esq., and Thomas P. Goodbody, Esq., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Smith :

The question presented is the correct interpretation of the respondent’s letter of July 17, 1936, permitting a modification of the crop basis of reporting taxable income. The respondent contends that his letter meant that for 1936 and subsequent years the petitioners were not to deduct from. gross income under the new accounting system any indirect expenses except those which were incurred during the taxable year. The petitioners, on the other hand, contend that the conditions of the letter did not require them to exclude from the deductions of 1936 the indirect expenses incurred and paid in years prior to 1936 in connection with the production of sugar which they had on hand at December 31, 1935.' They were not able to sell that sugar in 1935 by reason of the quota provisions of the Agricultural Adjustment Act.

The argument of the petitioners is that this sugar was not a part of the “crops in process” referred to in the respondent’s letter of July 17, 1936. They point out that this sugar on hand was inventoried in their accounts and in their returns for 1935 not at market, but at cost of production, including indirect expenses properly allocable to the sugar; and contend that in computing profits from the sale of that sugar in 1936 they should use as a basis the same inventory value as was shown by their books of account at December 31,1936.

In this connection it should be noted that the treatment ox the carry-over sugar by the petitioners in 1935 had the effect of leaving the account for such sugar in suspense; in other words, the sugar was inventoried exactly at the cost of production, including the indirect expenses. No gain or loss on the sugar was reflected in the accounting for 1935. The accounting for profit or loss in respect of that sugar was deferred to 1936, the year in which it was sold.

It seems to us clear that the condition upon which the petitioners were permitted to modify their system of accounting and reporting was that for the year 1936 the petitioners should not receive the benefit of the deduction of any of the indirect expenses allocable to the sugar sold in 1936, except, of course, the total indirect expenses incurred in 1936. The pertinent language of the letter of July 17, 1936, bearing upon this point is the proviso that “the taxpayers express their willingness to exclude from deductions for the year of change and subsequent years the indirect charges which have been deferred under the method of allocating such costs to crops in process.” The indirect expenses pertaining to the sugar on hand at December 31, 1935, was in the case of the Kahuku Plantation Co. $23,904.07 and in the case of the McBryde Sugar Co., Ltd., $17,909.49. We think that these indirect expenses must be excluded from the deductions of 1936 as well as the other indirect expenses which had been charged on the books of account to the 1936 and 1937 crops which were charged off to profit and loss in 1936 in compliance with the condition of the permission to change.

The petitioners complain that under this construction of the respondent’s letter they will never be allowed to deduct the indirect expenses pertaining to the carry-over sugar. The respondent admits that this is so but insists that it was a condition of the grant of the permission for the petitioners to change their accounting method.

The petitioners admit that under the condition of the grant they forever lose the right to deduct the indirect expenses which had been incurred and paid in years prior to 1936 which they had charged to the 1936 and 1937 crops, the amounts being $175,616.49 in the case of the Kahuku Plantation Co. and $269,792.28 in the case of the McBryde Sugar Co., Ltd. We can see no good reason why the indirect expenses allocable to the carry-over sugar should not be given the same treatment. It seems to us that a fair interpretation of the respondent’s letter requires such a conclusion.

The respondent’s action upon the point involved is approved.

Decisions will he entered under Rule 50.


author: PIakRon :

text:
    Margaret R. Phipps, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96471.
    Promulgated February 28, 1941.

      Dmid A. Reed, Esq., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

PIakRon :

The main question is whether for gift tax purposes the proper criterion for the valuation of the three policies irrevocably assigned by petitioner as gifts in the taxable year was the cost of duplicating the policies at the date of gift or the cash surrender value of the policies at such date. The question arises under section 506 of the Eevenue Act of 1932, which provides that for gift tax purposes the amount of a gift made in property is “the value thereof at the date of the gift.”

On her gift tax return for the taxable year each policy was returned by petitioner at a value which was more than the cash surrender value of the policy at the date of gift but less than the cost of purchasing a similar policy at such date. In the, statement attached to the deficiency notice respondent determined that the value of each policy was the cost of purchasing a similar policy at the date of gift. Eespondent made his determination in accordance with article 19 (9) of Eegulations 79 (1936 Ed.). In her petition petitioner alleges that the value of each policy was the cash surrender value at the date of gift and that therefore she is entitled to a refund of gift taxes paid.

The Supreme Court has held recently that for gift tax purposes the proper criterion for the valuation of single premium life insurance policies irrevocably assigned as gifts is the cost of duplicating the policies, rather than the cash surrender value of the policies, at the dates of the gifts, Guggenheim v. Rasquin, 312 U. S. 254; United States v. Ryerson, 312 U. S. 260; Powers v. Commissioner, 312 U. S. 259; even where there has been a lapse of some years between the issuance and the assignment of the policies, United States v. Ryerson, supra. In Guggenheim v. Rasquin, supra, the rationale of these decisions is set forth in part as follows:

* * * But the owner of a fully paid life insurance policy has more than the mere right to surrender it; he has the right to retain it for its investment virtues and to receive the face amount of the policy upon the insured’s death. * * * All of the economic benefits of a policy must be taken into consideration in determining its value for gift tax purposes. To single out one and to disregard the others is in effect to substitute a different property interest for the one which was the subject of the gift. * * * Presumptively the value of these policies at the date of the gift was the amount which the insured had expended to acquire them. Cost is cogent evidence of value. And here it is the only suggested criterion which reflects the value to the owner of the entire bundle of rights in a single-premium policy — the right to retain it as well as the right to surrender it.

In our opinion the proper criterion for the valuation of each of the three policies for gift tax purposes is the cost of duplicating each policy at the date of gift rather than the cash surrender value of each policy at such date. With respect to the single premium endowment policy, the three decisions of the Supreme Court are directly controlling. (No contention is made that the single premium endowment policy is not a policy of life insurance, and we think there can be no doubt on that point. See Estate of William G. Thompson, 41 B. T. A. 901, 906.) And with respect' to the two annual premium ordinary life policies, the rationale of the three decisions of the Supreme Court compels the conclusion that the proper criterion for valuation is the cost of duplicating the policies at the date of gift, even though petitioner had paid only the first annual premiums on the policies. As in the case of the single premium policy, the assignees had “more than the mere right to surrender” the policies; they had the right to retain the policies for their “investment virtues” and to receive the face amounts of the policies upon the insured’s death. Cf. Guggenheim v. Rasquin, supra. Under the policies, the assignees might enjoy these rights from the date of gift, March 9, 1937, until the expiration of the grace period for the payment of the next annual premiums, November 30, 1937, without the payment of any additional premiums, and thereafter they might continue to enjoy these rights by the payment of the annual premiums as they came due. That cash surrender value at the date of gift is not the proper criterion for the valuation of the policies is shown graphically by the fact that the policies had no cash surrender value at the date of gift and would have none until the payment of three years’ full premiums. Cost of duplicating the policies at the date of gift is “cogent evidence of value”, and, in the absence of more cogent evidence of value, cost “is the only suggested criterion which reflects the value” to the assignees of their “entire bundle of rights” in the two annual premium ordinary life policies. Cf. Guggenheim v. Rasquin, supra; United States v. Ryerson, supra. Therefore, respondent’s determination that the value of the three policies at the date of gift was the cost of duplicating the policies at such date is sustained. Guggenheim v. Rasquin, supra; United States v. Ryerson, supra; Powers v. Commissioner, supra.

Respondent concedes that he made an error in the original computation of the deficiency. The parties have stipulated that if the Board’s decision is in favor of respondent on the main question, the correct amount of the deficiency is $117.85.

Decision will he entered that there is a deficiency of $117.85.

       Art 19 (9) Life insurance * * * contracts. — The value of a life insurance contract * * * is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts.

       In Guggenheim, v. Rasquin, 110 Fed. (2d) 371; affd., 312 U. S. 254, the Circuit Court of Appeals, Second Circuit, made the following observation :
      “* * * With policies on an annual premium basis, It is tbe general practice not to allow cash surrender value for the first two years. * * * It would hardly be urged, however, that a life insurance policy was worthless until the third year, or that the gift of a policy less than three years old was not subject to gift tax on the ground that the property given had no value. Vet that would be the result if cash surrender value were the determining factor under the gift tax law.”


author: Hill,

text:
    Spokane Dry Goods Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103916.
    Promulgated February 28, 1941.

      Boger L. Shidler, Esq., for the petitioner.

      E. O. Adams, Esq., for the respondent.
   OPINION.

Opper: Respondent determined a deficiency of $479.75 in petitioner’s income tax for the calendar year 1938. Only $236.19 of such deficiency is in controversy in this proceeding and represents that part of the deficiency which, results from the disallowance of a dividends paid credit in the amount of $35,830.30. This disallowance is the only error assigned by petitioner. The facts are stipulated and are hereby found accordingly.

The petitioner, Spokane Dry Goods Co., is a Washington corporation, with its principal place of business at Spokane, Washington, and its income tax return for the calendar year ended December 31, 1938, was filed in the district of Washington. The par value of the common stock of the Spokane Dry Goods Co. outstanding at all times herein mentioned was $1,000,000.

During the calendar year 1938 the petitioner kept its books on the accrual basis, and made its income tax return for that year on the accrual basis.

The board of directors of petitioner, at a meeting held on December 22, 1936, declared a dividend on petitioner’s common stock in the total sum of $120,000, by adoption of the following resolution:

Whebeas this Corporation has a substantial surplus from earnings and is able to pay a dividend;
Therefoke Be It Resolved that a dividend of twelve per cent of the capital stock of the corporation be paid to stockholders of record December 28, 1936, which dividend shall be paid before December 31, 1936, either in cash or at the option of such stockholders in notes of the Corporation, which notes shall be payable on December 31, 1937, or before at the option of the Company, and bear interest at five per cent per annum until paid.

Of the total dividend declared in the amount of $120,000, $94,826 was paid with promissory notes of petitioner, pursuant to election by stockholders.

The promissory notes in the total sum of $94,826 delivered to stockholders on account of such dividend had an actual value at the time of delivery equal to their face value.

The petitioner in its income tax return for the calendar year 1936 claimed a dividends paid credit because of the above mentioned dividend in the sum of $120,000 declared on its common stock, of which the sum of $94,826 was on account of such promissory notes delivered to the common stockholders.

In the calendar year 1938 the petitioner paid to the holders of such promissory notes received by stockholders in payment of dividends the sum of $35,830.30, which sum represented the remaining principal balance of the notes issued in 1936.

The only question involved is whether petitioner is entitled to a “dividends paid credit” in the year 1938 on account of the payment of $35,830.30 to its stockholders to redeem its promissory notes delivered to such stockholders in 1936 in payment of dividends. Petitioner contends that it is entitled to the credit in question under the provisions of section 27 (a) (4) of the Revenue Act of 1938, notwithstanding it took a dividends paid credit in its income tax return for 1936 on account of dividends paid in that year in its obligations, the payment of the remaining principal of which in 1938 is the basis of the credit now claimed.

Although the present situation would fall within the language of section 27 (a) (4), if that were all there was to the matter, it is also described by section 27 (e) , which so far as material here is the same as section 27 (d) of the Revenue Act of 1936. In such circumstances the general provision must give way to the particular. Missouri v. Ross, 299 U. S. 72; Ginsburg & Sons, Inc. v. Popkin, 285 U. S. 204; United States v. Chase, 135 U. S. 255; McKee v. United States, 164 U. S. 287; Townsend v. Little, 109 U. S. 504, 512. Thus, section 27 (e), dealing specifically with the redemption of obligations issued in payment of dividends, prevails over the provisions of section 27 (a) (4), which deals with the whole class of corporate obligations. The apparently applicable sections do not need to be in conflict for this rule to apply. McKee v. United States, supra. Where Congress sets up a specific method of dealing with a narrow class of cases, as it has here, we think that treatment must be regarded as exclusive and that in the absence of indications to the contrary the general language of section 27 (a) (4), “although broad enough to include it, will not be held to apply to a matter specifically dealt with in another part of the same enactment.” Ginsburg & Sons, Inc. v. Popkin, supra.

When to this it is added that we should not presume without unmistakable and definitive language that Congress intended to grant a double deduction for the same transaction, Ilfeld Co. v. Hernandez, 292 U. S. 62, and that no reason is apparent in the legislative history or suggested by petitioner why a particular class ■of taxpayers should have been singled out by Congress for this especially favorable treatment, we are unable to reach the conclusion that the credit to which petitioner lays claim is available to it.

Reviewed by the Board.

Decision will be entered for the respondent.

Hill,

dissenting: I do not agree with the conclusion in the opinion of the majority. Two premises are assumed in support of such conclusion. They are (1) that section 27 (e) of the Revenue Act of 1938 specifically prescribes what dividends paid credits are allowable in respect of dividends paid in a corporation’s obligations and that thereby the dividends paid credit provided by section 27 (a) (4) of such act is excluded if the indebtedness involved represents a dividend obligation; and (2) that it should not be presumed that Congress intended to grant a double deduction for the same transaction in the absence of unmistakable and definitive language evidencing such intent.

It is my conviction that the first premise is wrong. The second premise is sound in the abstract but, in my opinion, the situation here does not invoke its application.

I see nothing in the language or the subject treated in section 27 (e) to indicate that the prevention of duplication of dividends paid credit was involved in the purposes of such enactment. It seems clear to me that the objectives of such enactment are merely to provide when and in what amounts dividends paid credits shall be allowed for dividends paid, such dividends being paid in the corporation’s obligations (1) when such dividends are so paid and, (2) when the dividend obligations are redeemed, if the amount for which they are redeemed exceeds their fair market value at the time of the dividend payment. The scope of the provisions of section 27 (e) is confined to the one purpose of assuring to the taxpayer credit or credits for dividends paid to the extent of the amount for which the obligations are redeemed. The specific and plain language used to express this limited purpose leaves no doubt of its meaning. Neither section 27 (e), supra, nor 27 (d) of the Revenue Act of 1936 relates to dividends paid credit provided by section 27 (a) (4), supra, on account of money used or irrevocably set aside to pay or retire indebtedness. Neither section 27 (e) nor section 27 (d) purports to exclude the application of the provisions of section 27 (a) (4) where the indebtedness involved represents a dividend obligation. Neither of such sections touches the subject of duplicate credits, either specifically or by implication. The Revenue Act of 1936 has no provisions comparable to those of section 27 (a) (4) and consequently section 27 (d) thereof was enacted without reference to such provisions. Section 27 (e), supra, is in essence merely a reenactment of such section 27 (d). Section 26 (c) (1) and (2) of the Revenue Act of 1986 provides credits to corporations for purposes of surtax in the case of contracts restricting payment of dividends and contracts requiring earnings and profits to be paid or irrevocably set aside within the taxable year for the discharge of a debt. Section 26 (c) (3) of that act prohibited the allowance of double credits in respect of such contracts. The provisions of such section 26 (c) (1), (2), and (3) were not carried forward to or reenacted in the Revenue A.ct of 1938 and no provisions comparable thereto appear in the latter act.

The provisions of section 27 (a) (4) first appeared in the 1938 Act. Its language is all-embracive and unambiguous in providing dividends paid credit for payment of indebtedness as therein defined. By its terms it applies to such “indebtedness of any kind.” There is no exception. Section 27 (a) (4), on the one hand, and section 27 (e) and section 27 (d), supra, on the other, treat of and specifically provide for different, noninterdependent, and nonexclusive sources of dividends paid credit. There is nothing in the language of either of such sections or elsewhere in the Revenue Act of 1938 to indicate that if a dividends paid credit is taken for dividends paid in the corporation’s obligations a dividends paid credit may not also be taken as provided by section 27 (a) (4) when such obligations are paid, provided such obligations constitute indebtedness as defined in section 27 (a) (4). The obligations paid in 1938 by petitioner for which it claims a dividends paid credit in this proceeding constitute such indebtedness.

The credit in question is affirmatively authorized by unambiguous provisions of statute. The lack of ambiguity in the statute forecloses the privilege, assumed in the opinion of the majority, to construe it.

“It is elementary that the province of construction lies in the domain of ambiguity, and that the use by a legislative body of words having definite meanings creates no ambiguity, and that such words are to be taken and understood in their plain ordinary and popular sense.” Helvering v. Nebraska Bridge Supply & Lumber Co.. 115 Fed. (2d) 290.

Furthermore, it is doubtful whether the charge of duplicate credit can be sustained in respect of the credit here in question. The credit in 1936 for dividends paid in petitioner’s obligations was applied against income not for the purpose of normal tax, but for the purpose of surtax on undistributed profits under section 14 of the Revenue Act of 1936. There was no such credit in respect of normal tax. The Revenue Act of 1938 has no provision for tax corresponding to the tax imposed by section 14 of the 1936 Act. The credit in question here applies only to the tax provided by section 13 of the Revenue Act of 1938. It does not apply to any other tax-levying provision. The charge of duplicate credit must, therefore, apply only in respect of the tax levied under section 13 of that act. That section does not levy a surtax but levies a tax of 19 percent on the adjusted net income of corporations generally. If a corporation has received dividends in the taxable year from domestic corporations it gets a credit against tax of 16y2 percent of 85 percent of such dividends. If it has a dividends paid credit consisting of one or more of the items constituting such credit as provided in section 27, it gets a credit against tax of 2% percent of such dividends paid credit.

A comparison of the Revenue Acts of 1936 and 1938 discloses that not only are the credits allowed corporations under sections 26 and 27 of the 1936 act widely variant in scope and kind from credits provided in sections 26 and 27 of the 1938 act, but they are applied differently and under radically different schemes or plans of taxation.

The Revenue Act of 1936 levied both a normal and a surtax on corporations generally. The rate of the normal tax levied was graduated through four brackets from 8 percent to 15 percent on the normal tax net income. The rate of the surtax levy was graduated through five brackets from 7 percent to 27 percent on the undistributed net income. The credit which petitioner received for dividends paid in 1936 was a deduction from income for the computation of surtax only. It had no application to the normal tax levied. The credit that petitioner claims in this proceeding would, if allowed, be applied not as a deduction from income or in respect of a tax levied on undistributed profits, but to the extent of 2y2 percent thereof as a credit against a tax on the adjusted net income of corporations generally, regardless of whether any of such income was undistributed.

The two credits — the one received in 1936 and the one now claimed— were not credits against the same thing. One was against income, the other against tax. They were not the same kind of credits. One was for dividends paid and the other for indebtedness paid. They were not credits in respect of the same kind of tax or under the same or a comparable scheme of taxation. One credit was applied to the extent of its full amount, the other to the extent of only 2% percent of its amount. The credit in 1936 may have eliminated a surtax entirely or it may have reduced the rate of surtax from 27 percent to 7 percent or to some intermediate rate, while the credit claimed in this proceeding would reduce a normal tax lexy by the amount of 2y2 percent of such credit.

An attempt to detail all of the variances between the two credits which would be revealed in their application under the respective revenue acts would present a problem in permutations.

Who, then, can say that the credit'claimed by petitioner in this proceeding duplicates the dividends paid credit received in 1936? If there is a duplication, how can the extent of it be calculated ?

However, whether or not the allowance of the credit claimed here by petitioner would result in duplicating a credit which it took for the year 1936, it appears to me clear that the Congress intended to and did expressly grant such credit as is here claimed. The language providing such credit is unambiguous and, without reading something into the statute as it stands or imputing to it a more restricted meaning than its language warrants, I think it must be concluded that petitioner’s claim of credit is authorized and should be allowed.

,Black and Haeeon agree with this dissent.

       SEC. 27. CORPORATION DIVIDENDS PAID CREDIT.
      (a) Definition in General. — As used in this title with respect to any taxable year the term “dividends paid credit” means the sum of :
      *******
      (4) Amounts used or irrevocably set aside to pay or to retire indebtedness of any kind, if such amounts are reasonable with respect to the size and terms of such indebtedness. As used in this paragraph the term “indebtedness” means only an indebtedness of the corporation existing at the close of business on December 31, 1937, and evidenced by a bond, note, debenture, certificate of indebtedness, mortgage, or deed of trust, issued by the corporation and in existence at the close of business on December 31, 1937, or by a bill of exchange accepted by the corporation prior to, and in existence at, the close of business on such date. Where the indebtedness is for a principal sum, with interest, no credit shall be allowed under this paragraph for amounts used or set aside to pay such interest.

       (e) Dividends in Obligations of the Corporation. — If a dividend is paid in obligations of the corporation, the amount with respect thereto which shall be used in computing the basic surtax credit shall be the face value of the obligations, or their fair market value at the time of the payment, whichever is the lower. If the fair market value of any such dividend paid in any taxable year of the corporation beginning after December 31, 1935, is lower than the face value, then when the obligation is redeemed by the corporation in a taxable year of the corporation beginning after December 31, 1937, the excess of the amount for which redeemed over the fair market value at the time of the dividend payment (to the extent not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable year in which the redemption occurs.


text:
    John J. Ide, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101347.
    Promulgated February 28, 1941.

      James L. Bohr, Esq., for the petitioner.

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

Smith :

This is a proceeding for the redetermination of deficiencies in income tax for 1936 and 1937 of $521.74 and $486.70, respectively. The question in issue is whether the petitioner is entitled to deduct from gross income for the years 1936 and 1937 certain amounts expended by him in excess of his per diem allowance in lieu of subsistence for meals, lodging, and entertainment and for the use of an automobile.

The petitioner is an individual, residing at 2 Avenue Gabriel, Paris, France. His income tax returns for 1936 and 1937 were filed with the collector for the district of Maryland.

The petitioner is a graduate of Columbia University. From 1917 to 1920 he served in the Naval Aviation Corps. In 1921 he was appointed Technical Assistant of the National Advisory Committee for Aeronautics, with office and headquarters at the American Embassy in Paris. During the taxable years he was the European representative of that committee.

The committee referred to was established in 1915 by an Act of Congress which provided, among other things, “that it shall be the duty of the Advisory Committee for Aeronautics to supervise and direct the scientific study of the problems of flight, with a view to their practical solution, and to determine the problems which should be experimentally attacked and to discuss their solution and their application to practical questions.” U. S. C. A., Title 50, §151.

During the taxable years the petitioner was paid a regular salary and a moderate quarters allowance and was reimbursed for certain official travel expenses, including a per diem allowance to cover lodging and meals at a rate of $5 a day in the United States and $6 a day in Europe.

Petitioner’s duties were generally similar to those of the military and naval attaches at the American Embassy, except that they related to aeronautics instead of military and naval matters and that they covered Europe in its entirety, whereas the military and naval attaches as a rule covered only one country. In substance the petitioner was required to keep the Advisory Committee fully informed as to the scientific research and the technical development of aeronautics in Europe. In the performance of his duties he acted under the general direction of the Advisory Committee, but the means of obtaining the desired information were left largely to his discretion. He traveled extensively in Europe and the United States visiting aircraft laboratories, aircraft and engine factories, aviation fields, and centers of aviation research; he maintained an acquaintance built up over the years with various persons, including Government officials active in the aeronautical field; he was under the necessity of doing a great deal of entertaining of foreign officials and of maintaining a certain prestige while traveling by always stopping at the best hotels; he attended international aeronautical conferences held in various countries; he found it necessary to own and use an automobile more or less continuously, to visit aircraft factories and flying fields in the environs of Paris and occasionally in countries other than France. The information obtained as a result of these activities was reported by him to the Advisory Committee.

In the performance of his duties petitioner received no allowance or reimbursement from the Advisory Committee for a variety of expenditures made from his own funds. In this respect the petitioner differed materially from the military and naval attaches, who received substantial allowances to cover a variety of expenses, including rent, hire of servants, entertainment, gratuities, taxi, automobile hire, club fees and dues, and costs of operating privately owned automobiles. The amounts so paid by the petitioner and not reimbursed by his employer included railroad and steamship fares, meals and lodging while traveling, costs of operating his own automobile, and certain entertainment expenses. In his return for the year 1936 the petitioner deducted $2,600 as automobile expense and $2,400 as travel expense; in his return for 1937 he deducted $2,400 for automobile expense, $150 for entertainment, and $2,600 for travel expense. All of these deductions were disallowed by the respondent in the determination of the deficiencies.

Travel Expense.

In 1936 the petitioner traveled in England, France, Germany, Sweden, Czechoslovakia, Holland, Switzerland, Italy, Poland, and the United States. In 1937 he traveled in France, Italy, England, Germany, Eoumania, and the United States. He maintained a travel diary which showed that he spent 200 days away from his post in Paris in 1936 and 180 days in 1937. Part of this travel was the result of specific travel orders for which the petitioner received his railroad fare and specific allowances. The excess of such travel allowances was paid by the petitioner from his own funds. In other cases the petitioner traveled entirely at his own expense and without reimbursement. In 1936, for instance, he traveled from the eastern part of the United States to California and back at his own expense. He did this with the approval of the Advisory Committee (which had no funds available for such travel) in order to keep himself abreast of American development in aeronautics and to obtain information which he believed would be useful to his employer. In both years the petitioner paid substantial sums for travel costs for which he was not reimbursed. The cost of railroad fares so paid in 1936 was approximately $400; the cost of lodging, meals, etc., was $10 per day in excess of reimbursement for each of 200 days. In 1937 the cost of these expenses amounted to approximately $2,600, of which, however, $700 was spent in connection with a trip to the United States for personal business purposes. The expenses paid which related directly to his employment amounted to $2,400 in 1936 and $1,900 in 1937.

Automobile Expense.

During the years 1936 and 1937 petitioner was the owner of a Packard limousine which he used in part in the performance of his duties. The car was purchased in 1935 at a cost of $4,800. In the year 1936 he drove the car 13,000 miles, of which about 80 percent, or 10,000 miles, was devoted to the objectives of his employment. The cost of operation for 1936 was as follows:

In 1937 the petitioner drove the car a total of 10,000 miles, of which 75 percent, or 7,500 miles, was devoted to the objectives of his employment. The costs in 1937 were as follows:

Entertainment.

In 1937 petitioner expended certain sums in the entertainment of foreign officials. As a result of such entertainment he was able to facilitate and secure authorizations to visit various plants and laboratories. The total amount expended for such entertainment was approximately $600. At least $150 of that amount was expended in connection with his line of employment.

Section 23 (a) of the Revenue Act of 1936 provides for the deduction from gross income of:

(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * *

The respondent contends that the petitioner was not entitled to deduct the expenses paid by him during the years 1936 and 1937 in excess of the amounts for which he was reimbursed in connection with his employment and relies largely upon the fact that the National Advisory Committee for Aeronautics informed the internal revenue agent in charge under date of May 19, 1939, that “This employee [John J. Ide] was not required to incur any expenses incidental to his position during the years 1936 and 1937 for which he was not reimbursed.” We do not think that this fact makes the expenses claimed by the petitioner as deductions from gross income nondeductible. The facts are simply that the petitioner was of the opinion that he could obtain the results required by his employment only by living at the best hotels, by using an automobile to save time in making many trips, principally in and around Paris, and by entertaining certain individuals which would give him an entree to certain plants and laboratories which he wished to visit. In this connection it should be noted that the automobile referred to in our findings of fact was only one of two automobiles which the petitioner had in Paris. The other automobile was used almost exclusively for personal purposes. The Packard limousine was used principally for business purposes.

Several cases have come before the Board which involved facts analogous to those herein presented. We have permitted the deduction of traveling expenses in those cases. Thus, in D. C. Jackling, 9 B. T. A. 312, the taxpayer was a mine operator and metallurgical engineer who was employed by the United States during 1918. During that year he expended $29,151.37 from his own funds for subsistence and transportation for himself and secretary in connection with his employment, an amount greater than that allowed him by the United States for those purposes. We held the amount was a legal deduction from gross income. In Chester D. Griesemer, 10 B. T. A. 386, we held that the expenses incurred by the taxpayer while in Europe on business for his employer, which were in addition to the cost of maintaining his usual place of abode in the United States, were allowable deductions. In Edwin T. Pollock, 10 B. T. A. 1297, we held that amounts necessarily paid out of his personal funds by a naval officer appointed the Governor of American Samoa for official entertainment of representatives of foreign governments were deductible as ordinary and necessary expenses. Cf. Walter F. Brown, 13 B. T. A. 832.

The respondent objects to the fact that the division of the expenses between personal expenses and business expenses was based largely upon estimates. The petitioner in Paris had records which enabled him satisfactorily to allocate the expenses. This information was not available to the petitioner at the time he gave his deposition in New York.

In Cohan v. Commissioner, 39 Fed. (2d) 540, the court held that some deduction should be allowed for entertainment and travel expenses even though the taxpayer was able to give only the most general type of estimate. The court said:

* * * Absolute certainty in sucb matters is usually impossible and is not necessary; tbe Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. * * *

The Board has given careful consideration to the deposition of the petitioner received in evidence and also to the exhibits in evidence, one of which was offered by the respondent. After a careful consideration of all of this evidence the Board reaches the conclusion that of the amounts disallowed by the respondent in the determination of the deficiencies for 1936 and 1937, $2,600 for automobile expense and $2,400 for travel expense for the year 1936; and $2,250 for automobile expense, $1,900 for travel expense, and $150 for entertainment expense for 1937, were erroneously disallowed. The respondent’s action in making such disallowances in the determination of the deficiencies for 1936 and 1937 is reversed.

Reviewed by the Board.

Decision will be entered wnder Rule 50.

Van Fossan dissents.


author: Kern :

text:
    Boeckeler Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97756.
    Promulgated February 28, 1941.

      Stanley S. Waite, Esq., for the petitioner.

      Benjamin L. Bird, Esq., for the respondent.
   OPINION.

Kern :

The predecessor corporation in 1930 executed a written contract expressly dealing with the payment of dividends. The charter of the predecessor corporation expired April 8, 1935, and, there having been no further extension of the charter granted, the existence of the Boeckeler Lumber Co., petitioner’s predecessor, that day ceased. Cf. Meremac Spring Park Co. v. Gibson (1916), 268 Mo. 394; 188 S. W. 179; Pendleton v. Russell, 144 U. S. 640; American Arch Co. (1928), 13 B. T. A. 552. On August 5, 1935, when a charter for the petitioner corporation was granted by the Secretary of State of the State of Missouri, a new corporation came into existence; while this new corporation was free to assume any obligations of its predecessor, it was, nevertheless, a new and distinct legal entity.

To be eligible for a credit created for the benefit of taxpayers, strict compliance with the terms of the section granting the credit must be shown. Cf. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46.

Petitioner seeks to avail itself of the provision of section 26 (c) (1) of the Revenue Act of 1936. In order to prevail, petitioner must establish the fact that there did exist in the taxable year a written contract executed by itself, a provision of which expressly restricts the payment of dividends. The only such written contract which petitioner has disclosed was never executed by itself. It was executed by petitioner’s predecessor. When that predecessor ceased to exist and petitioner was incorporated with the same name, the contract did not ipso facto become executed by petitioner. The evidence indicates that petitioner did assume its predecessor’s liabilities under that contract. But it did not do this by a similar contract to which it affixed its corporate signature. Rather, this was done orally or by implication from its course of conduct and the written evidence thereof is not found in a written contract. Certainly it can not be correctly thought that this is compliance with the terms of section 26 (c) (1). The essentials of a formal written contract are lacking. See Davison-Joseph Campau Realty Co., 41 B. T. A. 675.

We do not consider the question of whether the petitioner could have made distribution of dividends in the taxable year notwithstanding the fact that it assumed the liabilities of the predecessor corporation. Because of our disposition of the first question involved, such inquiry is unnecessary. Petitioner is not entitled to the credit.

Reviewed by the Board.

Decision will be entered under Rule 50.

Harron dissents.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the ease 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 op 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. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


author: Hill:

text:
    Harry H. Diamond, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96651.
    Promulgated February 28, 1941.

      Harold S. Skinner, Esq., for the petitioner.

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Hill:

The principal issue submitted for decision in this case is whether the loss sustained by petitioner in the taxable year by reason of the foreclosure of a mortgage on real estate owned by him constituted an ordinary loss deductible in full under section 23 (e) of the Revenue Act of 1936, as contended by petitioner, or whether, as contended by respondent, such loss resulted from a “sale or exchange” of a capital asset within the meaning of section 117 (d) of the same act, and thus was subject to the limitations on deduction of capital losses provided therein. Section 23 (e) allows as deductions, in computing the net income of individuals, losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit; while section 117 (d) provides that losses from “sales or exchanges” of capital assets shall be allowed only to the extent of $2,000 plus the gains from such “sales or exchanges.”

In his income tax return for the year 1936 petitioner deducted $33,832.49 as a loss resulting from the foreclosure sale above mentioned. In the deficiency notice, respondent allowed a capital loss of $2,015, which embraced the allowance of $2,000 provided in section 117 (d), plus the amount of $15 reported by petitioner as gain from the sale or exchange of capital assets.

There is no controversy that the property sold under foreclosure was a capital asset, nor that petitioner’s loss was incurred in a transaction entered into for profit. The question is whether or not the loss resulted from a “sale or exchange” as that term is used in section 117 (d). On brief, petitioner cites and relies upon the decision of the Circuit Court of Appeals for the Sixth Circuit in Commissioner v. Hammel, 108 Fed. (2d) 753, and concedes that the material facts in the Hammel case were substantially the same as those in the case at bar. In that case the Circuit Court of Appeals held that a foreclosure sale was not a “sale or exchange” within the meaning of section 117, and therefore a loss sustained by a mortgagor through foreclosure was not a capital loss subject to the limiting provisions of section 117. However, the decision of the lower court in the Hammel case was reversed by the Supreme Court of the United States in Helvering v. Hammel, 311 U. S. 504, it being there held that for the purpose of applying the limitations on deduction of capital losses provided in section 117, the term “sales” applied to forced sales as well as voluntary sales.

On authority of the decision last above cited, we approve respondent’s determination in the present proceeding in so far as it is involved in the principal issue.

There remains for consideration a second question, relating to the right of the petitioner to deduct as an ordinary loss the amount of $4,500 paid by petitioner in 1936, subsequent to the foreclosure sale, in order to obtain release from personal liability under the mortgage. In addition to the deduction taken by petitioner in his return for loss of his investment in the property in the amount of $33,832.49 on account of money paid on the purchase price prior to the foreclosure sale, he also deducted as a loss the $4,500 paid to the mortgagee in settlement of a suit for deficiency judgment. In the deficiency notice respondent made no change with reference to such deduction of $4,500, but, by amended answer filed pursuant to leave duly granted, respondent alleged that the payment of $4,500 was a part of the capital loss sustained as a result of the foreclosure sale and, since the maximum amount of deductible loss allowable under the statute is $2,015, the inclusion of the $4,500 in such loss does not increase or otherwise affect the deductible amount thereof. In the amended answer respondent further made claim for the increased deficiency which would result from the disallowance of the deduction of $4,500 taken by petitioner in his return. Petitioner contends that the payment to secure relief from personal liability under the mortgage was made after the loss of the foreclosure had been fully sustained, and was a separate transaction; hence, that the amount is deductible as an ordinary loss, irrespective of the nature of th'e loss of his investment in the property resulting from the foreclosure. We do not agree with petitioner’s contention.

Petitioner had actually paid $38,832.49 on the purchase price of the land' at 'the time of the foreclosure sale. This amount plus his mortgage indebtedness liability of $26,000 equals $64,332.49, the amount stipulated as the depreciated cost of the land and improvements thereon at the time of the foreclosure sale on January 2, 1936. The record does not disclose the exact amount for which the land sold at foreclosure sale, but it seems safe to assume that it was an amount which when credited on 'the mortgage indebtedness of $26,000 plus the cost of foreclosure proceedings reduced such indebtedness to about $20,000.

If the payment of the $4,500 by the petitioner in settlement of the bálance of his mortgage debt, remaining after the foreclosure sale, was a part of the cost to him in the purchase of the mortgaged property, it was a' part of his realized capital loss which resulted from the foreclosure sale. If, however, the settlement of the mortgage debt deficiency be considered as a transaction unrelated to, and independent of, petitioner’s investment in the mortgaged property and the foreclosure sale thereof, there is no basis upon which to predicate a loss since, in such unrelated aspect, petitioner merely settled a personal obligation of about $20,000 by the payment of $4,500.

The mortgage debt deficiency had its inception in the personal obligation of petitioner to pay the purchase price of the lands involved. The foreclosure of the mortgage lien to secure such payment could only occúr upon petitioner’s failure to discharge the obligation. The foreclosure sale relieved petitioner of such obligation only to the extent that it was reduced by the amount realized on such sale. The payment of the remainder of the purchase price continued to be a personal obligation of petitioner until it was satisfied. Such remainder or deficiency never lost its character as a purchase money obligation. The payment in settlement of such deficiency was merely a payment on the purchase price of the property which petitioner had obligated itself to make. Such payment of $4,500 was, therefore, part of the cost to petitioner of the mortgaged property and must be included as such in determining the capital loss sustained by it, in the foreclosure sale.

Taxation is a practical matter, and in our opinion it is clear that the amount paid by petitioner to escape a deficiency judgment was a part of the total loss sustained by him as a direct result of the foreclosure sale of the realty. It should be so treated for tax purposes. Compare on this point, John O. Fowler, 40 B. T. A. 1293; Pender v. Commissioner (C. C. A., 4th Cir.), 110 Fed. (2d) 477.

C. L. Gransden & Co., 39 B. T. A. 985, appears to hold contrary to our view herein that the $4,500 payment in settlement of a suit for a deficiency judgment represents a capital loss within the meaning of section ITT (d). A question similar to this in principle was involved in the Grmsden case as determined by the Board, but it was not included in the subject of review by the Circuit Court which affirmed the Board’s decision in Gransden & Co. v. Commissioner, 117 Fed. (2d) 80. In so far as our decision in the Gransden case on the question indicated may be construed as being in conflict with our holding herein, it will not be followed hereafter.

The deduction taken by petitioner is disallowed, and respondent’s claim for an increased deficiency is approved.

Reviewed by the Board.

Decision will he entered wnder Bule 50.

TtjeneR and Mellott dissent on the second point.


author: HaRRON :

text:
    Estate of Silas B. Mason, Deceased, by Sam A. Mason, Horatio P. Mason, and Susanne B. Mason, Co-Administrators, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100944.
    Promulgated February 28, 1941.

      John F. Greaney, Esq., and H. M. Collins, Esq., for the petitioners.

      Thomas F. Gallaban, Esq., for the respondent.
   OPINION.

HaRRON :

The first question is whether the proceeds of the policies of insurance which were taken out by decedent upon his own life and which were pledged by him with his former wife to secure the payment of the amount allowed her as alimony by the Fayette Circuit Court should be included in the decedent’s gross estate, under section 302 (g) of the Revenue Act of 1926, as amended by section 404 of the Revenue Act of 1934, the pertinent provisions of which are set forth in the margin.

On their estate tax return petitioners did not include the proceeds of the policies in the gross estate. In the statement attached to the deficiency notice respondent included the proceeds of the policies in the gross estate on the ground that ‘'the record discloses that decedent, at the time of his death, was vested with such incidents of ownership of the life insurance policies involved as to bring them within and to make them a part of his taxable estate.”

In their brief petitioners assume that the proceeds of the policies were receivable by a beneficiary other than decedent’s “executor” within the meaning of subsection (g) and argue that the proceeds of the policies may not be included in the gross estate because at the time of his death decedent retained no incidents of ownership in the policies. Petitioners rely on Anna Rosenstock, 41 B. T. A. 635; D. W. Blacksher et al., Executors, 38 B. T. A. 998; Thomas C. Boswell et al., Executors, 37 B. T. A. 970. Respondent also assumes in his brief that the proceeds of the policies were receivable by a beneficiary other than decedent’s “executor” within the meaning of subsection (g) and argues that the proceeds of the policies may be included in the gross estate because at the time of his death decedent retained incidents of ownership in the policies. Respondent relies on Old Point National Bank, Executor, 39 B. T. A. 343.

In our opinion the proceeds of the policies should be included in the gross estate. The proceeds of policies of insurance taken out by a decedent upon his own life which in terms are payable to a beneficiary other than the decedent’s “executor”, but which are required to be used, and are in fact used, to satisfy debts of decedent or his estate, should be treated as being receivable by the decedent’s “executor” within the meaning of subsection (g) and should be included in the decedent’s gross estate. Mathilde B. Hooper, Administratrix, 41 B. T. A. 114; and see Marmaduke B. Morton, Administrator, 23 B. T. A. 236; Pacific National Bank of Seattle, Executor, 40 B. T. A. 128; Estate of Waldo Rohnert, 40 B. T. A. 1319; Regulations 80, art. 26; Paul, “Life Insurance and the Federal Estate Tax”, 52 Harvard Law Review 1037, 1059; even though decedent irrevocably assigned the policies to the beneficiary, and did not reserve to himself the power to borrow on the policies or to receive the cash surrender value thereof or “to exercise any of the incidents of ownership therein.” Mathilde B. Hooper, Administratrix, supra. At the time of decedent’s death, with the exception of policy No. 292183 issued by the Phoenix Mutual Life Insurance Co., which was payable to decedent’s executor, administrator, or assignee, all the policies here were in terms payable to Posa Tucker Mason. However, by the provisions of the judgment of the Fayette Circuit Court and of the several agreements executed by decedent the proceeds of all the policies were required to be used to satisfy decedent’s obligation to pay the amount fixed in the judgment of the Fayette Circuit Court as the alimony of Rosa Tucker Mason, and, in fact, were so used. Therefore, under the principles set forth above, the proceeds were receivable by the decedent’s executor within the meaning of subsection (g) and should be included in the gross estate.

Even if the proceeds were regarded as receivable by a beneficiary other than the decedent’s executor within the meaning of subsection (g), the proceeds should be included in the gross estate because at the time of his death decedent retained certain incidents of ownership in the policies. See Chase National Bank v. United States, 278 U. S. 327. The policies were merely pledged by decedent with Rosa Tucker Mason as collateral security, cf. Nelson v. Commissioner, 101 Fed. (2d) 568; Estate of Harriet Blair Borland, 38 B. T. A. 598; and the several assignments executed by decedent to Rosa Tucker Mason were conditional and not absolute. Vance, Handbook of the Law of Insurance, secs. 143-145. Cf. Anna Rosenstock, 41 B. T. A. 635. Petitioner had the power to obtain redelivery of the policies at any time by paying Rosa Tucker Mason the amount fixed as alimony in the judgment of the Fayette Circuit Court. Rosa Tucker Mason’s power to borrow on the policies or to receive the cash surrender value of the policies was limited by the provisions of the judgment of the Fayette Circuit Court and of the several assignments executed by the decedent. If the proceeds of the policies which were received by Rosa Tucker Mason had exceeded the amount of decedent’s obligation to pay. the. alimony fixed in the judgment of the Fayette' Circuit Court, she would have held the excess in trust for the personal representatives of decedent. Vance, Handbook of the Law of Insurance; secs. 148-145. The mere fact that immediately prior to decedent’s death the amount of the obligation secured exceeded the value of the policies pledged is “unimportant,” Nelson v. Commissioner, supra. It should be pointed out that Rosa Tucker Mason’s obligation to apply the proceeds upon the amount of decedent’s obligation to pay the alimony fixed in the judgment of the Fayette Circuit Court gave decedent the right to the “economic benefits” under the policies and constituted an “incident of ownership” within the definition given in 'article 25 of Regulations 80. See Paul, “Life Insurance and the Federal Estate Tax”, supra.

Petitioners contend in the alternative that the amount fixed in the judgment of the Fayette Circuit Court as the alimony of Rosa Tucker Mason, i. e., $150,000, should be deducted from the value of the gross estate under section 303 (a) (1) (D) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932 and section 403 (a) of the Revenue Act of 1934, the pertinent provisions, of which are set forth in the margin.

It is clear that the amount fixed as alimony in the judgment of the Fayette Circuit Court was an “indebtedness in respect to, propertj’’ where the value of decedent’s interest therein, undiminished by such * * * indebtedness, is included in the value of the gross estate” within the meaning of section 303 (a) (1) (D). Decedent’s obligation to pay the amount fixed as alimony in the judgment of the Fayette Circuit Court was an “indebtedness”, Becknell v. Becknell, 110 Ind. 42; 10 N. E. 414; Coffman v. Finney, 65 O. St. 61; 61 N. E. 155; the payment of the indebtedness was secured by the pledge of the policies; and it has been held that the proceeds of the policies should be included in the value of the gross estate. See Estate of Harriet Blair Borland, supra.

However, respondent contends that the indebtedness in question was founded upon the agreement between decedent and Rosa Tucker Mason; that the consideration for the agreement was the relinquishment by Rosa Tucker Mason of “marital rights in the decedent’s property or estate”; that the consideration for the agreement was not a consideration “in money or money’s worth” under section 303 (d) of the Revenue Act of 1926, as amended by section 804 of the Revenue Act of 1932, the pertinent provisions of which are set forth in the margin, and that thus the amount of the indebtedness in question was not deductible under section 303 (a) (1) which requires that an indebtedness founded on an agreement be contracted “for an adequate and full consideration in money or money’s worth.”

Petitioners contend that the indebtedness in question was founded upon a liability imposed by law and not upon an agreement and that section 303 (a) (1) does not require that an indebtedness founded upon a liability imposed by law be contracted “for an adequate and full consideration in money or money’s worth.” In support of these contentions petitioners rely especially on Edythe C. Young, Executrix, 39 B. T. A. 230.

Section 303 (a) (1) of the Revenue Act of 1926 as originally enacted required that the deduction allowed in the case of any indebtedness be limited to the extent that such indebtedness was “incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth.” Section 303 (a) (1) was amended by section 805 of the Revenue Act of 1932. As so amended section 303 (a) (1) required that the deduction allowed in the case of any indebtedness “when founded upon a promise or agreement” be limited to the extent that such indebtedness was “contracted bona fide and for an adequate and full consideration in money or money’s worth.” The legislative purpose for this amendment was stated in the reports of the Committee on Ways and Means and the Committee on Finance to be as follows:

A clarifying provision limiting the requirement of an adequate and full consideration in money or money’s worth to liabilities founded on contract. The existing law might be open to a construction under which no claim against the estate would be deductible unless supported by an “adequate and full consideration in money or money’s worth,” but the real intent could hardly have been to deny the deduction of liabilities imposed by law or arising.out of torts, and the amendment whereby the requirement of a consideration applies only where the liability is founded on contract is designed to clear up any doubt which may be thought to exist.

In Edythe G. Young, Executrix, supra, until November 13, 1917, the decedent, who was a resident of Pima County, Arizona, was tbe husband of Katherine P. Young, who was a resident of Clinton County, Iowa. Katherine P. Young instituted divorce proceedings in Clinton County, Iowa, against the decedent. On November 12, 1917, the decedent and Katherine P. Young entered into a written contract under which it was agreed that if Katherine P. Young was granted a decree of divorce she should be awarded as alimony, among other things, the sum of $4,500 per annum during her lifetime. On November 13, 1917, the judge of the District Court for Clinton County, Iowa, entered a decree of divorce and for alimony, which provided, among other things, that Katherine P. Young was awarded as alimony the sum of $4,500 per annum during her natural life, to be paid in accordance with the terms of the written contract between the parties which was made a part of the decree. After decedent’s death Katherine P. Young made a claim that she was entitled to be paid from the assets of the estate the sum of $4,500 per annum as long as she might live. The executrix of decedent’s estate and Katherine P. Young entered into an agreement under which this claim was to be settled by the delivery of certain notes of the par value of $12,500. The agreement was approved by the Superior Court of the State of Arizona for the County of Pima. On the decedent’s estate tax return a deduction was claimed in the amount of $12,500 on account of Katherine P. Young’s claim against the estate. Respondent disallowed the deduction “on the ground that the claim is founded upon a promise or agreement to pay alimony during the lifetime of the decedent’s former wife” and contended that the claim “was not incurred for adequate and full consideration in money or money’s worth within the meaning of sections 804 and 805 of the Revenue Act of 1932, amending section 303 (a) (1) and (d) of the Revenue Act of 1926.” The Board held that the claim was not founded upon a promise or agreement, but upon a liability imposed by law, and that the deduction was proper. The Board stated in part as follows (pp. 234-235) :

It is true that Katherine P. Young and the decedent entered into an agreement during the pendency of the divorce proceedings which provided inter alia for the payment of alimony in the event a decree for divorce was granted, but the wife’s right to alimony grows out of the legal duty of the husband to support her and not out of a promise or agreement. Martin v. Martin, 65 Iowa, 255; 21 N. W. 595; Wilson v. Hinman, 182 N. Y. 408; 75 N. E. 236; Wagner v. Wagner, 132 Mich. 343; 93 N. W. 889; Stahl v. Stahl, 114 Ill. 375; 2 N. E. 160; Emerson v. Emerson, 120 Md. 584; 87 Atl. 1033. “The judgment for alimony does not create a new obligation or duty in that respect. It but determines the extent of the existing obligation, and regulates the manner of its performance.” Martin v. Martin, supra.
Even if the parties have settled their property rights, and have made provision for the support of the wife by a written agreement, the court may disregard the agreement and award such alimony as it deems right. In such case the right to alimony is predicated on the action of the court and not upon the agreement of the parties. Douglas v. Wiilcuts, 296 U. S. 1; Parsons v. Parsons, 152 Iowa, 68; 131 N. W. 17; Wilson v. Wilson, 40 Iowa 230. * * *
jfc iH # # ‡ ❖
It would seem to follow that the claim which Katherine P. Young asserted against the decedent’s estate rested immediately upon the judgment and decree of the Iowa court, which in turn was a judicial determination of the amount required from decedent to discharge an obligation imposed by law. Neither the obligation, nor the amount thereof, was created or determined by the agreement of the parties. The law imposed the one and the decree of court determined and adjudicated the other.

In our opinion the decision in Edythe C. Young, Executrix, supra, is controlling. In Kentucky, as in Iowa, the husband’s obligation to pay alimony arises out of his legal duty to support his wife. Collins v. Collins, 279 Ky. 139; 130 S. W. (2d) 37; Muir v. Muir, 133 Ky. 125; 92 S. W. 314, in which alimony was defined as “that provision which the law makes for the support of the wife, or of her who was the wife, out of the estate of the husband after separation in lieu of his common law obligation to support her as his wife if they should have continued living together.” Moreover, although the Fayette Circuit Court in its judgment did fix the alimony of Rosa Tucker Mason ■at the gross sum of $150,000 in accordance with the agreement entered into between decedent and Rosa Tucker Mason, the court was not bound by that agreement in fixing the amount of the alimony. See Wallace v. Wallace, 74 N. H. 256; 67 Atl. 580; Phillips v. Phillips, 39 R. I. 92; 97 Atl. 593; sec. 2122, Carroll’s Kentucky Statutes; Schouler’s, Marriage, Divorce, Separation and Domestic Relations, 6th ed., sec. 1815. Therefore, as was stated in Edythe O. Yowng, Executrix, supra, “Neither the obligation, nor the amount thereof, was •created or determined by the agreement of the parties. The law imposed the one and the decree of court determined and adjudicated the other.”

In view of the conclusion that the indebtedness in question was not founded “upon a promise or agreement,” it is not necessary to consider the further contention advanced by respondent that the indebtedness was not contracted “for an adequate and full consideration in money or money’s worth.”

The final question is whether the amount of $750 which petitioners paid to the decedent’s widow in accordance with section 1408 of Carroll’s Kentucky Statutes should be deducted from the value of the gross estate under section 303 (a) (1) (E) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932 and section 403 (a) of the Revenue Act of 1934. Section 303 (a) (1) (E) as so amended is set forth in the margin.

On their estate tax return petitioners took a deduction of $750 paid the widow of decedent under section 1403 of Carroll’s Kentucky Statutes, the pertinent provisions of which are set forth in the margin. The deduction was disallowed by respondent.

In Allentown National Bank et al., Executors, 37 B. T. A. 750, the executors of the decedent claimed as a deduction $500 paid the widow of the decedent under section 12 (a) of the Pennsylvania Fiduciaries Act of 1917, which section was.quite similar to section 1403 of Carroll’s Kentucky Statutes. The Board sustained the disallowance of the deduction because there was no evidence “that the $500 was either ‘reasonably required’ or ‘actually expended’ for the support of the widow.”

In our opinion the decision in Allentown National Bank et al., Executors, supra, is controlling. Although the $750 was paid to the decedent’s widow, there is no evidence whatsoever that the $750 was either “reasonably required” or “actually expended” for her support.

On their estate tax return petitioners took a deduction of $4,000 for miscellaneous administration expenses. Respondent disallowed the deduction. The parties have stipulated that petitioners are entitled to deduct from the gross estate $3,270.43 as expenses actually and necessarily incurred in the administration of the estate.

In the statement attached to the notice of deficiency respondent computed a gross deficiency in estate tax of $87,233.89 and stated that no allowance was made for a credit on account of state estate, inheritance, legacy, or succession taxes paid, but that if the full 80 percent credit were allowed, the net deficiency in estate tax would be $38,400.01. However, in the notice of deficiency respondent actually determined a deficiency in estate tax of $38,400.01. In the answer respondent alleged that petitioners had not paid any state estate, inheritance, legacy, or succession taxes and that respondent had erroneously allowed the full 80 percent credit in determining the amount of the deficiency and prayed that the Board allow an increased deficiency in estate tax of $87,233.89. The parties have stipulated that petitioners paid $21,529.47 to the State of Kentucky as inheritance and estate taxes and $7,500 to the State of Washington as inheritance and estate taxes, oi a total of $29,029.47. Upon computation under Rule 50 petitioners should be allowed a credit in that amount.

Decision will ~be entered under Rule 50.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the United States—
      *******
      (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 •of the amount receivable by all other beneficiaries as insurance under policies taken out iby the decedent upon his own life.

       Article 26 of Regulations 80 Ras been amended recently by T. D. 5032, promulgated January 10, 1041, to provide as follows:
      “Art. 26. Insurance in favor of tile estate. — The statute requires tbe inclusion in the ■gross estate of all insurance receivable by the executor or administrator or payable to the decedent’s estate, and all insurance which is in fact receivable by, or for the benefit of, the estate. It includes insurance effected to provide funds to meet the estate tax, and any other taxes, debts, or charges which are enforceable against the estate. The manner in which the .policy is drawn is immaterial so long as there is an obligation, legally binding upon the beneficiary, to use the proceeds in payment of such taxes, debts, or charges. The full amount of the proceeds so receivable, without the benefit of any exemption, forms a part of the gross estate, though all the premiums or other consideration wherewith the insurance was acquired may have been paid by a person other than the decedent. If the decedent procured insurance in favor of another person or corporation as collateral security for a loan or other accommodation, the insurance is considered to be receivable for the benefit of the estate. The amount of the loan outstanding at decedent’s death •will be deductible in determining the net estate, and the interest thereon will be deductible in accordance with, the provisions of article 36.”

       Aet. 251 Pawable insurance. — * * *
      *******
      * * * Legal incidents of ownership in the policy include, for example: The right of the insured or his estate to 'its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc.

         Sec. 3i>3. For the purpose of the tax the value of the net estate shall be determined— (a) in the ease of a citizen or resident of the United States, by deducting from the value of the gross estate—
      (1) 'Such amounts—
      *******
      (D) for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, and
      * * * * * •* *
      as' are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after thé death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth.

       Sec. 303. (cl) For the purposes of this title, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent’s property or estate, shall not be considered to any extent a consideration “in money or money’s worth.”

       Report of the Committee on Ways and Means, H. Kept. No. 708, 72d Cong., 1st sess., p. 48: Report of the Committee on Pina nee, S. Rept. No. 665, 72d Cong., 1st sess., p. 51.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a citizen or resident of the United States, by deducting from the value of the gross estate—
      (1) Such amounts—
      **■}!#*#*
      (E) Reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent.

       Sec. 1403. Personal estate of intestate; surplus; how distributed; articles or money set apart to widow or children; appraisement; renunciation of will. — Where any person shall die intestate as to his personal estate, or any part thereof, the surplus, after payment of funeral expenses, charges of administration and debts, shall pass and be distributed among the same persons, and in the same proportions, to whom and in which real estate is directed to descend, except as follows:
      * * # * * *
      Fifth. Personal property or money on hand or in bank to the amount of seven hundred and fifty dollars ($750) shall be exempt from distribution and sale, and shaU be set apart by the appraisers of the estate of an intestate to his widow and infant children, or if no widow, to his infant children or child surviving him. And a like amount of property or cash shall be exempt from distribution and sale and shall be set apart by them to the surviving infant children or child of a widow who dies intestate.
      The appraisers shall state in their appraisement the money or the articles and value of each, set apart by them to the widow, or infants, separately to the articles appraised for sale, but if the widow be present at the time of the appraisement, or any one authorized by her in writing, she may make her selection out of the property appraised to the amount of said seven hundred and fifty dollars ($750.00) and said appraisers shall so report. The provisions of this section shall apply to cases where the husband dies testate and the widow renounces the provisions of the will in the time prescribed by law.


text:
    Lottie Zukor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99901.
    Promulgated March 6, 1941.

      Marshall D. Hall, Esq., and F. A. Pike, O. P. A., for the petitioner.

      Samuel Taylor, Esq., for the respondent.
   OPINION.

Kern : The sole question is whether one-half of the sum of $45,000 paid by petitioner’s husband, Adolph Zukor, in the taxable year 1937 in compromise of two suits begun in 1934 against him and others in New York is deductible from petitioner’s gross income for that year under section 23 (a) of the Revenue Act of 1936. The two spouses, as they might properly do, each reported one-half of the earned income. United States v. Malcolm, 282 U. S. 792. Each claimed also one-half of the deductions related to that income, including the expense in question. Obviously, in California, as in Texas, if the debt was incurred by the husband in that state during coverture and was, therefore, a community debt, one-half would be deductible by each spouse. Alice G. K. Kleberg, 43 B. T. A. 277. The character of the expense is not in controversy. The question is, therefore, narrowed to whether petitioner, who was residing in the community property State of California in the taxable year, is entitled to such a deduction arising out of litigation instituted in and growing out of acts performed in the noncommunity property State of New York. The nature of the two suits has been sufficiently set out to make recapitulation here unnecessary beyond saying that they both grew out of alleged improper acts of petitioner’s husband and others while he was an officer and/or director of the Paramount Publix Corporation in the State of New York.

Respondent confesses that he hap been able to find no cases precisely in point here, but contends that the obligation, having arisen while petitioner and her spouse were not residing in California, was his alone, and cites various cases holding that the property of the husband acquired in a noncommunity property state remained his separate property after his removal to California; Charles A. Shea, 30 B. T. A. 1265; affd., 81 Fed. (2d) 937; W. L. Honnold, 36 B. T. A. 1190; Ruth B. Rains, 38 B. T. A. 1189. He does not trace, however, the progress of California legislation on this subject to show what rule is now applicable.

We must here look to the law of California first. The Civil Code of California, by sections 162 and 163, defines the separate property of spouses, and by section 164 defines community property as follows:

All other property acquired after marriage by either husband or wife, or both, including real property situated in this State and personal property wherever situated, heretofore or hereafter acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this State, is community property; * * *

This provision is the result of an amendment on July 27, 1917, and another in 1923, for the provision as it stood previously was held by the State Supreme Court in In re Arms' Estate, 186 Calif. 554; 199 Pac. 1050, to mean much less:

It has long been the established law of this state that where a husband brings into this state money or property acquired by him during coverture in another state, by whose laws it was his separate property, it remains his separate property after it reaches this state, and that any property acquired therewith in this state, either by purchase or exchange, is also the separate property of the husband.

Since the year here involved is 1937, the section as amended in 1917 and 1923 would be applicable. It is significant, therefore, that the new provision, after first having been upheld by the State Supreme Court, was, in In re Thornton's Estate (Cal., 1934), 33 Pac. (2) 1, held unconstitutional, as infringing the due process and privileges and immunities clauses of the Fourteenth Amendment of the Federal Constitution. As we said in Shea's case, supra, at page 1269, commenting on this decision, “The result is that the rule in California is now the same as it was prior to the amendments to section 164, and property acquired in another state by whose laws it was the separate property of the husband remains his separate property when taken into California, In re Arms' Estate, supra, and under section 163 the ‘rents, issues, and profits thereof’ are his separate property.”

This is the rule in respect of separate personal property acquired in a noncommunity property state and thereafter brought into California. Neither party has cited any California law in respect of obligations incurred in a noncommunity property state. Respondent points out what is obvious, that the liability in these New York suits was single and that of the husband, when the suits were instituted and, under New York law, when that liability was discharged by payment. He argues, therefore, that the obligation remained the separate obligation of the husband after his removal with his wife to California, when California law would apply; and in support of his contention he ventures upon the doubtful argument, drawn from Helvering v. Fitch, 309 U. S. 149; and Helvering v. Leonard, 310 U. S. 80, that the law of a /state must be proved as a fact by tbe taxpayer at bis peril in courts and administrative tribunals of the United States.

We think it unnecessary to examine this argument more carefully,, for a more obvious answer lies in the very nature of deductions allowed in the Federal revenue acts. Had the California courts upheld the constitutionality of section 164 of the Civil Code, as amended, a question of more difficulty would have been presented; for where the law of the state of the new domicile has impressed hitherto separately acquired personalty of the husband with the interests of the marital community, it would not be unreasonable to assume in petitioner’s favor that separate obligations of the husband would likewise become joint obligations of husband and wife. In such a posture of affairs the very nature of allowed deductions in the Federal revenue acts, which are correlative to interests owned, would, in justice, require their allowance here. See Kleberg, supra. But this is not the case. Property of the husband separately acquired in a noncommunity property state remains his property in California as if section 164 had not been amended, and we think that deductions for liabilities arising against him in a noncommunity property state should be treated in the same way and are allowable only to the husband, even though satisfied after the husband and wife have become domiciled in a community property state.

Judgment will be entered for the respondent.