author: Murdoch :

text:
    Estate of Philipina Schaub, Margaretha Weber, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. Margaretha Weber, Petitioner, v. Commissioner of Internal Revenue, Respondent. John Bottjer, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry R. B. Bowden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89661, 89662, 89663, 89666.
    Promulgated August 22, 1939.

      Thomas M. Willems, Esq., for the petitioner.

      Gomoay Kitchen, Esq., for the respondent.
   OPINION.

Murdoch :

The Commissioner determined a deficiency of $6,560 in the income tax of the estate of Philipina Schaub for the calendar year 1933 (Docket No. 89661), and he determined that the other three petitioners are liable for that deficiency as transferees. The deficiency results from including $52,480 in the income of the estate as a capital gain from a sale of real estate. The facts are found in accordance with the stipulation of the parties.

Philipina Schaub died in 1923. She owned at that time a farm of 8y2 acres in Queens, New York. Her will provided in part as follows:

Thied : ALL the rest residue and remainder, of all of my real and personal property of what nature and hind and wheresoever situated I Give, devise and bequeath unto my children as above named, to be divided unto them equally, share and share alike, and should any of my said children die, leaving lawful issue, their share or shares, are to be divided as follows: to wit: I direct that the said issue, are only to receive Three Quarters of their parent’s share into my estate, and the balance of One Quarter Share thereof, to be given unto the husbands of my said daughters, if then surviving.
Foubth : I direct my executors, as hereinafter named, to sell and convey all my real property of what nature and kind, at a public or a private sale, and empower them to give a proper deed or deeds of conveyance for the same, and out of the proceeds thereof to divide the same unto my said legatees as above named, as by this will directed.

The farm was a part of the residuary estate. The decedent was survived by three children, Margaretha Weber, John Bottjer, and Jeanette Bowden. The latter died on February 23, 1925, and her husband succeeded to all of her rights in the residuary estate of her mother. The executors of the estate of Philipina Schaub, acting under the power granted to them in paragraph “Foukth” of the will, sold the farm for $100,000 and conveyed it to the purchaser on November 15, 1929. They received $25,000 of the purchase price in cash and immediately distributed it to the three beneficiaries. The balance of the purchase price was evidenced by a bond and mortgage for $75,000. The bond and mortgage were paid in full on July 17, 1933. The executors immediately distributed the $75,000, less $5,-136.42 claimed as deductible expense of the estate, to the three beneficiaries. The executors thereafter had no property of the estate.

An information return on form 1041 was filed on behalf of the estate for 1929, showing a profit of $69,973.33 from the sale of the farm and reporting one-fourth of that profit as income for 1929. The return also showed that all of the net income was distributed to the three beneficiaries, $5,720.59 going to each.

An information return on form 1041 was filed on behalf of the estate for 1933, reporting the other three-fourths of the profit as income for 1933 and showing that all of the net income was distributed to the three beneficiaries, $16,789.53 going to each.

Bowden reported all of his share of the profit from the sale of the farm on his return for 1933. The other two beneficiaries reported on their returns for 1933 the distributions of net income of the estate received by them in that year, and later filed claims for refunds of the tax paid on that income.

The Commissioner has determined that the $52,480 was taxable income of the estate for 1933 and has not allowed any deduction for distributions to the beneficiaries.

The petitioners concede that the gain would be taxable to the estate if there had been some necessity for the executors to have title to the farm. But they contend that the executors never had title, title vested in the children immediately upon the death of their mother, title passed to the purchaser from the children, not from the executors, the latter had only a naked power to sell and distribute the proceeds, taxable gain from a sale can result only to that one who owned the property, and, consequently, the gain in question was that of the beneficiaries and not of the estate. No authority directly in point is cited for the conclusion reached. The respondent points out that the executors were directed, to sell the real estate and distribute the proceeds and they did exactly as they were directed. He concedes that the beneficiaries could have elected to take the real estate. But they did not do so. He concludes that the gain is taxable to the estate.

Section 161 (a) of the Revenue Act of 1932, like its predecessors, imposesi a tax upon “the income of estates”, including “income received by estates of deceased persons during the period of administration or settlement of the estate.” The wording of this will is not exactly like that in any other case which has been brought to our attention. It does “direct” the executors to sell. They made the sale and conveyed the title. The beneficiaries did not convey anything. It does not appear that under the laws of New York no title vested in the executors or that title passed to the purchaser from the residuary legatees. The distribution of the money was in exact compliance with the will. The sale was made “during the period of administration or settlement of the estate” by the fiduciaries in accordance. with the directions given them in the will. The income, under such circumstances, is income of the estate within the meaning of section 161 (a). Clarence Strecker, Executor, 6 B. T. A. 19; County National Bank & Trust Co.., Executor, 39 B. T. A. 357; Anderson v. Wilson, 289 U. S. 20.

The petitioners contend, in the alternative, that in any event the estate is entitled to a deduction for the distribution of its income. The right to such a deduction depends upon whether there is any provision in section 162 authorizing it. Those provisions have been interpreted as allowing a deduction to the estate only in case the income may properly be included in the taxable income of the beneficiary. See Old Colony Trust Co. et al., Executors, 38 B. T. A. 828, and cases there cited. Here the entire amount receivable by the beneficiaries ($100,000 less expenses) came to them, not as income, but as a nontaxable “bequest, devise, or inheritance.” Sec. 22 (b) (3). The estate is not entitled to any deduction for such distributions.

The petitioners also contend that the respondent has failed in his burden of showing transferee liability. However, he has shown that these distributions in 1933 left the estate with no property and the taxes unpaid, and the value of the distributions exceeded the taxes. No further proof was necessary.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Martin O’Connor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96639.
    Promulgated August 22, 1939.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $765.82 in the petitioner’s income tax for 1936. The only issue for decision is whether the gain from the sale of United States bonds was community property, as the petitioner contends, or was the separate property of the petitioner, as the Commissioner has determined. The case has been submitted upon the pleadings, all of the allegations of fact in the petition having been admitted in the answer. The facts are found as pleaded.

The petitioner acquired $326,000 face value of United States bonds as a legatee and devisee of his brother. The brother died on October 20,1932, at which time the market value of the bonds was $321,775.27. The petitioner sold the bonds during 1936 for $347,026.56 and realized a profit, of which 60 percent, or $15,150.77, is to be taken into account in. computing net income. The petitioner at all times material hereto was married and living with his wife in Victoria, Texas. They each reported one-half of the last mentioned amount on their separate returns for 1936. The Commissioner, in determining the deficiency, included the entire amount in the income of the petitioner on the ground that all of the proceeds from the sale were his separate property.

The parties agree that the bonds were at all times the separate property of the petitioner. They also agree that the laws of Texas govern the question of whether all of the proceeds from the sale of those bonds were the separate property of the petitioner, or the excess of the amount realized over the value of the bonds when acquired by the petitioner represented community property. The law of Texas provided in 1936 that “all property of the husband, both real and personal, owned or claimed by him before marriage, and that afterwards acquired by gift, devise, or descent, as also the increase of all lands thus acquired, shall be his separate property.” Art. 4613, Vernon’s Texas Statutes - 1936. It is not argued here that the words “increase of all lands thus acquired” are to be taken literally, as if they referred only to increase in real estate. On the contrary, the petitioner concedes that mere enhancement in value of separate personal property is “increase in lands” and remains separate property. The point which he would make is that the increase in value becomes community property when it is realized through a sale. While the revenue acts provide that the excess realized over basis is gain, yet it does not appear that the laws of Texas include any similar method for determining that a part of the sale price of separate property is community property. The petitioner has not cited a single authority for concluding that any part of the proceeds from the sale of separate property is community property in the absence of some contribution by the community towards the increase in value. Here the bonds were the separate property of the petitioner. The increase in their value was in no way produced by his efforts or the efforts of the community.

Each party has cited a number of authorities to show that the law of Texas favors his view, but upon analysis we conclude that those most nearly in point support the determination of the Commissioner. Cases involving the use of separate property in some mercantile or other business in which the husband was actively engaged are not in point. The income resulting from the employment of his time and energy is community property. Likewise, interest and rents from separate property are community property. If the proceeds from the sale of separate property are inseparably intermingled with community property, the latter is always favored and the former may lose its identity. The case of W. T. Carter, Jr., 36 B. T. A. 853, relied upon by the petitioner, is distinguishable for the reasons just mentioned. There the husband acquired some stock in a family corporation in Texas as a gift from his father. Later, he acquired additional stock by (1) purchase with community funds, (2) stock dividends, and (3) gift from his mother. He then sold some of the stock at a profit, which the Board held was community property taxable one-half to each spouse. The Board there said:

Where the increase in separate property was spontaneous and independent of assistance from the community, it was separate property, Stringfellow v. Sorrells, 82 Tex. 277; 18 S. W. 689, but where it involves care, labor, or attention from the members of the community, it is community property, Hayden v. McMillan, 23 S. W. 430. In the case at bar, petitioner devoted the major portion of his time to the management and operation of the corporation which issued the stock in controversy.

The case of Brand v. Brand, 102 S. W. (2d) 210, was apparently another where separate and community funds were commingled.

The case of Anita Owens Hoffer, 24 B. T. A. 22, is directly in point. There the wife had acquired some corporate stock by gift. She sold it at a profit during coverture while living in Texas. The Commissioner contended and the Board held that the gain was her separate property, citing Oscar Chesson, 22 B. T. A. 818, and G. C. M. 8209, C. B. IX-2, p. 326. There was no indication that that community had contributed in any way to the increase in value. The later Carter case, supra, in no way impinges upon the rule of the Hoffer case. The following is from Oscar Chesson, supra, which was affirmed, 57 Fed. (2d) 141:

The answer to this question depends upon the local law. Stephens v. Stephens, 292 S. W. 290, has been accepted as a leading case defining the property rights of husband and wife in royalties from the separate property of the husband. See John O’Neil et al., supra, and Ferguson v. Commissioner of Internal Revenue, 45 Fed. (2d) 573, affirming W. P. Ferguson, 20 B. T. A. 130, in this regard. The opinion of the Court in the Stephens case included the following reasoning which is especially pertinent to the instant case:
The land is separate property. The oil in place is realty capable of distinct ownership, severance and sale. It is a part of the corpus of ap-pellee’s sole estate. He conveyed his oil and received, as. the principal consideration therefor, one-eighth of the production. No skill, labor or supervision of either of the spouses, and no community property was expended in the sale or production. The oil and the proceeds thereof received by the appellee were neither rent nor profits, within the meaning of the law making such common property, but the consideration for separate realty. Extracting the oil from beneath the surface depletes and exhausts forever the corpus of his separate property; removing it to the top of the ground changes it from real to personal property, but such change or mutation, and the money received, are definitely traced, and, in our opinion, the fund in controversy belonged to appellee in his sole and separate right.
See also James R. Parkey, 16 B. T. A. 441.
We follow these decisions in concluding that the income from the royalties here under consideration belongs to the petitioner and should therefore be reported for income tax purposes in its entirety by the petitioner.

Since the community contributed in no way to the increase in value of the bonds here in question, and there appears to be no distinction between such increase and the increase in value of real estate, we conclude that the entire proceeds of the sale of the bonds was the separate property of the petitioner under the laws of Texas and the Commissioner did not err in taxing the proper percentage of the gain as his income.

Decision will l>& entered, for the respondent.


author: Tyson:

text:
    Elmer W. Hartzel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78769.
    Promulgated August 23, 1939.

      D. W. Maxon, Esq., and Oletus G. Roetzell, Esq., for the petitioner.

      Henderson A. Melville, Esq., for the respondent.
   OPINION.

Tyson:

Petitioner contends that the issuance by the company direct to the older stockholders of all the new preferred stock and direct to the younger stockholders of all the new common stock, in lieu of the old common stock theretofore respectively held by them, constituted part of an entire transaction of exchange of such stock which was in pursuance of and embodied in a plan of reorganization, within the provisions of section 112 (b) (3) of the Revenue Act of

1928. and that consequent gain or loss therefrom is not to be recognized.

Respondent concedes that there was a reorganization, through recapitalization, within section 112 (b) (3), supra, in so far as the reorganized company was authorized to issue the new preferred and new common stock for the outstanding old common stock on a pro rata basis. However, he contends that the reorganization was completed when the certificate of recapitalization was filed with the Secretary of State of Ohio authorizing the issuance of new preferred and common stock on a pro rata basis and that the new preferred and new common stock “were issued for all intents and purposes in accordance with the terms” of that certificate; that when thereafter the older stockholders received direct from the reorganized company all its preferred stock in lieu of the old common stock theretofore owned by them, and when the younger stockholders received direct from the company all its new common stock in lieu of the old common stock theretofore owned by them, such latter transactions were separate and independent ones and constituted no part of the reorganization, but constituted a taxable exchange of shares in the reorganized company between the stockholders in their individual capacities; and that the fact that the stockholders, by their individual agreement and by resolution in their formal special meeting, authorized and instructed the company to “do the exchanging for them does not change the picture.”

The question then occurs whether the issue by the reorganized company of all its preferred stock direct to the older stockholders and of all its new common stock direct to the younger stockholders, in lieu of the old common stock held by such stockholders, was in pursuance of a plan of reorganization within the purview of section 112 (b) (3), supra, as contended by petitioner. We think it was. The plan was initiated by written agreement of all the individual stockholders with the definite object in view of finally placing in the ownership of the old stockholders all the preferred stock and in the ownership of the younger stockholders all the common stock for the sole purpose of giving the younger stockholders a greater voice in the control of the company because of certain contingencies which might arise in the future, i. e., that some of the older stockholders might die, their stock go to their children, and voting control of the company thus pass into the hands of people totally unfamiliar with its affairs, who might displace the younger stockholders from the positions they held with the company.

The plan so initiated by the individual stockholders embraced a provision for such direct issuance by the company of its new preferred stock to the older stockholders and of its new common stock to the younger stockholders. The plan as so initiated was adopted and approved by unanimous vote of all the stockholders in official meeting, through the medium of two resolutions passed at that meeting, the second of which, after expressly authorizing and instructing the proper officers of the company to issue all the preferred stock direct to the older stockholders and all the common stock direct to the younger stockholders, stated further “and that the issuance of such stock” in that manner “shall be considered as a full compliance with the terms of said plan of reorganization.”

It is true that the method adopted in the plan to effectuate the desired result, i. e., that when the whole plan was consummated the younger stockholders would own all the new common stock and the older stockholders would own all the new preferred stock, included what may be termed a “detour” (the provision for the pro rata distribution of the new stock). However, this “detour” was used because of real or feared impediments of the Ohio State Statutes with regard to what was requisite to be set out in a certificate of recapitalization. “Detours” similarly occasioned have not prevented this Board and the courts from holding that reorganizations in which “detours” occurred were, nevertheless, effectuated within the reorganization statutes. Howard v. Commissioner, 56 Fed. (2d) 781, affirming 20 B. T. A. 207; certiorari denied, 287 U. S. 619; Thurber v. Commissioner, 84 Fed. (2d) 815; Marh Kleeden, 38 B. T. A. 821; cf. Gladys Bilicke, 20 B. T. A. 784.

But respondent contends, in effect, that even if the plan of reorganization embraced all steps, as claimed by petitioner, including the direct issuance to the older stockholders of all the new preferred stock and the direct issuance of all the new common stock to the younger stockholders in lieu of pro rata distribution, yet, nevertheless, the reorganization did not come within the ambit of section 112 (b) (3), swpra, because even in such event the interests of the various stockholders in the company, including the petitioner, after recapitalization was consummated, were different in that (a) the older stockholders received in exchange preferred for common stock and (b) the voting interests of the stockholders were so changed as to greatly increase the value of the stock of the younger stockholders, including petitioner, thus interrupting the continuity in interest of the stockholders necessary to a reorganization within the meaning of the applicable statute.

As to the receipt of new preferred for old common stock by the older stockholders, the following authorities establish the principle that such would not exclude the reorganization from the provisions of section 112 (b) (3), supra. H. E. Muchnic, Administrator, 29 B. T. A. 163; cf. Burnham v. Commissioner, 86 Fed. (2d) 776, affirming 33 B. T. A. 147; certiorari denied, 300 U. S. 683; and L. & E. Stirn, Inc., 39 B. T. A. 143.

As to the contention that the younger stockholders had a greater voting power after the reorganization of the company and consequently the value of the new stock received by them was greater than the value of the old stock exchanged therefor, it is unnecessary to say more than that they, as well as the older stockholders, acquired through their new stock a definite, substantial, and continuing interest in the reorganized company. Helvering v. Minnesota Tea Co., 296 U. S. 378; Helvering v. Watts, 296 U. S. 387; G. & K. Manufacturing Co. v. Helvering, 296 U. S. 389; and Miller v. Commissioner, 84 Fed. (2d) 415. Cf. Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; and Independent Oil Co., 35 B. T. A. 32.

We conclude that the respondent erred in the respects stated in petitioner’s assignment of errors Nos. (1) and (2) and accordingly hold that the exchange here involved, by petitioner of his old stock in the Hardware & Supply Co. for new stock in that company after its reorganization, did not result in recognizable gain by the petitioner.

There was much testimony as to the value of the new preferred and common stock received by the various stockholders as a result of the reorganization of the Hardware & Supply Co. However, our conclusion that the exchange of stock was one in which gain is not recognizable obviates the necessity of our making findings as to such values and of deciding the issue presented by petitioner’s assignment of error No. (3).

Decision will he entered under Rule 60.

       (b) Exchanges solely in hind.—

      (3) Stock foe stock on reorganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.


author: Black:

text:
    C. J. Wrightsman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91973.
    Promulgated August 23, 1939.

      Raymond Tollett, Esq., R. B. Gannon, Esq,, and Harry O. Weeks, Esq., for the petitioner.

      James L. Backstrom, Esq., James H. Yeatman, Esq., and M. L. R. Wade, Esq., for the respondent.
   OPINION.

Black:

The facts in the instant case show that the salary of $50,000 was credited to petitioner by the Wrightsman Oil Co. at the end of 1936 rather than being paid to him in cash. The corporation, however, was thoroughly solvent and able to pay and the petitioner, although on the cash basis, makes no point that the salary was not paid to him in 1936.

The only question involved, therefore, is whether the entire $50,000 credited to petitioner by the company as salary for the year 1936 is community income or whether 357/365 thereof is petitioner’s separate income. Petitioner contends that the entire salary is community income for the reason that the board of directors did not vote it to him until after he and his wife had moved from the noncommunity property State of Oklahoma and had established their legal domicile in the community property State of Texas, and that there had been no prior agreement thereto that petitioner would receive any salary for the year 1936. Petitioner contends that the $50,000 salary thus credited to him is just as much community property as the $50,000 dividends declared and paid him on the same date by the company, which the Commissioner has treated as commmiity income. The respondent contends that the origin or inception of the right to the salary occurred while the petitioner and his wife were domiciled in Oklahoma; that the salary was earned ratably throughout the year; that the ripening of the right must be held to relate back to its incipiency; and that the portion earned while the petitioner and his wife were residents of Oklahoma must, therefore, be held to be petitioner’s separate property and income.

Questions relating to the ownership of property acquired after petitioner and his wife established their legal domicile in Texas must, of course, be decided by the laws of that state. Poe v. Seaborn, 282 U. S. 101. See also articles 4627, 4613 (as amended by Acts of 1929, 41st Legislature, p 66, ch. 32, sec. 1), and 4619 (as amended by Acts of 1927, 40th Legislature, p. 219, ch. 148) of Yernon’s Annotated Texas Statutes, which are printed in the margin.

Speer, in his Law of Marital Eights in Texas, 3d ed., p. 254, said:

The status of the property of marital partners is determined by the time and circumstances attending its “acquisition.” It is therefore helpful to keep in mind what is meant by “acquired.” The term signifies the origin or inception of the right, rather than its later ripening or fruition.

In Jackson v. Jackson, 258 S. W. 231, the Texas Court of Civil Appeals, among other things, said :

The character of the title to property with reference to being separate or community depends upon the existence or nonexistence of the marriage at the time of the incipiency of the right by virtue of which title is finally vested, and when title is so vested it relates back to that time, Creamer v. Briscoe, 101 Tex. 490, 109 S. W. 911, 17 L. R. A. (N. S.) 154, 330 Am. St. Rep. 869; Welder v. Lambert, 91 Tex. 510, 44 S. W. 281.

In Commissioner v. King, 69 Fed. (2d) 639, affirming 26 B. T. A. 1158, King, while married and a resident of Texas, entered into an oral contract in 1920 to prosecute a lawsuit and receive compensation therefor only in the event that his client won. In 1923, while the suit was pending on appeal, King’s wife died. The suit was settled favorably to King’s client in 1924, and King was allowed a fee of $52,000, which was paid to him in 1925. The Commissioner determined and contended that the entire fee was King’s separate income, taxable to him in 1925, because his wife had died prior to the time the litigation was successfully concluded and King’s fee was allowed and paid. King contended that the fee had its incipiency in the contingent fee contract entered into in 1920, and under the principles enunciated in Jackson v. Jackson, supra, was, therefore, community property belonging one-half to himself and one-half to the estate of his deceased wife. The court agreed with his contention and affirmed the Board, which had so held.

In the instant proceeding petitioner concedes that the decision of the court in the King case is applicable and that respondent’s determination is proper if it can be correctly said that prior to December 30, 1936, petitioner had an enforceable right to compensation for the services he performed for the Wrightsman Oil Co. during that part of the year 1936 in which he and his wife were domiciled in Oklahoma. He contends that, since the bylaws of the Wrightsman Oil Co. provided that the salaries of all officers of the corporation should be fixed by the board of directors, and since the board did not vote him a salary for 1936 until December 30, 1936, therefore, prior to December 30, 1936, there was no contract, agreement, or arrangement for compensation, either expressed or implied; and that under such circumstances the general rule is that he had no enforceable right to compensation prior to the action taken by the board of directors on December 30, 1936, citing as authorities Lofland v. Cahall, 13 Del. Ch. 384; 118 Atl. 1; 10 Texas Jurisprudence, p. 934; Austin City Railroad Co. v. Swisher, 1 White and Wilson Texas Unreported Cases, par. 75; Southwestern Portland Cement Co. v. Latta & Happer, 193 S. W. 1115; Fletcher’s Cyclopedia of Corporations (Permanent ed.), vol. 5, pars. 2112 and 2113; and Pew v. First National Bank, 130 Mass. 391.

It seems clear that petitioner had no express contract with the Wrightsman Oil Co. for the services he was rendering. If he had an enforceable right to compensation, it must be by virtue of an implied contract. We think the evidence is sufficient to show that there was such an implied contract.

With reference to the $50,000 salary credited to petitioner, December 30, 1936, the following questions and answers are found in Wrightsman’s testimony at the hearing:

Q. Prior to that time had you or not any agreement or understanding with the Wrightsman Oil Co. as to whether or not you would be paid a salary for the services rendered that company for the year 1936?
A. No, sir, there was no understanding.
Q. Had you and the company in previous years followed the same practice?
A. Yes, sir. That is, of uncertain and indeterminate amounts until the end of the year.
Q. Were there years in which you were paid no salary?
A. That is my best recollection, yes, sir.

We construe this and other testimony in the record to mean that it was understood by petitioner and the corporation that he was to receive compensation for Ms services of an uncertain and indeterminate amount, if the affairs of the corporation were conducted successfully, and the amount thereof was left for determination by the board of directors at the end of the year.

The services rendered by petitioner to the Wrightsman Oil Co. were very valuable. As to this there can be no doubt. Petitioner was not only a director and president of the company, a business concern of large affairs, but was its manager and chief executive officer, or, as he expressed it on the witness stand, the “work ox” of the company. He devoted all of his time and attention to managing and supervising the affairs of the company and its 100 percent owned subsidiary, the Home Co., which during the taxable year was merged with the parent company. We think petitioner’s services were rendered under such circumstances as to raise a fair presumption that the parties intended and understood that they were to be paid for on one contingency, namely, that the corporation’s profits warranted the payment. In such a situation petitioner’s compensation for his services was no more contingent than was King’s in Commissioner v. King, supra, where King was to receive a fee if he prosecuted the litigation to a successful conclusion and none if he lost.

In our opinion, the only effect of the resolution of December 30, 1936, was to fix the amount of the salary, just as the order of the court fixed the amount of King’s fee in Commissioner v. King, supra, but was not the inception of the right. The resolution in the instant case did not create the right to the salary. That right accrued as the services were rendered, upon an implied contract that the services would be paid for at what they were reasonably worth, depending upon the earnings of the company. Cf. Fitzgerald & Mallory Co. v. Fitzgerald, 137 U. S. 98, 111; National Loan & Investment Co. v. Rockland Co., 94 Fed. 335, 338; Montana Tonopah Mining Co. v. Dunlap, 196 Fed. 612, 619; Vaught v. Charleston National Bank, 62 Fed. (2d) 817. If petitioner had no agreement, either expressed or implied, that he should receive compensation for the services which he had rendered in 1936 prior to the vote of the directors on December 30,1936, then the directors violated their trust in voting the salary to petitioner for past services performed and rendered themselves liable to any complaining stockholder. See the same authorities just above cited.

We hold, therefore, that the respondent was correct in determining that 357/365 of the $50,000 voted petitioner by the board of directors of the Wrightsman Oil Co. as salary “for the year 1936” represented petitioner’s separate income. Commissioner v. King, supra. Cf. Asher v. Welch, et al., United States District Court, Southern District of California, Central Division, decided May 24, 1938.

Decision will be entered for the respondent.

       Art. 4627. jRights of persons married elsewhere. — The marital rights of persons married in other countries who may remove to this State shall, in regard to property acquired in this State, during the marriage, be regulated by the laws of this State.
      Art. 4613. Uusl)andJs separate property. — All property of the husband, both real and personal, owned or claimed by him before marriage, and that acquired afterwards by gift, devise or descent, as also the increase of all lands thus acquired shall be his separate property. * * *
      Art. 4619. Community property. — Section 1. AU property acquired by either the husband or wife during marriage, except that which is the separate property of either, shall be deemed the common property of the husband and wife; and all the effects which the husband and wife possess at the time the marriage may be dissolved shall be regarded as common effects or gains, unless the contrary be satisfactorily proved. * * *
      40 B. T. A.


author: Turner :

text:
    Virginia L. Houghteling, Helen L. Richardson Abdill and The Second National Bank of Danville, Illinois, Executors of the Estate of Helen A. Gannon, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89698.
    Promulgated August 30, 1939.

      Horace E. Gunn, Esq., and Leo W. Burk, Esq., for the petitioners.

      Franklin F. Korell, Esq., for the respondent.
   OPINION.

Turner :

This proceeding involves a deficiency in estate tax in the amount of $11,412.35. The question presented is -whether, the amount of $90,000 representing the value of certain shares of stock transferred by the decedent to a trust prior to her death should be included in her gross estate under section 302 (d) of the Revenue Act of 1926 as amended. In his deficiency notice, respondent stated that his determination was in accordance with section 302 (c) and/or section 302 (d). At the hearing section 302 (c) was again mentioned as a basis for the claimed deficiency, but in neither his opening statement nor in his brief has counsel for respondent advanced any argument to indicate the applicability of that section. Furthermore, we find nothing in the facts of record to indicate that it is applicable. Accordingly our discussion here will be limited to the applicability of section 302 (d).

The case was submitted on a stipulation of facts and on documentary evidence placed in record by stipulation of the parties. The said stipulation and documents referred to will constitute our findings of fact, and only such, facts as are indicated in the discussion of the issue will be recited.

The decedent, Helen A. Cannon, died testate on February 23, 1935. Her will was duly probated in the Probate Court of Vermilion County, Illinois, and the petitioners are the duly appointed and qualified executors. She had never married and her heirs at law were her nieces, Virginia Houghteling and Helen Eichardson Abdill, daughters of her sister, Mabel C. LeSeure.

On March 28, 1930, the decedent and Mabel LeSeure entered into a trust agreement under the terms of which they transferred to the Second National Bank of Danville, Illinois, as trustee, 2,660 shares of the capital stock of that bank, 900 shares of which were contributed by the decedent and 1,160 of which were contributed by her sister. These shares of stock represented the controlling interest in the Second National Bank and had been held by the Cannon family for many years. The trust indenture provided that during the joint lives of the sisters the income from the trust was to be payable to them in such proportions and amounts as they might designate and that after the death of either sister the income was to be paid to the survivor for life. The indenture further provided as follows:

Third,: After the death of both of the Settlors, all of said shares of stock shall be assigned, transferred, conveyed and delivered to the Trustees named and designated in the Last Will and Testament of Mabel O. LeSeure, subject to be managed, controlled, distributed and disposed of according to the exact manner and method and to the same beneficiaries under the same method and manner of distribution, accumulation and management as if or may be provided in the Last Will and Testament of Mabel C. LeSeure.
Fourth: The undersigned hereby declare that during the lifetime of the said Settlors, said shares of stock in said Second National Bank of Danville, Illinois, are held subject to a special power of appointment, vested in the said Settlors or the survivor of them, under and by which the said Settlors have the exclusive right of voting said stock in any stockholders’ meeting of the Second National Bank of Danville, Illinois, and executing proxies for such voting privileges. Said stock is also subject to the power of appointment, vested in the Settlors, of receiving and designating all stock rights accruing to said shares of stock and the right and power of the Settlors, or the survivor of them, to require said shares of stock in said Second National Bank of Danville, Illinois, to be sold and converted into money and the said fund derived from the sale of such shares of stock, subject to the same trust provisions hereof that may exist at the time of such sale and transfer of stock.
Fifth: During the joint lives of the Settlors, this Indenture and each and every trust thereby created may be revoked, either in whole or in part, by notice in writing to the Trustee, signed by the Settlors, or the survivor thereof, and by Virginia Houghteling and Helen Richardson, daughters of the Settlor, Mabel O. LeSeure, or in case of the death of either Helen Richardson or Virginia Houghteling, by the survivor thereof, and in ease of the death of both the said Virginia Houghteling and Helen Richardson, then this Indenture and each and every trust hereby created may be revoked, either in whole or in part, by notice in writing, signed by the Settlors alone or by the survivor thereof.
Sixth: The Settlors herein believe that a considerable portion of the value of the stock herein mentioned consists in the fact that it constitutes a majority of the stock of said Bank and the Trustee is hereby directed that no sale thereof shall be made unless such sale includes the entire amount herein mentioned, provided, however, that any of the beneficiaries mentioned herein, with or out of other funds under their control, may become purchasers of portions of said stock.
Seventh: In case of any revocation of this Trust, then the trust estate, or the portion thereof to which this Indenture may be revoked, shall be conveyed by the said Trustee to the Settlors as they may designate in writing, free from all trusts herein contained.

On March 29, 1930, the day following the date of execution of the trust agreement, Mabel C. LeSeure died, leaving a last will and testament which was duly probated in the Probate Court of Vermilion County, Illinois. She was survived by the decedent, Helen A. Cannon,, her two daughters, Helen Richardson Abdill and Virginia Houghteling, and two grandchildren, who were the children of Virginia Houghteling. Her will had been executed on June 25, 1928, and the terms thereof were known to Helen A. Cannon at the time of the execution of the trust instrument on March 28, 1930.

By the terms of her last will Mabel C. LeSeure had provided that the income from all of her stock in the Second Rational Bank of Danville, Illinois, should go to Helen A. Cannon during her lifetime, and that the stock itself should go to the Second National Bank of Danville, Illinois, Helen Richardson, and Virginia Houghteling, as cotrustees “to be disposed of and distributed, and the income paid, as provided” elsewhere in the will. The above shares are the same shares which had been transferred by Mabel C. LeSeure the day prior to her death under the trust agreement previously described.

All of the rest, residue, and remainder of her estate Mabel C. LeSeure also devised and bequeathed in trust to the same trustees named with'respect to the bank stock. The will of Mabel C. LeSeure thereafter provided as follows:

Sixth : Tbe income from all properties held by my said trustees, after the deduction of expenses, shall be paid in equal quarterly installments to my daughters, Helen Richardson and Virginia Houghteling, and my said Trustees, ■during the life of this trust shall have no power to accept or recognize any assignment made by my said daughters of any of the benefits accruing to them under this trust, subject to the bequest to my sister, Helen Cannon.
Seventh : In case of the death of either or both of my said daughters, leaving heirs of their body surviving them, then the said income shall be paid to such heir or heirs of the body of my said daughter or daughters deceased, or in ease such heirs are not of legal age, then the same sum shall be paid to the legal guardian of such heirs or heir until such heir or heirs become of legal age. Upon the death of either of my said daughters, if she shall leave heirs of her body surviving her, this trust shall continue for the benefit of such heirs of her body during the life of such heir and at their death be paid to their respective heirs at law. This provision in my Will is subject to the power of diminution or extension on tlie part of the trust as provided in Clause 9 hereafter.
Eighth : Should either of my said daughters die without heir or heirs of her body surviving her, I expressly will and devise that the share that would otherwise have vested in such deceased daughter, to my surviving daughter, and the heirs of her body, under the same terms and conditions as first herein specified, provided however, that the power of distribution to such heirs of the body, subject to the exercise of the powers herein expressly granted to each of my said daughters to further continue the period of distribution of the principal fund as provided in Clause 9 of this Will.
Ninth: I further devise and will to each of my said daughters, Virginia Houghteling and Helen Richardson, in the event only that they die leaving them surviving heirs of their body, the right and power by Will to provide for the continuation of the trust herein provided for the benefit of the heirs of her body, for a further period of time not in violation of the rule against perpetuities in the State of Illinois, or of providing that upon the death of such surviving daughter, the whole or any part of the trust fund may be paid by said Trustees to any or all of the heirs of the body of such surviving daughter and the trust, with respect to such heirs of the body, ended and terminated.
Tenth: In the event that either of my daughters should die without heirs of her body surviving her, whereby the use and benefit of the whole estate should come into said trustees for the benefit of my surviving daughter, and such surviving daughter should die without heirs of her body surviving her, then in such event, only, my said daughter so' surviving shall have the right and power to dispose of, by will, the cash securities and property remaining in this trust at the time of her death in the same manner as though such cash security and property were vested and possessed by her at such time.

With respect to the stock of the Second National Bank transferred by the decedent, Helen A. Cannon, to trust on March 28, 1930, she provided in her will as follows:

Third: I make no devise of the stock of the Second National Bank of Dan-ville, Illinois, heretofore owned by me, for the reason that said stock was transferred and assigned and conveyed to the Second National Bank of Dan-ville, Illinois, as Trustee, under a certain Trust Agreement dated March 28, 1930 between Mabel G. LeSeure and myself, wherein provision is made for the disposition of my interest in the proceeds of said stock, which Trust Agreement I hereby confirm.

On the estate tax return the petitioners included no amount in the gross estate with respect to the 900 shares of stock of the Second National Bank which had been transferred to trust on March 28, 1930, as previously described. The respondent has determined that such omission was erroneous and has increased the gross estate by the sum of $90,000 as representing the value of the said stock at the date of the decedent’s death. The parties have stipulated that the value used by the respondent in his determination was the correct value of the stock on that date.

The question for determination is whether or not the decedent at the time of her death alone or in conjunction with “any person” had the right within the meaning of section 302 (d), supra to alter, amend, or revoke the trust to which the bank stock had been transferred on March 28, 1930. Paragraph fifth of the trust instrument provided as follows:

Fifth: During the joint lives of the Settlors, this Indenture and each and every trust thereby created may be revoked, either in whole or in part, by notice in writing to the Trustee, signed by the Settlors, or the survivor thereof, and by Virginia Houghteling and Helen Richardson, daughters of the Settlor, Mabel 0. LeSeure, or in case of the death of either Helen Richardson or Virginia Houghteling, by the survivor thereof, and in case of the death of both the said Virginia Houghteling and Helen Richardson, then this Indenture and each and every trust hereby created may be revoked, either in whole or in part, by notice in writing, signed by the Settlors alone or by the survivor thereof.

It is tbe contention of the respondent that subsequent to the death of Mabel C. LeSeure the trust was revocable by the decedent, Helen A. Cannon, alone at any time up to the date of her death. The petitioners claim that there was no right of revocation in anyone except during the joint lives of the settlors, Mabel C. LeSeure and Helen A. Cannon, and that upon the death of Mabel C. LeSeure on March 29, 1930, the trust became irrevocable. In the alternative, it is claimed by the petitioners that, even if paragraph fifth quoted above should be construed as reserving the right of revocation in Helen A. Cannon in conjunction with Virginia Houghteling and Helen Richardson Abdill, the two parties last mentioned were all of the then beneficiaries of the trust and that the trust instrument gave them no rights in addition to the rights they already had under the law, and applying the decision of the Supreme Court in Helvering v. Helmholz, 296 U. S. 93, section 302 (d), supra, does not apply.

With respect to paragraph fifth of the trust instrument, the petitioners claim that the phrase “During the joint lives of the Settlors” appearing in the first line and the phrase “or the survivor thereof” appearing in the fourth line are repugnant, and they cite numerous decisions to support the proposition that under such circumstances the second phrase must give way to the first. The rule sought to be applied is merely an aid to interpretation, the primary object being to determine, if possible, the intent of the parties to any given instrument. In the instant case there is no necessity to go outside the instrument itself in order to determine the intent of the parties. By reading paragraph fifth as a whole, it is, in our opinion, obvious that the parties to the instrument had no thought or idea that the phrase “During the joint lives of the Settlors” should be construed as the petitioners here seek to construe it. Clearly, the parties did intend that the survivor of Mabel C. LeSeure and Helen A. Cannon should have the right to revoke the trust either in whole or in part under certain circumstances and subject to certain conditions therein prescribed. As we read the paragraph, the trust could be revoked by a notice in writing as follows: (1) By the settlors acting in conjunction with Virginia Houghteling and Helen Richardson Abdill; (2) by the survivor of the settlors acting in conjunction with Virginia and Helen; (3) by the settlors acting in conjunction with the survivor of Virginia and Helen; (4) by the survivor of the settlors acting in conjunction with the survivor of Virginia and Helen; or (5) by the settlors alone or the survivor thereof in case both Virginia and Helen should be deceased. Under paragraph fifth of the trust instrument, Helen A. Cannon, at the time of her death, had the power, acting in conjunction with Virginia Houghteling and Helen Richardson Abdill, to revoke the trust, and the claim of the petitioners that the trust was irrevocable from and after the death of Mabel C. LeSeure must be rejected.

In support of the petitioners’ alternative contention that the doctrine of Helvering v. Helmholz, supra, is controlling and that the said shares of stock do not therefore constitute a part of the gross estate of Helen A. Cannon, it is argued that the term “all of the then beneficiaries” as used in that case had reference only to beneficiaries with vested interests and did not include beneficiaries with contingent interests. Reasoning from that point, it is claimed that Virginia Houghteling and Helen Richardson Abdill were all of the beneficiaries with vested interests exclusive of Helen A. Cannon and that a right in these three parties to revoke the trust instrument was not, under Helvering v. Helmholz, a power to revoke within the meaning of section 302 (d), supra.

We think it clear that Helvering v. Helmholz, supra, is not authority for the proposition stated. The Supreme Court there made no distinction between the holders of vested interests and holders of contingent interests. The Court stated that the general rule is that all parties in interest may terminate the trust, and in a footnote there is a statement to the effect that no authority has been cited to the contrary in Wisconsin, the place of the transaction. Then with respect to the provisions of the trust instrument there under consideration the Court said “The clause in question added nothing to the rights which the law conferred”, and then concluded as follows: “Congress can not tax as a transfer intended to take effect in possession or enjoyment at the death of the settlor a trust created in a state whose law permits all the beneficiaries to terminate the trust.”

In the instant case the pleadings show that at the time of the making of the trust and at all times thereafter Virginia Houghtel-ing had two children. These two children were contingent beneficiaries under the will of Mabel C. LeSeure and under paragraph third of the trust instrument executed March 28, 1980, the said will also served to make them contingent beneficiaries of the trust.

By the terms of the trust instrument Helen A. Cannon, after the death of Mabel C. LeSeure, had the power in conjunction with Virginia Houghteling and Helen Richardson Abdill to revoke the trust without regard to the rights, contingent or vested, of the children of Virginia Houghteling. If they had the same rights to revoke under the laws of Illinois and could thereby cut off the rights of the children, the ruling in Helvering v. Helmholz, supra, described above would be applicable, but such is not the law of Illinois. Anderson v. Williams, 262 Ill. 308; 104 N. E. 659. In discussing a similar situation, the court there said:

Mary W. Anderson has four minor children, who, if they survive her, will take an interest in the trust fund, and the trust was created, in part, for their benefit. It could not therefore be terminated by the consent and agreement of Mary W. Anderson, the other adult heirs of the testator and the trustees. Where all the parties interested in the trust fund are sui juris, they may consent to a termination of the trust and distribution of the funds (2 Perry on Trusts §920), but this rule has never been applied where there are contingent interests in the trust which cannot be determined until the happening of certain events, or where the interests of minors are involved (Brandenberg v. Thorndike, 139 Mass. 102, 28 Northeastern 575; 39 Cyc. 97). * * * Cases on this subject are not numerous, but the termination of trusts upon the application and agreement of the interested parties appears to be limited to cases where the design and object of the trust have been practically accomplished and all the interests created by it have become vested.

To the same effect, see Hubbard v. Buddemeier, 328 Ill. 76; 159 N. E. 229, and Botzum v. Havana National Bank, 367 Ill. 539; 12 N. E. 203.

From the above it is definite and clear that by the terms of the trust instrument the decedent at the time of her death, in conjunction with her nieces, Virginia Houghteling and Helen Richardson Abdill, had a power to revoke the trust which she did not have under the law of Illinois and the rule laid down by the Supreme Court in Helvering v. Helmholz, supra, is not applicable, but, to the contrary, the power so reserved by the trust instrument was a power within the meaning of section 302 (d), supra, and the action of the respondent in including as a part of the decedent’s gross estate the 900 shares of stock in the Second Rational Bank of Danville, Illinois, is sustained. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85.

Decision will be entered wider Bule 50.

       SEC. 401. REVOCABLE TRUSTS.
      Section 302 (d) of the Revenue Act of 1926 is amended to read as follows:
      “(d)(1) 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 * *


author: Haeron :

text:
    Albert K. Miller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86438.
    Promulgated September 6, 1939.

      F. Demid Mannoccir, 11, Esq., for tlie petitioner.

      Harry B. Morrow, Esq., for the respondent.
   opinion.

Haeron :

The respondent determined a deficiency in income tax for the year 1933 in the amount of $2,170.46. The deficiency results from respondent’s disallowance of certain minor deductions and of net loss, carried over from 1932, in the amount of $63,226.02. The petitioner concedes the correctness of the adjustments made, except the disallowance of the net loss deduction.

The facts were stipulated and, in so far as material, are as follows:

(1) The petitioner is a resident of San Francisco, California. Petitioner filed his income tax return for the year 1933 with the collector at San Francisco. During the calendar years 1932 and 1933, petitioner was engaged in business as a trader in securities listed on various stock exchanges in the United States.

(2) During the calendar year 1932 the petitioner sustained a net loss, attributable to the operation of his business, in the amount of $63,426.02, which he brought forward and claimed as a deduction from gross income in his income tax return filed for the year 1933 under section 117 of the Revenue Act of 1932. The respondent, in determining the deficiency, disallowed the amount of $63,226.02 instead of the full amount claimed by the petitioner on his return.

(3) Claim is made by the respondent for the increased deficiency in tax which would result from the disallowance of the full amount of $63,426.02 instead of $63,226.02.

The respondent disallowed the deduction on the ground that, since section 117 of the Revenue Act of 1932 had been specifically repealed by section 218 (a) of the National Industrial Recovery Act, effective as of January 1, 1933, petitioner could not deduct in 1933 net loss brought forward from 1932.

The petitioner contends that section 218 (a) of the Recovery Act is unconstitutional and that, consequently, section 117 of the Revenue Act of 1932 was not repealed, and that therefore the statutory net loss sustained in 1932 is deductible in 1933.

Section. 117 of the 1932 Act allowed deduction of a net loss sustained in a preceding year, to be taken in computing the net income for the succeeding taxable year. By section 218 (a) of the Recovery Act, the Congress repealed section 117 of the 1932 Act, effective January 1, 1933. The Congress repealed, outright, the provisions of section 117, and did not delegate any authority or power to any officer of the Government to effect the repeal. The Congress revoked a privilege it had given previously. This was within the legislative power of Congress. The allowance of deductions from gross income for the purpose of determining taxable income is a matter of “legislative grace.” New Colonial Ice Co. v. Helvering, 292 U. S. 435; Helvering v. Independent Life Insurance Co., 292 U. S. 371.

The Recovery Act was approved June 16, 1933. Repeal of section 117 of the Revenue Act of 1932 was effective January 1,1933. It thus appears that the period of retroactivity involved in the enactment of the repeal provision was very short. It is well settled that retro-activity in income tax statutes is consistent with the due process of law clause of the Fifth Amendment. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1; United States v. Hudson, 299 U. S. 498; Fesler v. Commissioner, 38 Fed. (2d) 155; Phipps v. Bowers, 49 Fed. (2d) 996; certiorari denied, 284 U. S. 641; Edgar Stanton et al., Executors, 34 B. T. A. 451; affd., 98 Fed. (2d) 739; Chester A. Souther, 39 B. T. A. 197,219. The cases of Nichols v. Coolidge, 274 U. S. 531; Untermeyer v. Anderson, 276 U. S. 440; and Milliken v. United States, 283 U. S. 15, cited by the petitioner, are not applicable, no income tax statutes being involved in any of those cases.

The petitioner also contends that since Title I of the Recovery Act was declared invalid by the Supreme Court by its decision in Schechter Poultry Corporation v. United States, 295 U. S. 495, all other titles and provisions of the Recovery Act are invalid. As far as we know it has never been contended that Title II of the Recovery Act is unconstitutional. See Allied Agents, Inc. v. United States, 26 Fed. Supp. 98, 104.

The general authorization to the President, contained in section 209 of Title II, to make necessary rules and regulations clearly has no application to section 218 (a), which directly repealed section 117 of the 1932 Revenue Act.

Further, there is a separability clause in the Recovery Act, section 303, and the effect of this clause is to create a presumption in favor of separability. Carter v. Carter Coal Co., 298 U. S. 238, 312. Petitioner has failed to show that the provisions of Title II of the Recovery Act, particularly section 218 (a), are not separable from the provisions of Title I thereof. “A provision within the legislative power may be allowed to stand if it is separable from the bad.” Lynch v. United States, 292 U. S. 571, 586.

Other sections of Title II of the Eecovery Act have been held constitutional. See A. J. Crowhurst & Sons, Inc., 38 B. T. A. 1072, involving section 215 (d) and (f) of the Eecovery Act; W. & K. Holding Cory oration, 38 B. T. A. 830, involving section 216 (a); Allied Agents, Ino. v. United States, sufra, involving sections 215, 216. See also Cerectl Products Refining Corf oration, 39 B. T. A. 92, where it was held that a taxpayer obtained new rights in the matter of filing separate income tax returns by reason of the enactment of new revenue provisions enacted in section 218 (e) of the Eecovery Act, and where it is pointed out also that as a matter of reality a new revenue act was enacted by Congress in 1933 by virtue of the enactment of the various revenue provisions, some new and some amendatory, in the Eecovery Act. Petitioner’s argument would have little merit if the repeal of section 117 of the Eevenue Act of 1932 had been made in a separate revenue act, and it has scarcely more merit, if any, as the matter stands because of the separability of the revenue provisions of the Eecovery Act from other provisions thereof.

It is our opinion that section 218 (a) of the Eecovery Act is valid, not violating any provisions of the Constitution of the United States as far as this record shows. It is held that respondent properly disallowed deduction in 1933 of the statutory net loss sustained in 1932.

Eecomputation of the deficiency is necessary. Disallowance of the full amount of the net loss deduction, as taken on the return, will result in increase of the deficiency.

Decision will be entered wnder Rule 50.

       [National Industrial Recovery Act, Title II, Public Works and Construction Projects, Reemployment and Relief Taxes.]
      Sec. 218. (a) Effective as of January 1, 1933, sections 117, 23 (i), 169, 187, and 205 of the Revenue Act of 1932 are repealed.


author: Murdock :

text:
    Henry A. Loeb, Petitioner, v. Commissioner of Internal Revenue, Respondent. Carl M. Loeb, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92587, 92643.
    Promulgated September 7, 1939.

      Arthur B. Hyman, Esq., and David A. Goodhind, C. P. A., for the petitioners.

      C. O. Holmes, Esq., for the respondent.
   OPINION.

Murdock :

The question for decision is whether the income of the trust is all taxable to the two grantors under section 167 (a) (2) of the Revenue Act of 1934, which provides that “where any part of the income of a trust may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor * * * then such part of the income of the trust shall be included in computing the net income of the grantor.” All of the income of this trust could be distributed to the grantors in the discretion of the trustee. The case turns upon whether the trustee had “a substantial adverse interest in the disposition of” the income.

The petitioners’ first argument is that the trustee was “the virtual owner of the trust property” by reason of his broad powers over it. He was not to receive any of the income or corpus for himself under any circumstances. His wife was to receive none of the corpus. His powers were those of a trustee, not of an owner. The petitioners state that a far more important power was his power to distribute the income to his wife and their other children to the exclusion of the grantors. They argue that he had a legal duty to support and maintain his wife and he owed a strong moral duty to his children, both of which he could and did relieve himself of by distributing trust income to them to the exclusion of the grantors. It is difficult to follow this argument in so far as it relates to the children, since the grantors were also his children. While he could and did make distributions to his wife, who used the money for household and personal expenditures, still she was not required to use that money to support and maintain herself and the distributions to her did not relieve him of his legal obligation to maintain and support her. He might reason logically that the more money he gave her from the trust the less she would demand from his own pocket. But that possibility did not give him a substantial interest in the distribution of the trust income adverse to that of the petitioners.

The petitioners say that there is no case precisely in point and none authoritatively defining “adverse interest.” Cases like Savage v. Commissioner, 82 Fed. (2d) 92, which arose under a prior act, in which the words “substantial adverse interest” did not appear, are not in point. Mary A. Cushing, 38 B. T. A. 948. Those cases in which the person exercising the discretion was also a beneficiary or a person with a not too remote possibility of benefiting are distinguishable, since such persons clearly have a substantial adverse interest. Cf. Jane B. Shiverick, 37 B. T. A. 454; Sophia P. O. Morton, 38 B. T. A. 419; Daniel P. Woolley, 39 B. T. A. 802. A decision more nearly in point is that in Mary A. Cushing, supra. The petitioner there created a trust and named her mother as one of the trustees. The trustees were to pay the grantor $1,000 annually, but larger sums and parts of the corpus could be paid to her with the consent of the trustees. The instrument could also be altered with the consent of the trustees. The corpus was to be distributed in accordance with the will of the petitioner or as if the petitioner had died intestate, in case she left no will. The Commissioner included all of the income of the trust for 1932 and 1933 (far in excess of $1,000) in the income of the grantor. The question was whether the mother had a substantial adverse interest. The mother, a widow, was not named as a beneficiary, but the petitioner argued that her mother had a substantial adverse interest because she could, if destitute, demand support of the petitioner and enforce her demand by an order to the trustees to distribute more than $1,000 to the petitioner and, also, she had a contingent interest in that she was among the petitioner’s intestate successors. The Board held that the mother did not have a substantial adverse interest. The argument made by the present petitioners is fundamentally the same and the interest of their father is not much less remote. The personal interest which he might have had in making distributions to his wife and their other two children rather than to the two grantors is too remote to qualify as a substantial adverse interest within the meaning of section 167 (a) (2).

The petitioners also argue that the above provision of the statute was intended to be applied only in case the trust income was actually distributed to the grantors and, if not so construed, it is unconstitutional. It would be completely ineffective in carrying out the intent of Congress if it applied only in case the income was actually distributed to the grantors. Cf. Burnet v. Wells, 289 U. S. 670; Jane B. Shiverick, supra. The statute assesses the tax according to what may be done under the trust. Kaplan v. Commissioner, 66 Fed. (2d) 401; Greenough v. Commissioner, 74 Fed. (2d) 25. We are not convinced that it is unconstitutional. Cf. Corliss v. Bowers, 281 U. S. 376; Jane B. Shiverick, supra; Kaplan v. Commissioner, supra.

Decision will ~be entered wnder Bule 50.


author: Black :

text:
    Estate of Charles H. Lay, Oil City Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92163.
    Promulgated September 7, 1939.

      R. J. Oleary, Esq., for the petitioner.

      Paul E. 'Waring, Esq., for the respondent.
   OPINION.

Black :

Did the respondent err in disallowing as a claim against the estate of the decedent the item of $42,372.04 deducted by petitioner under schedule I of the estate tax return? The applicable statute, section 303 (a) (1) of the Bevenue Act of 1926, as amended by section 805 of the Eevenue Act of 1932 and section 403 (a) of the Bevenue Act of 1934, provides:

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—
(C) for claims against the estate,
(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 * * *. 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. * * *

While decedent, Charles H. Lay, was not personally liable upon the notes due by his son, Russell C. Lay, to the Oil City Trust Co., nevertheless, he had during his lifetime loaned some of his securities to Russell to be used as collateral security to secure the payment of Russell’s notes to the bank. Certainly to the extent that this collateral will be subjected to the payment of Russell’s debts there is a deductible claim under section 303 (a) (1), but the amount of petitioner’s claim must be reduced by other considerations which we shall discuss later.

At the time of decedent’s death these securities which were the property of decedent and were up as collateral to secure his son’s indebtedness had a fair market value of $43,222.22 and were included at that value as a part of decedent’s gross estate. The petitioner does not claim as a deduction the full market value of the securities, but claims a somewhat less amount, to wit, $42,372.04. This latter amount represents the figure which remains after the fair market value of the collateral put up prior to decedent’s death by Russell, the maker of the notes, is deducted from the indebtedness represented by the notes.

Petitioner concedes that the amount of the collateral put up with the bank by Russell must first be deducted from the indebtedness due the bank and then it contends that the balance, not exceeding the fair market value of the collateral put up by decedent, is deductible from decedent’s gross estate — this, of course, assuming that the estate’s claim over against Russell was valueless because of his insolvency.

We think that as a general rule, without anything more, petitioner’s contention would be sound. But it has been held that the amount of a claim for liability of a decedent as surety or endorser which is deductible from the estate is not in all cases what it would have figured on paper at decedent’s death. Subsequent events which serve to increase or decrease the amount which the estate has to actually expend in settlement of the liability may be taken into consideration. Buck v. Helvering, 73 Fed. (2d) 760; Percy B. Eckhart, Executor, 33 B. T. A. 426; Estate of Harriet Blair Borland, 38 B. T. A. 598.

The evidence in this proceeding shows that although the creditor, the Oil City Trust Co., had the right to subject to the payment of its notes against Russell the entire collateral put up by decedent to secure the payment of his son’s notes, there was an agreement between decedent and his son that decedent should have a claim over against his son for any amount that decedent’s collateral should be used to pay the son’s debts. Because of this agreement, petitioner concedes that the indebtedness of $59,015.10 must be reduced by $16,743.06, the value of the collateral pledged by Russell. We think it must be reduced still further in the manner hereinafter set out.

The evidence shows that decedent made special bequests of $5,000 each to Russell’s wife and two daughters. These special bequests have been assigned by the owners thereof to Russell and he in turn has assigned them to the bank as additional collateral. The facts show that the estate is thoroughly solvent and that these three specific bequests of $5,000 each will undoubtedly be paid. If, and when they are paid, they will reduce Russell’s indebtedness to the bank in the amount of $15,000 and the collateral belonging to decedent will be relieved to that extent. This fact is made clear by the testimony of petitioner’s witness, A. E. Mackintosh, vice president of the Oil City Trust Co., whose testimony included the following with reference to the effect of the assignment to the bank of the three specific bequests of $5,000 each:

Q. Who will receive the $5,000 as set forth in those assignments on the ultimate liquidation of this estate?
A. The Oil City Trust Company.
Q. And what will happen to that $15,000 according to your own schedule here for distribution of assets?
A. It would reduce the amount of the notes.

We may point out that when petitioner, as executor of the estate, finally makes payment of this $15,000 to the Oil City Trust Co. it will not be paying it as a debtor but will be distributing it as a fiduciary to the assignee of those entitled to receive it under the terms of the will. When this $15,000 is paid to the Oil City Trust Co. it will reduce Russell’s liability on the notes to that extent.

Thus we have to reduce the $59,015.10 indebtedness which existed at the time of decedent’s death by $16,743.06, the value of Russell’s collateral on that date, a concession which petitioner makes, and, in accordance with our holding, by the $15,000 which will be paid in settlement of the three specific bequests just mentioned. This will leave $27,272.04 of the indebtedness unpaid, which under ordinary circumstances the collateral belonging' to the estate of decedent would have to pay and the amount would be deductible under section 303 (a) (1).

There is another consideration, however, that has to be taken into account in determining whether or not under the facts as found the estate will be entitled to have this remaining $27,272.04 allowed as a deduction, which is that Russell is the residuary legatee of decedent’s estate. The facts show that the value of the assets belonging to the estate at the time of the hearing in this proceeding is $64,368.49, all liquid securities. The estate owes no indebtedness except to the extent that its collateral up with the Oil City Trust Co. may be subjected to the payment of Russell’s notes.

As we have already stated, $15,000 of this $64,368.49 remaining assets of decedent’s estate will be used to pay the specific bequests which the Oil City Trust Co. now holds as additional collateral to secure the payment of Bussell’s notes and when so used it will reduce Bussell’s notes by that amount. That will leave the estate with $49,368.49 liquid assets, including the assets on deposit with Oil City Trust Co. as collateral. These assets will belong to Bussell, as residuary legatee, subject only to the claim of the Oil City Trust Co., there being no other indebtedness of the estate. The value of those remaining assets, $49,368.49, will be considerably greater than the amount of the claim which will still remain unsatisfied after the collateral belonging to Bussell and the three specific bequests of $5,000 each are used to reduce the indebtedness. This $49,368.49 residuary part of the estate will, as we have just stated, belong to Bussell and, when eventually used to pay the remaining $27,272.04 indebtedness of the Oil City Trust Co. against Bussell, it will be a case of using Bussell’s property to pay Bussell’s debts and we fail to see where, under these circumstances, the estate of Charles H. Lay is entitled to any deduction at all because of the alleged claim against it.

Of course, if when decedent died there had been indebtedness to the Oil City Trust Co. for money borrowed by decedent, the claim would have been deductible in full. Doubtless, the Commissioner would not contend otherwise, but where an estate is liable only as a surety or an endorser, it can not take any deduction because of such liability where the principal has ample assets to pay the indebtedness. Cf. Buck v. Helvering, supra; Parrott v. Commissioner, 30 Fed. (2d) 792. On this issue we hold for the respondent.

Decision wül be entered umder Bule 50.


author: Smith:

text:
    Edward C. Kohlsaat, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 91723, 92169.
    Promulgated September 7, 1939.

      Marry N. WyoM, Esq., Richard H. Levin, Esq., and A. J. Pflwum, Esq., for the petitioner.

      David Altman, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in petitioner’s income tax for 1934 and 1935 in the respective amounts of $197.24 and $424.11. The questions in issue are whether the petitioner is entitled to the deduction of interest on a mortgage note and taxes on the real estate securing the mortgage, which were paid by the petitioner’s divorced wife with funds furnished to her by the petitioner for that purpose after he had deeded the property to the wife under a separation agreement.

The petitioner is a resident of Chicago, Illinois, and is a practicing attorney.

In 1922 the petitioner purchased certain residential property located at 777 Bryant Avenue, Winnetka, Illinois, paying a part of the purchase price in cash and executing purchase money notes, secured by a first mortgage in the face amount of $25,000, for the balance. The mortgage was refinanced in 1929 when the old notes became due and the new mortgage and notes of the face amount of $22,500 were executed. Petitioner’s wife, Mabel G. Kohlsaat, joined with him in executing the new mortgage notes. The wife, however, had no interest in the property other than her dower rights.

On May 24, 1933, petitioner and his wife were divorced by decree of the Circuit Court of Cook County, Illinois, and on that date they executed a separation agreement which was incorporated in the divorce decree. The agreement provided in effect that the petitioner would pay to Mabel G. Kohlsaat $700 a month as alimony and in addition would convey to her the above mentioned real estate located at 777 Bryant Avenue, Winnetka, Illinois, which had been used by them as a family residence; that in addition to the $700 monthly alimony petitioner would pay to his wife $225 a month, until the aggregate amount of $15,000 had been paid, which payments were to be used by the wife in paying the carrying charges against the property, including taxes, special assessments, and interest on the outstanding mortgage amounting at that time to $15,000. The balance of the $225 monthly payments was to be applied in reducing the principal of the mortgage. The agreement reads in material part as follows:

Whereas, the parties are desirous of settling and determining their respective property rights and to fix a fair and reasonable provision for the support and maintenance of the said wife;
Now, Therefore, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties Agree as follows:
(a) The husband shall pay to the wife the sum of Seven Hundred Dollars ($700.00) per month as alimony, for the support and maintenance of herself until her death or remarriage, and the parties specifically agree that said order and amount is to stand regardless of any future change in the financial condition of either party that may occur hereafter.
(b) The said husband shall transfer and convey to the wife all of his right, title and interest in and to the premises located in the Village of Winnetka, County of Cook and State of Illinois, commonly known as 777 Bryant Avenue and legally described as follows:
* * * Said premises are at this time encumbered with a first mortgage lien in the principal amount of Eighteen Thousand Dollars ($18,000.00) and a second mortgage lien in the principal amount of Ten Thousand Dollars ($10,-000.00). The said mortgage lien of Ten Thousand Dollars ($10,000.00) is to be cancelled and released. The first mortgage lien in the principal amount of Eighteen Thousand Dollars ($18,000.00) is to be reduced by the sum of Three Thousand Dollars ($3000.00), to a net principal indebtedness of Fifteen Thousand Dollars ($15,000.00). Said husband shall cause the then existing first mortgage of Fifteen Thousand Dollars ($15,000.00) to be modified so as to provide for annual payments of principal to be the sum of One Thousand Dollars ($1000.00) instead of Fifteen Hundred Dollars ($1500.00) per year, and also agrees to cause the annual interest thereon to be reduced from six percent (6%) to five and one-half percent (5*4%). Said husband further shall cause the maturity of said indebtedness to be extended under the foregoing terms to the 9th day of August, A. D., 1938.
(d) .The said husband is to pay to the said wife, in addition to the said Seven tlundred Dollars ($700.00) above provided for, the sum of Two Hundred Twenty-five Dollars ($225.00) per month until the aggregate net sum of Fifteen Thousand Dollars ($15,000.00) has been paid to the wife under the provisions of this paragraph; that the said monthly payments of Two Hundred Twenty-five Dollars ($225.00) are to be used by the wife and applied by her to pay the carrying charges against said premises, namely, general taxes, special assessments and interest on the first mortgage indebtedness, the balance of said monthly payments to be applied towards reduction of the principal of said first mortgage indebtedness against said premises. The said wife shall make such payments as hereinabove agreed, and shall within thirty (30) days after the due date thereof produce for the inspection of the husband proper receipts evidencing the fact of such payments. In the event said premises shall be rented by the wife and thereafter the tenant vacates or defaults in payment of rent, then in such event the sum of One Hundred Forty Dollars ($140.00) per month, out of the Two Hundred Twenty-five Dollar ($225.00) monthly payments, is not to be credited against the aggregate sum of Fifteen Thousand Dollars ($15,-000.00) to be paid by the husband to the wife as provided in this paragraph, so long as such premises are not producing any revenue. Provided, however, that the husband shall have the right at all times to pass upon the desirability of any prospective tenant for said premises before such tenant is accepted by the wife. In the event the above described property is sold by the wife before the husband shall have paid to her the sum of Fifteen Thousand Dollars ($15,000.00) under the terms of this paragraph, and the amount realized from such sale shall be less than the sum of Twenty-five Thousand Dollars ($25,000.00) net to the wife, then in such event the payments thereafter to be made by the husband shall continue until such time as the aggregate of the amount realized from such sale, taken together with the monthly payments by the defendant of Two Hundred Twenty-five Dollars ($225.00), shall equal the total sum of Twenty-five Thousand Dollars ($25,000.00), but in no event shall the obligations of the husband under this paragraph exceed the sum of Fifteen Thousand Dollars ($15,000.00). In the event said premises are sold by the wife and the amount realized therefrom, taken together with the monthly payments theretofore made to her by the husband under this paragraph, exceeds the sum of Twenty-five Thousand Dollars ($25,000.00), then in such event the wife agrees to pay to and reimburse the husband the excess over the sum of Twenty-five Thousand Dollars ($25,000.00) thus realized, limited, however, to the amount of the contributions made by the husband under this paragraph, and future payments under this paragraph shall not be required of the husband.

In accordance with the aboye agreement the Winnetka property was conveyed by warranty deed to Mabel G. Kohlsaat’s attorney, Frank E. Cantwell, as her nominee, soon after the divorce decree was entered. The deed was executed by the petitioner and his wife jointly and provided that the conveyance was made “subject to the existing first mortgage” in the amount of $15,000.

Thereafter, and during 1934 and 1935, petitioner made the payments to his wife called for in the separation agreement. Likewise, in accordance with the agreement his wife paid the interest on the mortgage note in the amounts of $825 in 1934 and $756.25 in 1935. She also paid taxes on the property of $975.52 in 1934, being the taxes assessed for 1931 and 1932, and $1,263.31 in 1935, being the 1933 taxes in the amount of $605.25 and the 1934 taxes in the amount of $658.06.

In making his income tax returns for 1934 and 1935 petitioner deducted all of the above amounts of interest and taxes paid on the Winnetka property during those years.

The respondent in his determination of the deficiencies herein allowed the deduction of the taxes for 1931 and 1932 which were paid in 1934 but disallowed the deduction of the interest paid in 1934 and 1935, as well as the taxes paid in 1935.

At the hearing before the Board the respondent asked for an increase in the 1934 deficiency based upon the disallowance of the deduction of the 1931 and 1932 taxes paid in that year.

The respondent’s contentions are that the interest and the taxes paid on the Winnetka property in 1934 and 1935 after the property had been conveyed to petitioner’s wife were paid by the wife out of her own funds; that the monthly payments of $225 which petitioner made to his wife under the separation agreement were in discharge of petitioner’s marital obligations, and under the decisions of the Supreme Court in Gould v. Gould, 245 U. S. 151, and Douglas v. Willcuts, 296 U. S. 1, no part of such amounts is deductible from petitioner’s gross income.

The petitioner does not contend that all of the $225 monthly payments is deductible, but only such portions as were used to pay the interest and taxes on the Winnetka property. He strenuously argues that the interest and taxes were his personal obligations on which he was primarily liable; that these obligations were paid by him and are therefore deductible by him.

Section 23 of the Bevenue Act of 1934 provides in material part that:

* * * In computing net income there shall be allowed as deductions:
(b) Interest. — All interest paid or accrued within the taxable year on indebtedness, * * *
(c) Taxes Generally. — Taxes paid or accrued within the taxable year, * * *

Section 24 of the same act provides in part:

(a) General Rule. — In computing net income no deduction shall in any case be allowed in respect of—
(1) Personal, living, or family expenses.

Under the express provisions of the separation agreement petitioner’s wife was required to use as much as necessary of the $225 monthly payments to pay the carrying charges on the Winnetka property. Parole evidence was adduced by the petitioner at the hearing before the Board through the testimony of the petitioner and Mabel G. Kohlsaat to show that as a condition of the divorce petitioner’s wife demanded from him, in addition to the alimony and other benefits provided for in the agreement, a cash payment of $25,000; that petitioner was unable to raise that amount of cash and instead agreed to convey the Winnetka property to her with the understanding that she was to hold it as surety for the payment of the $25,000; that petitioner never intended to and did not part absolutely with the ownership of the property.

The separation agreement itself bears out these contentions in part, but only in part. Undoubtedly the historical reason for the conveyance of the property to the wife was as explained by the witnesses. For instance, there is the provision in the agreement that “in the event said premises are sold by the wife” she would “reimburse” the petitioner for the contributions made (the $225 monthly payments) to the extent of the excess of the selling price plus the sum of such monthly payments over $25,000.

We can not agree, however, that the conveyance of the property to the wife was merely an equitable conveyance and that she held title thereto as security for the payments to be made by the petitioner in lieu of the $25,000 cash. The deed by which the conveyance was made is complete and unconditional on its face. It makes no mention of any interest in the property being reserved to the petitioner or of the separation agreement between petitioner and his wife. There is no provision in either the deed or the separation agreement that requires the wife ever to xeconvey the property to the petitioner. Even though it may have been the intention of the parties that the wife would sell the property if a favorable opportunity should occur, she was under no binding obligation to do so. Petitioner’s only interest in the property after the conveyance was the right to receive under certain conditions a portion of the selling price if and when the property should be sold by the wife. There is no evidence in the record as to the value of the property during the years 1934 and 1935 or as to the value, if any, of petitioner’s right to receive a part of the proceeds from the sale of the property. Apparently this right had very little value, if any; for there was no obligation on the wife’s part ever to sell the property. She was free either to occupy it as a residence or to rent it and receive the rentals for her own use. The separation agreement itself makes provision for certain benefits to the wife to compensate for the loss of revenue from the property caused by a tenant vacating or defaulting in his rental payments.

The fact, however, that there was an unconditional conveyance of the property to the wife prior to the taxable years involved is not dispositive of the issues raised. The property was conveyed to the wife subject to an existing first mortgage in the amount of $15,000. It is so recited in the deed. Ordinarily after such a conveyance, and the absence of any further agreement between the parties, the grantor or mortgagor remains personally and primarily liable to the mortgagee for the mortgage debt, including both principal and interest. Shepherd v. May, 115 U. S. 505; Farmers’ Loan & Trust Co. v. Penn Plate Glass Co., 186 U. S. 434; Scholten v. Barber, 217 Ill. 148; 75 N. E. 460. The property conveyed stands as the primary fund for the payment of the mortgage debt, however, and if the mortgagor subsequently pays the debt he is entitled to reimbursement out of the property. In re M. Dewing Co., 248 Fed. 605; Howard v. Burns, 279 Ill. 256; 116 N. E. 703. (Petitioner’s rights to any reimbursement here, however, are subject to the provisions of the separation agreement which he entered into with the grantee.)

The grantee of mortgaged property does not incur personal liability for the mortgage debt in the absence of such contractual obligation. Elliott v. Sackett, 108 U. S. 132; Shepherd v. May, supra; Crawford v. Nimmons, 180 Ill. 143; 34 N. E. 209. There is no evidence here of any expressed or implied agreement on the wife’s part to assume the mortgage indebtedness as her personal liability. The provisions of the separation agreement are that she would use as much as necessary of petitioner’s $225 monthly payments “to pay the carrying charges against said premises”, including taxes and interest, and would apply the balance to reduce thé principal of the mortgage. This did not amount to an assumption of the mortgage debt by the wife. The petitioner remained personally and primarily liable for the mortgage debt as well as the interest thereon, and if such interest was actually paid by him, or by his wife for him, it is he who is entitled to the deduction thereof. It is axiomatic that the statute in allowing the deduction of interest paid refers to interest paid by the taxpayer in discharge of his own liability. As stated in Chester A. Shepparrd, Trustee, 37 B. T. A. 279, 281, “The statutory provision allowing deduction for interest on indebtedness means interest on an obligation of the taxpayer claiming it.” Petitioner’s liability on the mortgage debt and interest arose not from any contractual or other obligation to his wife, but from the preexisting mortgage agreement itself. Cf. in this respect William Ainslie Colston, 21 B. T. A. 396; affd., 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640, where it was held that interest paid by a husband on his wife’s mortgage indebtedness for which he was not liable was not deductible by the husband. To the same effect is Longyear v. Helvering, 77 Fed. (2d) 116; affirming 28 B. T. A. 1086, holding that interest payments on a note representing alimony were not deductible. See also Chesterr A. Sheppardt Trustee, supra; Automatic Sprinkler Co. of America, 27 B. T. A. 160; Helen B. Sulzberger, 33 B. T. A. 1093; William H. Simon, 36 B. T. A. 184. The separation agreement imposed no new obligation on the petitioner to pay interest on the mortgage debt. That he was already bound to do. It provided only that, instead of continuing to pay the interest directly to the mortgagee, he would pay it to his wife and she, in turn, would pay it to the mortgagee.

No part of the $225 monthly payments represented alimony or any “allowance” to the wife. She could not use the funds for any other purpose than to pay the carrying charges on the mortgaged property and to reduce the principal mortgage debt. In so doing she acted as agent or trustee for the petitioner. In legal effect the payments of the interest by the wife out of the funds furnished by the petitioner for that purpose were payments of the interest by the petitioner. We are of tbe opinion that the petitioner is entitled to the deduction of the interest so paid during the taxable years.

As to the taxes on the property which were paid out of the same funds the same general rule applies; that is, the deduction for the taxes is allowable to the petitioner to the extent that, and only to the extent that, they were paid by the petitioner in discharge of his own liability as owner of the property. Porter v. United States, 27 Fed. (2d) 882; Walsh-McGuire Co. v. Commissioner, 97 Fed. (2d) 983; Colston v. Burnet, supra. In Eugene W. Small, 27 B. T. A. 1219, we said that “In order to be entitled to a deduction for taxes paid, a petitioner before us must show not only that he paid the taxes, but that the taxes were imposed upon him by the taxing authority.” See also Shearer v. Commissioner, 48 Fed. (2d) 552.

The taxes in dispute here were assessed against the property for the years 1931 to 1934, inclusive. The taxes for 1931 and 1932 were paid in 1934 and those for 1933 and 1934 were paid in 1935.

Ordinarily, state and municipal property taxes become a personal obligation of the owner of the property when under the state laws the incidences of the tax become fixed and the tax becomes a lien upon the property. Walsh-McGuire Co. v. Convmissioner, supra; Colston v. Burnet, supra; Eugene W. Small, supra; Helvering v. Missouri State Life Insurance Co., 78 Fed. (2d) 778; Gatens Investment Co., 36 B. T. A. 309.

The Illinois Bevised Statutes, 1935 (Ill. State Bar Stats.) ch. 120, ¶¶ 63, 64, and 268, provide:

¶ 63. May 1 — Assessment to other than owner, legal.'] § 58. All real property in this State, subject to taxation under this Act, including real estate becoming taxable for tbe first time, shall be listed to tbe owners thereof, by such owners, their agents, county clerks, or assessors, or tbe county board, and assessed for the year ,one thousand eight hundred and eighty-one, and yearly thereafter, with reference to the amount owned on the first day of May in each year, including all property purchased on that day :.***•
¶ 64. Owner on May 1 liable.] § 59. The owner of property on the first day of May in any year, shall be liable for the taxes of that year. The purchaser of property on the first day of May shall be considered as the owner on that day.
¶ 268. First lien on realty — Proceedings to enforce collection — Receiver— Procedure — Reduction of taw by court.] § 253. The taxes upon real property, together with all penalties, interests and costs, that may accrue thereon, shall be a prior and first lien on such real property, superior to all other liens and incumbrances, from and including the first day of [April] in the year in which the taxes are levied until the same are paid; * * *

See also People ex rel. McCullough v. Ladies of Loretto, 246 Ill. 403; 92 N. E. 908; People ex rel. Pearsall v. Catholic Bishop of Chicago, 311 Ill. 11; 142 N. E. 520. The respondent ruled in G. C. M. 6278, C. B. YIII-1, p. 168, that April 1 of each year is the date of the accrual of real and personal property taxes in the State of Illinois. We think that ruling is in accordance with the provisions of the statutes and the decisions of the courts of the State of Illinois.

It follows then that the taxes which accrued against the Wixmetka property for the years 1931,1932, and 1933 (the property was deeded to petitioner’s wife on or about May 24, 1933) were a personal liability of the petitioner and since they were paid by him, through his wife as an agent or trustee in the same manner as was the interest on the mortgage indebtedness, they are deductible by him in his income tax returns.

The taxes for the subsequent year 1934, however, which accrued after the petitioner had conveyed the property absolutely to his wife, became her personal obligation as the owner of the property on the date of their accrual and although the petitioner paid them his liability for such taxes was based not on his ownership of the property but on his contractual relationship with his wife and his marital obligations to her. We said in Gatens Investment Co., supra:

It is clear from these interpretations of the statute [of Oregon] that conveyance of the land to petitioner prior to the issuance of a warrant for collection of taxes levied thereon for 1931 did not transfer to the grantee the personal liability for the tax which had been upon the former owner, asi a primary liability, that of the property itself being secondary. The liability for the tax, notwithstanding the transfer, continued to be an obligation of the person who was the owner on March 1. In view of the above interpretation of the Oregon statutes by the highest court of that state, we must and do hold that the petitioner merely paid the tax of another taxpayer, and in doing so acquired no rights under the Act to a deduction for taxes paid within the taxable year. It did not pay a tax “imposed upon the petitioner.” Eugene W. Small, 27 B. T. A. 1219, 1223. * * *

In Walsh-McGuire Co. v. Commissioner, supra, the court said:

Each person holding the land is required to pay the tax assessed thereon each year. Section 5681, General Code of Ohio. While the taxes are levied and assessed upon the real estate, they are also a personal obligation of the owner of such property. Cincinnati College v. Yeatman, Aud., 30 Ohio St. 276, 281, 286, 287. These taxes, then, which accrued on April 12, 1931, prior to the organization of petitioner’s corporation, were the obligation of petitioner’s predecessor in title. The payment was made in order to lift the ineumbranee from the land, and was a capital expenditure being a part of the cost of acquiring the land. Merchants Bank Bldg. Co. v. Selvering, 8 Cir., 84 F. 2d 478, 481.

In our opinion tbe taxes on tbe Winnetka property for tbe year 1934 are not deductible by tbe petitioner.

Decision will he entered under Rule 50.