author: Sternhagen :

text:
    Ralph Pulitzer and Margaret L. Pulitzer, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82246.
    Promulgated November 26, 1937.

      John G. Jackson, Esq., for the petitioners.

      Harold Allen, Esq., for the respondent.
   OPINION.

Sternhagen :

Although at the hearing the question was suggested as to the participation in this proceeding of the wife, and both counsel were directed to deal with the subject, it has been ignored by them. Since no deficiency has been determined as to her or notice sent to her, there is no subject as to her within the jurisdiction of the Board, J. A. Staley, 9 B. T. A. 932; C. A. Bryan, 19 B. T. A. 111, 121; William A. Matern, 21 B. T. A. 384, 387; see Cole v. Commissioner, 81 Fed. (2d) 485; Frank W. Darling, 34 B. T. A. 1062, 1065; Ella T. Flaherty, Executrix, 35 B. T. A. 1131; Arthur B. Hyman, 36 B. T. A. 202, 207. Her name is therefore stricken as a party petitioner, and the proceeding as to both years will be confined to a consideration of the deficiencies determined as to Ralph Pulitzer.

1. The Commissioner computed the deduction for charitable contributions by applying the statutory 15 percent limit to a net income of $7,005.47, being the remainder after subtracting capital losses, $242,956.15, from ordinary net income, $249,961.62. The petitioner assails the subtraction of capital losses. The question is no longer open, Avery v. Commissioner, 84 Fed. (2d) 905; certiorari denied, 299 U. S. 604, rehearing denied, 300 U. S. 686; Lockhart v. Commissioner, 89 Fed. (2d) 143; certiorari denied, — U. S. — (Oct. 11, 1937); Louis W. Hill, 33 B. T. A. 891; affd., 88 Fed. (2d) 941; Howard Heinz, 34 B. T. A. 885 (on review, C. C. A., 3d Cir.). The disallowance is sustained.

2. By paragraph sixteenth of the trust instrument, the power rests in the grantor to appoint an individual other than himself with the right to terminate the trust entirely or in part, whereupon' the trustee shall transfer so much of the fund to the appointee as the terms of the appointment provide, up to the entire amount. The Commissioiner determined that this was a revocable trust and hence that the income is properly taxable to the petitioner. The respondent here supports this determination by sections 166 and 167, Revenue Act of 1932, and by citing Reinecke v. Smith, 289 U. S. 172, and Bowler v. Commissioner, 80 Fed. (2d) 103. The petitioner argues, relying upon Commissioner v. Yeiser, 75 Fed. (2d) 956; Carl F. Holmes, 27 B. T. A. 660; and Valentine Bliss, 26 B. T. A. 731, that because the power to revest the corpus is not reserved or given to the grantor by the express terms of the instrument itself, the statute is not applicable.

There is, however, no such restriction in the statute and nothing from which it can be implied. The statutory requirement that the income of a trust shall be attributed to the grantor operates whenever there exists in fact the described “power to revest.” It is not limited to cases where such power is derived from the express terms of the instrument, Reinecke v. Smith, supra; Bowler v. Commissioner, supra; Higgins v. White, 18 Fed. Supp. 986 (on appeal C. C. A., 1st Cir.). That such a power actually is in the grantor of the present instrument seems plain. He may at any time, without let or hindrance from any of the beneficiaries, the trustee, or anyone else, appoint whomsoever he will, with the direction to terminate the trust. The direction may be made a contractual obligation upon the appointee; and although the trustee is required to transfer the fund directly to the appointee alone, there is nothing to prevent the creation by the grantor of a legal obligation, in Ms appointee to transfer the fund at once to the grantor. This ready and simple method available to the grantor for taking ownership and possession of the trust fund and having the trust terminate or diminish at his pleasure is hardly less than a power to revoke or revest. Indeed, the use of the word “revoke” in the instrument carries the implication that the control is intended to remain in the grantor, for strictly the word could not suitably be applied to the act of termination by another. The same considerations are here as moved the decision in Reinecke v. Smith, supra, and require that the taxable income of the trust should be included in that of the grantor.

The opinion of the Board in Valentine Bliss, supra, was promulgated before the Supreme Court’s opinion in Reinecke v. Smith, supra, and must give way to the extent that it may conflict with the later and superior authority. In the Holmes case, the power of revocation held by the grantor was expressly conditioned upon the consent of the beneficiary, an adverse interest. In the Yeiser case, the husband was appointed by the instrument not only with power to terminate beyond the control of the grantor, but also to protect the interests of the minor children. This was regarded by the court as substantially to circumscribe the power and control of the grantor.

The determination of the Commissioner is sustained.

Judgment will be entered for the respondent.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
      SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or 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 may be, held or accumulated for future distribution to the grantor; or
      (2) 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; or
      (3) is, or 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 may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.
      (b) As used in this section, the term "‘in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”


source: Caselaw Access Project

author: Sternhagen : Leech,

license: Public Domain

text:
    George Vanderbilt Trust, Henry B. Anderson and Frederick W. Vanderbilt, as Trustees Under the Last Will and Testament of Alfred G. Vanderbilt, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Henry B. Anderson and Frederick W. Vanderbilt, as Trustees Under the Last Will and Testament of Alfred G. Vanderbilt, Deceased, of the Trust for Alfred G. Vanderbilt, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70489, 70490.
    Promulgated November 26, 1937.

      William H. Hayes, Esq., and Roy C. Gasser, Esq., for the petitioners.

      DeWitt M. Evans, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioners claim a deduction of the amount paid in the taxable year to their attorney in the litigation to construe the will of Cornelius Vanderbilt and determine to whom belonged the accumulated excess corpus and income in which they claimed through the decedent Alfred as a residuary legatee. In re Vanderbilt’s Estate, 134 Misc. Rep. 574; 236 N. Y. S. 316; In re Vanderbilt’s Will, 229 App. Div. 574; 243 N. Y. S. 165. They can succeed only if they bring this expenditure within the deduction described in section 23 (a), [Revenue Act of 1928, as one of “the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The issue, made clear from the time of the notice of deficiency through the trial, has been whether the petitioners were in fact carrying on any trade or business to which this attorney’s fee would be properly regarded as an incident. The record, however, gives not the slightest evidence of what these trusts did that might be called carrying on trade or business. It appears only that by the will of Alfred G. Vanderbilt his executors were appointed trustees of these two trusts and that they had power to invest and reinvest the principal, to collect the income, pay taxes and expenses, and distribute to their separate beneficiaries in the prescribed manner. How they exercised these powers does not appear except as to the distributions, and according to this record they may have been mere passive conservators of a well invested trust fund.

Petitioners cite John H. Watson, Jr., et al., Trustees, 35 B. T. A. 706, as supporting their position and as holding generally that the management of any testamentary trust of a residuary estate constitutes a carrying on of business within the statute. That decision, however, can not be given such a broad scope. The case apparently arose originally, not upon the Commissioner’s determination that the

trust was not carrying on trade or business, but upon his determination that, although it was carrying on trade or business, a portion of its expenses was not deductible because allocable to tax-exempt income. After the hearing, however, the respondent in his brief broadened his position to contend that the petitioner was entitled to no deduction whatever because it was not carrying on a trade or business, and the Board held that the broadened position had no merit. Whether it would have had merit if the petitioner had had an opportunity to litigate it and had failed in his proof would be a different question, and that is the question here. It is a question of fact. Conceivably, testamentary trusts such as these petitioners may be engaged in business of one kind or another, and no less conceivably they may refrain from engaging in business. The statute applies its provisions similarly to trusts and to individuals, and it can not be dogmatically said as to a trust, even though it be one of long standing, that an attorney’s fee reasonably and necessarily paid by it is deductible as an expense of carrying on business any more than it can be said as to an individual. Dorr v. United States, 18 Fed. Supp. 92; Morse v. Helvering, 85 Fed. (2d) 262; Monell v. Helvering, 70 Fed. (2d) 631; Ames v. Commissioner, 49 Fed. (2d) 853.

The respondent’s argument also makes the point that, even though the trusts were to be regarded as carrying on a trade or business, bin's fee was not a business expense deductible to reduce gross income but was either (or both)' an administration expense of the decedent estate of Alfred G. Vanderbilt or a nondeductible capital expenditure because incident only to the enlargement of the corpus-of the trust fund. He suggests also that the fee may not be- deducted by these petitioning trusts because it was actually paid by the executors of the decedent’s estate and not by the trustees, who were parties to the surrogate’s proceeding involving Cornelius Vanderbilt’s will only because they had become the residuary legatees under the will of their father, one of Cornelius’ sons and a residuary legatee. These questions, however, escape decision in view of the principal determination that the fee has not been shown in fact to be an expense of “carrying on any trade or business” by the taxpayers, and the Commissioner’s determination is sustained.

Reviewed by the Board.

Judgment mill be entered for the respondent.

Tyson dissents.

Leech,

concurring: The holding of the majority is predicated wholly upon the premise that the conduct and management of the petitioning trusts, during the taxable year, was not a “carrying on [ of] any trade or business.”

The trusts in question, apparently, had existed, in fact; for some 14 years. The powers of the trustees wore very broad, including a right to invest and reinvest the principal and to collect income. The corpus of each trust was large and the income therefrom correspondingly substantial. Obviously, such income was so substantial that $35,000 therefrom was paid to each of the two present trusts annually for the support of their respective beneficiaries. This was so during the tax year. These facts seem to me to be implicit in this record. Therefore, I think that the conduct and management of these trusts during the taxable year was the “carrying on of [a] trade or business” drying the taxable year. Flint v. Stone Tracy Co., 220 U. S. 107; John H. Watson, Jr., et al., Trustees, 35 B. T. A. 706; acquiesced in by the respondent (C. B. XVI-18-8673).

Although the record does not disclose the identity of the items deducted by the petitioners which were allowed by the respondent, since the deduction of compensation for the trustees is not contested, it would seem such an item had been allowed. In any event, from a reading of the respondent’s brief, the respondent apparently placed little if any reliance on the position that the conduct and management of the petitioning trusts did not constitute the carrying on of a trade or business during the taxable year. Thus, his brief states:

* * * It is the position of the respondent that the attorney’s fees were capital expenditures incurred by the executors of the estate and were made to increase the value of the estate, and hence not an ordinary and necessary expense, and that in any event they were expenditures occurred [sic] in an isolated, unusual and extraordinary transaction, and were not ordinary and necessary expenses in carrying on any business.

If the action of the respondent in disallowing the disputed deductions is correct, it is so, in my opinion, because the payments supporting those deductions were made in the acquisition of capital assets and, for tax purposes, are nondeductible capital expenditures.

Stephens Fuel Co., 13 B. T. A. 666; Columbia Theatre Co., 3 B. T. A. 622; First National Bank of St. Louis, 3 B. T. A. 807; Emerson Electric Manufacturing Co., 3 B. T. A. 932; Charles P. Hewes, 2 B .T. A. 1279; Laemmle v. Eisner, 275 Fed. 504. Cf. S. & L. Building Corporation, 19 B. T. A. 788 (reversed on other grounds); Spinks Realty Co., 21 B. T. A. 674; affd., 62 Fed. (2d) 860; certiorari denied, 290 U. S. 636; Central Bank Block Association, 19 B. T. A. 1183; affd., 57 Fed. (2d) 5; Horn & Hardart Baking Co., 20 B. T. A. 486; Clara Hill Lindley, 26 B. T. A. 741; affd., 63 Fed. (2d) 807,

ARNOLD concurs in the above.


author: Murdock:

text:
    Estate of Jacob S. Hoffman, Harry I. Hoffman, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73092.
    Promulgated November 30, 1937.

      Peter L. Wentz, Esq., for the petitioner.

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

Murdock:

The Commissioner determined a deficiency of $3,44^92 in the income tax of the estate for the year 1930. The issue for decision is whether the estate is entitled to a deduction of $94,344.21 claimed on the return as a bad debt. The facts have been stipulated as follows:

Jacob S. Hoffman died testate, a resident of Chicago, Cook County, Illinois, on January 17, 1930, and petitioner, Harry I. Hoffman, is the duly qualified and acting Executor of the Estate of said decedent.
Prior to his death the decedent and another were co-guarantors of the obligations of a third party and were called upon to perform their obligation as guarantors. The decedent failed .to pay his pro rata amount as co-guarantor, with the result that his co-guarantor, as guarantor, paid the entire amount guaranteed. At the date of his death the decedent was obligated to said co-guarantor for his contributory share on account of said guarantee in the amount of $65,891.18 of principal and $27,936.06 of interest, totaling $93,827.24.
After the death of said decedent no part of said sum was collectible from the primary debtor, with the result that petitioner, as Executor of the Estate of said decedent, was called upon to pay and did pay, pursuant to order of court, to said co-guarantor in 1930 $94,344.21, of which $65,891.13 was principal and $28,453.03 was interest, of which $516.97 had accrued subsequent to January 17, 1930, payment being made by the borrowing of funds by the executor. Petitioner deducted' said sum of $94,344.21 in his income tax return for the taxable year January 18 to December 31, 1930, as Executor of the Estate of said decedent. Both petitioner and decedent kept their accounts and made their income tax returns on the cash receipts and disbursements basis. Said decedent had never taken any deduction on account of said item in any income tax return.
Petitioner, in his estate tax return for the Estate of said decedent, deducted said amount of $93,827.24 from the gross estate in computing the net estate subject to estate tax. Said deduction was allowed for estate tax purposes.
Said deduction of $94,344.21 was disallowed for income tax purposes by respondent.

The petitioner, the estate, claims the right to deduct $94,344.21 as a loss. The estate is a different taxpayer from the decedent. It is entitled only to those deductions allowed in the statute. The statute allows deduction for losses sustained during the taxable year:

(1) if incurred in trade or business; or (2) if incurred in any transaction ' entered into for profit, though not connected with the trade or business; * * *

The petitioner has not been specific in its claim as to whether (1) or (2) above applies. But it is clear that (1) does not apply because there is no showing that the estate was engaged in any trade or business. The estate in no way benefited by the transaction. It is obvious that the loss was not incurred in any trade or business of the estate because it was an old debt at the date of the death of the decedent and had no relation to any activity of the estate.

Nor does (2) apply. This taxpayer came into existence at the death of the decedent. The decedent became indebted to his co-guarantor prior thereto. The obligation to pay did not result from any transaction entered into by the estate for profit. (2) refers to a transaction entered into by the taxpayer for profit. When this taxpayer came into existence it had a certain amount of capital. Its capital consisted of the net estate of the decedent. Money then due the estate was a part of that capital and its later receipt did not represent the receipt of income by the estate, although it would have been income to the decedent. Nichols v. United States, 64 Ct. Cls. 241; Ernest M. Bull, Executor, 7 B. T. A. 993; Walter R. McCarthy, Executor, 9 B. T. A. 525; William K. Vanderbilt et al., Executors, 11 B. T. A. 291; E. S. Heller et al., Executors, 10 B. T. A. 53; Estate of A. Plumer Austin, 10 B. T. A. 1055; Ella C. Loose, Executrix, 15 B. T. A. 169, affd., 74 Fed. (2d) 147; Mellie Esperson Stewart, 18 B. T. A. 1010. Debts owed by the estate at that time likewise have no effect upon the income of the estate when later they are paid, although they might have been deductible by the decedent had he paid them. John M. Brown, Executor, 11 B. T. A. 1203; Roy J. O'Neil et al., Administrators, 31 B. T. A. 727; Herbert G. Perry et al., Executors, 32 B. T. A. 513; Florence O. R. Lang et al., Executors, 32 B. T. A. 522. It is only increases or decreases in the net estate with which this-taxpayer started that affect its income.

The stipulation shows that the decedent owed principal and interest of $93,827.24 at the time of his death. Apparently this debt was then an old one, as is shown by the amount of the interest then due. Its amount was then fixed as is shown by the stipulation and by the fact that it was claimed and allowed as a deduction in determining the amount of the estate tax due. But however old the debt may have been, the present taxpayer took the estate of the decedent encumbered by this particular obligation in the amount of $93,827.24 and, had it paid no more than $93,827.24 in discharging the debt, it would have suffered no loss whatsoever. The amount which it paid included $516.97 of interest accrued after the death of the decedent. This was interest due from and paid by the estate and was in addition to the amount owed when the estate came into existence. The $516.97 is interest deductible by the estate from its income. Sec. 23 (b).

Decision will be entered under Rule 50.


author: Sternhagen:

text:
    Georgia S. Williams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83298.
    Promulgated December 2, 1937.

      William Cogger, Esq., and Eugenio M. Fonbuena, Esq., for the petitioner.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner treated the $2,982 as additional compensation for prior services and included it within petitioner’s taxable income under Revenue Act of 1932, section 22 (a). She urges that the amount was a gift and therefore excluded from gross income under section 22 (b) (3). This she derives from the fact that the Philippine statute is entitled “An Act to Provide for the Payment of Retirement Gratuities to Officers and Employees of the Insular Government Retired from the Service as a Result of the Reorganization or Reduction of Personnel Thereof”, and in terms provides that such an employee as she “shall be entitled to a gratuity as follows:", the “gratuity” provided being measured by the length of service and the rate of pay.

Whether the amount received by the petitioner is subject to United States income tax depends upon whether it is covered by the United States revenue act. That statute taxes amounts received as compensation for services, and if the amount here in'question is within the meaning of that language in United States law, it may not be excluded because of any label placed upon it by the Philippine Legislature. This is true as to a conflict between state nomenclature and a Federal revenue statute, as well as a conflict between a characterization under the law of a foreign government and that under our revenue law. So the inquiry must be not with regard to what the payment has been called in the Philippine statute, but what in our law it shall be called.

In Bogardus v. Commissioner, 302 U. S. 34, the question was described as “whether a sum of money received by the petitioner * * * was ‘compensation’ subject to the federal income tax, or a ‘gift’ exempt therefrom.” A conclusion that the payment was additional compensation for services was held to be “a conclusion of law or at least a determination of a mixed question of law and fact”, and not such a finding of fact as is conclusive if supported by evidence. The statutory categories of compensation and gift -were held to be mutually exclusive, and it was said that if the sum in question “be in fact a gift, that is an end of the matter.” “A claim that it is a gift presents the" sole and simple .question whether its designation as such is genuine or fictitious—that is to say, whether, though called a gift, it is in reality compensation. To determine that question we turn to the facts.” The facts in that case included the lack of a contractual relation, past or present, between the parties, no legal obligation or moral duty of the payer to the recipient, nothing to support an inference that the payment was inspired by a desire for good will or loyalty, and the expression used by the payer to describe the amount was “gift or honorarium”, indicating an intent to be generous rather than merely belatedly just. It was held that because the payer “had benefited by the past services of the recipients, it by no means follows that the distribution in question was not a gratuity. It nowhere appears in the record that full compensation had not been made for these services. There would seem to be a natural inference to the contrary; and the inference is made determinate by the stipulated fact that no one was under any obligation, legal or otherwise (and this would include a moral obligation, however slight) ‘to pay any additional compensation.’ There is no ground for saying that the benefit received and the compensation then paid for it were not equivalents.” Any implication from the use of the word honorarium was put aside because the word had been “loosely and inaccurately used.” “A gift is none the less a gift because inspired by gratitude for the past faithful service of the recipient.”

In the present case, there is no evidence from which intent of the payer can be inferred except the terms of the Philippine statute, and this is also the only source from which an obligation, legal or moral, can be derived. The testimony consists entirely of petitioner’s statement that she was employed by the Philippine Government for thirteen years, that her position was discontinued, and that she chose to take a lump sum of $2,982 instead of monthly payments of $83.23 for a stated time.

The Philippine statute was approved February 21, 1933, relates in its title to the “payment of retirement gratuities to employees retired from the service as a result of reorganization”, and provides that whenever it is necessary to abolish a position or retire an employee he “shall be entitled to a gratuity as follows.” Thus there is created a legal obligation inuring to the benefit of each employee retired. Were it not for the use of the word “gratuity” to describe it, no one could doubt that the payments were a commonplace system of retirement pay, inspired not by spontaneous generosity, but by a recognition of services rendered. The variation in amounts is made to depend on length of service and salary earned. In this there is little of the nature of a gratuity. True, the Philippine Legislature was not obligated to enact the statute which gave petitioner her right; but this did not serve to .stamp the amount received as a gift. It was a statutory method of paying her an additional amount for her service or its discontinuance. Levey v. Helvering, 68 Fed. (2d) 401.

In our opinion, the amount was not a gift, but compensation for services, and the Commissioner correctly ruled it to be within the petitioner’s gross income and subject to tax.

Judgment will be entered for the respondent.