author: Murdock. : Mellott,

text:
    Estate of Robert Wetherill, Deceased, Chester-Cambridge Bank & Trust Company, Robert Wetherill, Jr., and Anne W. Kerr, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86862.
    Promulgated December 31, 1937.

      Edgar J. Goodrich, Esq., and J. H. Ward Hinkson, Esq., for the petitioners.

      Frank T. Horner, Esq., Eugene G. Smith, Esq., and William H. OConnor, Esq., for the respondent.
   OPINION.

Murdock. :

The parties have agreed to the value at the date of the decedent’s death of the property in the two trusts. A great deal of evidence was introduced on the question of whether or not the trusts were made in contemplation of death. All six of the decedent’s surviving children, several of his sons-in-law, several grandchildren, domestic servants, family physicians, close business associates, attorneys who took part in preparing the trust instruments, and others have testified at length as to the business career, character, mental qualities, physical condition, and mode of life of the decedent, the financial circumstances of the children, and declarations of the decedent made before, at the time of, and after the making of the transfers in controversy. Their testimony was supplemented by photographs and motion pictures of the decedent. This evidence is summarized in the findings of fact. All of the evidence has been carefully considered, regardless of whether or not particular mention is made of it in the findings.

The first question for decision by the Board is whether the Commissioner erred in including in the gross estate of the decedent $5,839,414.16 representing the value at the date of the decedent’s death of property transferred by him in trust for the benefit of his children on October 6, 1931. The Commissioner, in determining the deficiency, held that this transfer was made by the decedent in contemplation of death within the meaning of section 302 (c) of the Revenue Act of 1926. The burden of proof on this issue was upon the petitioners. They have produced a great deal of evidence to show that the transfer was not made in contemplation of death. The decedent was an unusually healthy man. He' suffered from no illness or physical weakness which might furnish a possible reason for making the transfer. Although he was about eighty-three years of age at that time, it has been held that age alone can not be regarded as furnishing a decisive test. United States v. Wells, 283 U. S. 102. The decedent was cheerful, hopeful, optimistic, and sanguine in character and temperament, and had no tendency to be sad, despondent, or gloomy. He was extremely active in the affairs of life. The evidence shows that his purpose in creating this trust was one associated with life rather than with death. That purpose was to make his children independent financially during his lifetime so that they would no longer annoy him with requests for money and so that he could assist them in their efforts to learn how to handle large incomes. Another purpose, of less importance but one likewise associated with life rather than with death, was to relieve himself of the burden of handling a part of his fortune. His own tastes were simple and he used only a small portion of his income for his personal needs and living expenses. Several of his children were entirely dependent upon him for support; others made frequent and urgent demands upon him for financial assistance. He was both annoyed and disappointed by these frequent demands. The long delay in the establishment of the trust is amply explained by evidence of the decedent’s slow, deliberate, careful, and methodical way of conducting his affairs. There is a finding above that the transfer of October 6, 1931, was not made in contemplation of death. The evidence preponderates in favor of such a finding.

The principal argument made by the respondent is based upon statements made by the decedent in letters to the Bankers Trust Co. of New York to show consciousness of Federal estate taxes and contemplation of death. All of the correspondence between the decedent and that bank has been examined and carefully considered in the light of all of the other evidence in the case. The phrase “setting your house in order for the inevitable end” and the phrase “get your House in order” are the statements relied upon by the respondent to show that the transfer of October 6,1931, was made in contemplation of death. He says those phrases are “the mournful expressions of the decedent himself.” We think, however, that the decedent must have borrowed the words from the writings or statements of some other person because they do not seem to come naturally from his hand. But however that may be, their use by the decedent in these letters is insufficient evidence that the transfer, made many years later, was made in contemplation of death. Cf. Commercial National Bank, 36 B. T. A. 239.

The letters in this correspondence written by the decedent are for the most part extremely ambiguous, vague, and indefinite. It is difficult, if not impossible, to determine from the letters what may have been the decedent’s purpose in writing them. He may have had in mind his will. The trust for his children was never mentioned in any of the letters. The letters contain a reference to a possible trust for his grandchildren. There is evidence to indicate that the decedent 'was peculiarly fond of obtaining free advice and information on many subjects. The petitioners suggest, and they may be right, that the decedent in this correspondence was merely enticing the bank to give him as much free information as possible without in any way committing himself. But regardless of what may be the correct explanation of these letters and of the use by the decedent of the expressions in question, we are satisfied that their presence in this record is insufficient to show that the transfer of October 6, 1931, was made in contemplation of death or even to balance the evidence of the petitioners that the transfer was not made in contemplation of death.

The respondent contends further that this transfer was made to take effect in possession or enjoyment at or after death. The authorities on this point are to the contrary. The trust was irrevocable and absolutely divested the grantor of all title to the property. After the transfer he held no right in the trust estate which in any sense was the subject of testamentary disposition, and his death neither passed any interest to any of the beneficiaries nor enlarged their interest beyond what was conveyed by the indenture. Helvering v. St. Louis Union Trust Co., 296 U. S. 39. The trust instrument contains the following provision:

The interest of the respective beneficiaries to be contingent upon their being respectively alive at the stated time or times of income distribution and the stated time of principal distribution, and not to constitute a previously vested interest.

However, the case is not controlled by niceties of the law of contingent and vested remainders, but rather by whether the death of the decedent is the indispensable event which effects transmission of the estate from the dead to the living. Klein v. United States, 283 U. S. 231. If the title of the grantor is divested, it is not important whether there was a vesting of title in a particular grantee. Tait v. Safe Deposit & Trust Co., 74 Fed. (2d) 851. The decedent in the present case parted with all title. He provided that if a particular beneficiary were not alive to receive a particular distribution, that distribution should go to another beneficiary. There was no probability of failure of any part of the grant because of lack of named beneficiaries. Cf. Nanaline H. Duke et al., Executors, 23 B. T. A. 1104, 1114; affd., 62 Fed. (2d) 1057; Daisy Christine Patterson, Executrix, 36 B. T. A. 407. The conclusion that this transfer was not made to take effect in possession or enjoyment at or after death within the meaning of section 302 (c) seems inescapable.

The next question is to determine whether or not there is evidence in the record to support the respondent’s affirmative contention that the transfers in trust for the benefit of the decedent’s grandchildren were made in contemplation of death. He did not hold, in determining the deficiency, that those transfers were made in contemplation of death. His claim in this connection is for an increased deficiency, represents new matter in his answer, and, therefore, the burden of proof is upon him. The original of these transfers was made 11 years prior to the decedent’s death. The evidence shows that these transfers also were made for purposes connected with life rather than with death. The decedent wanted to use a relatively small part of his ample fortune, while his grandchildren were still young, to create a fund which would give each grandchild a certain financial independence when the child became of age. He planned to have the income accumulate and become corpus during the minority of each child, and it was characteristic of him to want to establish the fund as early as possible so as to hold to a minimum the amount necessary to bring about the desired results. That was his reason for allowing the trust for the benefit of his grandchildren to take precedence over the trust for his children. He had already had experience with his own children and he wanted his grandchildren to be independent of their parents and to pay their own way in life after they became of age. The evidence in the record of his purpose in creating this trust is not nearly as voluminous as is that showing his purpose in creating the trust for his children. He discussed the trust for the grandchildren less than he discussed that for his children. The respondent again relies upon the correspondence with the Bankers Trust Co. which has been discussed above. That evidence fails to show that this transfer was made in contemplation of death, and there is no other evidence in the record to show that the purpose of the transfers related to death rather than to life. Nor were these transfers for the benefit of the decedent’s grandchildren made to take effect in possession or enjoyment at or after death. This trust instrument completely divested the decedent of any interest in the property transferred. The Commissioner did not err in failing to include the value of this trust property in the gross estate of the decedent.

Reviewed by the Board.

Decision will be entered under Rule 50.

Mellott,

concurring and dissenting: I concur in the findings and the portion of the opinion holding that the conveyance by the decedent of a portion of his property to the trust for the benefit of his grandchildren was not made in contemplation of his death. I am not convinced, however, that the facts justify a similar conclusion with reference to the conveyance for the benefit of his children. The fact that he had discussed, and had given consideration to, the making of such conveyance for 15 years but had deferred doing so until he reached the ripe old age of 83 years; that for many years he had apparently been content to dole out his property to his children rather than attempt to teach them how to handle large incomes; and that he was “fully aware of the importance of setting [his] house in order for the inevitable end” 10 years before the conveyance was made, indicate quite clearly that it was made in contemplation of his death rather than for “purposes associated with life.” United States v. Wells, 283 U. S. 102. Accordingly I dissent from the portion of the opinion which holds that the property conveyed by the decedent to the trust for the benefit of his children should not be included in his gross estate.

TURNER agrees with the above.


source: Caselaw Access Project

author: Tyson:

license: Public Domain

text:
    Estate of John T. H. Mitchell, Deceased, Anna L. W. Mitchell, Administratrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74805.
    Promulgated January 4, 1938.

      E. L. Bono, Esq., and Brice (Jlagett, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

Tyson:

The respondent has determined and asserted against the petitioner herein a Federal estate tax deficiency in the amount of $35,769.14, all of which is in controversy in this proceeding.

The petitioner assigns as errors in the respondent’s determination (1) that 900 shares of capital stock of Lennen & Mitchell, Inc., owned by the decedent at date of his death, had a value of $313,771.93 on that date instead of $111,105.26 as reported on the return; (2) that the sum of $402,273.70, as the proceeds of certain insurance policies on the decedent’s life, payable to decedent’s business associate, is includable in the decedent’s gross estate.

The petitioner, a resident of Greenwich, Connecticut, is the duly qualified and acting administratrix of the estate of John T. H. Mitchell, deceased, who died intestate on November 17, 1930, a resident of Greenwich, Connecticut.

In 1924 John T. H. Mitchell, now deceased, and Philip W. Lennen formed a corporation under the name of Lennen & Mitchell, Inc., for the purpose of engaging in the advertising business, with an office located in New York City. Each of those individuals acquired one-half or 900 shares of that corporation’s capital stock and each continued to own such shares up to the time of the decedent’s rdeath. The advertising business conducted by Lennen & Mitchell, Inc., was of a highly personal service character and its success was •; dependent upon the efforts of those two individuals owning the stock. In the spring of 1928 Lennen and Mitchell entered into an oral agreement, which was thereafter reduced to writing and signed by the parties on April 30, 1929. The agreement recites, inter alia, that the parties thereto “deem it to their mutual interest to make provision for the purchase and disposition * * * upon the death of either of them” of the 900 shares and any additional shares of the Lennen & Mitchell, Inc., stock acquired by them and that “it is their intention to provide for the purchase price or a part of the purchase price for such stock from the proceeds of life insurance which is or may be payable to the estate of either party, as hereinafter provided.”

The agreement provided further, inter alia, that neither party should sell or dispose of his shares of such stock or any part thereof without first offering to sell same to the other party to the agreement at a price to be mutually agreed upon; that “for the purpose of carrying this agreement into effect as^hereinafter set forth, and to provide for a part of the purchase price of the stock,1 the parties hereto have caused life insurance in the sum of $200,000 to be placed upon the life of each of the parties hereto as evidenced by” certain designated policies; that the premiums would be paid when due in a manner to be agreed upon between the parties; that the proceeds of the policies should be made payable., to the estates of the respective .„patfcies. “ior the purpose of providing a part of the purchase price to be paid for the stock of the party who shall have predeceased the other, and the said sum of $200,000 is to be received on account of the purchase price as if the surviving party had paid the same, and it is agreed that the surviving party shall receive the stock held by the estate of such deceased party in the corporation of Lennen & Mitchell, Inc., as though a direct purchase had been made by such surviving party, it being the intention of the parties hereto and the parties hereto agree for their respective estates that the said sum of $200,000 received by the estate of either party shall be applied on account of the purchase price for the benefit of the surviving party”; that “the surviving party shall immediately receive and be entitled to the stock” upon payment of the $200,000 insurance proceeds to the estate of the deceaséd party unless the corporation’s^ tangible assets, excluding book value and good will,.show-a. value o£the -stock.in...excess..of, $200.000, in which event such excess should be paid either in cash or in certain specified installments at the option of the purchaser; that on each party’s certificate of stock there be inscribed “Subject to written agreement dated April 30,1929, between Philip W. Lennen and John T. H. Mitchell”; and that “this agreement shall be binding upon and shall inure to the benefit of the executors, administrators and assigns of the parties hereto.”

The certificates of stock of Lennen & Mitchell, Inc., held by the decedent and Lennen were inscribed as provided for by the agreement.

Pursuant to this agreement, in April 1928 Lennen and Mitchell each applied for and secured the issuance of insurance policies in the amount of $200,000 on each of their respective lives. The $200,000 policy on Mitchell’s (decedent’s) life was made payable to his executors, administrators, or assigns and there was reserved to the insured, without the consent of any beneficiary, the exercise of all rights and privileges under the policy such as change of beneficiary, surrender options, loans, and the receipt of proceeds as endowment. The two policies aggregating $200,000 on the life of Lennen were made payable to his executors, administrators, or assigns, with the same reservation of rights to the insured as those contained in Mitchell’s policy.

With regard to the premiums on the $200,000 life insurance policies^ Mitchell and Lennen agreed that each would pay the premiums due 1 on the other’s insurance. However, that agreement required Lennen to pay a larger amount as premiums because Mitchell was several years older than Lennen and Mitchell voluntarily offered to pay half of that difference so that Lennen’s cost for the same protection would be equalized. It having been the custom of Lennen and Mitchell to have Lennen & Mitchell, Inc., issue its checks in payment of their personal bills and charge such payments against their .accounts, the insurance premiums were paid in the same One-half of the total premiums paid on the policies was charged to } the personal account of Mitchell and one-half thereof was charged to the personal account of Lennen. These charges to their accounts were offset by credits for salaries and dividends due them from time to time. The policy on Mitchell’s life was delivered into the possession of Lennen and the policies on the latter’s life were delivered to Mitchell. many of I personal I manner. J

The parties have agreed that the proceeds of the $200,000 policy on Mitchell’s life, payable to his estate, amounted to $202,666.67.

At or about the time of Mitchell’s death the boohs of Lennen & Mitchell, Inc., showed an indebtedness to it due from the decedent in the amount of $206,648.17. Subsequent to the decedent’s death and in order to settle all questions as to the value of the decedent’s 900 shares of Lennen & Mitchell, Inc., stock, the sale thereof to Lennen, pursuant to the contract of April 30, 1929, and the amount of Mitchell’s indebtedness to the corporation and settlement thereof, Philip W. Lennen, as the party of the first part, and Anna L. W. Mitchell, administratrix of the estate of John T. H. Mitchell, deceased, as the party of the second part, and the decedent’s sole heirs and next of kin, as parties of the third part, entered into an agreement dated December 31, 1930. By such agreement those parties mutually agreed, inter alia, that the said 900 shares owned by decedent at date of death had a value of $313.771.93 on that date, as provided by the contract of April 30, 1929; that the second party “agrees to sell, transfer, assign and deliver the said 900 shares of stock to the said party of the first part for the sum of $313,771.93 and to apply upon said purchase price the sum of $202,666.67 received by her as said administratrix as the proceeds on the said life insurance policy upon the life of the said John T. H. Mitchell, referred to in said agreement of April 30,1929, leaving a balance on said purchase price of $111,105.26”; that the first party agrees to purchase the said stock for $313,771.93 and pay forthwith the balance due in the sum of $111,-105.26; and that the first party “agrees that he will procure the said Lennen & Mitchell, Inc. to accept from the said party of the second part hereto the sum of $111,105.26 in full payment, compromise, satisfaction and discharge for any and all indebtedness due or claimed to be due from the said John T. H. Mitchell to the said Lennen & Mitchell, Inc.”

The provisions of that agreement of December 31, 1930, were carried out on the same date. Petitioner transferred and delivered the 900 shares of Lennen & Mitchell, Inc., stock to Lennen, who paid the balance of the purchase price due in the sum of $111,105.26 by his certified check, drawn to the order of Anna L. W. Mitchell, adminis-tratrix of the estate of John T. H. Mitchell, deceased, and she endorsed the check to the order of Lennen & Mitchell, Inc., in full payment of decedent’s indebtedness to that corporation, which executed a general release pursuant to its written agreement of December 31, 1930, with petitioner and other parties in interest.

In the estate tax return petitioner reported the 900 shares of Lenten & Mitchell, Inc., stock as being subject to the agreements of April ; 30, 1929, and December 31, 1930, and as having a fair market value of $111,105.26 at date of decedent’s death. Petitioner also reported ft the said sum of $202,666.67 as the proceeds of the insurance policy payable to tlie estate of tlie decedent. In his determination of the deficiency the respondent increased the value of the said stock to the amount of $313,771.93 and he made no change with respect to the inclusion of the insurance proceeds of $202,666.67 in the gross estate as reported.

The petitioner contends that the 900 shares of stock owned by decedent at date of death were subject to a binding agreement which definitely limited the value thereof at date of death to the sum of $111,105.26, the amount actually received therefor in excess of the insurance proceeds of $202,666.67, which proceeds were included in the gross estate as reported. In the alternative, petitioner contends that, if the 900 shares of stock should be included in the gross estate at a value of $313,771.93, then the insurance proceeds of $202,666.67 should be excluded from the gross estate, because such proceeds had to be applied, imder the terms of a binding contract, to the purchase price of the stock paid by Lennen and was a burden thereon. Briefly stated, petitioner takes the position that not more than $313,771.93 should be included in the gross estate on account of both the stock and the said insurance proceeds because the estate was not entitled to receive and did not receive both insurance proceeds in the sum of $202,666.67 cash and an amount of $313,771.93 as the value of the stock. The respondent contends that the question of the value of the stock presents one issue and that its value was $313,771.93 at date of death, and, further, that the question of the inclusion in the gross estate of the insurance proceeds presents an entirely separate and distinct issue having no connection with the determination of the .fair market value of the stock.

The decedent having died in 1930, the Revenue Act of 1926 as amended by the Revenue Act of 1928 is controlling. The applicable provisions of the 1926 Act are as follows:

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

In our opinion there can be no doubt that the insurance proceeds in the amount of $202,666.67 must be included in determining the value of the decedent’s gross estate, as proceeds of insurance, within the meaning of section 302 (g), supra. In addition to the fact that at the date of his death the decedent had many incidents of ownership and the reserved right to change the beneficiary in the insurance policy, which fact would be sufficient to make the value of the policy includable in the gross estate, Louise O. Moore, Executrix, 83 B. T. A. 108, and authorities cited therein, the policy was payable to the admin-istratrix of his estate, and the proceeds were received by her and actually became a part of the decedent’s gross estate.

However, such insurance proceeds were received by decedent’s estate subject to the terms of a valid and binding contract that they be applied to reduce the purchase price to be paid by Lennen for the decedent’s 900 shares of Lennen & Mitchell, Inc., stock which by the same contract Lennen was obligated to buy. Those shares, being so burdened, were not subject to the unfettered ownership of the decedent’s estate. The effect of the contract was to reduce the value of the estate’s interest in such stock by an amount equal to the amount ; of the proceeds of the insurance policy, and the value of the stock as Lso reduced must be deemed as its value for estate tax purposes. Cf. Wilson v. Bowers, 57 Fed. (2d) 682; M. W. Dobrzensky, Executor, 34 B. T. A. 305, 312; Edith M. Bensel et al., Executors, 36 B. T. A. 246, and authorities cited therein. As so reduced that amount was $111,-105.26, for which amount the decedent’s estate was obligated to and did transfer the said shares to Lennen. In our opinion, the value of such shares at the date of decedent’s death was, fo?r the purpose of determining the value of his gross estate, $111,105.26, for we must deal in actualities and such amount was the sale price actually received by the estate after the reduction of the amount of the insurance proceeds from the total sale price of the stock. • The respondent erred in. increasing the value of such stock from $111,105.26, as reported by petitioner, to the amount of $313,771.93. “ . .

The second issue involves the question of whether the sum of $402,273.70, representing the total proceeds of several insurance policies, on the decedent’s life, payable to his business associate, Lennen. is includable in the decedent’s gross estate.

Due to the fact that the personal services of both Lennen and Mitchell constituted a vital factor in the success of the advertising business of Lennen & Mitchell, Inc., and that such business would suffer greatly in the event of the death of either of those individuals, they entered into an oral agreement in the spring of 1928, that each would secure life insurance in the amount of $400,000 payable to the other, to compensate the survivor for the financial loss which would be occasioned by the death of either party.

Pursuant to that agreement Lennen applied for and secured the issuance of several life insurance policies on his life in the sum of $400,000, payable to Mitchell as the beneficiary. Also, Mitchell applied for and secured the issuance of six life insurance policies on his life in the sum of $400,000, payable to Lennen as the beneficiary. Each of the policies so taken out provided, in effect, that if the designated beneficiary should predecease the insured the beneficial interest of the policy would vest in the estate of the insured. The right to change the beneficiary was not reserved in any of those policies so taken out by Lennen and the decedent, and there was not reserved any right to obtain loans thereon, or the cash surrender value thereof, or any interest therein, at the date of death which could be exercised without the consent of the, beneficiary. The policies so issued on Lennen’s life were delivered to Mitchell and the six policies so issued on Mitchell’s life were delivered to Lennen, who had possession of them at the date of decedent’s death.

Lennen agreed to pay the premiums due on the policies on Mitchell’s life and Mitchell agreed to pay the premiums due on the policies on Lennen’s life. However, Mitchell voluntarily offered to pay half of the difference between the larger premiums on the policies on his life and the premiums on the policies on Lennen’s life so as to equalize their cost for the same amount of protection. The premiums on such insurance policies were paid by Lennen & Mitchell, Inc., and on its books one-half of the total premiums was charged to the personal account of Mitchell and one-half thereof was charged to the personal account of Lennen.

The parties have agreed that the proceeds of the six insurance policies on Mitchell’s life amounted to $402,203.70. Those proceeds were paid to Lennen and no part thereof was turned over to the decedent’s estate.

In the estate tax return the petitioner did not include any part of the $402,203.70 insurance proceeds in the decedent’s gross estate. In his determination the respondent included in the decedent’s gross estate the amount of $402,273.70 as the proceeds from the six policies on Mitchell’s life, apparently for the reason that the proceeds of each of the six policies were payable to the insured’s estate in the event the insured survived the beneficiary. On brief respondent states that the weight of authority does not sustain the inclusion of such insurance proceeds in the gross estate of the decedent. However, he nevertheless contends, without the citation of authority, that the proceeds of the policies remained the property of the insurance company until the date of death and could not be disposed of prior to that event, that consequently the disposition takes effect at death as a testamentary disposition and that, therefore, such proceeds constitute a part of the decedent’s gross estate. There is no merit to this contention.

This Board has held in several cases that where the insured did not reserve the right to change the beneficiary and at date of death had no interest in the policy which he could exercise without the consent of the beneficiary, the proceeds of the policy are not includable in the decedent’s gross estate. Louise O. Moore, Executrix, supra, and cases therein cited. The fact that the policies provided that the proceeds thereof would become payable to the insured’s estate in the event that the beneficiary predeceased the insured, affords no ground for the inclusion of such proceeds in the decedent’s estate. Title and possession of the irrevocably designated beneficiary to the proceeds of the insurance policy were fixed beyond the power of the insured to affect and the latter’s death did not result in the transfer of any interest from the decedent to the beneficiary of the policy. The decedent’s death merely terminated the possible contingency of the beneficiary predeceasing the insured. Bingham v. United States, 296 U. S. 211; Helvering v. St. Louis Union Trust Co., 296 U. S. 39. The respondent erred in including in the decedent’s gross estate the amount of $402,273.70 as proceeds of insurance.

Decision will he entered wider Bule 50.


author: MuRdock :

text:
    Edward Hagelin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70208.
    Promulgated January 4, 1938.

      Garl R. Qhindhlom, Esq., for the petitioner.

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

MuRdock :

The Commissioner determined deficiencies in income tax of $2,262 for 1929 and $541.11 for 1980. One of the issues raised by the petition has been.waived. The remaining issue is whether the petitioner is entitled to deductions for real estate taxes alleged to have been paid by him in the taxable years. The deductions claimed are $9,000 for 1929 and $9,658.96 for 1930. The facts are stipulated so that no findings are necessary.

The petitioner is a resident of Chicago, Illinois. He filed income tax returns for 1929 and 1930 on the cash receipts and disbursements basis. He owned numerous pieces of real estate in Cook County, Illinois.

Prior to the taxable years the Lincoln Trust & Savings Bank of Chicago (hereinafter referred to as the bank), was appointed a deputy collector of taxes by the county treasurer and, ex officio, county collector for Cook County, pursuant to authority vested in him by the laws of Illinois. The petitioner had in prior years regularly paid his real estate taxes during the year in which he received the tax bills. That was always the year following the year for which and during which the taxes were assessed. The payments were made to the bank, by checks payable to the bank, and the bank issued receipts in the name of the collector.

Assessments on property for taxation purposes in the State of Illinois are made for and during the current calendar year, and the taxes are extended for collection during the following year. This procedure was uniformly followed in Cook County until the state tax commission in 1928, pursuant to law, ordered a reassessment of all real property in Cook County for 1928 taxes payable in 1929. The reassessment was not completed until after 1929, and real estate taxes for 1928 were not determined or placed in collection during 1929 when they otherwise would have been due for payment.

The petitioner delivered $9,000 to the bank on December 30, 1929, together with a letter stating that the amount was to be “held in trust in payment for 1928 real estate taxes levied against” designated pieces of real estate, and directing the bank “to hold this amount and pay the same to Treasurer of Cook County upon presentation of tax bills for 1928.” The petitioner received tax bills for 1928 in the total amount of $9,953.25 on July 10, 1930. He then paid the bank the additional sum of $953.25 and received receipts from it as deputy in the name of the county treasurer.

Beal estate taxes in Cook County for 1929 were not assessed, extended, determined, or collected during 1930 as they otherwise would have been. The petitioner, on December 31, 1930, delivered to the bank $12,750, to be held and used by it for the payment of real estate taxes for 1929 when the bills therefor should be presented to it. He received a receipt from the bank stating that the money was to be held “for the purpose of paying general taxes for the year 1929” on designated pieces of real estate. The bank ceased doing business on April 16, 1931, and was placed under the control of the Auditor of Public Accounts of the State of Illinois, who thereafter appointed a receiver for the bank. The sum deposited by the petitioner was in the possession of the bank at the time the bank was closed and came into the possession of the receiver. The affairs of the bank and the receivership were conducted in a chancery proceeding in the Circuit Court of Cook County. The petitioner filed an intervening petition in that proceeding, and on September 23,1931, a decree was entered declaring that the money was deposited for the express and special purpose of having the same used by the bank to pay certain real estate taxes, the bank accepted the money for that purpose, and the money had not been used for that purpose but still remained a part of the assets of the bank in the possession of the receiver and constituted a trust fund which should be paid to the petitioner as a pi’eferred claim. The receiver paid the amount of $12,750 to the petitioner on November 6, 1931.

The taxes for 1929 upon the real estate mentioned in the receipt became due and payable on May 15, 1931. On that date the bank was not acting as deputy collector, and had not used the money deposited for payment of real estate taxes as it had been instructed to do. The petitioner requested the receiver to use the money to pay the taxes, but the receiver refused. On August 14 and September 4, 1931, the petitioner paid directly to the county treasurer the amount of $9,-658.96, in payment of taxes for 1929 upon the real estate referred to in the receipt issued by the bank on December 31,1930. These payments were made to prevent sales of the real estate for the nonpayment of taxes. The bills rendered for the taxes so paid contained a notice and direction by the county collector to taxpayers to pay their taxes at various substations which had been authorized to receive such taxes. The bank was included in the list of substations, although it did not in fact act as subcollector after April 16,1931.

In determining the deficiencies the Commissioner allowed no deduction from the petitioner’s gross income for 1929 for real estate taxes paid on Chicago real estate in 1929. He allowed the petitioner a deduction from his gross income for 1930 of the amount of real estate taxes paid during 1930 on account of 1928 taxes.

A number of proceedings have come before the Board as a result of the reassessment of real property in Cook County ordered by the state tax commission in 1928. This taxpayer filed his returns on the cash receipts and disbursements basis. In prior years he had paid a substantial amount of taxes on real estate in Cook County and had properly taken deductions on his income tax return for the taxes paid. As a result of the delay in the reassessment, no real estate taxes were actually assessed during 1928, and no taxes were determined or placed in collection during 1929. The petitioner realized that unless he could pay his taxes in some way he would not get any deduction in his income tax return, so he tried to devise a plan which would entitle him to the deduction. He chose a bank which had been regularly appointed a deputy collector of taxes. He placed $9,000 in the hands of that bank during 1929 for the payment of real estate taxes for 1928 as soon as they might be made ready for payment. During the year 1930 the bank actually used the funds for the purpose of paying the 1928 taxes. The petitioner had to make an additional payment of a small amount. The Commissioner allowed the entire amount paid in 1930 as a deduction for 1930. But the petitioner contends that he is entitled to deduct $9,000 of the amount in computing his income for 1929. Unfortunate as it may be, he is not entitled to the deduction claimed for 1929.

The statute in section 23 (c) allows a deduction, to one on a cash receipts and disbursements basis, of the taxes paid within the taxable year. Milton D. Eisner, Executor, 9 B. T. A. 210; Corinth State Bank, 14 B. T. A. 1162; Benjamin I. Powell, 26 B. T. A. 509; Leach v. Commissioner, 50 Fed. (2d) 371. The petitioner did not pay the taxes in 1929. It appears that payment at that time was impossible because the amount was not known and no one had authority to receive any amount from him in 1929 as payment of real estate taxes for 1928. The bank, although a deputy collector, had no authority to accept the $9,000 as payment of taxes, and it merely accepted the amount in trust for the purpose of paying the taxes at a later date upon presentation of the tax bills. Those bills were not presented or paid until 1930. The bank was no more than agent or trustee for the petitioner in holding the funds during the interim. Arthur T. Galt, 31 B. T. A. 930. The statute limited the power of the bank as deputy to the collection of taxes “levied or assessed.” The taxes for 1928 had not been levied or assessed in 1929 and the bank had no authority at that time to collect the money as an actual discharge of the 1928 taxes. The deduction is allowed only when there has been payment to the tax collecting authority. Payment means the discharge of a debt or obligation, and payment of taxes means payment to a properly designated officer who, at the time of the payment, has authority to receive. it as tax in discharge of the debt or obligation.

The facts upon which the petitioner relies to show his right to deduct for 1930 a portion of the amount which he deposited in that year for payment of his taxes for 1929 are, if possible, less favorable than those pertaining to the alleged deduction for 1929. Before the bank could use the money to pay the taxes for 1929, it was closed and ceased to be a deputy collector. The money was never used for payment of the petitioner’s taxes, but was eventually returned to him. After his tax bills had been presented in 1931, he paid them with other funds. That did not entitle him to a deduction of that amount for 1930.

The petitioner contends that the deposits which he made were conditional payments, and, when they became final upon presentation of the tax bills and actual discharge of his liability, they related back to the time of the deposit. However, the deposits were not even conditional payment. They were merely for the purpose of payment in the future. The cases which the petitioner cites in support of this argument all involved cheeks issued in payment of taxes. The condition to be fulfilled was payment on presentation of the check. The payments were to the tax collector, and the decisions show that the regulations and statutes relating to payment by check were designed to avoid inconvenience in administration and collection of taxes. Those cases are not applicable here. Cf. Marian Stewart Honeyman, 24 B. T. A. 130.

Decision will be entered for the respondent.


author: Leech:

text:
    Allegheny Amusement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87111.
    Promulgated January 7, 1938.

      Maurice Stem, Esq., and Harry M. Richman, O. P. A., for the petitioner.

      T. F. Callahan, Esq., for the respondent.
   OPINION.

Leech:

The respondent contends that the petitioner distributed dividends among its four officer stockholders, falsely reported these distributions as salaries paid its officers and that this was done with intent to evade its income taxes by securing the benefit of deductions from gross income to which its officers knew it was not entitled.

The petitioner concedes that such distributions did not represent salaries, but now argues that they did constitute money belonging to the stockholders and that its treatment of them as salaries was a harmless error. It alleges in its petition that it erred in the first instance by reporting the proceeds collected under the lease to the Stanley Co., as income. The contention is that these sums, in fact, constituted interest payments due its stockholders from that company on the unpaid balances for their stock, and that in its collection and disbursing of these payments, it merely acted as a conduit through which the money passed from purchaser to seller.

We are unable to find in the record any basis for this position. It is contradictory to the terms of both the original contract among all the parties and the contract of lease between petitioner and the Stanley Co. Both of these instruments characterize these payments as rent for the use of petitioner’s property, and such they were in fact. That the four stockholders of petitioner, under the agreement, received no interest upon deferred payments for their stock is without significance because it is apparent that the agreement whereby they retained the beneficial ownership of their stock during the term over which the payments were being made, compensated them through the dividends which would be received on the stock and provided a return upon their investment.

Petitioner was the owner of the theatre property. The payments which it received were made for the use of its property and constituted petitioner’s income, free from any claims on the part of these four individuals, except such as they might have as stockholders of of the corporation. To treat such payments as anything other than rental, requires the utter disregard of the specific provisions of the written contracts. There is no ambiguity in these provisions and we have no authority for holding that they have a meaning entirely different from that conveyed by the language used. Henrietta Mills, Inc. v. Commissioner, 52 Fed. (2d) 931. It is very evident that petitioner, acting through its officers, considered these payments as rental income. It reported them as such, and, on its income tax returns, took deductions from such income on account of depreciation sustained upon the property in each of the taxable years here involved.

Thus, since these payments to petitioner’s stockholders, in fact, were distributions of earnings and not deductible expenses, respondent’s action in restoring these amounts to income and his determination of deficiency in tax in each year, is sustained.

Undoubtedly, part or all of each of the pending tax deficiencies resulted from respondent’s restoring these salary deductions to taxable income. Whether petitioner’s returns for each of the years 1921 to 1934, inclusive, because these deductions were asserted therein, were false and fraudulent and were filed with intent to evade tax, is a question of fact.

The determination of that fact controls not only the imposition of the disputed fraud penalties for each year involved but also disposes of the contested right of respondent to a deficiency for any of the years 1921 to 1932, inclusive. Summerill Tubing Co., 36 B. T. A. 347.

The respondent has the burden of establishing that fact by clear and convincing evidence. Charles J. Delone, 34 B. T. A. 1139. We think he has fully met that burden here. Certainly, as has been stated, each of the petitioner’s returns for the years in controversy was false in the characterization of these distributions to the officer stockholders, as salary payments, and deducting them from income as such an expense. That this was done, in each instance, with the fraudulent intent of evading income tax, is equally clear.

A careful consideration of this record is convincing that petitioner, through its responsible officers and the accountant acting under their direction, caused to be entered upon petitioner’s books as salaries for each of the years in review, distributions of taxable earnings made to its four stockholder officers and, in its income tax returns for each of those years, caused such distributions to be similarly reported, when these officers knew that no salary payments were due or had been made. This characterization of such distributions as salary payments and their deduction on the petitioner’s returns as such a business expense were thus asserted with the purpose of securing the benefits of those deductions from gross income, to which petitioner’s officers knew it was not entitled, and thus evade the just payment of income taxes. As the Board said in the case of M. Rea Gano, 19 B. T. A. 518, at page 533:

A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem' to permit of no difference of opinion. It evidences a fraudulent purpose.

Such a conclusion here is unavoidable in the face of the evidence. The record contains no indication that salaries were ever voted by petitioner to its officers in any amount or that the sums distributed to them, for which credit was taken as expenses representing salaries paid, in any instance, were fixed and in definite amounts but rather that, in each year, the amount to be distributed to each of the four officer stockholders was determined by taking approximately one-fourth of the corporate gross income of petitioner less actual cash expenditures.

Three of these individuals, to whom those distributions were made, admittedly performed no service of any kind to the corporation, and the fourth rendered services so trivial in character that reasonable compensation therefor would have been inconsequential. Actually, these four officer stockholders of the petitioner do not seem to have considered the services of their treasurer as deserving of any compensation, since he received in these distributions no more than the amount distributed to each of the other three, who were entitled, admittedly, to no compensation as officers. The treasurer of the petitioner did not even keep the books but employed an accountant for that purpose who merely came at intervals to write up the books from the stubs of the check book kept by the treasurer, whose only duties appear to have been limited to the receipt of rental checks and the distribution of those proceeds to himself and his three associates.

Petitioner attempts to justify its action as an honest mistake, by the argument that this treatment of these distributions on its books and in its returns was only natural if, under the contracts here, it considered this income, in fact, interest due these individuals rather than rental received by it upon its own account. The answer to that position is obvious. That there was no legal reason for so viewing these rental payments, we have already concluded. The evidence is equally compelling that petitioner’s officer stockholders did not, in fact, so consider them. Thus, this same method of treating rental income was established by the petitioner long before the execution of the contracts involved in this proceeding and during the years in which the income received is neither proved nor even alleged to have been considered as anything other than pure rental income. The only personal returns of petitioner’s officer stockholders for any of the years in dispute, in evidence, are those of petitioner’s vice president. These significantly indicate that the contested payments made to him by petitioner were nob treated in his returns as either income or salaries, but as dividends, and that having thus reported them, he took credit against this amount for normal tax, a credit to which he would not have been entitled if the payment had been interest or salary.

Since we have found that petitioner’s income tax returns for each of the years 1921 to 1934, inclusive, were false and fraudulent and filed for the purpose of evading taxes, petitioner’s plea of statute of limitations as to all deficiencies for the years 1921 to 1932, inclusive, is overruled. The contested determinations of deficiencies for each of the years, 1921 to and including 1934, together with the 50 percent fraud penalty imposed for each year, are sustained.-

Reviewed by the Board.

Decision will be entered, for the respondent.


author: Black :

text:
    Estate of Jose M. Tarafa y Armas, Deceased, Fernando J. Cancio y Erro, Executor and Ancillary Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82656.
    Promulgated January 7, 1938.

      E. A. Littleton, Esq., for the petitioner.

      O. A. Gwinn, Esq., for the respondent.
   OPINION.

Black :

Section 301 of the Eevenue Act of 1926 imposes a tax upon the value of the “net estate”, as determined under the provisions of section 303 of that act, of every decedent “whether a resident or nonresident of the United States.” Section 302 provides for inclusion in the “gross estate” of the value at the time of the decedent’s death of all property “wherever situated” to the extent of the decedent’s interest therein at the time of his death. Section 303 prescribes how the net estate of a decedent shall be determined, and by section 303 (b) the computation of the net estate of a nonresident starts with only that part of his gross estate which is situated in the United States. While “stock in a domestic corporation owned and held by a nonresident decedent” is “deemed property within the United States” (sec. 303 (d)), “moneys deposited with any person carrying on the banking business, by or for a nonresident decedent who was not engaged in business in the United States at the time of his death” are not so deemed. (Sec. 303 (e).)

The first numbered issue herein — whether or not the respondent correctly included the value of the decedent’s one-half community interest in a first mortgage bond of a private domestic corporation, which bond was physically located in the Eepublic of Cuba at the time of the decedent’s death — has been considered and decided adversely to the respondent in Herman A. Holsten, Executor, 35 B. T. A. 568, on review (C. C. A., 2d Cir.). We there held that bonds, even though of domestic corporations and municipalities, to be included in the gross estate of a nonresident alien must be physically located in the United States at the time of his death. On the basis of this decision we sustain petitioner on the first point.

The basis for the respondent’s inclusion of deposits in United States banks in the decedent’s gross estate is that the decedent was engaged in business in the United States and therefore such deposits are not within the ambit of subdivision (e) of section 303, supra. In this connection the proof shows that, while the decedent made many trips to the United States, usually stopping over for two or three weeks while on his way to Europe, he was not engaged in business here “at the time of his death.”

Decedent’s son, Jose Miguel Tarafa, testified at the hearing that every year, after the busy season in grinding sugar cane was over, his father visited the United States and Europe; that on most of the trips he accompanied his father; that these trips were not business trips, but were made for pleasure and recreation; and that his father carried on no business in the United States and was not in business in the United States at the time of his death. He testified that the bank deposits which his father made with New York banking institutions were made because of unsettled conditions in Cuba and because of the greater safety which United States banking institutions afforded; that his father’s death came while he was in the United States upon one of his habitual sojourns on pleasure.

Respondent bases his contention that decedent was engaged in business in the United States at the time of his death solely upon the ground that decedent was the sole stockholder of the Central Cuba Sugar Co., which was incorporated under the laws of the State of New York in 1911. Only in justifiable instances — and we do not consider this one — have the courts and this Board disregarded the separateness of the corporate entity from its stockholders. Burnet v. Commonwealth Improvement Co., 287 U. S. 415. Therefore we are not persuaded by respondent’s argument that the decedent was engaged in business in the United States by reason of the fact that his principal interest — Central Cuba Sugar Co. — obtained and enjoyed a domestic charter. The domestication of a corporation does not domesticate its nonresident stockholders to the extent of causing them to be in business in the United States if they are not otherwise engaged in business in the United States. Furthermore, the suggestion that these funds were deposited in the United States for business purposes therein is refuted by the testimony that they were in the interest' of safety and to avoid unstable political tendencies prevalent in Cuba since about 1917. These deposits, under the facts and circumstances found, have been expressly excepted by the statute from the decedent’s gross estate and the respondent’s action in including them was erroneous. See Burnet v. Brooks, 288 U. S. 378; Fredrick Rodiek, Ancillary Executor, 33 B. T. A. 1020; affd., 87 Fed. (2d) 328.

The respondent’s argument on the final issue, pertaining to the $50,000 contribution made by the decedent to the marital partnership, is that because, as he says, “all of the decedent’s holdings were situated in the United States, it necessarily follows that the decedent’s contribution of $50,000 to the marital partnership between himself and his wife necessarily had a situs in the United States for the purpose of the Federal estate tax.” If in fact all of the property of the conjugal community had been situated in the United States at the time of decedent’s death, we think respondent’s contention on this point would be correct. We have held however that the principal asset of the community — a bond of the Central Cuba Sugar Cte. on which a balance of $3,304,139.22 was due — was situated in the Republic of Cuba.

According to article 1395 of the Civil Code in force in Cuba, “The conjugal community shall be governed by the rules of the contract of partnership * * Contracts of partnership are governed by the laws where entered into and where their businesses are conducted. In re Hoyne, 277 Fed. 668; King v. Sarria, 69 N. Y. 24; 25 Am. R. 128; and Cutler v. Thomas, 25 Vt. 73. This contract of partnership was entered into in and under the laws of the Republic of Cuba, where the relationship was apparently intended to and did in fact continue until the death of decedent. There is nothing in the record from which it might be even slightly inferred that it was ever intended that the situs of this capital would change or that it in fact did change. It is true that some of the fruits of the community partnership were situated in the United States, and it was stipulated by the parties that “from that capital [the $50,000 contribution], the industry, salaries or work of the spouses, profits, rents and interest accruing during marriage from community property and from the property which belongs to either one of the spouses, the assets of said community at the time of the decedent’s death were derived.” But certainly it can not be said, with any reasonable force, that because some of the fruits of the contribution are situated in the United States for tax purposes, the contribution itself became so situated. The contribution having been made at the domicile of the decedent, under the laws of that domicile, which determined its situs and regulated its administration, and there being nothing in the record nor in the laws of Cuba that are before us indicating that such situs changed, we hold, following the situs test now well established, that the respondent’s inclusion of this item in the decedent’s gross estate was erroneous. Herman A. Holsten, supra; Fredrick Bodiek, Ancillary Executor, supra. Respondent has cited us to no authority to sustain his position on this point and we know of none.

Reviewed by the Board.

.Decision will be entered under Bule 50.


author: Mellott :

text:
    Calvin C. Green, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87639.
    Promulgated January 7, 1938.

      Olaude I. Parker, Esq., and Bayley Kohlmeier, Esq., for the petitioner.

      B. D. Daniels, Esq., for the respondent.
   OPINION.

Mellott :

The Commissioner added to the net income shown by the return of the Mericos Oil Co. for the year 1934, $6,434.60 and determined a deficiency in income tax of $884.76 and a deficiency in excess profits tax of $78.76. The petitioner, to whom all of the assets of said company were distributed on December 28, 1934, was duly notified that the Commissioner proposed to assess the amounts shown above against him as transferee, in accordance with the provisions of section 311 of the Revenue Act of 1934, and he filed a petition with the Board seeking a redetermination of the deficiency.

The proceeding was duly called for hearing on October 7,1937, and submitted upon a statement of facts, which omitting purely formal parts, exhibits, and signatures, is as follows:

X.
Petitioner is an individual and a resident of the City of Los Angeles, County of Los Angeles, State of California.
II.
The taxes in controversy are income taxes in the amount of $884.76 and excess profits taxes in the amount of $78.76 of Mericos Oil Company, a corporation, for the year 1934, proposed to be assessed to petitioner as transferee of said company.
III.
During the year 1984 and for many years prior thereto the Mericos Oil Company was the owner of certain real property in the City of Los Angeles, County of Los Angeles, State of California, known as Lots 13, 14, 15 and 16 of the Cottage Home Tract in the City of Los Angeles. Said lots were improved by small buildings.
IV.
On July 10, 1928, the City of Los Angeles started proceedings to condemn a portion of the aforesaid property of Mericos Oil Company for the purpose of widening and laying out Dayton Avenue and Figueroa Street in Los Angeles by filing an action in the Superior Court of the State of California in and for the County of Los Angeles entitled “City of Los Angeles v. Kate B. Francisco, et al — No. 256421”. Mericos Oil Company was made defendant in said action. The complaint in said action was filed pursuant to the authority and direction of Los Angeles City Ordinances Nos. 58304 and 60088. Copies of material portions of said ordinances are attached hereto, marked Exhibits A and B and made a part hereof.
The portions of the property of said Mericos Oil Company designated by said complaint to be condemned were all of Lot 14 and parts of Lots 13, 15 and 16 of the Cottage Home Tract.
V.
On January 9, 1932, the Superior Court of the State of California In and for the County of Los Angeles made its findings of fact and rendered an interlocutory judgment in said condemnation proceeding in which the court determined the value of the property of the Mericos Oil Company to be condemned and made an award in favor of the Mericos Oil Company as follows:
Land-$10,851. OO
Severance Damages- 1, 750.00
Improvements- 2, 564.00
Total- 15,105.00
VI.
Under authority of the “Street Opening Act of 1903” of the State of California and Ordinance No. 58304, attached Exhibit B, the City Council of the City of Los Angeles determined an assessment district for the purpose of raising funds to purchase the land to be condemned and pay the expenses of the condemnation proceedings. The land in said assessment district was to be assessed for the payment of the property condemned and taken. All of the above described lots of Mericos Oil Company were within said assessment district. Assessments were levied against said lots in the total sum of $3,869.60. Said assessments were made under authority of and for the purposes designated in the “Street Opening Act of 1903” of the State of California.
Under authority of said “Street Opening Act of 1903” and the aforesaid City Ordinances of the City of Los Angeles, Mericos Oil Company paid and satisfied said assessments by receipting payment of the award granted and due to it in the condemnation proceedings in the amount of said assessments. Said receipt in satisfaction of the assessments against the property of said Mericos Oil Company was duly signed and delivered to the City of Los Angeles by the Mericos Oil Company on January 12, 1934. Said receipt was in words and figures as follows:
“$3869.60 Paragraph 167 No. 4395
Los Angeles, Cal. January IS, 19S4-
Received from the Ciot of Los Angeles (Bureau of Assessments) the sum of Three Thousand Eight Hundred Sixty-nine & 60/100 Dollars due me under the Interlocutory Judgment in case of City vs. Kate B. Erancisco being No. 256421 in the Superior Court of Los Angeles County, State of California as Offset against Assessments Nos. 998-999 for the opening and widening of Dayton Ave. from Pasadena Ave. to 2nd Street; and I hereby authorize the Clerk of said Court, to enter satisfaction of said Interlocutory Judgment to the extent of the sum aforesaid.
Mericos Oil Co.
Calvin C. Geeen
Secretary”
yii.
On June 28, 1934, Mericos Oil Company received the sum of $11,295.40, which sum represented a portion of the award granted it by the court in said condemnation proceeding. Said sum, together with the aforesaid offset for the assessments, as set forth in Paragraph VI above, were in full satisfaction of the award granted the Mericos Oil Company in said condemnation proceeding.
The property condemned and taken from Mericos Oil Company in said condemnation proceedings was acquired by said Mericos Oil Company prior to March 1, 1913, and the fair market value of said property on March 1, 1913, was $1,725.00. The basis for income tax purposes of the property against which severance damages were allowed was greater than the severance damages allowed, to-wit, $1,750.00.
VIH.
Mericos Oil Company duly filed its income tax return for the year 1934 and in said income tax return computed and reported a profit from the condemnation and taking of its said property in said condemnation proceeding in the amount of $5,255.40.
IX.
Upon examining the income tax return of Mericos Oil Company for the year 1934 the Commissioner of Internal Revenue determined that Mericos Oil Company received a profit in the amount of $11,690.00 from the condemnation and taking of its property as aforesaid.
Said profit was computed as follows:
Award for land_$10,851.00
Award for improvements- 2, 564. 00
-$13,415. OO
March 1,1913 value of land taken- 1,725.00
Profit. ... $11,690.00
As a result of said recomputation and increase of gain realized by Mericos Oil Company on the condemnation of its property the Commissioner of Internal Revenue determined and assessed a deficiency against Mericos Oil Company for the year 1034 of income taxes in the amount of $884.76 and excess profits taxes in the amount of $78.76. Said taxes have not been paid.
X
During the year 1934 Mericos Oil Company was dissolved and on December 28, 1934, all the assets of said company were distributed to petitioner as the sole stockholder of said company.
XI.
Petitioner concedes that he is liable as transferee of the Mericos Oil Company, under the provisions of Section 311 of the Revenue Act of 1934, for the taxes herein proposed to be assessed, if any be due, by said Company for the calendar year 1934.

No brief was filed, by either party but at the hearing it was stated that the proceeding is governed by the rule of law enunciated and applied by the Circuit Court of Appeals for the Ninth Circuit in Christian Ganahl Co. v. Commissioner, 91 Fed. (2d) 343, and Central ds Pacific Improvement Corporation v. Commissioner, 92 Fed. (2d) 88. Inasmuch as certiorari had been applied for in Christian Ganahl Co. v. Commissioner, supra, decision was deferred until it was ascertained whether the Supreme Court should grant or deny the writ. Certiorari was denied November 15, 1937.

The decisions of the court are binding upon us and must be followed in the instant proceeding; but it is necessary for us to discuss the stipulated facts briefly and to point out the reasons why there still is a deficiency in tax, though less than that determined by the respondent.

The total amount received by the petitioner was $15,165. This included severance damages, i. e., damages to the remaining property, in the amount of $1,750. The established rule of the Department had been (see I. T. 2599, X-2 C. B. 170) that “No taxable gain is recognized * * * with respect to that portion of the award which represents the severance damages, but the amount thereof should be deducted from the basis- to be used in determining gain or loss upon the subsequent disposition of the remaining portion of the property, unless the amount of the severance damages exceeds the cost or other basis of the remaining portion of the property, in which case such excess is taxable gain.” (See tabulation Christian Ganahl Co., 34 B. T. A. 126, 126.) The majority of this Board was of the opinion that the Commissioner had correctly deducted the severance damages from, and added the amount paid as assessments to, the remaining portion of the property; but the court reversed and upheld petitioner’s method of computing gain or loss. That method is to include all of the amounts received and to deduct from the total, the assessments paid plus the basis of the property condemned. The basis for the remaining property remains the same and is neither reduced by the amount of the severance damages nor increased by the amount of the assessments.

Under the facts as stipulated the deficiency shall be recomputed as follows:

Total amount received_$15,165.00
Less amount paid as special assessments_$3,869.60
Less basis — March 1, 1913, value_ 1, 725. 00
- 5,594 60
Net amount received_ 9, 570.40
Less amount reported as income_ 5,255.40
Amount to be added to the net income shown by the return_ 4,315.00

.The petitioner haying admitted that he is liable for the deficiency as redetermined, judgment will be enterd against him as a transferee under section 311 of the Eevenue Act of 1934.

Eeviewed by the Board.

Judgment will be entered wider Bule 50.


author: Disney:

text:
    W. L. Wester, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. L. Wester, Executor of Estate of Marjorie E. Wester, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67036, 67037, 67145, 67146.
    Promulgated January 7, 1938.

      John B. Wheeler, Esq., and George V. Whittle, G. P. A., for the petitioners.

      H. D. Thomas, Esq., for the respondent.
   OPINION.

Disney:

At the outset we are met with the contention of the respondent that the record is devoid of proof of any expenditure for any purpose. We can not so agree. The deficiencies involved herein were determined upon the basis of the Internal Revenue agent’s reports, which reports set forth that petitioner Wester, as claimed by the petitioners in their returns, expended $99,726.83 in 1929 and $41,711.50 in 1930 in developing the real estate, and are made a part of the deficiency notices by reference. The figures used by the respondent in the determination of the deficiencies are not only consistent with the returns of the petitioners, but in his answer to the petition filed in Docket No. 67036 he denies only such facts as are inconsistent with and contrary to his determination as stated in his notice of deficiency. Moreover, upon trial it was agreed by counsel that there was only one issue, the language being: “There is no issue with respect to the amount of income if it was in fact earned by Mr. Wester.” This can only fairly mean that there was no controversy as to the amount of the expenditures.

The determination of the respondent is presumed to rest upon a correct determination of the facts. Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289. There is no suggestion in the record before us that the figures used in arriving at the deficiencies in question are incorrect in any respect. Under the circumstances, it would be error for us to accept the correctness of the respondent’s determination without recognizing the basis for the result he reached. Wilson Coal Land Co. v. Commissioner, 87 Fed. (2d) 185.

The petitioners contend that the expenditures are deductible as ordinary and necessary business expenses, citing Salathiel R. Fletcher, 24 B. T. A. 75. In contending that we should sustain his determination, the respondent argues that the petitioners had an interest in the realty being sold and that, irrespective of the question of title, the expenditures were not ordinary and necessary.

In support of his view that Wester had sufficient title in the realty to require the expenditures in question to be capitalized as part of cost of the land on which the improvements were made, and to treat sales of parcels thereof as giving use to taxable gain to petitioner, the respondent cites Wester v. South Seattle Land Co., 24 Pac. (2d) 632, a case involving the identical contract before us. Our understanding of the court’s ruling does not agree with the respondent’s interpretation.

After the termination of the contract in August 1931, Wester filed a complaint in the Superior Court of King County for an order restraining the South Seattle Land Co. from canceling any of the sale contracts or options, from applying any of the moneys received thereunder other than in payment of delinquent taxes, from selling any lands upon which the permanent improvements were located, from interfering with his possession and operation of the poultry plant, and for an accounting for his equity in the contracts of sale, options, and permanent improvements made on the land. The pleading contained no allegation of interest in the realty other than the improvements made at the plaintiff’s expense. Wester appealed from the court’s decision that the complaint did not state a cause of action.

The ultimate ruling of the appellate court was that the complaint, as amended, stated a cause of action for an accounting. In reaching its conclusion the court did not expressly or inferentially hold that the South Seattle Land Co. and Wester were joint owners of the property so as to require a severance of title in connection with the proceeding. It remarked that “The enterprise had in it something of the nature of a joint adventure or of a special and limited partnership”, and that the interest of Wester in the “subject-matter” of the contract was such as to give him a right to an accounting. The premise for the decision was the well settled rule that equity will assume jurisdiction in cases where there is a complexity of mutual accounts and justice can not be done without an accounting. The plaintiff was entitled to receive a proportionate part of the money paid by purchasers of subdivisions prior to the termination of the agency contract, and, because of the complicated method adopted for apportioning receipts from sales, he would have been entitled to an accounting in equity irrespective of the fact that part of his compensation was contingently payable in real estate.

The lower court did not interpret the appellate court’s decision as holding that the petitioner had a property interest in the realty. In its decree entered in 1934 after trial it decreed the South Seattle Land Co. to be the sole owner of the contracts (for sales made by Wester), lands, and improvements existing on August 15, 1931, free from any claim which the plaintiffs may have had therein, without directing the plaintiffs to convey any interest in the property to the South Seattle Land Co.

In Salathiel R. Fletcher, supra, the petitioner and others, as agents, agreed to pay part of the cost of preparing a tract of land for sale as lots and thereafter sell the land for the account of the owner. When the owner received the sum of $400,000 from sales as the purchase price of the land, they were to receive, as compensation for their services, the unsold lots in the tract and all contracts, notes and mortgages, and other proceeds of the venture. In 1923 Fletcher paid the sum of $7,921.62 as his share of expenditures made by the agents “in connection with platting, surveying and preparing the real estate involved for sale as lots.” In holding that Fletcher was not required to capitalize the amount but was entitled to deduct it as an ordinary and necessary business expense, we said:

* * * The excess over the $400,000 was in fact compensation for services rendered as truly as if the owners had agreed to pay petitioner a straight salary or set commission. The expenditures made by petitioner in producing such income were in substance no different in principle from expenditures made by a lawyer in prosecuting his client’s ease on a contingent basis, which in the case of the lawyer are admittedly deductible. A taxpayer on the cash basis deducts his expenses when paid and reports his income when received. If, after petitioner receives his share of the property remaining unsold after the owners have been paid their $400,000, he makes further expenditures of the same nature as che ones in question, such further expenditures must be capitalized and considered a part of the cost of the property received. But this is because he is then acting on his own account and not as the agent for others. The same rule applies in the case of the lessee of property. If the lessee makes improvements having a life in excess of the term of the lease, the lessee is entitled to deduct as additional rental the cost of such improvements spread over the remaining term of the lease, Duffy v. Central R. Co. of New Jersey, 268 U. S. 55; whereas, if such improvements were made by the owner of the property, a deduction to the owner would be based on the life of the improvements. * * *

A like situation prevailed here respecting all of the items in controversy excepting those relating to the Monticello poultry houses and warehouse. Petitioner Wester, as agent for the South Seattle Land Co. and in consideration of the payment to him of certain commissions for effecting sales of parcels of land for the owner, agreed to put the tract in condition for sale at his own expense. The nature of the undertaking required the facilities for which the outlay was made. The expenditures merely enhanced the value of another’s property and did not result in the creation of a capital asset of Wester. The deductibility of an amount as an ordinary and necessary expense is ordinarily determined by the nature of the expense and not by the amount involved. In Union Collieries Co., 3 B. T. A. 540, we said, in discussing the question of capital expenditures as against business expenses, “this determination should not be made to depend alone upon whether they are major or minor items.” Generally speaking, the fact that expenses are unusual in amount can not deprive them of their inherent character as expense items. First National Bank of St. Louis, 3 B. T. A. 807. The amount of the expense in the Fletcher case was probably as large as the amount in controversy here, since Fletcher had only a one-sixth interest in the agency contract.

The petitioner received the moneys reported as income by him, from the owner of the land, as compensation for his services in handling the property. His contract was specifically one of agency. He never acquired ownership of any part of the land. If petitioner Wester had become entitled to a conveyance of unsold tracts upon the receipt by the owner of its share of the selling price, the fair market value of the land received would have been taxable to him as compensation for services rendered. W. L. Walls, 21 B. T. A. 1417; affd., 60 Fed. (2d) 347. Such amount would then constitute petitioner West-er’s cost basis for the computation of gain or loss upon a subsequent sale. The amounts received by petitioner Wester in the taxable years were not paid to him on account of a property interest he had in the realty, but as partial compensation for services rendered in order to enable him to meet overhead operating expenses.

Following the reasoning of the Fletcher case, we hold that all of the expenditures in question, except the expenditures of $55,182.97 and $22,852.76 made in 1929 and 1930, respectively, in connection with the construction of the Monticello poultry houses, are deductible as ordinary and necessary business expenses.

From the meager facts before us we are not warranted in concluding that the cost of the poultry houses should receive like treatment. Aside from the proof made by the petitioners that the plants were located on unsold land in the tract owned by the South Seattle Land Co., we have no competent evidence as to the circumstances surrounding the investment to overcome the presumption that the respondent’s determination rests upon a correct finding of the facts. Nothing appeared in the contract of May 23, 1921, as amended, obligating petitioner to make the investment and such poultry houses are not of the character of improvements, such as grading, etc., which are ordinarily associated with the sale of lots such as here involved. For aught we know there may have been an agreement between the owner of the land and petitioner Wester giving the latter title to the improvements at least during the effective period of the agency contract.

In computing the deficiencies the respondent allowed deductions for exhaustion at the rate of 7% percent per annum on cost. Such action has not been shown to be error and will not be disturbed.

Reviewed by the Board.

Decision will he entered under Bule 50.

SteRnhagen and Mellott dissent.


author: ARundell :

text:
    Estate of Herbert A. Schoenfeld, Deceased, L. Kenneth Schoenfeld, Herbert A. Schoenfeld and Ralph A. Schoenfeld, Administrators, de Bonis Non, cum Testamento Annexo, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83654.
    Promulgated January 7, 1938.

      Van G. Griffin, Esq., for the petitioners.

      James G. Maddox, Esq., for the respondent.
   OPINION.

ARundell :

The single issue submitted for decision was tried largely upon the question of the use of a formula to determine the amount allowable for the claim of the contract beneficiaries against the estate. The respondent in his determination of a deficiency has conceded the allowability of a claim and has worked out the amount allowable by a formula based on interest, mortality, and present worth tables.

Before reaching the matter of a formula, there is to be determined the question of whether decedent’s estate is liable for one-fourth or one-half of the total liability under the stock purchase contract. The petitioners claim one-half, the amount thereof being the amount for which a claim was filed by the contract beneficiaries and approved by the probate court. The Commissioner has allowed one-fourth of the contract liability, determining the amount allowable by a formula discussed more fully below.

The statute applicable here is section 805 of the Revenue Act of 1932, amending section 303 (a) (1) of the Revenue Act of 1926. This statute allows deductions, among others, for claims against the estate (subsection (B)), and for mortgages and indebtedness in respect to property which is included in gross estate without deduction for the mortgage or indebtedness (subsection (D)). These provisions are qualified by subsection (E) in several respects. One of the qualifications is that limiting the amounts deductible to such as are allowable by the laws of the jurisdiction under which the estate is being administered. Another is that the amounts allowable shall “be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth.”

Under these provisions of the statute the claim here made for allowance of what is said to be one-half of the contract liability fails in several respects. First, it appears that the administrators included in decedent’s gross estate only the value of one-fourth of the 25.15 shares of Schoenfeld Holding Corporation stock. As stated in the petition, the decedent had a community half of 12.575 shares, which interest was valued at $91,168.75. Against this community half of 12.575 shares, which is one-fourth of the total shares, the petitioners claim a deduction of one-half of the liability under the purchase contract. This may not be done under that part of the statute (subsection (D)) which requires an equality of treatment of the value of property returned and the amount of indebtedness against it. In other words, under subsection (D) the petitioners must need to have returned one-half of the value of the full 25.15 shares in order to support a claim for deduction of one-half of the indebtedness for the purchase price. Further, inasmuch as the decedent was entitled under the contract to only a one-fourth interest, he can not be said to have “contracted bona-fide and for an adequate and full consideration in money or money’s worth” for any greater sum than one-fourth of the liability.

If, as argued by the petitioners, one-half of the contract obligation was a community obligation, then upon the death of the wife her estate became liable for one-half thereof (one-fourth of the whole obligation) and thus the decedent’s estate would have a liability for only one-fourth of the whole. We have held, following the Washington statute and cases, that upon dissolution of the community by death the estate of the first decedent is entitled to deduct only one-half of the community debts. Estate of Julius C. Lang, 34 B. T. A. 337. The case of Schramm v. Steele, 97 Wash. 309; 166 Pac. 634, cited by petitioners is not in point. That case holds that community property is not subject to execution under a judgment against the husband for a tort committed by him alone.

The liability of the purchasers of the stock was, under the contract, a joint and several liability. However, if the decedent’s estate were required to pay any more than the decedent’s proportionate share there would arise a right of contribution against the other purchasers. The same situation was present in John Parrott, Jr., et al., Executors, 7 B. T. A. 134; affd. (C. C. A., 9th Cir.), 30 Fed. (2d) 792. In that case two persons were jointly and severally liable on a mortgage and it was held that upon the death of one only one-half of the indebtedness could be deducted from the gross estate. The court’s opinion reads in part:

* * * if either were required to pay more than one-half, the excess so paid was recoverable from the other. * * * Clearly, for taxation purposes under the Revenue Act, but one-half of the total mortgage debt was deductible in arriving at the amount of the tax upon the .estate of the testatrix.

Following that case it must be held here that the decedent’s estate may not deduct more than one-fourth of the contract liability.

The approval by the probate court of the claim presented by one of the contract beneficiaries on behalf of all of the beneficiaries does not establish the deductibility of the amount thereof under the Federal estate tax law. In Julius C. Long, supra, loc. cit. p. 345, we rejected a similar contention and determined the amount deductible under “the law of the jurisdiction * * * under which the estate is being administered” as the Federal statute requires. In United States v. Mitchell (C. C. A., 7th Cir.), 74 Fed. (2d) 571, the court held that the fact of allowance of a claim by the probate court and the payment thereof by the executors “has no bearing on the de-ductibility of the claim” under the Federal statute. In Mary M. Buck et al., Executors, 25 B. T. A. 780, we determined the amount reasonably required for the support of decedent’s widow and held that amount allowable, notwithstanding the probate court’s approval of a larger amount and the payment of the larger sum. The Circuit Court of Appeals for the Mnth Circuit, affirming our holding on this point, 73 Fed. (2d) 760, 764, said: “The fact that the probate court made an allowance of a larger sum was not binding on the Board of Tax Appeals.” Following the above cases, we hold that the fact that the probate court has allowed the claim of the contract beneficiaries in an amount purporting to be one-half of the total contract liability is not determinative of the amount allowable in this proceeding.

We have held above that the proportion of the contract liability representing an allowable deduction from this estate is one-fourth of the total liability. The Commissioner determined the same proportion to be allowable. In calculating the amount allowable the Commissioner determined the size of the fund necessary to pay the contract liability on a 4 percent basis and applied to it a reversion factor based on the life expectancy of the four beneficiaries at their then ages of 48, 58, 59, and 70 years. Petitioners attack the use of the 4 percent rate and also the factor based on the life expectancy of the four beneficiaries. On these matters, however, the petitioners have failed to establish that any other figures are more nearly correct. Where deductions must be estimated according to the expected life of individuals, resort to mortality tables is proper. Ithaca Trust Co. v. United States, 279 U. S. 151. This is what the Commissioner has done and if he erred in selecting a figure of life expectancy the burden is on the petitioners to show it. Fidelity-Philadelphia Trust Co. et al., Executors, 27 B. T. A. 972. The same applies to use of the interest rate.

The Commissioner is sustained.

Decision will he entered for the respondent.


author: Sternhagen:

text:
    Princess Lida of Thurn and Taxis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74929.
    Promulgated January 11, 1938.

      Norman W. Schur, Esq., and John L. Kuhn, Esq., for the petitioner.

      Edward A. Tonjes, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner, in determining the deficiency, said simply that the amounts received by petitioner from the funds established byi her divorced husband “are taxable to you.” At the hearing, his counsel stated that he questioned whether the amounts received could be regarded as by way of alimony, and that the question is whether the law of England provided for alimony.

The evidence leaves it indisputable that alimony is a recognized right and obligation under the law of England, that the agreement of 1906 was made in contemplation of divorce and to provide for alimony, that this provision was not subject to change or termination by remarriage, that in 1911 and again in 1915, both before and after petitioner’s remarriage, the Pennsylvania Court of Common Pleas lent its aid to the enforcement of the 1906 agreement, and that such agreement was the entire source of the petitioner’s receipts. Since the trial, the Government has filed no brief, and no argument is made in the light of the evidence to support the deficiencies.

The question thus appears to be a repetition of a controversy long since decided, i. e., whether an amount received by a divorced woman as alimony or in lieu of alimony is taxable income. It is not. Audubon v. Shufeldt, 181 U. S. 575; Gould v. Gould, 245 U. S. 151; Mary B. Spencer, 20 B. T. A. 58; Maud H. Bush, 33 B. T. A. 628.

There is much more law on the question of the effect of an alimony or subsistence agreement or trust upon the tax of the husband; but there is no such issue here, and it would not be proper to deal with it. The wife alone is the present petitioner, and as to her the Commissioner incorrectly; held the amounts received to be taxable income.

Judgment will be entered for the petitioner.