author: ARtjndell :

text:
    Henry Oliver Rea, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80265.
    Promulgated May 27, 1937.

      H. V. Bloater, Esq., and J. Garfield Houston, Esq., for' the petitioner.

      J. E. Marshall, Esq., and Allen T. Ahin, Esq., for the respondent.
   OPINION.

ARtjndell :

The respondent’s determination that the income of the trust here involved is taxable to the petitioner is based upon the theory that the trust was created by the petitioner pursuant to a separation agreement between him and his wife to provide alimony for her in discharge of his legal obligation to support her. It is well settled that where a trust is created by a husband for the benefit of his wife in discharge of his marital duty to support her, the income therefrom is taxable to the husband and not to the wife. Douglas v. Willcuts, 296 U. S. 1; Commissioner v. Coxey, 297 U. S. 694; Commissioner v. Brooks, 82 Fed. (2d) 173; Commissioner v. Hyde, 82 Fed. (2d) 174; Albert C. Whitaker, 33 B. T. A. 865. See also, Commissioner v. Schweitzer, 296 U. S. 551; Commissioner v. Blumenthal, 296 U. S. 664; Commissioner v. Stokes, 296 U. S. 551; Commissioner v. Grosvenor, 85 Fed. (2d) 2, reversing 31 B. T. A. 574; Louis W. Hill, 33 B. T. A. 891; affirmed in Hill v. Commissioner, 88 Fed. (2d) 941.

The petitioner herein testified that he had no understanding or agreement with his former wife, either oral or written, to set up a trust for her benefit, and that the trust was created pursuant to a desire on his part to give- her a separate income irrespective of whether a reconciliation or a divorce took place. No alimony was prayed for by the wife in the divorce proceedings, which were commenced prior to the execution of the trust. The decree of divorce contains no provision for'the support of the wife by the payment of alimony, or otherwise. The trust agreement does not show on its face that it was created to provide income for the support of the wife or in lieu of alimony, or that it constituted a settlement of the rights of the parties growing out of the marital relationship existing between them. It does not refer to a contemplated separation of the parties and contains no waiver or relinquishment by the wife of support or of her interest in petitioner’s estate. The trust agreement provides that the net income from the trust be paid in monthly installments to Margaret Moorhead Bea during her natural life, without any directions, requirements, or limitations as to the use, distribution, or expenditure of such income by her. The instant proceeding is distinguishable from the above cases involving income from trusts created by the husband for the wife in that therein either the separation agreement, decree of the court, or stipulation of the taxpayer and the Commissioner disclosed 'that the income involved was provided for and paid in lieu of alimony or the wife’s interest in the husband’s property. Furthermore, in all of the above cases there was an existing legal obligation on the part of the taxpayer, which obligation was discharged with the income derived from the trust created by the taxpayer.

Whether any legal obligation rested upon the taxpayer herein in 1932 to-support his former wife is dependent upon the laws of the State of Pennsylvania. “Proceedings in divorce are statutory, and permanent alimony, one of its features, is purely a creature of stalute law.” Hooks v. Hooks, 187 Atl. (Pa.) 245, citing Kerr v. Kerr, 216 Pa. 641, 644; 66 Atl. 107, 108; and Moore v. Moore, 64 Pa. Super. Ct. 192, 194. In the latter case the court held that, except where the common law had been changed by statute, alimony could not be awarded upon an absolute divorce. The divorce laws of Pennsylvania, beginning with the Act of 1785 and up to and including the Act of May 2, 1929 (P. L. 1287), in so far as alimony is concerned, were reviewed in Myers v. Myers, 17 Pa. Dist. & County 236 (Sept. 23, 1931). The court therein concluded that:

* * * historically, alimony has never been an incident of absolute divorce in Pennsylvania as a complete matter of right except from 1854 to 1895, from this latter year until 1925 it was a right solely contingent upon the discretion of the court, and since then it has not existed except in the case of insanity of one of the spouses.

See also Epstein v. Epstein, 93 Pa. Super. Ct. 398, where it was held that under the Act of April 4, 1925 (P. L. 124), amending the Act of June 25, 1895 (P. L. 308), there is no obligation on the court to consider the question of permanent alimony. In Emerick v. Emerick, 176 Atl. (Pa.) 509, a husband obtained in 1934 an absolute divorce, the wife being then confined to a hospital for the insane. Shortly thereafter and within the year the wife was discharged from the hospital and petitioned the court for a decree fixing the amount of her support. The Supreme Court of Pennsylvania held that, under the Act of May 2, 1929 (P. L. 1237) known as the Divorce Law, “To be entitled to the alimony, the wife must be insane” and that the “decree of the lower court should be modified so as to limit the payment of alimony during the period of respondent’s [the wife’s] insanity”, the husband, however, being “entitled to credit for any payments made by him during the period from the time she was released until the time of recommitment.” Under the Act of May 2, 1929, supra, the Court of Common Pleas of Pennsylvania is empowered, to grant alimony as follows: (1) Permanent alimony for the support of an insane wife, and for the support of an insane husband if he has no sufficient estate in his own right for his support and. the wife has sufficient'means (sec. 45); (2) reasonable alimony pendente lite, in proper cases, to the wife upon her petition (sec. 46) ; and, in case of divorce from bed and board, such alimony as the husband’s circumstances will admit of, but not exceeding one-third of his income (sec. 47). Section 55 of the same act provides that, after a decree nullifying or dissolving a marriage, “all and every the duties, rights, and claims” accruing to either spouse theretofore in pursuance of the marriage “shall cease and determine.’-’ It has been stated that a decree providing for permanent alimony is inconsistent with a decree nullifying a marriage under section 55. Hooks v. Hooks, supra. Under the laws of Pennsylvania as construed by its courts, a husband is not obligated after an absolute divorce to support his former wife. The income here involved is therefore not taxable to the petitioner on the ground that it was used to discharge a legal obligation. See Commissioner v. Yeiser, 75 Fed. (2d) 956.

The petitioner contends that he made a voluntary gift of the trust fund to his former wife. Whether or not the creation of a trust was a voluntary gift under the circumstances herein, it is not necessary for us to decide in view of our conclusion that no legal obligation existed to provide for the support of his wife after absolute divorce.

Even if the petitioner’s purpose in creating the trust was to provide adequate support or financial security for his wife and to discharge his then existing obligation to support her, the divorce decree not having been granted until some days later, such obligation was discharged in full prior to 1932. Furthermore, there was no obligation on his part to support his former wife who had remarried in 1929. Harry S. Blumenthal, 34 B. T. A. 994, 996.

Decision will loe entered under Rule 50.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Jordahl & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59581.
    Promulgated May 27, 1937.

      Richard 8. Holmes, Esq., Harvey L. Babbitt, Esq., and David A. Buckley, Jr., Esq., for the petitioner.

      Daniel A. Taylor, Esq., for the respondent.
   OPINION.

Smith :

This proceeding involves deficiencies in petitioner’s income tax for 1927 and 1928 in the amounts of $13,394.61 and $12,664.18, respectively. There are four major issues involved — (1) gain or loss on the sale of assets; (2) losses on match transactions; (3) amortization of patents; and (4) gain on exchange of assets for petitioner’s own capital stock. The fourth issue is raised by an affirmative plea in the respondent’s amended answer. There are also several collateral issues which will be set forth below.

The petitioner was incorporated in the State of New York on November 19, 1919, under the name of American Kreuger & Toll Corporation. In 1927 its name was changed to “Jordahl & Company, Inc.” During the taxable years involved the petitioner was engaged in the business of importing chemicals, steel, scientific instruments, matches, and other products, and in holding stocks of subsidiary corporations. Until 1927 all of the petitioner’s stock stood in the name of Ivar Kreuger. Kreuger served as president from the date of petitioner’s organization until December 28, 1925, when he was succeeded by Anders Jordahl.

Issue 1. — Gain or Loss on Sale of Assets.

Pursuant to an agreement entered into between Anders Jordahl and Ivar Kreuger in November 1927, the petitioner during that year sold all of the capital stock of three of its subsidiary corporations, the Midwest Steel & Supply Co., hereinafter referred to as Midwest Co.; Akatos, Inc., formerly known as C. P. Chemical & Drug Co.; and Deutsche Kahneisen Gesellschaft, a German corporation, hereinafter referred to as the D. K. Co.

The sale of the stock of the Midwest Co. carried with it the sale of the stock of two other subsidiary corporations, Midwest Air Filter's, Inc., and Holly Pneumatic Systems, Inc.

The transaction was recorded in petitioner’s books by a journal entry charging the account of petitioner’s president, Jordahl, with $680,757.21 representing the purchase price of all the assets. This figure included an amount of $30,088.92 representing an indebtedness of the Midwest Co. for moneys advanced to it by the petitioner. The amount charged to Jordahl’s account, $680,757.21, was later paid to the petitioner by Kreuger.

The facts and discussion regarding the petitioner’s gain or loss on the several assets will appear below under separate subheadings.

(a) — Midwest Steel & Supply Co. Stock.

The parties agree that the selling price of the Midwest Co. stock was $300,000, but they disagree as to its cost. In his deficiency notice the respondent has determined that the cost of such stock to the petitioner was $275,000 and that the petitioner realized a profit of $25,000 on its sale. In this proceeding the respondent pleads affirmatively that petitioner’s net income as determined in the deficiency notice should be increased by $216,496.75, representing the amount of the operating net losses of the Midwest Co. and its subsidiaries for the prior years 1921 to 1927, inclusive, which were claimed and allowed as deductions in consolidated income tax returns filed by the petitioner and its affiliates for such years. In other words, the respondent now contends that the petitioner realized, instead of a profit of $25,000 as determined in the deficiency notice, a profit of $241,496.75 on the sale of the Midwest Co. stock.

Altogether, there were 5,000 shares of the Midwest Co. stock. The petitioner acquired 1,250 of those shares from the Midwest Co. on October 15, 1920, for which it credited that company’s account with $125,000 representing the par value of such shares. It acquired from Ivar Kreuger 2,250 shares on October 30, 1920, for which it credited his account with $225,000, and 1,500 additional shares on December 31, 1923, for which it credited his account with $150,000.

The evidence before us is not clear as to the details of these transactions. According to the petitioner’s books the Midwest Co.’s indebtedness to it on October 15, 1920, was less than $10,000. At the end of 1921, however, the Midwest Co.’s account showed a debit balance of over $74,000, after allowing for the credit of $125,000 in 1920.

The petitioner’s capital account in 1920 showed bills receivable from Kreuger in the amount of $1,675,000; real estate, $3,000,000; and cash, $1,325,000. At the end of 1923 Kreuger’s account showed a debit balance of $434,385.57. In 1932 the petitioner’s books showed a balance of $278,903.96 in Kreuger’s favor.

These facts indicate that the petitioner paid par value for all of the Midwest Co.’s shares. The oral evidence adduced at the hearing supports this conclusion. We therefore find that the cost to the petitioner of the 5,000 shares of Midwest Co. stock was $500,000.

The further question remains as to what treatment is to be accorded the operating losses of the Midwest Co. and its subsidiaries in prior years which were deducted from gross income in the consolidated returns filed by the petitioner and its affiliated companies.

Net losses of the Midwest Co. and its subsidiaries were availed of to reduce the consolidated net income of the petitioner and its affiliates for the years 1921 to 1927, inclusive, as follows:

Petitioner contends, however, that it was not affiliated with the Midwest Co. until December 31, 1923, and that the operating losses of the Midwest Co. for 1924,1925,1926, and 1927 only may be used to reduce the loss on the sale of the Midwest Co. stock.

This conténtion is without merit. It is now well settled that the loss on the sale of the stock or liquidation of a subsidiary company, must be reduced lay the amount of the subsidiary’s operating losses which were availed of to reduce the taxable income of the affiliated group. Ilfeld Co. v. Hernandez, 292 U. S. 62; McLaughlin v. Pacific Lumber Co., 293 U. S. 351; Commissioner v. National Casket Co., 78 Fed. (2d) 940; Greif Cooperage Corporation v. Commissioner, 85 Fed. (2d) 365. In Ilfeld Co. v. Hernandez, supra, the Court said:

3. The allowance claimed would' permit petitioner twice, to use the subsidiaries’ losses for the reduction of its taxable income. By means of the consolidated returns in earlier years it was enabled to deduct them. And now it claims for 1929 deductions for diminution of assets resulting from the same losses. If allowed, this would be the practical equivalent of double deduction. In the absence of a provision of the Act definitely requiring it, a purpose so opposed to precedent and equality of treatment of taxpayers will not be attributed to lawmakers. * * *

Again, in McLaughlin v. Pacific Lumber Co., supra, the Court said that “Losses of Thane & Co. [the subsidiary] that were subtracted from respondent’s [the parent company’s] income are not directly or indirectly again deductible.” On the reasoning of the Supreme Court in those cases it is unnecessary to inquire, and it is doubtful whether it could be satisfactorily determined on the evidence before us, whether the corporations here properly filed consolidated returns in the years when the operating losses of the Midwest Co. were availed of to reduce the net income of the alleged affiliated group. The reason for the denial of the deductions claimed in the cited cases loses none of its force because of the fact that error may have been committed in the filing of the consolidated returns for the prior years and in the allowance of the subsidiary’s operating losses in such returns. In Summerfield Co., 29 B. T. A. 77, decided before the Supreme Court’s decisions in the cases cited above, we considered this angle of the question, saying:

* * * During the previous period of affiliation the consolidated income was offset by operating losses of the Taylor Oo. totaling $155,581.19. Respondent maintains that the loss sustained at liquidation upon open account must be reduced by that amount, citing Riggs Nat. Bank, 17 B. T. A. 615; affd., 57 Fed. (2d) 980; Burnet v. Aluminum, Goods Co., 287 U. S. 544; Hernandez v. Ilfeld, 66 Fed. (2d) 236. With that we agree. Petitioner cannot deny that during these prior years it was treated as affiliated — whether rightly or not we need not decide — and that it obtained a benefit from that affiliation through the reduction of its taxable income on account of the operating losses of its then subsidiary. To hold that it may now deduct the advances in their entirety would be to allow a second time the amounts deducted during the period of affiliation. That is contrary to our understanding of the view expressed in the cases above cited. * * *

Since the aggregate of the operating losses of Midwest Co. for the years 1921 to 1927, inclusive, availed of to reduce the net taxable income of the petitioner and other companies with which it joined in filing consolidated returns, is greater than the excess of the cost of the Midwest Co. shares over their selling price, no loss is allowable to the petitioner on the sale of the Midwest Co. shares in 1927. rr In his amended pleadings the respondent contends affirmatively [ that the petitioner realized a taxable gain on the sale of the Midwest 1 Co. stock measured by the difference between the original cost thereof, ! reduced by the amount of the operating losses deducted in the con- : solidated returns, and the selling price. This contention is likewise without merit. Ilfeld Co. v. Hernandez, supra, and the other cases cited above deal only with loss deductions. There is no implication that the rule therein stated is to govern in the computation of a taxable gain to the parent corporation. The necessity for the rule restricting the loss deductions, as the court pointed out, is to prevent a parent corporation from twice deducting the losses of a subsidiary corporation.

In Burnet v. Riggs National Bank, 57 Fed. (2d) 980, the court said:

On the other hand, we are convinced that the Board of Tax Appeals was right in refusing to allow the claim of the Biggs Bank for the empire loss as at the time of the liquidation, because of the fact that a part of this loss had been deducted by the bank in its return for the first part of the year 1922. To allow the entire loss as of June 10, 1922, would have resulted in respondent receiving credit twice for a part of the loss. * * * [Italics supplied.]

It is to be noted that the court refers to the “entire loss.” This must mean the loss sustained on the liquidation of the subsidiary without regard to the operating losses previously deducted. In other words, the “entire loss” is computed in the ordinary manner, without any adjustment of the base, but that part of the loss which has been previously deducted as an operating loss is not again allowable as a capital loss.

In Remington Rand, Inc. v. Commissioner, 33 Fed. (2d) 77, cited in Ilfeld Co. v. Hernandez, supra, the court held that a subsidiary company’s accumulated earnings could not be added to the cost of the stock in determining the parent company’s taxable gain on its sale to outside interests. As a corollary the subsidiary’s losses should not be subtracted from the cost of the stock in determining the parent company’ gain.

The operating losses of a subsidiary corporation do not stand in the same category as depreciation and depletion allowances on wasting assets, which, xuider the decision of the Supreme Court in United States v. Ludey, 274 U. S. 295, must be applied to reduce the base of such assets whether actually availed of to reduce taxable income or not. The basis in the hands of a parent corporation of the shares of a subsidiary is not affected by the operating losses of the subsidiary and must be determined as provided in the statute. Under section 113 of the Revenue Act of 1926 the basis in the hands of the petitioner of the Midwest Co. shares was their cost. Since this cost was greater than the selling price but the difference was less than the amount of the subsidiary’s operating losses which were deducted in the consolidated returns for prior years,- there was neither a gain nor a deductible loss on the sale of the shares by the petitioner in 1921.

(b) — D. K. Co. (Deutsche Kahneisen Gesellschaft).

In 1927 the petitioner sold 600 shares of D. K. Co. stock for $75,000. It acquired this stock on December 30, 1922, from the Midwest Co. at a cost of $100,000. The Midwest Co. in turn had acquired it from another of the Kreuger corporations, Aktiebolaget Kreuger & Toll, a Swedish corporation, in 1920 in exchange for 1,500 shares of its own capital stock. In its income tax return for 1927 the petitioner claimed a loss on the transaction in the amount of $75,000, which the respondent disallowed for the reason, as stated in his deficiency notice, that the 600 shares of the D. K. Co.’s stock were acquired by the petitioner from the Midwest Co. in exchange for its own capital stock in an intercompany transaction, the petitioner and Midwest Co. then being affiliated, and that the value of the shares as of that time, 1920, can not be shown.

The petitioner here contends that in any event it is entitled to-the deduction of a loss on the sale of the stock in question of $25,000, the difference between its selling price and the amount which it paid for it in 1922; and that if it should be determined that it (the petitioner) and the Midwest Co. were affiliated in 1922 the amount of the deductible loss is $75,000, the difference between the selling price and the alleged cost of the shares to the Midwest Co. in 1920.

The respondent concedes that if the petitioner and Midwest Co. were affiliated in 1922, and he maintains that they were, the basis of the 600 shares of D. K. Co. stock in the hands of the petitioner is their cost to the Midwest Co. He contends, however, that this cost is not shown by the evidence and that therefore no loss deduction is allowable.

From a consideration of all of the evidence we are of the opinion that the petitioner is entitled to a loss deduction of only $25,000 from the sale of the D. K. Co. stock. The evidence does not show the value of the 600 shares of D. K. Co. stock at the time it was transferred to the Midwest Co. in exchange for 1,500 shares of its own capital stock. That value may not have been in excess of $100,000. We do know that the petitioner paid the Midwest Co. $100,000 for these shares. This is the correct basis for the computation of the loss.

(o) — Ahatos, Inc., 8toch.

Prior to 1920 and after March 1, 1913, the petitioner acquired all of the capital stock, 100 shares, of Akatos, Inc., formerly C. P. Chemical & Drug Co., at a cost of $50,000. Thereafter, and during the period of their affiliation, petitioner advanced to Akatos, Inc., the aggregate amount of $76,555.12. During the years 1922 to 1927, inclusive, Akatos, Inc., had operating losses of $88,994.96 which were claimed and allowed as deductions from gross income in consolidated returns filed for those years by the petitioner, Akatos, Inc., and other affiliated corporations. In 1927 petitioner sold the 100 • shares of Akatos, Inc., stock for $15,000 and claimed a loss thereon of $22,-560.16 .in its income tax return for that year. The respondent determined in his deficiency notice that the petitioner sustained a deductible loss of $111,555.12 on the transaction, being the difference between the cost to it of the Akatos, Inc., stock plus the amount of cash advanced to the company, and the selling price. The respondent now contends that the determination in his deficiency notice is in error and that the petitioner’s income, as determined therein, should be increased by the amount of the net operating losses for Akatos, Inc., which were allowed as deductions in the consolidated returns filed for prior years. The amount of such losses is stated in the respondent’s pleadings as $88,931.97 instead of $88,994.96.

The respondent’s contention that the operating losses -of Akatos, Inc., which were deducted in the consolidated returns for prior years to the extent of $88,931.97, should be applied to reduce the petitioner’s loss on the sale of the shares in 1927 is sustained upon authority of Ilfeld Co. v. Hernandez, supra, and other cases cited in our discussion under issue 1 (a).

Issue %. — Loss on Match Transactions.

During 1927 and 1928 the petitioner sold matches in the United States which it had imported from Europe. The cost of the matches sold in 1927 and 1928 exceeded the selling price, as shown in petitioner’s books, by the amounts of $68,134.33 in 1927 and $10,330.58 in 1928. By direction of Anders Jordahl, petitioner’s president, these amounts were charged in the petitioner’s books to the Swedish Match Co., another Kreuger controlled corporation, in Stockholm, Sweden, which was engaged in manufacturing matches and holding stocks of other companies. These charges against’ the Swedish Match Co., with minor adjustments on account of operations in subsequent years, were carried in petitioner’s books as an open account until 1932 when, on Ivar Kreuger’s instructions, they were transferred to his personal account with the petitioner. Kreuger’s account at that time showed a credit balance of $278,903.96.

In its income tax return for 1927 the petitioner reported under gross income an item “Loss on Match Operations included in Cost and Expenses — charged to Swedish Match Co. 68,134.33.” A similar item of $10,330.58 was reported in petitioner’s return for 1928. The respondent’s deficiency notice shows no adjustment respecting these items.

The petitioner kept its books and made its returns upon an accrual basis.

The petitioner alleges in its amended petition that the respondent erred in disallowing the stated amounts of $68,134.33 and $10,330.58 as losses of the respective years 1927 and 1928. It is now contended on behalf of the petitioner that the amounts in question constitute deductible operating losses of the respective years 1927 and 1928 and that such amounts were erroneously entered in its books and reported in its returns as items of accrued income.

The evidence indicates that the petitioner at the request of Kreu-ger entered into these match transactions. So far as the record shows,' Kreuger was aware that the petitioner had charged against the Swedish Match Co. the difference between the cost of the matches sold and the amount realized therefrom, and acquiesced therein. This charge was eventually liquidated out of a credit due to Kreu-ger. The petitioner sustained no loss in either of the years 1927 or 1928, or eventually, in respect of the match transactions. The claim of the petitioner that the net incomes for 1927 and 1928 should be reduced by $68,134.33 and $10,330.58, respectively, is not approved.

Issue 3. — Amortization of Patents.

The Arenco Machine Co. in 1927 and 1928 was a wholly owned subsidiary of the petitioner, engaged in the business of importing cigarette packing machines for sale in the United States. These machines were manufactured in Sweden upon order from the petitioner and were covered by six United States patents owned by the Arenco Machine Co. The function of the machines was to count and pack cigarettes in convenient packages, usually twenty, for retail trade. The machines were sold principally to large cigarette manufacturers in this country. Their sale price was between $8,500 and $10,000 each. It was estimated by officers of the Arenco Machine Co. in 1926 that there would be a market in the United States for approximately 500 cigarette packing machines and it was believed that the petitioner would be able to supply the market to the extent of 400 machines. About 50 machines had been sold prior to 1927, of which 33 had been sold in 1926. There were 180 sold in 1927, 81 in 1928, 44 in 1929, none in 1930, 22 in 1931, none in 1932 or 1933, 8 in 1934, none in 1935, and 21 in 1936. The 21 machines sold in 1936 were sold at a large discount and were the last that the manufacturers had on hand. It was not expected at that time that any more machines of that type would be manufactured or sold. A superior machine had been developed and put on the market by an American company in 1930 and since that time about 200 American machines have been sold.

The first of the six United States patents under which the cigarette packing machines were manufactured was issued in May 1921 and the last in June 1924. These patents were acquired by the Arenco Machine Co. from a Swedish corporation in about 1925 or 1926 at a cost of $200,000 and were owned by the Arenco Machine Co. in 1927 and 1928.

Fritz Atterberg, the former president of the Arenco Machine Co., when asked if he knew whether any new machine for the packing of cigarettes had been invented, replied:

Yes, I know of my own knowledge that the same company in Sweden that has manufactured these machines is developing or has practically developed a new machine which is much superior in every respect to the machine we are discussing.

The Arenco Machine Co. went out of business in 1932 and a new corporation by the same name was organized in that year. The new company did not acquire the patents referred to above or any of the other assets of the old company. The witnesses did not know what had become of the old patents — whether they had been useful to the Swedish company in the development of a new machine.

In its consolidated return for 1927 the petitioner claimed an amortization deduction on the above described patents owned by the Arenco Machine Co. in the amount of $35,788.25, with the notation “Amortization has been calculated on a machine rate basis calculated to fully amortize these patents at the time when sales shall have reached a saturation point.” The respondent in his deficiency notice reduced the amount claimed to $14,501.40, amortizing the cost basis of $200,000 used by the petitioner over the life of the patents. Likewise, in its 1928 consolidated return the petitioner claimed a deduction for amortization of the patents in the amount of $93,637.75, of which the respondent has allowed the deduction of $14,501.40, the same amount allowed in 1927, and has disallowed the balance claimed of $79,136.35.

The petitioner contends in this proceeding that amortization on the patents should be computed “on the. basis of the number of machines sold during each taxable year; that is, the value of $200,000 placed upon the patents should be amortized in each taxable year in the ratio which the number of machines sold in that year bears to 400.” In the alternative, the petitioner contends that it is entitled to an allowance for depreciation of the patents on the basis of their having-become worthless by the end of the year 1931, which result could be foreseen in 1927.

The statute provides for a reasonable allowance for the exhaustion, wear, and tear of property used in the trade or business, including a reasonable allowance for obsolescence. See sections 234 (a) (7) of the Revenue Act of 1926 and 23 (k) of the Revenue Act of 1928.

Ordinarily the depreciation allowance on patents is computed on the basis of the cost or March 1, 1913, value spread ratably over the remaining life of'the patents. Under the Commissioner’s regulations, however, an additional allowance for obsolescence may be taken when the patent becomes obsolete prior to its expiration “if affirmative and satisfactory evidence that the patent became obsolete in the year for which the return is made is submitted to the Commissioner.” See article 167 of Eegulations 69 and article 207 of Regulations 74, promulgated under the Revenue Acts of 1926 and 1928. See also Hershey Manufacturing Co., 14 B. T. A. 867; affd., 43 Fed. (2d) 298; and Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513.

A United States patent has a life of 17 years. The question here is whether an allowance of one-seventeenth of the cost of each of the patents acquired by the Arenco Machine Co. constitutes a reasonable allowance for depreciation of the patents in each of the years 1927 and 1928. Petitioner contends that it does not; for in 1926 the officers of the Arenco Machine Co. estimated that the total number of machines which could be absorbed by the American market was only approximately 400 machines. The evidence, however, does not show the life of the machines or whether there would be a demand for the replacement of the machines. Neither does it show that the estimate was accurate as to the number of machines for which there was a demand. The evidence does show that a superior machine was developed in the United States in 1930 and also that the Swedish company which had manufactured the machines has practically perfected a new machine. Apparently it is contemplated that there will be a demand for the improved machine. The witnesses did not know what had become of the patents formerly owned by the Arenco Machine Co. They did not know whether they had been acquired by the Swedish manufacturers or whether the new Swedish machine is being developed upon the basis of those patents.

Even if the evidence might support a claim for obsolescence of the patents for later years, there is no evidence that any obsolescence occurred prior to 1930, when the American machine was put on the market. Upon the evidence of record the petitioner’s claim for an obsolescence allowance in excess of the allowance made by the respondent in the determination of the deficiencies is disapproved.

Issue 4- — Exchange of Assets for Petitioner's Own Capital Stocla,

In 1927 the petitioner transferred to Ivar Kreuger in exchange for 15,000 shares of its own capital stock of a par value of $1,500,000 the following assets :

Account receivable against Swedish Match Co_ $8,440. 55
Account receivable against Aktiebolaget Kreuger & Toll_ 228, 419. 57
Stock of Swedish Match Co. (book value)- 1,190,000. 00
Total-'-1, 426, 880.12

In recording the transaction in its books petitioner credited Ivar Kreuger’s account with $1,500,000 and debited it with $1,426,800.12. Later, adjusting entries were made as of the close of the year 1927 debiting Kreuger’s account with $73,139.88 and crediting “capital surplus” account with the same amount. The amount of $73,139.88 appears in petitioner’s income tax return for 1927 in “Schedule £L’— Reconciliation on Net Income and Analysis of SuRplus” under the entry “Capital Surplus Acquired by exchange of assets having a book value of $1,426,860.12 for 15,000 shares own capital stock.” This item of $73,139.88, however, was not included in petitioner’s gross income.

In his answer to the amended petition herein the respondent affirmatively alleges that the petitioner realized a taxable gain of $73,139.88 on the above described exchange of assets for its own capital stock and that the deficiency as determined in the deficiency notice, which failed to include the amount in gross income, should be increased accordingly.

The respondent has the burden of proving that the petitioner realized a taxable profit of $73,139.88 upon the redemption of 3.5,000 shares of its own capital stock. We are of the opinion that the respondent has not borne this burden. The bookkeeping records are not competent proof of the realization of this amount of income. • We do not know what the petitioner received from the issuance of the 15,000 shares of stock in question nor do we know the value of the shares at the time they were redeemed by the petitioner. In the light of the evidence it must be held that the petitionér realized no taxable gain from the redemption of the shares in question.

Reviewed by the Board.

Judgment will be entered under Rule 50.


text:
    May Billings and City Bank Farmers Trust Company, as Executors of the Last Will and Testament of Richard Billings, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81638.
    Promulgated May 27, 1937.

      Russell L. Bradford, Esq., and James D. Ouchterloney, Esq., for the petitioners.

      Lewis /S'. Pendleton, Esq., for the respondent.
   OPINION.

Smith :

The first question presented by this proceeding is whether the proceeds of 32 life insurance policies which were paid to May Billings, the beneficiary, in the amount of $538,462.43 formed a part of the gross estate of the decedent. The decedent had the right to change the beneficiary of these policies up to the date of death. Petitioners have made no argument, either orally or written, in support of their contention upon this point. This Board and the courts have long held that, regardless of the date on which the policies were taken out, the proceeds of insurance on a decedent’s life are properly includable in his gross estate where he has retained until his death the power to change the beneficiaries. Chase National Bank v. United States, 278 U. S. 327; Reinecke v. Northern Trust Co., 278 U. S. 339; Heiner v. Grandin, 44 Fed. (2d) 141; certiorari denied, 286 U. S. 561; H. T. Cook et al., Executors, 23 B. T. A. 335; affd., 66 Fed. (2d) 995; Jacob K. Newman et al., Executors, 29 B. T. A. 53; and Louise C. Moore, Executrix, 33 B. T. A. 108. The proceeds of these 32 policies constituted a part of the gross estate of the decedent.

With regard to the policies referred to as items 63, 64, and 66 of the estate tax return, the petitioners contend that, inasmuch as these policies were taken out before the effective date of the Revenue Act of 1918 (February 24,1919) and were made payable to an irrevocably named beneficiary, they may not be included in the gross estate. The petitioners cite Bingham v. United States, 296 U. S. 211, and Industriad Trust Co. v. United States, 296 U. S. 220, in support of this contention. The cited cases stand for the proposition that where insurance policies were taken out prior to the effective date of the Revenue Act of 1918 and prior to such date the decedent had no interest in tlie policies such as the right to change the beneficiary, or to borrow money on the policies, or to surrender them without the consent of the beneficiary, the proceeds of the policies are not subject to Federal estate tax.

In Industrial Trust Co. v. United States, supra, the facts, were that the decedent died in 1930. He had taken out a policy in 1892, the proceeds of which were payable to the wife of the decedent as sole beneficiary if living, and, if not living, to the surviving children of the decedent. In 1912 the policy became a paid-up policy, requiring no further payment of premiums. No power was reserved to change beneficiaries, borrow on the policy, or surrender it. The Court stated:

The case of Lewellyn v. Frick, 268 U. S. 238, 45 S. Ct. 487, 69 L. Ed. 934, arose under the Revenue Act of 1918. This case arises under the Act of 1926, § 302 (g), 26 USCA § 411 (g), which is the same as section 402 (f) of the former act (40 Stat. 1097). Subdivision (h) of the 1926 Act, 26 USCA § 411 .(h), however, provides that subdivisions (b), (c), (d), ,(e), (f), and (g) shall apply to “transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act [February 26, 1926].” Whether any of these terms apply to an amount receivable by a beneficiary, under a policy such as we have here, is fairly debatable. See Wyeth v. Crooks (D. C.) 33 F. (2d) 1018, 1019. If any of them do apply, the provision is open to grave doubt as to its constitutionality, and the rule of the Frick case controls.

The respondent contends that the above cited decisions are not determinative of the present issue, since the decedent retained:

* * * until his death powers of control over the economic benefits thereof sufficient to support the tax. In the Bankers Life Company policy and the Fidelity Mutual policy the decedent had the power during his lifetime to direct that the proceeds should be retained by the company during- the life of the beneficiary and upon the latter’s death to be paid over to the executor or administrator of the beneficiary. In all three of the policies the decedent had the power to direct payment of the proceeds in fixed annual installments or in installments during the lifetime of the beneficiaries based upon his or her life expectancy and to deprive the beneficiary of any right to commute these annual installments for cash. * * *

Section 302 of tbe Revenue Act of 1926 provides in part:

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—
»****♦ *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, * * * in contemplation of . * * *. his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
_ (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.
(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.

The incidence of the estate tax is upon the value of the net estate of the decedent which passes by reason of his death. In the determination of that value it is provided that there shall be included in the gross estate the value at the time of death of all property, real or personal, tangible or intangible, wherever situated, to the extent of the decedent’s interest therein. Where the decedent has the right to change the beneficiary of a policy or-to surrender the policy without the consent of the beneficiary he has a valuable interest in the policy which may properly be included in the gross estate. Chase National Bank v. United States, supra. The inclusion in the gross estate of the proceeds of life insurance policies was sustained in the Chase National Bank case upon the theory that the decedent up to the date of death had control of the insurance to the extent that he could name the beneficiary. The Court stated:

* * * As it is tbe termination of tbe power of disposition of tbe policies by decedent at death which operates as an effective transfer and is subjected to the tax, there can be no objection to measuring the tax or fixing its rate by including in tbe gross estate the value of the policies at the time of death, together with all the other interests of decedent transferred at his death. * * *

In the proceeding at bar the decedent did not have such an interest. The mere right to say when the proceeds of the insurance policies should be paid to the beneficiary does not amount to a control of the proceeds. They irrevocably belonged to the beneficiary from the date the policies were taken out.

We are of the opinion that the proceeds of these policies did not constitute a part of the gross estate of the decedent.

The third question presented by this proceeding is whether the proceeds of the three policies issued by the Missouri State Life Insurance Co. should be included in the gross estate of the decedent. These policies were payable to the estate of the decedent, with the right in the decedent to change the beneficiary. He assigned these policies to named persons on June 24, 1931, or within six months from the date of death. The respondent held that the assignment was in contemplation of death. At the time the decedent was suffering from a chronic cardiac valvular disease. The petitioners have offered no evidence to show that the assignment was not made in contemplation of death. We accordingly hold that they were so assigned.

Each assignment states that it is made “for value received.” The •determination of the respondent was, however, to the effect that there was no consideration paid by the assignees for the assignments of the policies and in the absence of proof to the contrary it must be held that they were assigned without consideration.

The petitioner’s argument upon this point is that insurance policies on the life of a decedent, payable to the insured’s estate but with the right on the part of the insured to change the beneficiary, which are assigned to named persons without consideration in contemplation of death, may not be included in the gross estate under section 302 (c) of the Eévenue Act of 1926; that insurance policies on the life of a decedent are includable in the gross estate by virtue of subdivision (g) of section 302 and may not be included by virtue of any other subdivision; and that the term “assignee” is not comprehended by the phrase “all other beneficiaries” contained in subdivision (g). In support of the last proposition the petitioners cite Guettel v. United States, 67 Ct. Cls. 613.

The decedent unquestionably had a valuable property right in the Missouri State Life Insurance Co. policies up to the time that they were assigned by him to named persons on June 24, 1931. Section §02 (c) covers all kinds of property owned by a decedent. We are of the opinion that there is no merit in the contention of the petitioners that life insurance policies on the life of a decedent may not be included in the gross estate when assigned without consideration to named persons in contemplation of death. If this were so, it would be possible for an insured to assign policies of life insurance payable to his estate in contemplation of death and thereby eliminate the proceeds of the policies from his gross estate. We are of the opinion that such a construction of the statute is not tenable.

In Guettel v. United States, supra, a policy was taken out in 1920 payable to the estate of the decedent. On March 25, 1920, the decedent assigned this policy to his wife. The Court of Claims in its ■opinion states that the assignment was for a valuable consideration, ¡although it has made no finding to that effect. The court held, however, that it could not be included in the gross estate, saying:

The language “all other beneficiaries,” used in tRe statute, can not be fairly •construed as applying to the assignee of a policy payable to a designated beneficiary. Such a construction would be an unwarranted extension of the meaning of the statute here involved. * * *

We find ourselves in disagreement with this proposition. It .■appears to us that the phrase “all other beneficiaries” contained in subdivision (g) is broad enough to include an assignee where the policy was assigned to a named person or persons without a valuable-consideration.

In Frick v. Lewellyn, 298 Fed. 808, 807, the court stated:

* * * None of the policies passed from the decedent’s estate by will, descent, or distribution; nor can it be held that any of the policies were transferred in contemplation of death within the meaning of paragraph (c) of section 402, as all transfers occurred more than two years before the decedent’s death. If a transfer without consideration, within the period of two years, is deemed to be in contemplation of death, unless the contrary be shown, it would seem that a transfer prior to that time would be presumed not to have-been so made, and there is nothing before the court to overthrow this presumption as to transfers of any of the policies in question.

The Supreme Court has said that the dominant purpose of subT division (c) requiring the inclusion in the gross estate of transfers in contemplation of death or intended to take effect at or after death was to reach substitutes for testamentary dispositions. of property and thus to prevent the evasion of estate tax. United States v. Wells, 283 U. S. 102, 116; Milliken v. United States, 283 U. S. 15; Nichols v. Coolidge, 274 U. S. 531, 542.

The legal conception of policies of life insurance as property is firmly established. Frick v. Lewellyn, supra.

The petitioners also argue that to include the proceeds. of the assigned policies in the gross estate would be contrary to the provisions of the Constitution of the United States. We are of -the opinion that there is no merit in this contention. See Chase National Bank v. United States, supra.

We are of the opinion that the respondent did not err in including the proceeds of these three policies in the gross estate of the decedent.

The final question in issue in this proceeding is whether the respondent erred in not allowing proper credit against the Federal estate tax for state inheritance and estate taxes. The parties have stipulated that the petitioners paid the State of Vermont state-inheritance taxes aggregating $63,064.29. In the petition it is alleged that the respondent also allowed only $2,102.84 representing the transfer tax paid to the State of ISFew York, whereas proof of credit was filed with the respondent in the amount of $2,122.84. An-inspection of the deficiency notice would indicate that the correct amount was $2,122.84. Proper credit will be allowed in the final settlement of the deficiency.

Eeviewed by the Board.

Judgment will ~be entered wader Rule 50-


author: Artjndell :

text:
    Walter W. Moyer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82588, 87119.
    Promulgated May 28, 1937.

      Henry M. Ward, Esq., and A. H. Conner, Esq., for the petitioner.

      Hartford Allen, Esq., and Walter W. Kerr, Esq., for the respondent.
   OPINION.

Artjndell :

(1) The respondent contends that during the taxable years there was no bona fide partnership existing between the petitioner and his wife and that there was no effective gift by petitioner to his wife of an interest in the business at Ephrata.

We have held that a married woman in Pennsylvania may enter into a partnership with her husband. John T. Newell, 17 B. T. A. 93; Thomas F. Kelley, 9 B. T. A. 834. The fact that the business is conducted in the name of the husband does not defeat the partnership. J. Kammerdiner, 25 B. T. A. 495, and Leonard M. Gunderson, 23 B. T. A. 45, and partners may agree to lodge in one partner the sole management of the business. Richard H. Oakley, 24 B. T. A. 1082. We have also held that a husband may constitute his wife his partner by giving her an interest in the business. Jasper Sipes, 31 B. T. A. 709, and Richard H. Oakley, supra. An agreement or transaction is not rendered ineffectual merely because entered into or motivated by a purpose to avoid taxes. Commissioner v. Gregory, 69 Fed. (2d) 809; affd., Gregory v. Commissioner, 293 U. S. 465. The question to be determined, therefore, is whether the petitioner actually made a gift to his wife of an interest in the business in the amount of $100,-000. If he did make a gift to his wife, she made a contribution to the business and hence had an interest in the partnership. Section 16601, Pa. St. 1920, provides that “A partnership is an association of two or more persons to carry on as co-owners a business for profit.”

In Packer v. Clemson, 269 Pa. 1, 3; 112 Atl. 107, a gift is defined as follows:

To make a valid gift inter vivos there must be a clear, satisfactory, and unmistakable intention of the giver to part with and surrender dominion over the subject of the gift with an intention to invest the donee with the right of disposition beyond recall, accompanied by an irrevocable delivery.

The evidence here convinces us that the petitioner made a gift to his wife of an interest in the business to the extent of $100,000. Not only was the gift evidenced by the book entry, but also by the statement in the first partnership agreement that the wife had contributed to the partnership the sum of $100,000. Thereafter the wife asserted her ownership of such interest by placing it in trust. Under the laws of Pennsylvania assignment by a partner of his interest does not of itself dissolve the partnership. Sec. 16622, Pa. St. 1920. Pier interest in the partnership ivas again recognized in the second partnership agreement, wherein she again asserted ownership thereof by assigning a part of such, interest to her daughters. The profits to which she was entitled as a partner were received by her. The petitioner did not reacquire any part of such interest or any of the profits therefrom. The assistant trust officer, whom the petitioner’s wife consulted about the drafting of a will, testified in substance that the trust agreement was determined upon at his suggestion as a means to prevent, in the event of her death, the tying up of her estate in the courts and to avoid probate expenses; that the revocation provision was inserted in the agreement merely to permit a change in the agreement if necessary; and that, upon being informed by him that she could place the power of revocation in herself, her husband, or anyone else, she stated that she desired her husband to exercise the power rather than herself because she was in very poor health and felt that her husband would outlive her and she preferred to have him look after the children’s interest. Although the petitioner revoked the trust, he did not reacquire her interest but at the time her ownership of such interest was acknowledged in the second partnership agreement. Upon all the evidence we are of the opinion that the petitioner made an irrevocable gift to his wife of ■ an interest in his business at Ephrata to the extent of $100,000 and that the partnership existed between them. We, therefore, conclude that the wife’s share in the profits of the partnership did not constitute income to the petitioner during the taxable years and that the respondent erred in including such profits in the taxable income of the petitioner.

Jackson v. Commissioner, 64 Fed. (2d) 359, wherein the court held that no irrevocable gift had been made, is distinguishable on the facts. Therein the husband gave his wife certain securities which he owned, with the understanding that she would simultaneously create a trust for the benefit of their children. The trust agreement therein provided, among other things, that in the event of the death of the wife, whether children survived or not, the entire trust estate' should be jaaid over to the taxpayer and that he could revoke the trust upon written notice of his intention to revoke given to his wife. There was no such understanding here; the creation of the trust was the voluntary act of the wife.

(2) The petitioner contends that he sustained an ordinary loss to the extent of the cost of the 1,400 .shares of Pennsylvania Trust Co. stock in 1933, due to the stock becoming worthless in that year.

The petitioner testified that he was informed by various directors of the bank shortly after the bank closed in March 1933 that the stock was then worthless. That the petitioner was correctly informed is borne out by the data set> forth in the reorganization plans submitted to the stockholders. It appears therefrom that the total assets of the bank had a value in 1933 of about $1,460,000; and that it agreed to transfer about $3,102,000 of such assets to the new bank, leaving about $4,357,000 of sucb assets to the old bank to be liquidated. Out of such assets the old bank was required to pay the expense of liquidation, a loan of $700,000 made to it by the Reconstruction Finance .Corporation as an aid to effecting the reorganization, and about 58 percent of its deposits, aggregating about $4,297,000. In addition there were some trustees’ mortgage participation certificates outstanding and other liabilities referred to in amounts not shown, all of which were payable prior to any distribution to stockholders. Unless the assets could be liquidated in amounts substantially in excess of their then value, the deposits and loan alone far exceeded the value of the assets, leaving nothing for other creditors and stockholders. A “loss may become complete enough for deduction with'out the taxpayer’s establishing that there is no possibility of- an eventual recoupment.” United States v. White Dental Manufacturing Co., 274 U. S. 396. While the sale of the stock at auction at the end of 1933 was a bona fide sale in the sense that it was an actual and not an accommodation sale, it was a futile and expensive gesture, unnecessary to establish the loss, since the stock was worthless prior thereto. Peter Doelger Brewing Co., 22 B. T. A. 1176. “In such cases a sale is necessarily fictitious; it establishes nothing * * DeLoss v. Commissioner, 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840. See Claude D. Cass, 32 B. T. A. 713; affd., 83 Fed. (2d) 841; Alfred K. Nippert et al., Executors, 32 B. T. A. 892; William E. Steinback, 30 B. T. A. 1252; Harry C. Kayser, 27 B. T. A. 816; Jessie S. Meachem, 22 B. T. A. 1091; Gilbert H. Pearsall, 10 B. T. A. 467.

The petitioner is entitled to a deduction in 1933 of the amount of $43,356.40 as an ordinary loss.

Decision will be entered wnder Rule 50.

       Section 16622. Assignment of Partner’s Interest. — (1) A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive, in accordance with his contract, the profits to which the assigning partner would otherwise be entitled.
      (2) In case of a dissolution of the partnership, the assignee is entitled to receive his assignor’s interest and may require an account from the date only of the last account agreed to by all the partners.


author: Leech :

text:
    Warren H. Corning, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86898.
    Promulgated May 28, 1937.

      David A. GasMU, Esq., and Earl P. Schneider, Esq., for the petitioner.

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

Leech :

Respondent determined a deficiency in petitioner’s income tax for 1934 in the sum of $3,776.71, of which $3,713.04 is in controversy. The disputed tax arises by reason of the increasing of petitioner’s reported income by the amount of the income realized, but not distributed, by the trustees in that year, under two trusts created in prior years by petitioner.

The facts are stipulated. The two trust instruments, together with the amendments executed, are made a part of the formal stipulation filed. Briefly stated, the facts are that petitioner in 1929 executed, two trust instruments. By one he conveyed to the Union Trust Co.. of Cleveland, Ohio, as trustee, certain corporate stock, such of the yearly income as the trustee might “deem advisable” to be paid to him for life, then to his wife for her life. On the death of the survivor of these two the corpus was to be divided among petitioner’s direct descendants or in case there were none surviving, to be paid over to petitioner’s father, if living. The trustee was given authority to sell the trust property, to invest funds of the trust, and otherwise deal with the trust corpus without legal restrictions otherwise applicable to trustees, and to lend money to or purchase property from petitioner’s estate without security and without liability for loss. It. was provided that the trustee should, before purchase or sale of securities, secure the approval, during his life, of petitioner’s father and after his death, of petitioner, and there was specifically reserved to petitioner the right at any time to remove the trustee and substitute another merely upon giving written notice.

It was further provided by this trust that petitioner’s father might, during his life, amend or terminate the trust in whole or in part and change any beneficial interest thereunder. In case of termination of the trust under this power, the corpus was to be paid over to petitioner, if living, or if not living, then to any one specified by petitioner’s father. Petitioner also reserved the right, after the death of his father, but in no event prior to 1932, to amend or terminate the trust, it being provided, however, that he might not revest himself in any year with the corpus of the trust unless he had given notice in writing of his intended action' not later than November 30 of the preceding year.

On December 1,1931, petitioner’s father, Henry W. Corning, in the exercise of his power to amend the terms of the trust instrument, executed an amendment providing that the income of the trust during the life of petitioner should be accumulated and added to the corpus, and changing from 1932 to 1937 the earliest date at which petitioner might terminate the trust. On August 8,1933, petitioner’s father executed a second amendment providing that sale, lease, investment, or reinvestment of the trust estate until October 1, 1933, should be made by the trustee upon direction of petitioner, and that the trustee -would be absolved from any and all responsibility for acts done under such direction. By a third amendment, executed October 1, 1933, this power of direction by petitioner was extended to July 1, 1935.

By the second trust certain securities were transferred by petitioner to one S. Roswell Shepherd as trustee. The beneficiaries -were the same as in the first trust. The powers granted to the trustee and petitioner’s father and those reserved to the petitioner -were the same as in the first trust, with the one exception that petitioner was not limited as to time with respect to his right of revocation or amendment of the trust, except that it be subsequent to his father’s death. This trust differs from the first mainly in the amendments executed by petitioner’s father under the power granted him.

Thus, on January 17, 1933, petitioner’s father executed an amendment changing the provision for payment by the trustee in its sole discretion of all or part of the income to petitioner, to provide that the income in the sole discretion of the trustee be, during the life of petitioner, accumulated or paid to petitioner’s xvife, his mother, his father, and/or any descendants of him surviving. Any income not so distributed by the trustee was to be accumulated and set apart in a separate “Fund A.” Upon petitioner’s death “Fund 'A” was to be added to the corpus of tbe trust and tlie income from such corpus paid over to petitioner’s wife for life and upon her death to be paid in equal shares to petitioner’s children, or, per stirpes, to descendants, if any, of children not then living. By this amendment it was further provided:

I hereby authorize and empower my father, Heni:v W. Corning, during his life, and thereafter I reserve to myself, during my life, the right, to change or modify any of the administrative provisions of this agreement and to change any beneficial interest hereunder and to revoke this trust either in whole or in part, by delivering to the Trustee an instrument in writing acknowledged like a conveyance of real property entitled to record in New York, unless acknowledgment be waived by it, and in the event of the revocation of all or a part of this trust by my father, the Trustee shall pay over the principal thereof so revoked (excluding, however, the principal of the said Fund A) to me if I am then living, or if I am not then living the Trustee shall pay over the entire principal thereof (including the principal of the said Fund A) to my father or to such person or persons as he may designate in writing to the Trustee; provided, however, that, during my life, neither my father nor I shall have the power, at any time prior to January first, 1938, to revoke this trust- either in whole or in part or to direct that any part of the income of the trust be paid over or held or accumulated for future distribution to me or be applied by the Trustee to the payment of premiums upon policies of insurance on my life, and provided further, that during my life and after January first, 1938, neither my father nor X shall have the power at any time during any taxable year within the meaning of the revenue laws of the United States to exercise any of the aforesaid powers not exercisable before said date, except that, if, during the month of December in the taxable year 1937 or during the month of December in any taxable year thereafter, my father, or in ease he is not living, then if I, deliver to the Trustee during such month a written notice that it is desired to have such powers during any specified time after the first day of the next succeeding taxable year, then during such specified time, but neither prior nor, except upon similar notice, subsequent thereto, my father if living and if he be not living, then I, shall have full power by instrument of the character hereinbefore specified, to revoke this trust in whole or in part or to direct that any part of the income of the trust thereafter accruing be paid over or held or accumulated for future distribution to me, or be applied by the Trustee to the payment of premiums upon policies of insurance upon my life. Anything herein to the contrary notwithstanding, neither my father nor I shall at any time have the right to vest in myself title to any part of the said Fund A, and the Trustee shall in no event pay over any of the principal of said Fund A to me during my life, and in the event of the revocation of this trust in whole or in part during my life any part or all of the said Fund A so affected shall be paid over by the Trustee to the persons named and in the proportions designated by my father, Henry W. Corning, if he is then living, by an instrument in writing delivered to the Trustee, and any affected part of the said Fund not validly so appointed shall be paid over to the persons named and in the proportions designated by my mother, Edith W. Corning, if she is then living; provided, however, that in no event shall either my father or my mother have the power to direct that any portion of said Fund A shall be paid over to me, and any affected part not validly so appointed shall be paid over to my said wife if she is then living, or if not, in equal shares per stirpes to my descendants then living, or if none, in equal shares per stirpes to my father’s descendants (other than myself) then living. I also reserve the right for myself or any other person to increase this trust by delivering property or making insurance policies payable to the Trustee for that purpose or by bequest or devise by will. No income of the trust shall be applied to the payment of premiums upon policies of insurance on my life, unless and until direction shall be given to the Trustee therefor upon compliance with the conditions hereinbefore specified. In no case shall the duties and liabilities of the Trustee hereunder be increased without its written consent.

None of the income of the two trusts for 1934 was distributed but all was accumulated by the trustees.

Section 166 of the Revenue Act of 1934 provides:

SEC. 166. REVOCABLE TRUSTS.
Where at any time 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 shall be included in computing the net income of the grantor.

Respondent, by article 166-1, Regulations 86, has construed this section as follows:

Art. 166-1. Trusts, with respect to the corpus of which, the grantor is regarded as remaining in substam.ee the owner.—
<b) Section 166 defines with particularity instances in which the grantor is regarded as in substance the owner of the corpus by reason of the fact that he has retained power to revest the corpus in himself. For the purposes of this article the grantor is deemed to have retained such power if he, or any person not having a substantial interest in the corpus or the income therefrom adverse to the grantor, or both, may cause the title to the corpus to revest in the grantor. If the title to the corpus will revest in the grantor upon the exercise of such power, the income of the trust is attributed and taxable to the grantor regardless of—
' (1) Whether such power or ability to retake the trust corpus to the grantor’s own use is effected by means of a power to revoke, to terminate, to alter or amend or to appoint;
(2) whether the exercise of such power is conditioned on the precedent giving ■of notice, or on the elapsing of a period of years, or on the happening of a specified event;, '
(3) the time at which the title to the corpus will revest in the grantor irt possession and enjoyment, whether such time is within the taxable year or not, or whether such time be fixed, determinable, or certain to come;
(4) whether the power to revest in the grantor title to the corpus is in the ■grantor, or in any person not having a substantial interest in the corpus or income therefrom adverse to the grantor, or in both. A bare legal interest, ¡such as that of a trustee, is never substantial and never adverse;
(5) when the trust was created.

Sections 166 of the Bevenue Acts of 1928 and 1982 were similar to the above quoted section of the 1934 Act here applicable with the exception that the former provide that, to tax any of the trust income to the grantor, the power of revocation must exist “within the taxable year.” That limitation led to the creation of trusts with the power of revocation only upon the giving of notice of that intent more than 12 months in advance. Langley v. Commissioner, 61 Fed. (2d) 796; Faber v. United States, 1 Fed. Supp. 859; Lewis v. White, 61 Fed. (2d) 1046, affirming 56 Fed. (2d) 390; Mabel A. Ashforth et al., Executors, 26 B. T. A. 1188. It was to meet this practice and prevent this method of tax avoidance that the change was made in section 166 of the 1934 Act. This provision has been reenacted without alteration in the Bevenue Act of 1936 in the face of its interpretation by the Commissioner by his regulations above quoted.

In the present case under his interpretation of section 166, respondent has included in the income of the petitioner all of the income of the two present trusts, for the reason that under each trust petitioner has reserved the power to revoke or amend, under certain conditions, and thus repossess the corpus. It is petitioner’s contention that section 166 does not apply because his right of revocation was subject to a contingency which had not yet happened and the occurrence of which was beyond his power to control. That contingency was the death of his father without exercise of a power of amendment granted the father, which might be used to destroy petitioner’s right of revocation.

Section 166, here involved, and its companion section 167 of the Bevenue Act of 1934, were both enacted to prevent the avoidance of surtax through creation of trusts subject in some manner to the control of the grantor. They, as well as the similarly numbered sections of the 1928 and 1932 Acts, constitute a reenactment and extension of sections 219 (g) and (li) of the Acts of 1924 and 1926. The court in Kaplan v. Commissioner, 66 Fed. (2d) 401, in construing section 219 of the Revenue Act of 1924, said':

* * * This provision was intended, as its legislative history clearly shows, as a protection to the government against evasion oí income taxes, especially surtaxes, by means of trusts whereby the grantor, although parting with the legal control of the trust property, reserved a practical control over the income of it which could, in point of fact, be exercised for his own benefit. As Kaplan named himself trustee, the large discretion given in the trust instrument to the trustee as to the accumulation and payment of income is attributable to him personally. By the terms of the trust that discretion can be exercised for his own possible benefit, within wide limits. Wo see no occasion for refinement of construction against the government. We think the statute means that if under any circumstances or contingencies any part of the accumulated income might inure to the benefit of the grantor such portion of the income is taxable to him.

It is argued by respondent that the reasoning of the court in the Kaplan case is sound and that there is no occasion for a refinement of construction against the Government in interpreting section 166 of the 1934 Act. Respondent thus urges that this provision .shall be applied in taxing to the grantor the income of a trust where he has reserved to himself, at any time or under any conditions, a right of revocation even though the exercise of such right be subject to a condition precedent over which the grantor has no control.

On this question we agree with respondent. Petitioner has reserved to himself the power, in the case of each trust, after his father’s death and after 1936, to revest himself with the corpus. It is true that his father is granted the right to amend the trust and change any beneficial interest thereunder. But there has been no amendment executed by his father divesting petitioner of the right reserved to him at some time to revest himself with the trust corpus. Until petitioner is divested of that right by the exercise of the power granted to his father, he stands possessed of it. Therefore, during the pending tax year petitioner had the right to revest the trust corpus in himself at some time in the future. Higgins v. White, 18 Fed. Supp. 986. Cf. Fanny M. Bravo et al., Executors, 34 B. T. A. 190.

And, although we conclude that the respondent’s interpretation of section 166 by Regulations 86, article 166-1, supra, in applying it in cases where thq right of revocation reserved is subject to a condition precedent which has not yet occurred, is reasonable ■ and that under that section the income of the trusts here in question for the year 1934 is taxable to this petitioner, it appears that section 167 also applies, since the income from both trusts for,the tax year Wa,s accumulated. In the first trust the power reserved by petitioner to revest in himself the corpus existed also with respect, .to the accumulated income. In the second trust, although it was provided that the accumulated income should be set apart and designated as “Fund A”, and that under no circumstances could petitioner or his. father vest in petitioner title1 to that particular fund, there is no provision preventing its use in payment of premiums upon policies of insurance on petitioner’s life. Thus, it is apparent that under certain conditions the accumulated income of the second trust may be applied, after the death of petitioner’s father, to the payment of such premiums.

It is also intimated by respondent that, aside from the provisions of sections 166 and 161 of the Revenue Act of 1934, the petitioner retained such “substance of enjoyment” of the trust property of both trusts as to warrant the disregard of both trust entities and so, their income should be taxed to petitioner on that theory. He cites Burnet v. Wells, 289 U. S. 670, and Douglas v. Willcuts, 296 U. S. 1.

It is true, under the first trust, petitioner had the power to remove the trustee at will by merely giving written notice. Under this provision he could at any time designate himself as trustee and exercise the wide powers which he had granted the trustee in respect of the trust property, including the right to lend the trust corpus to his estate without security and to invest and reinvest it in such securities and on such terms as he might direct. During the year 1934 lie had the full and unrestricted power to direct the actions of the trustee in the handling of the corpus. The trustee was “absolved from any and all responsibility”, if it were shown that he acted upon petitioner’s direction.

With respect to the second trust, petitioner similarly .reserved the power to remove the trustee at will and substitute a successor. The broad discretion granted the trustee in the first instrument is found here again with the added provision that the trustee might determine, petitioner or his father, upon such evidence as he might consider sufficient, to be incompetent to direct the management of the trust property, in which event the party so determined to be incompetent, would be considered, for the purposes of the trusty instrument, as “dead.” Under this provision petitioner could, at any time through his action, substitute himself as trustee and remove his father completely from any power to direct management of the trust property or amend or revoke the trust instrument!

However, at all events, neither of the cases cited is authority for a disregard of the trust entities here, unless that: was the ground for the decision of the Supreme Court in Douglas v. Willcuts, supra. On that point no opinion is expressed. .

Decision will be entered for the respondent.

       Conference Report No. 1385, 73d Cong., 2d sess., p, 24.

       SBC. 167. INCOME BOR BENEFIT OB 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 (o) 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”.


author: Steenhagen :

text:
    Bing & Bing, Incorporated, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51433, 51434, 51435, 51436, 51437, 51438, 51439, 51440, 51441, 51442, 51443, 51695, 60397.
    Promulgated May 28, 1937.

      Laurence■ A. Tamer, Esq., for the petitioners.

      Hartford Allen, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Clark Henry Corporation ; Ashley Realty Corporation; 117 Corporation; 1980 Corporation; Salva Realty Corporation; 906 Corporation; 2311 Corporation ; 840 Corporation; 5421 Corporation; and Thirty Nine Realty Corporation.

   OPINION.

Steenhagen :

The principal controversy in this proceeding is as to the legal character of the Carbarn Syndicate. The syndicate is not a corporation, partnership, joint stock association, or, trust, as those-terms are commonly used, and the question is how it shall be classified under the revenue acts. This very syndicate and others similar were considered in Glenmore Securities Corporation, 24 B. T. A. 697; 62 Fed. (2d) 780; Frank G. Wild, 24 B. T. A. 691; 62 Fed. (2d) 777; Realty Associates, 17 B. T. A. 1173. But the more recent decisions, of the Supreme Court in Morrissey v. Commissioner, 296 U. S. 344; Commissioner v. Coleman-Gilbert Associates, 296 U. S. 369; Swanson v. Commissioner, 296 U. S. 362, and Commissioner v. Combs, 296 U. S. 365, considering in broader scope organizations of various-¡kinds, covered such as this into the category of associations. Hence it is to be treated as a corporation for all purposes of the act, Revenue Act of 1926, sec. 2 (a) (2), and this means as well when considering distributions by it as when its own income and taxes are in ■question. The income of an association is not taxed to the members until distribution has been made or accrued by an appropriation similar to the declaration of a dividend, and the respondent was ■clearly in error in including in petitioner’s .income any part of tho syndicate’s income before actual or accrued distribution.

In 1925 the petitioner received from the syndicate $348,729.59. It treated this as return of capital, $330,000, the amount of its original ■contribution, and $18,729.59 as interest, only the latter amount being returned as taxable gross income. This treatment is also incorrect because it is at variance with the concept of corporate distribution. By section 201 (b), Revenue Acts of 1924 and 1926, “every distribution [by a corporation] is made out of earnings or profits to the extent thereof.” There were earnings and profits of $1,089,724.74, of which petitioner’s proportionate share of 41]4 percent was $449,-511.46. The amount received was $348,729.59, and is therefore all to be regarded as an ordinary dividend. Glenmore Securities Corporation, supra; Pierce Oil Corporation, 32 B. T. A. 403, 429. Since, however, petitioner is a corporation, the amount thus received as a dividend “shall be allowed as a deduction.” Revenue Act of 1926, sec. 234 (a) (6); Smith v. Commissioner, 69 Fed. (2d) 911.

The Commissioner now argues that if Carbarn Syndicate was an ■association it should have paid a tax upon its income, and that its failure to do so gives foundation for an equitable set-off as in Bull v. United States, 295 U. S. 247. But the record is inadequate to supply the basis for the argument, even if the reasoning be sound. The evidence shows that the syndicate filed only a fiduciary return for 1925. It does not show whether tax was determined or paid, ■■and there is intimation that proceedings covering the syndicate’s taxes for 1925, 1926, and 1927 were settled by stipulation. An injustice clearer than this must affirmatively appear to produce a judgment against a member of an association to recoup for the uncollected tax of the association. Cf. Edmonds v. Commissioner, 90 Fed. (2d) 14.

As to the years 1926 and 1927, when the syndicate made no distributions whatever, the Commissioner’s inclusion of $104,875.56 and $49,315.34 as petitioner’s distributable share of the earnings of the syndicate was in error.

Likewise the deduction for 1928 of $6,878.56, being 41]4 percent of a syndicate loss of $16,675.28, is inconsistent with the treatment of the syndicate as an association and, therefore, was in error, as affirmatively pleaded by the respondent in Docket No. 60397.

2. The petitioner assails the Commissioner’s inclusion of $136,-215.59 in its income for 1925 as an accrued manager’s fee. No amount -was received by petitioner on this account and none was accounted for by either the syndicate or the managers. The respondent urges a construction of the syndicate agreement that would give the manager a right to an annual fee computed upon the basis of current earnings or distributions, and points to the actual payment of such a fee in 1930, before the syndicate was terminated, as indicating a practical construction. The terms of the instrument are quoted in the findings and show clearly that during the tax years now under consideration the manager’s fee was to be paid “at the time of such termination” of the syndicate after proper capital distribution with “interest” and before the distribution of profits. No interim fee was provided for, and the fact that one was paid in a later year does not support a holding that a right to a fee accrued prior thereto. The Commissioner’s determination as to the manager’s fee for 1925 is reversed.

3. For 1927 and 1928 the petitioner, having made advances to the Temple Terrace Construction Co., in which it owned half the stock,, charged off on its books, and apparently upon its returns, as bad debts $70,130.38 for 1927 and $32,500 for 1928, which were one-half the amounts of the Construction Co.’s book deficits. Both these deductions were allowed by the Commissioner, and there is, therefore, no reference to the item in the deficiency notice for either of these tax years. The petitioner, however, attacks the Commissioner’s failure to allow additional deductions as bad debts of the Construction Co. to the extent of $166,117.55 for 1927 and $164,-764.13 for 1928.

These deductions are claimed under that portion of section 234 (a) (5), Revenue Act of 1926, which provides “when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.” The Commissioner is not “satisfied” that this debt was in the taxable years recoverable only to the extent which the petitioner now claims, and the question is whether the evidence is sufficiently strong to require a holding that he reasonably should have been so satisfied. The petitioner relies upon an estimate, made apparently for the first time at the hearing of this proceeding in 1936, of the actual value in 1927 and 1928 of the Construction Co.’s assets, consisting largely of mortgages and real property in the State of Florida. This estimate was made by its comptroller, who kept the corporation’s accounts in its office in New York, and his opinion expressed at the hearing of the value of these properties at the close of the years in question was entirely inadequate to establish that the Commissioner’s official determination, which was identical with that •expressed by the petitioner upon its own books, was incorrect or that his failure spontaneously to make a more favorable determination was unreasonable. The petitioner’s allegations, therefore, as to this item must be dismissed for insufficiency of proof to support a finding of nonrecoverability greater than that already allowed.

Other items which are covered by the pleadings have all been disposed of by withdrawal, concession, or stipulation.

Reviewed by the Board.

Jlodgment will be entered under Rule 50.


author: Biack :

text:
    Edward E. Rieck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79157.
    Promulgated May 28, 1937.

      W. W. Booth, Esq., W. A. Seifert, Esq., and A. Q. WaTlerstedt, Esq., ior the petitioner.

      E. M. Woolf, Esq., and F. R. Shearer, Esq., for the respondent.
   OPINION.

Biack :

The respondent concedes that petitioner is entitled to deduct from his gross income for 1932 the amount of $56,517 as a loss •due to his investment in 129 shares of Diamond National Bank stock, which stock became worthless during the taxable year 1932; that after the allowance of this deduction petitioner had no net income subject to tax:; that his tax liability for 1932 was nil; and that, therefore, petitioner overpaid his taxes for 1932 in the total, amount of $2,057.98.

The respondent’s position is that, notwithstanding the admitted fact that petitioner overpaid his taxes for 1932 in the amount of $2,057.98, the refund of such amount, or any portion thereof, is now barred by the statute of limitations, namely, section 322 of the Revenue Act of 1932, as amended by section 504 (a) of the Revenue Act of 1934, the material part, of which statute as amended is as follows:

(e) Detect op Petition to Boaed. — If the Commissioner has mailed to the taxpayer a notice of deficiency under section 272 (a) and if the taxpayer files a petition with the Board of Tax Appeals within the time prescribed in such subsection, no credit or refund in respect of the tax for the taxable year in respect of which the Commissioner has determined the deficiency shall be allowed or made and no suit by the taxpayer for the recovery of any part of such tax shall be instituted in any court except * * * [Exceptions not here-material.]
(d) Overpayment Pound by Board. — If the Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined' the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be. credited or refunded to the taxpayer. Ufo such credit or refund shall he made of any portion of the tax unless the Board determines-as part of its decision that it toas paid within two years before the filing of the claim or the filing of the petition, whichever is earlier. [Italics supplied.]

The part of paragraph (d) above, which is in italics, was added by section 504(a) of the Revenue Act of 1934.

The parties have stipulated that no claim for refund has been filed. Therefore, the question we have to decide is whether the $1,669.92' which petitioner paid September 5, 1934, was paid within two years before the filing of the petition.

The respondent contends that the “petition” referred to in the statute must in effect be interpreted, in so far as it affects this case, as meaning the “petition as amended” for the reason that the overpayment is due entirely to the allowance of the $56,517 loss and the-petition as originally filed did not assign as error the failure of the-respondent to allow that loss, and that, when so interpreted, the-refund of the $1,669.92 is also barred as petitioner paid the amount-more than two years before the filing of the amendment to the petition. The respondent proceeds to justify this contention on two principal grounds, namely, (1) that whenever a refund is-involved in a proceeding before the Board the same rule regarding-amendments to the petition filed with the Board should apply as applies to amendments to claims for refund filed with the Commissioner, and (2) that, aside from the rules governing claims for refund, filed with the Commissioner, it is a general rule of law that no new and distinct cause of action which is barred by the statute of limitations can be asserted in a pending lawsuit by means of an amendment to the pleadings, and that the amendment to the petition in the-instant case raised a new and distinct cause of action.

Regarding claims for refund, the Supreme Court has held in several cases that, if a taxpayer corporation files a timely general claim for refund with the Commissioner. without stating the specific-grounds relied upon, it may amend its claim and state the specific-grounds relied upon at any time before the claim is finally rejected,, even though the time has expired within which a new claim might-. be filed, United States v. Memphis Cotton Oil Co., 288 U. S. 62; United States v. Factors & Finance Co., 288 U. S. 89; Bemis Brothers Bag Co. v. United States, 289 U. S. 28; George Moore Ice Cream Co. v. Rose, 289 U. S. 373, but where a taxpayer, corporation files a timely specific claim for refund based upon a specific request for special assessment and abandons the position that there had been any error of fact or law in the assessment of the tax according to the normal method, it can not, after the statute has run for filing a new claim, amend the claim and allege that its profits taxes should be determined according to the normal method. United States v. Henry Prentiss & Co., 288 U. S. 79.

For reasons given later in this opinion, we do not think that petitions before the Board are subject to the same rules regarding amendment as are applied to claims for refund filed with the Commissioner. For that reason we will not undertake to decide whether the filing of the amendment to the petition in the instant case would be permissible under the decisions of the Supreme Court above quoted if the same rule applied to it as applies to amending claims for refund.

The reasons why we think that petitions before the Board are not subject to the same rules regarding amendment as are applied to, claims for refund filed with the Commissioner are that the Board was created and continued as an independent agency in the executive branch of the Government and Congress has specifically prescribed that its proceedings .shall be conducted in accordance with such rules of practice and procedure (other than rules of evidence) as the Board itself may prescribe. It has been held that the question of what constitutes a “petition” is one for the Board to determine. Continental Petroleum Co. v. United States, (Dist. Ct., W. D. Okla., Apr. 14, 1936, not reported); affirmed by the Tenth Circuit, 87 Fed. (2d) 91. The petition here in question was in all respects regular and the amendment thereto was offered and allowed in accordance with the Board’s rules and with no objection on the part of the respondent as to the. propriety of permitting it to be filed. The respondent merely argues as to the legal effect of the amendment. He argues that, due to section 322 (d) of the Bevenue Act of 1932, as amended by section 504 (a) of the Bevenue Act of 1934, the amendment to the petition is wholly ineffective in so far as authorizing the refund of the’admitted overpayment. This brings us to the consideration of respondent’s second principal ground mentioned above, which is that the amendment to the petition sets up a new cause of action and starts a new date for the filing of the petition.

The leading cases relied upon by respondent in support of his second ground are Union Pacific Railway Co. v. Wyler, 158 U. S. 285; Willard v. Wood, 164 U. S. 502; and Lorenzen v. United States, 41 Fed. (2d) 369; affd., 52 Fed. (2d) 106. In the last mentioned case the United States District Court, W. D. Missouri, stated the principal of law relied upon by respondent as follows:

It is undoubtedly the law that, although a cause of action is instituted within the time provided for in the statute of limitations, an amendment to such cause of action which states a new and different cause of action, unless the amendment is also within the time provided for in the statute, can not be maintained. It is barred by the statute of limitations.

We do not question the correctness of the above statement of law. The difficulty is not with the statement itself, but with what constitutes a “cause of action” in cases involving the determination of the income tax liability of taxpayers.

Did the amendment to the petition, which was filed pursuant to leave granted in our order dated September 28, 1936, set up a new cause of action? We think not. Pi’oceedings are brought before this Board in cases where the Commissioner has determined a deficiency for a given taxable year. If the petition has been properly filed, the Board has jurisdiction to determine the correct tax liability for that year.

It seems plain to us that it was the intent of Congress, in establishing the Board of Tax Appeals and in enacting statutes to govern the hearing and decision of tax cases before it, that the entire tax liability of the taxpayer should be determined for the given taxable year, assuming, of course, that issues are properly raised.

If there is no deficiency, that fact should be determined; if there is a deficiency, then the amount thereof should be determined. If there is an overpayment, then that fact should be determined, and, where section 504 of the Revenue Act of 1934 is applicable, we should also determine, as a part of our decision, the amount of the overpayment which was paid within the time prescribed by the applicable •revenue act to save it from the running of the statute of limitations; or, if there is an increased deficiency over that determined by the Commissioner, that fact should be determined, when the Commissioner has properly pleaded the necessary allegations for the determination of an increased deficiency.

It seems clear that, where the original deficiency notice was sent to the taxpayer prior to the expiration of the statute of limitation, the Commissioner may amend his pleadings and ask for an increased deficiency on grounds entirely different from those originally relied upon, even though the time of filing the amendment to his answer asking for the increased deficiency would be barred by the statute of limitations if it were an original deficiency notice. In such a case, the Commissioner’s claim for the increased deficiency relates back to the time of mailing the original deficiency notice. Cf. Davison v. Commissioner, 60 Fed. (2d) 50. It seems to us that it would be a strained construction for us to hold that an amendment to a petition which merely sets up an additional assignment of error and facts to support it would be setting up a new cause of actipn and thereby fix a new’ date as the date of the filing of the petition. We can not subscribe to such a theory.

In Peruna Co., 11 B. T. A. 1180, we held that the cases of Union Pacific Railway Co. v. Wyler, supra, and Willard v. Wood, supra, were not there in point, and, among other things, we said:

In the present case, as in Eastman Gardiner Naval Stores Oo., supra, petitioner liad one right of action in the sense that term is used in the cases cited. This was its right to petition this Board for a review of its income-tax liability for certain years as finally determined hy the Commissioner. When the petition was filed the final determination had been made and the petitioner was seeking a review thereof. It was not a condition which gave him two distinct rights of action under which he elected to pursue one and then save the benefit given by the other, as in the Wei/ler case.

It follows that if the amendment to the petition in the instant proceeding did not set up a new cause of action, and we do not think it did, then it relates back and is effective from the date the original petition was filed. United States v. Memphis Cotton Oil Co., supra. It is considered as incorporated into and as a part of the original petition. Underwood Contracting Corporation v. Davies (C. C. A., 5th Cir.), 281 Fed. 776; Chesapeake & Ohio Railroad Co. v. Coffey (C. C. A., 4th Cir.), 37 Fed (2d) 320, 323; certiorari denied, 281 U. S. 479 (amending to show diversity of citizenship), quoting the following from Texas Portland Cement Co. v. McCord, 233 U. S. 157:

“It is elementary that an amendment dates back to the filing of the petition, and is to supply defects in the cause of action then existing, or at most to bring into the suit grounds of action which existed at the beginning of the case. United States ex rel. Texas Portland Cement Co. v. McCord, 233 U. S. 157, 94 S. Ct. 550, 553, 58 L. Ed. 893.”

In Western Wheeled Scraper Co. v. United States, 72 Fed. (2d) 487, the court said:

A statute giving a taxpayer the opportunity to secure a refund of an overpayment is to be liberally construed in the taxpayer’s favor. Bonwit Teller & Co. v. United States, 283 U. S. 258, 51 S. Ct. 395, 75 L. Ed. 1018.

Reviewed by the Board.

A decision will be entered that there is an overpayment of tax for the taxable year 1932 in the amownt of $2,057.98, and that $1,669.92 thereof loas paid within two years before the filing of the petition in this proceeding.