author: Van Fossan:

text:
    Valvoline Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 108309.
    Promulgated October 6, 1942.

      Carl M. Jacobs, Esq., and Murray M. Flack, Esq., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Van Fossan:

The question presented for our decision is whether petitioner was entitled to a credit on its undistributed profits tax under section 26 (c) (1) of the Revenue Act of 1936 by reason of a contract prohibiting it from paying dividends. Petitioner relies first on a contract respecting the loan from Fifth-Third Union Trust Co. The loan was originally for $142,000 and was made pursuant to a signed agreement dated as of June 25, 1934, which provided in part that so long as the loan was unpaid no dividend could be declared or paid by petitioner. Ninety-day extensions of this loan under the same terms and conditions were made from time to time until September 24, 1935. Respondent argues that the failure to extend the loan on September 24, 1935, caused the loan agreement to expire. With this we can not agree. Although the agreement was not renewed on September 24, 1935, the loan was still outstanding. The agreement itself indicated that it governed the loan, although no formal extension was made because it provided that certain bank balances were to be maintained “during the 90-day extension period and wntil the said bank loans are paid? It further provided that no dividends were to be paid on capital stock of petitioner “so long as said bank loans are unpaid? Thus it is clear that the parties themselves intended to be bound by the terms of the agreement as long as the loans were outstanding.

Our view is supported by Haskelite Manufacturing Corporation, 44 B. T. A. 636, and Sutcliffe Co., 41 B. T. A. 1009. In the latter case we held that a taxpayer was entitled to a credit under section 26 (c) (1) although the original loan contract made prior to May 1, 1936, prohibiting the payment of dividends on all of its capital was extended and amended on September 2, T936, to permit the payment of dividends on preferred stock. We stated therein as follows:

The letter or contract of September 2, 1936, refers in express terms to the renewal of the company’s note for $30,000, balance due on the original obligation, and expresses the desire to extend the agreement made February 25, 1936. As the terms and conditions of that instrument were binding on petitioner until all the obligations to the bank were discharged, no extension or renewal was necessary. The obligation to the bank was not discharged until 1938. While the letter or contract of September 2, 1936, modified the agreement of February 25, 1936, by the removal of the prohibition or restriction against the payment of preferred dividends, in all other respects it was a confirmation of that agreement and did not otherwise abrogate or supplant its terms and conditions. The giving of the note of September 2, 1936, can not be considered as the discharge of the existing obligation and the creation of a new obligation, in the absence of evidence that it was so intended.

As the foregoing quotation indicates, the modification of the loan agreement between petitioner and the bank in the present proceeding did not result in a new contract. By express agreement the old restriction against the payment of dividends by petitioner remained effective even after the modification of the original agreement. Moreover, that the modified agreement was considered by the bank to be merely an extension of the old agreement is indicated in a letter in which the president of the bank informed a vice president that at a directors’ meeting of petitioner “an, appropriate resolution was passed binding the company to continuation of the various clauses under the present agreement.”

We are of the opinion and hold that the petitioner was bound by the terms of a written contract, signed by the corporation, to pay no dividends and accordingly is entitled to the credit asked under favor of section 26 (c) (1).

Petitioner, however, has two strings to its bow. It contends that the documents and letters set forth in the findings of fact respecting the loan from the Bank of the Manhattan Co. constitute a contract prohibiting it from paying dividends within the meaning of the statute as interpreted by the Supreme Court in Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46, and that accordingly it is entitled to the credit sought. The respondent contends that the statute “contemplated as between the taxpayer and its creditor a single written formally executed and delivered contract containing therein an explicit prohibition against the payment of dividends.”

We are unable to agree with respondent’s premise or to accept the construction asked. It is justified neither by the statute nor by anything said by the Court in Helvering v. Northwest Steel Rolling Mills, Inc., supra. An exchange of letters may constitute a written contract under the cited statute. See Atlantic Co., 45 B. T. A. 657; affd., 129 Fed. (2d) 87. Moreover, the Supreme Court expressly observed in the above cited case: “True, obligations not set out at length in a written contract may be incorporated by specific reference, or even by implication.”

We are of the opinion that under the holding of the Supreme Court in Helvering v. Northwest Steel Rolling Mills, Inc., supra, and the reasoning of the Board in Sutcliffe Go., sufra, and HasheUte Manufacturing Corf oration, sufra, the petitioner is entitled to prevail. In 1935 petitioner was under an express prohibition against paying dividends by virtue of the resolution of August 13, 1935, and the exchange of letters between petitioner and the Bank of the Manhattan Co. and petitioner and Fifth-Third Union Trust Co. The limiting language was explicit and absolute. The documents and letters clearly constitute written contracts executed by the corporation prior to May 1, 1936. This restriction was never removed or relaxed. It remained in full force and effect throughout 1936. That the parties so construed their rights, intentions, and restrictions is well evidenced by the exchange of letters of December 2, 1936, December 8, 1936, and December 10, 1936, wherein petitioner requested permission to pay a dividend on December 31, 1936, and the banks pre-emptorily refused. At the time the Bank of the Manhattan Co. wrote:

The resolution of August 13th, not to pay dividends on the Capital Stock while the Company was in debt to its hanks, was created because it was one of the conditions under which the Bank of the Manhattan Company made the loan, and until we have been paid in full, we will not agree to the payment of dividends.

The Fifth-Third Union Trust Co. at the same time wrote:

In August 1935, when we agreed to increase our loan to the Company, it was on the expressed condition and agreement that your Company would pay no dividends until the debt to us was discharged. You were then faced with an approaching maturity date on your debentures, and while we appreciate that the Company has made progress this year, we feel that we must stand on our decision then, and insist that the agreement be not broken.

We see no occasion for extending the discussion. By this agreement also petitioner was prohibited from the payment of dividends by the provision of a contract in writing executed by the corporation before May 1, 1936, and is entitled to the credit provided by section 26 (c) (1) of the Bevenue Act of 1936.

Reviewed by the Board.

Decision will he entered under Rule 50.

Disney concurs only in the result.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      * ⅝ * * ⅜ * *
      (c) Contracts Restricting Payment of Dividends.—
      (1) .Prohibition on payment of dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of .dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


source: Caselaw Access Project

author: ARundell :

license: Public Domain

text:
    Mabel Shaw Birkbeck Estate, the Chase National Bank of the City of New York, Successor Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106530.
    Promulgated October 6, 1942.

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

      J. 0. Maddox, Esq., for the respondent.
   OPINION.

ARundell :

The only question presented is whether or not the transfer of property by decedent in trust in 1903 was within the scope of section 811 (c) of the Internal Revenue Code. Petitioner contends that, inasmuch as the trust was created prior to the enactment of the Revenue Act of 1916, which contained the first Federal estate tax, the Fifth Amendment to the Constitution prohibits the inclusion in the decedent’s estate of the property transferred in trust. It maintains that the creation of the trust was not a transfer intended to take effect in possession or enjoyment at or after decedent’s death. Respondent argues that the taxation of the trust property as a part of decedent’s estate is not a retroactive application of section 811 (c). He asserts that the transfer is clearly within section 811 (c) and cites as authorities for this contention Helvering v. Haddock, 309 U. S. 106, and Estate of Marp H. Hughes, 44 B. T. A. 1196.

The trust was to continue during the lives of decedent and her daughter, the income going first to the former and then to the latter, and upon termination the principal was to be delivered to the issue of the daughter. In default of issue the remainder was to go as decedent might appoint by will; in default thereof, as the daughter might appoint by will; and in default thereof, to decedent’s next of kin as by intestacy.

The reservation of decedent’s life estate could not by itself justify the proposed deficiency, Nichols v. Coolidge, 274 U. S. 531, but respondent’s principal contention is based upon the provisions of the trust instrument that the daughter, unless she survived decedent, would have taken nothing by her life estate, and her issue, unless they survived both decedent and their mother, would have taken nothing, and decedent would have been in a position to appoint the remainder. This, respondent argues, can not be distinguished in substance from a possibility of reverter and consequently the Halloch doctrine must govern.

In the view we take of this proceeding, however, it is unnessary to decide that question, for we are of opinion that in any event section 811 (c) may not validly be applied to the facts of this case. We thus do not consider whether a power of appointment constitutes an interest in property. Cf. Porter v. Commissioner, 288 U. S. 436; United States v. Field, 255 U. S. 257, 263; Estate of John S. Conant, 41 B. T. A. 739; Meta Biddle Robinette, 44 B. T. A. 701, reversed, 129 Fed. (2) 832. It may not be amiss, however, to point out that decedent’s death did not determine the devolution of the trust estate. While she exercised her reserved power in her will to the extent that she was able, it is impossible to say whether anything will ever pass by virtue of that appointment. The daughter survived with two children of her own. If either of the children or any other child of the daughter survives the mother the corpus will go to that child upon termination of the trust and in accordance with its terms rather than to decedent’s tentative appointees. Thus it can not be said here, as in Commissioner v. Flanders, 111 Fed. (2d) 117, tbat decedent’s death destroyed a possibility of reverter or brought into being remainders over which the issue had full dominion. See Estate of Frederick, Bodell, 47 B. T. A. 62; Commissioner v. Washer, 127 Fed. (2d) 446.

The retroactive application of taxing statutes is not necessarily unconstitutional. Welch v. Henry, 305 U. S. 134. “It is necessary to consider the nature of the tax and of the decedent’s gift.” Milliken v. United States, 283 U. S. 15. If the donor voluntarily makes a gift absolute and beyond recall, which he might well have refrained from making could he have foreseen the enactment of a later estate tax, the transfer may not validly be taxed as intended to take effect at death, although a life estate is reserved to the donor. Nichols v. Coolidge, supra. Similarly, with respect to a completed gift and a subsequently enacted gift tax. Untermyer v. Anderson, 276 U. S. 440. If, however, the transfer is not complete in the sense that the grantor may, in the light of the subsequent enactment, amend or revoke and thereby relinquish any strings he may have attached to the gift or undo what he has previously done, he is in no position to complain that the statute is retroactive if he voluntarily chooses not to exercise these powers. Reinecke v. Northern Trust Co., 278 U. S. 339; Saltonstall v. Saltonstall, 276 U. S. 260; Porter v. Commissioner, supra; Commissioner v. Chase National Bank, 82 Fed. (2d) 157, certiorari denied, 299 U. S. 552. See United States v. Jacobs, 306 U. S. 363, holding section 302 (e) of the 1924 Act valid as applied retroactively to tax the full value of a joint tenancy, where the Court stated that “Until the death of her co-tenant, the wife could have severed the joint tenancy and thus have escaped the application of the estate tax of which she complains.” Nor does the Constitution prohibit the imposition of a tax under a statute enacted after the transfer where an earlier statute in force at the time of the transfer contained similar provisions so that the grantor was on notice of the nature of the tax and the possibility of increased rates. Milliken v. United States, supra; Klein v. United States, 283 U. S. 231; Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. But if, notwithstanding the reservation of powers in the decedent, the transfer is in effect beyond recall, as for example where the power to revoke is exercisable only with the consent of an adverse interest, a retroactive tax imposed solely by reason of the ineffective power reserved is invalid. Helvering v. Helmholz, 296 U. S. 93; White v. Poor, 296 U. S. 98; Commissioner v. Flanders, supra (Trust No. 3).

With these general principles in mind we think it clear under the facts of the present case that section 811 (c) may not validly be invoked. The trust was created many years before enactment of the first Federal estate tax and decedent could not reasonably have anticipated the nature of the section sought to be applied. The trust was irrevocable, since she retained no power to revoke. Garner v. Germainia Life Insurance Co., 110 N. Y. 266; 18 N. E. 130; Dickey v. Goldsmith, 60 Misc. 268; 111 N. Y. S. 1025; Scott on Trusts, sec. 330. Decedent retained no power to amend or modify during her life. The reserved power of appointment, conditioned not only upon termination of the trust which will occur after her death but upon the survival or nonsurvival at that time of the issue of the second life tenant, gave decedent no power to recall the gift nor to relinquish any retained interests which might make the subsequent statute operative. While we agree with respondent that substance rather than form should govern, it does not suffice to say that the gift was incomplete because until decedent’s death it was impossible to determine who would enjoy the remainder. In fact, it is still impossible to determine that. The transfer was beyond decedent’s control at all times after enactment of the statute. To apply section 811 (c) in these circumstances would, we think, be as arbitrary as was the attempted application of its forerunner to the facts appearing in Nichols v. Coolidge, supra.

This disposition makes unnecessary any findings as to the values of the several interests involved or any consideration of petitioner’s alternative contention that in any event the value of the daughter’s life interest should be excluded from the decedent’s gross estate.

Decision will be entered for the fetitioner.

       SEC. 811. GROSS ESTATE.
      The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States—
      ***** ⅜ *
      (e) Transfers in Contemplation of, or Taking Effect at Death. — To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom ; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, 'shall, unless shown to the contrary, be deemed to hare been made in contemplation of death within the meaning of this subchapter.


author: Upper:

text:
    Estate of Pamelia D. Holland, Deceased, Frank P. Holland, Jr., Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 107906.
    Promulgated October 6, 1942.

      Richard R. Conner, Esq., and R. A. Conner, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

Upper:

An analysis of the contract by which decedent “sold” this stock to her children creates grave doubt whether it was of any real effect in advance of decedent’s death. Internal Revenue Code, sec. 811 (c). Endorsement and return of the stock as “security” was called for at once, all voting rights were retained during decedent’s life, and the “vendees” were forbidden “to sell, assign, mortgage, pledge, hypothecate or in any manner dispose of any of said stock,” until after her death and that of her husband. It is even stipulated in express language “that upon the death of both said Frank P. Holland and Mrs. Pamelia D. Holland [decedent] * * * the title of said Vendees to said stock evidenced by their said certificates respectively shall become absolute,” and that “all of the provisions of this contract are to be and always construed to be conditions precedent to the right and title of Vendees * *

Petitioner refers to a statute of the state of domicile, Texas, which voids as to creditors and bona fide purchasers reservations of title retained to secure the purchase price, Texas Revised Civil Statutes, art. 5489, and to Harling v. Creech, 31 S. W. 357; 88 Texas 300, which seems to hold that such an arrangement is to be construed as no more than a chattel mortgage even as between the parties. The contention is that consequently “The conditions imposed on the sale and the reservations of title, if any, in the contract were absolutely void even as between the parties * * In other words, petitioner asks us to disregard the plain language of the contract and the obvious intention of the participants on the ground that they purported to accomplish a postponed transfer which the law of Texas forbids, and hence that the Federal estate tax which would apply if the contract meant what it says is frustrated by local law. This would be a process of reasoning not without difficulty. See Lyeth v. Hoey, 305 U. S. 188. We should rather incline to the view expressed by a Federal court sitting in Texas:

* * ⅜ the law covering this tax is based upon “the intention of the grantor” ⅜ * *. In the case at bar the property was delivered to the grantees but contemporaneously therewith they passed and delivered it * * * in pledge * * *. The Court * * * finds that the several transfers, though not made in contemplation of death, resulted in decedent still holding, during her lifetime * * * the personal estate which she had contemporaneously passed to her children * * *. In substance, the transfers, though in form legal and serving to accomplish their purpose as transfers, could not thereby defeat the tax obligation ⅜ ⅜ *. [Tips v. Bass (Dist Ct., W. Dist. Texas), 21 Fed. (2d) 460.]

But, however that may be, there is a further aspect of the transaction which we regard as controlling. In addition to all that has already been detailed, the contract reserved a payment of $25,000 a year to decedent’s husband as long as he lived and thereafter to decedent. Even if there was an outright transfer of the title, we see no escape from this reservation of the income for life or from the consequent necessity of including the property in the estate, under the principle of Helvering v. Hallock, 309 U. S. 106; Estate of Mary H. Hughes, 44 B. T. A. 1196.

True, this payment was denominated “salary” and was not specified as company profits or dividends on the shares. But no services were or could be required in exchange. And at petitioner’s request, we have found the value of the company’s capital and surplus at that time to have been $125,000. The annual payment would thus approximate a return of 20 percent on the investment. In the absence of evidence of prior earnings in excess of that figure, and there is none, we can not regard it as reasonable that the parties would expect the property to produce a higher average return. This was presumably income of the marital community before the husband’s death, and belonged to decedent alone thereafter. The parties raise no question of decedent’s continuing interest in this income on the strength of the community property aspect. Hence, without yielding completely to terminology, and viewing the transaction in its essential reality, the income to be expected from the stock was in effect retained by decedent during her life. As the Board said in Mary H. Hughes, supra (p. 1200) :

* * ⅜ If [decedent] * * * had in 1928 given $945,000 to the children, or someone representing them, and had taken their promise not to use it during her lifetime except to pay her $31,500 a year until she died, this would certainly have been a gift to take effect in possession or enjoyment at or after her death, even though ownership of the fund vested in the children at once ⅜ * *.

We take the same view of the present transaction.

Certainly, on an inclusive view of the whole arrangement, this withholding of the income until decedent’s death, coupled with the retention of the certificates under the pledge and the reservation of the right to vote the stock and to designate the company officers, is an illuminating instance of the futility of that inquiry into “the technical forms in which interests contingent upon death are cast” which the Hallock case renounces. The very injection, into the discussion, of the nature of the title under the law of the domicile, and of the extent to which the contingencies of the transfer were the conditions precedent of a conditional sale or the conditions subsequent of a chattel mortgage, are reminiscent of the “unwitty diversities of the law of property” represented by the St. Louis Union Trust Co. cases, 296 U. S. 39, 48, but challenged by Helvering v. Hallock. We can not reach our conclusion in reliance upon any such “gossamer distinctions” and accordingly find no error in respondent’s inclusion of the stock in decedent’s estate.

We agree with petitioner, however, that the valuation placed upon , the stock as of the date of death was too high. Book value of cor-i jporate assets must be qualified by their earning capacity. It can ' not be assumed that the figure employed is a liquidating value, and if the appraisal is based upon worth as a going concern it is obvious that anticipated earnings are a controlling factor. See Elverson Corporation, 40 B. T. A. 615; affd. (C. C. A., 2d Cir.), 122 Fed. (2d) 295.

As we have recognized in discussing the basic issue, salary paid to decedent and her husband for services of a negligible value was in effect an element of corporate profits, and we think may appropriately be considered as such in analyzing the earnings of the business. By adding these amounts to the profit and loss figures in the company’s accounts, we find that total earnings for the five years preceding decedent’s death were in the neighborhood of $35,000, or an average of $7,000 a year. But the profits were unstable and fluctuated violently, indicating they were far from assured, with both the figures and the testimony justifying the anticipation of a downward trend. Taking all the factors into account, we have accordingly found a value per share of $125.

The remaining issue relating to the value of certain real property in the estate known as Hollandale Farm has now been abandoned by petitioner and need not be further noticed.

Decision will he entered vmder Bule 50.


author: Qpper : Mellott,

text:
    The Evergreens, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 96513, 98635.
    Promulgated October 7, 1942.

      Neilson Oleott, Esq., Valentine B. Havens, Esq., and Charles B. Melnnis, Esq., for the petitioner.

      F. Samuel Gettle, Esq., for the respondent.
   OPINION.

Qpper :

By order of the Board the issues here were severed so as to consider separately petitioner’s contention that the present question has already been determined in a prior proceeding binding upon both parties. A decision on that point in petitioner’s favor would have disposed of the case without the introduction of additional testimony. Further proceedings were accordingly postponed pending disposition of this preliminary question.

The basic issue before us is the March 1, 1913, value of certain cemetery property sold by the petitioner in the years 1934 and 1935. That, as petitioner concedes, is different from the value of other lots sold from 1929 through 1933, the ultimate issue in the prior proceeding on which it relies (Docket Nos. 71187, 72271, 75422, 83294, and 83458, memorandum opinion entered May 11, 1937). It is clear, however, that as between the same parties “a right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction as a ground of recovery, cannot be disputed in a subsequent suit by the same parties or their privies.” Southern Pacific Railroad Co. v. United States, 168 U. S. 1, 48. The rule applies to tax cases, and governs even if the question arising in a subsequent action between the same parties is “upon a different claim or demand.” Tait v. Western Maryland Ry. Co., 289 U. S. 620. Though the basic issue is different, there may still be aspects of a prior action binding upon the parties under the principle of res judicata, sometimes referred to as estoppel. “While the effect of the judgment as an estop-pel is limited to matters involved in litigation, it is equally conclusive whether the point decided was of itself the ultimate vital point or only incidental, if its determination was necessary to the judgment. ‘A judgment concludes not only the technical fact in issue but also every component fact necessarily involved in its determination.’ ” 2 Freeman on Judgments, 5th Ed., 1463.

This application of the principle of res judicata is not to be confused with that in which a former adjudication of the same issue justifies a complete plea in bar. Petitioner recognizes this. It urges, however, that in its disposition of the prior proceeding the Board necessarily arrived at decisions, including principally the significant one of the March 1, 1913, value of petitioner’s property, which were material to its conclusion and that for that reason the question of value on the basic date, even though an issue here with respect to land sold in subsequent years, is concluded.

It is alleged in the petition in the prior proceeding that “the average value of the unsold area of petitioner’s cemetery property on March 1,1913, was not less than three dollars ($3.00) per square foot.” This, among other allegations, was denied in respondent’s answer. As the opinion shows, the case was presented to the Board by. each party in a manner which, if accepted, would have required for the determination of value that the figure be computed by dividing the basic-date value of all salable property by the area available for sale, or, in other words, by reaching an average value per square foot of all the property susceptible of disposition.

Although rejecting the formula proposed by both litigants, the findings in the prior proceeding nevertheless demonstrate that the Board did determine an average square foot value for the fully improved property as of the basic date. It is true that determination of an average value was requisite there only in order to compute the March 1,1913, worth of the lots then in issue. But no effort was made by the Board nor apparently by the parties to distinguish between the various presently salable lots whenever sold; and the usefulness of an average figure arose only from the tacit assumption apparently accepted by the Board and both parties that for purposes of valuation the square feet of salable land could be treated as interchangeable. It seems to us to follow that a finding by the Board of average value governs, as its term implies, the over-all value of all the square feet, and therefore of each one, regardless of the purpose for which the value may be material.

The specific finding was that “the fair market value of the improved land available for sale for burial purposes on March 1, 1913, was at that date $1.55 a square foot.”

We are, therefore, of the opinion that the Board’s determination in the previous proceeding between the parties hereto is binding with respect to all the improved land available for sale on March 1, 1913, and it is on the strength of that prior adjudication and not upon independent evidence that the values of the plots sold therefrom in the taxable periods here in issue have been included in our findings of fact. Chicago Cemetery Association v. United States, 19 Fed. Supp. 228.

But some land was sold by petitioner in the instant years which was unimproved on March 1, 1913. There is present here, therefore, an issue which was not in controversy in the prior proceeding, namely, the value on the basic date of petitioner’s unimproved land. This feature presents a more difficult question.

It is pressed upon us with great emphasis that the same reasons require us to find a corresponding value for the partially improved land. The parties have stipulated the cost of improvement required to bring these portions to a comparable condition with the land which was fully improved in 1913. We are hence committed, the argument runs, to the purely arithmetical process of reducing the fully improved valuation by the cost of improvement.

This is said to be so for three somewhat related reasons: First, the value of the improved land is res judicata in this proceeding quite as much for purposes of appraising the partially improved as the wholly improved land, on the theory that a fact once found is so for all purposes; second, that it is necessary that the several findings in this proceeding shall not be inconsistent with each other, and that any figure adopted for the unimproved land can comport with that for the improved only if the difference is no greater than the cost of necessary improvements; and, third, that in the prior proceeding the Board adopted a method or principle for valuing petitioner’s property Avhich is equally binding here and requires us to look to sales of comparable property at about the basic date as the exclusive test with respect to all parts of the cemetery, unimproved as well as improved.

We can not agree, however, that we are bound in our consideration of the value of the unimproved land by the previous determination as to the property which was fully improved. We have accepted it here in considering the lots sold from the fully improved sections only because, the present issue being identical, we consider it conclusive. We are not required in that connection to reexamine it for, if necessary, that “decision makes white black; black, white; the crooked,, straight; the straight, crooked.” Bouvier, Law Dictionary.

But in applying that result to the partially improved portions of the cemetery, one inquiry must be.“whether the point or question to-be determined * * * is the same as that litigated and determined in the original action.” Tait v. Western Maryland Ry. Co., supra. It seems to us clear that in the present situation that is not so. While there may be a discoverable relation between the appraisal of wholly and partially improved property, it seems manifest that they are not the same thing. Hence we regard this aspect of the case not only as presenting a different claim or demand, but as involving a different issue from that previously decided.

That a mathematically computable relationship may exist between the two determinations is in effect the foundation for petitioner’s further contention that any value we may place upon the partly improved portions can not vary by more than the cost of improvement from that conclusively fixed for the improved portions. But this, too, we think an unwarranted extension of the principle of res judicata. If our prior determination lacks conclusiveness because the issue is different, then the merely fortuitous inclusion of a foreclosed issue can not impose consistency here, any more than if this were a separate proceeding, or one between different parties. Nor do we grant that consistency is necessarily absent.

West View Cemetery Assn. v. Commissioner (C. C. A., 5th Cir.), 95 Fed. (2d) 714, and Fairmount Cemetery Assn. v. Helvering (App. D. C.), 92 Fed. (2d) 496, cited by petitioner for the proposition that unimproved land must be valued by deducting from the value of improved land the cost of improvement, were both decided upon an erroneous view of the Elmhurst case made manifest by the Supreme Court’s subsequent affirmance of Montrose Cemetery Co. v. Commissioner at 309 U. S. 622. For example, the West View opinion takes the position that “it [is] quite evident that the Supreme Court, in the Elmhurst case * * * rejected the discount method contended for by the Commissioner * * This is an interpretation repudiated, not only by the Board, see, e. g., Oak Woods Cemetery Association, 38 B. T. A. 121,134; affd. (C. C. A., 7th Cir.), Ill Fed. (2d) 863; certiorari denied, 808 U. S. 616, but even by the present petitioner, which concedes “that the Elmhurst case does not compel the application of an exclusive method.”

We think it no coincidence that these are the cases to which petitioner is forced to resort for authority on this point. For it seems apparent that, if the time element is a factor in estimating salability, a longer period may justifiably be assumed for the disposition of unimproved than of improved sections.

In fact, in his dissenting opinion in the West View case, Judge Sibley referred to “the unsold land in the improved area” and thought that “much of it would have to wait twenty or thirty years or more to find a sale. The semi-improved area would have to wait much longer * * * .” He went on to point out that the Board “reduced or discounted the fair value of the semi-improved area much more because it would probably have to wait much longer and would have to have money spent on it to sell at all.”

This can itself be the element which furnishes a basis in fact for attributing to unimproved land a lower value than mere reduction by the cost of improvement. Essentially, that is the very position taken here by petitioner; for the sales of unimproved land did not begin for twenty years, and on that ground petitioner denies the relevance of figures showing the intervening history of this same cemetery, and population growth and interment statistics, which petitioner asserts would be relevant only in valuing the improved land. It would not be'unreasonable for a prospective purchaser, appraising the situation in 1913, to give consideration to this prospect of delay. And we have ourselves accepted the figures in question only because they furnish such evidence as there is of a trend.

Finally, we find no justification for the suggestion that the method or principle of valuation adopted by the Board in the prior proceeding requires us to look here only to the record of actual sales to the exclusion of any other relevant considerations. The approach employed by the Board might, as we have observed, be entirely at variance in dealing with unimproved sections. Nor are we clear that the disposition of the question of law involved in ruling upon an appropriate principle of valuation is one by which we can assume the Board would be bound where the condition of the record and the state of the law have changed.

Be that as it may, however, there is nothing in the previous determination which so limits its effect. On the contrary, it contains specific language showing that the Board thought “that some consideration should be given to the undisputed fact that many years must pass before petitioner’s property will be sold out”; and that “This is emphasized by the fact that its sales over the fourteen year period from 1900 to 1918 had averaged 61,630 square feet and it had available for sale over 4,000,000 square feet at the basic date.” We are accordingly unable to concur in petitioner’s position, and are of the view that we may consider here the valuation to be placed upon the portions of the cemetery which were partly improved on March 1, 1913, entirely without reference to the prior adjudication as to the fully improved property, or the value thereof, or the method used to find that value.

Being of that opinion, and after the issues had been severed, as noted at the outset of this discussion, the Board issued its further order pursuant to which testimony was taken on the question of the value of the partially improved land.' As was to be expected, petitioner opposed the admission of all evidence inconsistent with the improved land value less cost of improvements. Rulings taken under advisement at that hearing are now made in respondent’s favor for the reasons already set forth.

From the facts and opinion testimony there submitted, and placing particular weight on the price and volume of contemporary sales, we have come to the conclusion that as of March 1, 1913, 35 years was a reasonable average anticipation for the disposal of the partly improved land; that considering lots and graves together, $3 was a reasonable anticipated average gross return per square foot when sold; that costs of operation and expenses of sale could be expected to reduce this amount by 25 percent, leaving a net return of $2.25; that 6 percent is a reasonable interest factor to be employed and that at that figure the present value of one dollar 35 years hence is 13.011 cents; all of this resulting in a fair market value per square foot of .13011 times $2.25, or slightly less than 30 cents per square foot.

We have considered the other evidence in the case, but find it leads to the same result, except that the witnesses produced and vouched for by respondent arrived at higher figures, at least for the land sold in 1934, which is by far the greatest bulk. Since one witness’ conclusion was 33 cents and the other 35, we have found as a fact that the land sold in 1934 was of a fair market value on the basic date of the higher of these figures. And since the distinction between the two parcels is none too clear on this record, and the second is insignificant, we have found, purely for purposes of this proceeding, that the particular land sold in 1934 and 1935 was of that basic value.

It is true that one of the witnesses made a further downward ad - justment of basis on the ground that the land sold in 1934, which the city of New York bought for parkway purposes,'included parts which would be waste if devoted to cemetery use. This reduced his average square foot figure for that particular parcel. But while the presentation of the case leaves this point in some doubt, we take the view that any such adjustment is inconsistent with the stipulated facts, and hence unsupportable. It is agreed that the land in question was part of the 1,143,925 square feet of land which was partially improved in 1913. That figure is a net quantity from which there has already been deducted the necessary wastage. Hence we think that all of the land sold should be regarded as included in the salable area, and that in computing its gross value the adjudicated basis should be multiplied by the total square footage which it contained.

Reviewed by the Board.

Decision will be entered, wider Bule 50.

Mellott,

concurring in part and dissenting in part: While I concur in the holding of the majority that the prior decision of the Board is res adjudícala as to the value of the lots in the improved sections of the cemetery, I must respectfully dissent from the holding that it is not also res adjudicata as to the lots in the unimproved sections.

The record in the prior proceedings indicates that the Board considered the value of all of petitioner’s cemetery property to be a relevant fact in determining the issue before it. This is evident not only from the findings, part of which are set out above, but also from the opinion of the Board. Therein it was said: “We also think that some consideration should be given to the undisputed fact that many years must pass before petitioner’s property will be sold out. Petitioner estimates the period at 45 years from March 1, 1913; the respondent uses a 65 year period. Whichever period is nearer right, it is plain that the petitioner must wait a considerable period of time before it realizes anything from a part of its property * * This statement apparently had reference, at least in part, to the unimproved sections of the cemetery. That it was so construed by the parties is indicated by the computation filed by the respondent, the essence of which is shown in the following schedule:

sq. ft. Total area of cemetery March 1, 1913_ 10, 912,825
Deduct: Sq. ft.
Portion devoted to roads, walks, etc. prior to March 1, 1913_ 1, 732, 308⅜
Lands sold prior to March 1,1913_ 4, 222, 745
- 5, 955,053 V2
Lands unsold March 1, 1913 (including 1,411,354 sq. ft. unimproved)- 4,957,771 ½
Deduct, per Board’s findings: sq. ft.
Waste land_ 150,150
Lands estimated and found to be necessary for needed drives, walks, etc- 758, 743 sq. ft.
- 908,893
Total unsold improved and unimproved land__ 4, 048,878½
March 1, 1013 value — 4,957,771% x $1.55_• $6,275,761.68
Deduct: Value recovered for years 1913 to 1928, incl_ 1, 904, 353. 98
Unreeovered value January 1, 1929_ 4,371,407. 70

In the prior proceeding it was found that the cost of making the necessary improvements in the unimproved sections would be “from 8 cents to 20 cents a square foot.” Since petitioner is relying upon the value determined in that proceeding, probably the most unfavorable estimate of cost should be used. As a matter of fact petitioner inferentially concedes that the 20-cent figure should be used. This would result in a holding, which I think should be made, that the March 1, 1913, value of petitioner’s improved property was, as determined by the majority, $1.55 per square foot and its unimproved property $1.35 per square foot.

Leech agrees with the above.

        Elmhurst Cemetery Co. of Joliet v. Commissioner, 300 U. S. 37.


author: Black:

text:
    Irma Jones Hunt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104903.
    Promulgated October 7, 1942.

      Murray B. Jones, Esq., for the petitioner.

      Franlc B. Schlosser, Esq., for the respondent.
   OPINION.

Black:

The first issue we have to decide is what wras petitioner’s basis of cost of the undivided one-half interest in property which she sold on January 1,1936, to T. P. Lee and his daughters for $200,000. The Commissioner in his computation of profit on this sale has treated the gains as capital gains and has taken into account the percentages provided by section 117 of the Revenue Act of 1936. Both parties are in agreement that this method is correct and, therefore, there is no issue on that score.

The parties are, however, in disagreement as to the basis which is to be used in computing petitioner’s capital gain from the sale. The Commissioner in his determination of the deficiency has used $136,-159.25 as the basis for her undivided interest in the property. The petitioner contends for a basis of $190,159.25 if the two basic dates of her acquisition are March 1,1913, and December 1919, or $212,159.25 if the basic dates of acquisition are 1919,1924, and 1925.

If the Board should determine that petitioner’s contention for the latter basis of $212,159.25 is correct, then that would decide the proceedings in petitioner’s favor and there would be no need to decide the other questions which have been raised by petitioner’s numerous assignments of error. However, we are unable to agree, for reasons presently explained, that petitioner is correct in claiming a basis of $212,159.25 for her interest in the property. Therefore, in the light of the pleadings and the evidence, we must decide what basis for petitioner’s undivided interest should be used in the computation of her capital gain or loss on the sale in question. We need only determine this basis in so far as the land alone is concerned, since the parties have stipulated that the depreciated basis of an undivided one-half interest in the improvements on the property at the time of the sale on January 1,1936, was the amount of $36,159.25.

The material provisions of section 113 of the Revenue Act of 1936, the act in force when the sale in question was made, are set out in the margin.

We have set out in our findings the manner in which petitioner and her brother, Murray B. Jones, each acquired an undivided one-half interest in the property in question.

The basis of the undivided one-half interest in lots 1, 2, and 3 acquired by petitioner as a gift from her mother on December 22, 1919, is the fair market value of such property at the time of such acquisition. Sec. 113 (a) (4), supra.

The basis of the undivided one-fourth interest in lots 6, 7, 8,12, and part of 11 acquired by petitioner under her father’s will is the fair market value of such property at the time of the death of the decedent (1902) or as of March 1,1913, whichever is greater. Sec. 113 (a) (5) and (14), supra; cf. Fidelity & Columbia Trust Co. v. Commissioner, 90 Fed. (2d) 219; certiorari denied, 302 U. S. 723. No evidence was offered as to the 1902 value, but this is not fatal because it would be material only if it were greater than the March 1, 1913, value. Petitioner has made no contention for a 1902 value as a basis. The basis of the undivided one-fourth interest in lots 6, 7, 8, 12, and part of 11 acquired by petitioner as a gift on January 1, 1924, is the same as it would be in the hands of petitioner’s mother on that date. Sec. 113 (a) (2), supra. Petitioner’s mother owned as her separate property an undivided one-half interest in lots 6,7,8,12, and part of 11 on March 1, 1913. She made a gift of this undivided one-half interest to her two children, petitioner and Murray B. Jones, on January 1, 1924. As to this undivided one-fourth interest petitioner likewise makes no contention that the cost or other basis provided for in subdivision (a) of section 204, supra, is greater than the fair market value of such property as of March 1, 1913. Therefore, adding the two undivided one-fourth interests together, the basis of an undivided one-half interest in lots 6, 7, 8, 12, and part of 11 in the hands of petitioner on October 31, 1932, is the fair market value of such one-half interest as of March 1,1913.

Upon the basis of the evidence, we have found that the fair market value of an undivided one-half interest in lots 6, 7, 8, 12, and part of 11 as of March 1, 1913, exclusive of improvements, was the amount of $92,400, and that the fair market value of an undivided one-half interest in lots 1, 2, and 3 on December 22, 1919, exclusive of improvements, was the amount of $38,500. These two amounts, plus the stipulated depreciated basis of an undivided one-half interest in the improvements in the amount of $36,159.25, all of which totals $167,059.25, represent the adjusted cost basis to petitioner. We, therefore, hold that the adjusted basis to petitioner of the property sold was the amount of $167,059.25 and that the respondent erred in determining that the adjusted basis was the amount of $136,159.25.

Petitioner’s next assignments of error raise the question whether ad valorem taxes paid in 1936 on her separate real estate, attorney fees paid for legal services by petitioner in the tax reduction suit which she brought against the city of Houston, Texas, and interest paid by petitioner in 1936 on her separate indebtedness, all constitute deductible expenses to her in determining her net income. Petitioner’s contention on this point in her brief is stated thus:

Where wife’s separate real estate was sold by her January 1, 1936, there were no rents and revenues collected by wife during income tax taxable year of 1936, and, therefore, no community income from said separate real estate to furnish a basis for dividing these deductions one-half to petitioner and one-half to her husband, W. G. Hunt.

The facts show that in 1936, in connection with the sale of her undivided one-half interest in the property to T. P. Lee and his daughters, petitioner had to pay to the city of Houston, Texas, the sum of $18,270.18 taxes. These taxes covered the years 1933, 1934, and 1935 against petitioner’s interest in the property. Petitioner also paid $1,500 interest on the mortgage indebtedness which was against her undivided one-half interest in the property. Petitioner also paid $1,543 as attorney fees to her attorney for securing an adjustment of her tax liability to the city of Houston, Texas, in the tax litigation which had been brought against that city. Petitioner in her income tax return took these several amounts as deductions from her gross income.

The Commissioner in his determination of the deficiency put these three foregoing deductions on the community property basis and allowed one-half of them to petitioner and the other one-half to petitioner’s husband, W. C. Hunt, determining an overassessment of taxes as to him for the year 1936. The Commissioner in explaining his action in this respect, stated in his deficiency notice, as follows:

Inasmuch as both income and expenses of separate property constitute community property the items of $18,270.18 representing local taxes paid in 1936, and $1,543.00 representing attorneys’ fees paid in 1938 for securing an adjustment of the foregoing tax liability, have been treated as community expenses. Accordingly, half of each item, or $9,135.09 and $771.50, respectively have been allowed as deductions from your income for 1936.

The Commissioner made substantially the same statement with reference to the $1,500 item of interest described above.

Respondent relies in his brief, as authority for dividing these three deductions and allowing one-half of them to petitioner and one-half of them to petitioner’s husband, upon Mellie Esperson Stewart, 35 B. T. A. 406; a fid., 95 Fed. (2d) 821. In that case we held, among other things, that under the Texas Community Property Law husband and wife are each taxable upon one-half of the net community income after the deduction of the allowable expenses incident to its production. In that case, in making our holding, we said, among other things:

* * * As Corpus Juris states the principle, citing Sharp v. Zeller, 110 La. 61; 34 So. 129 :
Where separate property is encumbered, the revenue therefrom may be applied to the discharge of the encumbrance, leaving only the excess to fall into the community. * * *
In accordance with this principle, the respondent has consistently computed the income of the spouses by including in the net income of each, one-half of the net community income, thus giving each, equally, the benefit of the deductions properly attributable to such income. As far as we have been able to find, no question has been raised heretofore as to this treatment. The usual method pursued was to have each spouse report all of the community income, and the deductions therefrom, and then include in his or her individual income, one-half of the net amount so computed. The rule consistently applied is stated by O. D. 909, 4 C. B. 254, as follows:
In returns in which community income is divided between husband and wife domiciled in States where such income is divisible for income tax purposes, both husband and wife should report in detail the gross income from such community property. The deductions properly chargeable against such income should be equally divided between husband and wife.

We then proceeded in the Stewart ease to approve O. D. 909 quoted above, and to apply it to the particular facts of that case. The difficulty of applying our holding in the Stewart case to the three claimed deductions above described in the instant case, as respondent claims should be done, is that the facts of the instant case are not the same as they were in the Stewart case. In the Stewart case the community income from the wife’s separate property exceeded the deductions applicable to such separate property and there was resulting net community income from the property, which was divided one-half to the husband and one-half to the wife. In the instant ease in the taxable year there was no community income from the property in question. It was sold on January 1,1936, and, therefore, there were no rents to fall into thé community for that year. The profits, if any, from the sale of the property were separate income to petitioner. Both sides agree on that. The taxes which were paid, amounting to $18,270.18, were petitioner’s own taxes, for which she was personally liable, and they were a lien against her property. See arts. 7171 and 7172, Vernon’s Texas Statutes.

Section 23 (c) of tbe Revenue Act of 1936 allows to a taxpayer a deduction for taxes paid or accrued within the taxable year. Petitioner was on the cash basis and under the circumstances of this case we think she is entitled to the deduction which she claims for the taxes paid in 1936. What we have said as to taxes we think applies in equal degree to the $1,500 interest which petitioner paid in 1936. This interest was paid on her separate indebtedness. The principal of the indebtedness and the interest due thereon were a lien against petitioner’s separate property and had to be satisfied in the consummation of the sale which is involved here. Therefore, we think the entire amount of this interest was deductible to petitioner in the taxable year under section 23 (b) of the Revenue Act of 1936.

The next item among this group of three items which the Commissioner has split into two parts is $1,543 fees, which petitioner paid for legal services rendered by her attorney in the tax suit against the city of Houston, Texas, to secure a downward adjustment in the taxes against her separate property. The Commissioner has not disallowed one-half of this deduction to petitioner on the ground that it was not an ordinary and necessary business expense. No such issue is raised by the Commissioner. His sole ground of disallowance to petitioner of one-half of this deduction was that it was a community deduction and as such should be divided one-half to petitioner and one-half to her husband.

Under Texas law, where a debt was contracted by a wife or by her authority and was for the benefit of her separate estate, she and her separate estate were bound therefor. Teel v. Blair, 128 S. W. 478; Dockery v. Johnston, 299 S. W. 505. See also sec. 179, Speer’s Law of Marital Rights in Texas.

In view of these Texas authorities we sustain petitioner’s contention as to these attorney fees and hold that "the Commissioner erred in allowing only one-half , of them as a deduction to petitioner. We next take up adjustment (e) as shown by the Commissioner in his deficiency notice. The Commissioner explained this adjustment in a statement attached to the deficiency notice as follows:

The deduction of $244.75, representing ½ of $489.50, that was claimed by you as commissions on purchases and sales of stock has been adjusted by including those commissions paid on sales in the computation of the loss of $203.00 from sale of stocks related above. The balance of the deduction represents commissions on purchases of securities. They are part of the purchase price and are not deductible as expenses. Helvering v. Winmill, 305 U. S. 79, 59 S. Ct. 45.

Computation of the adjustment, item (e), is shown as follows:

Attorney fees claimed-$1,543. 00
Attorney fees allowed (½ of $1,543.00)- 771. 50
Adjustment_ 771. 50
Commissions on stock purchases and sales, disallowed as expense (½ of $489.50)_ '$244.75
Commission on sale of your separate property- 4,000. 00
Revenue stamps on sale of your separate property_ 200. 00
Total adjustment_5,216.25

We have already disposed of the item of attorney fees which is mentioned in the Commissioner’s‘adjustment (e) shown above, along with items (c), interest, and (d), taxes, of the deficiency notice. The next item in (e) is $244.75 disallowed as expenses. These were commissions paid by petitioner in the purchases of stocks and taken as a deduction on her income tax return. It is clear that petitioner was not a dealer in securities and that the Commissioner’s treatment of this item was proper under Helvering v. Winmill, 305 U. S. 79. As to this item the Commissioner is sustained.

The next item in (e) is the disallowance as a deduction of $4,000 commissions which petitioner paid a real estate agent in the sale of her one-half interest in the property in question. The Commissioner, instead of treating this item of $4,000 as a separate deduction to petitioner in computing net income, disallowed it as a separate deduction and deducted it from the selling price of the real estate in computing petitioner’s gain thereon. The Commissioner in his brief cites Spreckels v. Commissioner, 315 U. S. 626, as his authority for this treatment.

We do not think the Spreckels case is in point. It dealt with a specific Treasury regulation which deals with commissions paid in selling securities. That regulation has no application here.'

Petitioner’s assignment of error as to the Commissioner’s method of treating this $4,000 is as follows:

Respondent erred in considering commission on sales of real estate in the amount of $4,000.00 representing commission paid for sale of separate property as a deduction from purchase price, whereas the same should be allowed as a separate business expense and, therefore, deductible in its entirety.

■ If petitioner had proved that she was engaged in the real estate business there might be merit in her contention as above made, but there is no proof whatever that during the taxable year petitioner was engaged in the real estate business. We know of no statute which would entitle her to take the deduction as a separate deduction, unless she was engaged in the real estate business. We think the Commissioner’s method of offsetting the sale price of the property by the amount of these real estate commissions was the correct one, under the facts we have here. Cf. Mrs. E. A. Giffin, 19 B. T. A. 1243.

We think the Commissioner erred in treating the $200 stamp taxes which petitioner paid on the execution- of her deed of the property to the purchasers as an offset to the price received for the property sold. These were taxes paid in the sale of her separate property and petitioner is entitled to deduct them in determining net income, under the provisions of section 23 (c) of the Revenue Act of 1936.

Petitioner’s last assignment of error is that the Commissioner erred in not crediting the overassessment of $138.96 which he determined in favor of petitioner’s husband, W. C. Hunt, to the deficiency determined against petitioner. This assignment of error is not sustained. Petitioner and her husband were two different taxpayers. Each filed separate returns, as they had a right to do. There is no authority in law for the Commissioner to credit any tax liability due-by petitioner with an overassessment due to her husband. H. B. Perine, 22 B. T. A. 201; Robert G. Roebling, 28 B. T. A. 644.

Decision will be entered under Rule 60.

       SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) oit PROPEEiry. — The basis of property shall be the cost of such property ; except that—

        *******

      (2) Gipts apter December 31, 1920. — If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift » * *.

        * * * * * ⅛ *
      (4) Gift or transfer in trust before January 1, 1921. — If the property was acquired by gift or transfer in trust on or before December 33, 1920, the basis shall be the fair market value of such property at the time of such acquisition.
      (5) Property transmitted at death. — * * * If the property was acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. * *
      *******
      (14) Property acquired before March 1, 1913. — In the case of property acquired before March 1, 1913, if the basis otherwise determined under this subsection, adjusted (for thd period prior to March 1, 1913) as provided in subsection (b), is less than the fair market value of the property as of March 1, 1913, then the basis for determining gain shall be such fair market value. * * *


author: Aeundell:

text:
    Charles C. King, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 109268.
    Promulgated October 7, 1942.

      Homer K. Jones, O. P. A., for the petitioner.

      Frauda M. Thompson, Jr., Esq., for the respondent.
   opinion.

Aeundell:

The Commissioner determined income tax'deficiencies of $6,957.94 and $2,093.50 for the calendar years 1936 and 1937, respectively. The sole issue is whether respondent erred in adding to gross income the amount of $7,500 each year representing income of a trust of which petitioner was grantor. A second issue, as to the taxability of dividends, has been settled by stipulation. The facts are stipulated.

Petitioner, a resident of Memphis, Tennessee, was married to Ramelle Van VIeet King in 1913, a son was born in 1918, a trust indenture and a property agreement were executed by petitioner and his wife on July 30, 1936, the wife filed suit for divorce on August 1, 1936, and a final and absolute divorce wras awarded her by decree dated September 22, 1936. In consideration of the execution of the property agreement and the property set apart therein to the wife, she released all claims and demands of every nature against petitioner, including support, main-1 tenance, alimony and dower, arising in any manner from the relation! of husband and wife, “as though the marriage relation had never ex-1 isted between them.” The agreement provided that the wife would! have the custody and guardianship of the son, but that petitioner for four years from September 1,1936, would pay all the expenses of the son’s support, maintenance, and education. The property agreement contained no reference to the trust created on the same day.

By the trust indenture petitioner conveyed to the wife as trustee certain stock, the income from which was to be paid to herself individually during her life or until her remarriage. Upon her death or remarriage successor trustees were named and directed to pay the income to petitioner’s son until he attained the age of 25, when he was to receive one-half of the corpus. The income from the remaining one-half was to be paid tó the son until he reached the age of 30, when he was to receive the balance of the corpus. If the son should not be living at the time of the wife’s death or remarriage, or if he should die before reaching 30, then in either of those events the corpus was to be delivered free of trust to the son’s wife, and if there were no wife surviving him, then to his child or children, and in default thereof to petitioner if he were living, otherwise to his heirs in accordance with the laws of Tennessee. The wife as trustee was granted the power to sell the securities constituting the trust corpus, in which event the proceeds of such sale were to be held subject to the terms of the indenture.

In her complaint for divorce the wife did not request alimony. The final divorce decree contained the following:

And, it being stated to tbe Court that the property rights of the complainant and the defendant, and provision for the support of said child have been made and effected by a private agreement, no award is made of alimony for the support of the complainant and her son.
This cause is retained in Court, however, for the purpose of permitting the complainant to apply for an award of alimony for the support of her son, in the event of the breach of the written agreement heretofore entered into between the complainant and the defendant, for the support of said child, and, further, for the enforcement of this decree and any further orders that may be entered in said cause, and for all other things that may be proper in the circumstances.

No part of tbe trust income for the years 1936 and 1937 was paid to petitioner or for the support of the son. The income was paid directly to the wife and was reported by her in her income tax returns. No refund of the taxes paid thereon by the wife has been made pending final determination as to whether the tax on the trust income is due from her or petitioner.

In accordance with the property agreement petitioner supported the son with his personal funds during the taxable years, and a.t all times material to this proceeding the property agreement has been performed by the parties according to its terms.

At the time of the separation of petitioner and his wife, the net worth of the wife was in excess of $500,000.

The income of this trust is to be taxed to petitioner unless there is a clear showing that its- payment to the wife did not discharge a continuing obligation on his part, either contractual or statutory, to support and maintain her. Pearce v. Commissioner, 315 U. S. 543; Helvering v. Leonard, 310 U. S. 80; Helvering v. Fuller, 310 U. S. 69; Helvering v. Fitch, 309 U. S. 149; Douglas v. Willcuts, 296 U. S. 1.

It is clear there was no continuing contractual obligation. The property settlement completely and finally absolved petitioner from any future liability to support his wife. Nor do we think there is any doubt that petitioner, under the present circumstances, was left free of any continuing burden imposed by local law.

The Supreme Court of Tennessee decided at an early date that an absolute divorce extinguishes the marriage relationship and all duty of maintenance upon the part of the husband “as much as if the dissolution had been effected by the death of the wife.” Chenault v. Cheriault, 37 Tenn. (5 Sneed) 248. The wife could have no claim on the future earnings or acquisitions of the husband, and the proper course in such a case was to make a division of the husband’s estate and vest a specific portion thereof in the wife. The granting to the wife of an award in gross upon an absolute divorce has continued to be the customary practice in Tennessee. Brown v. Brown, 156 Tenn. 619; 4 S. W. (2d) 345; Williams v. Williams, 146 Tenn. 38; 236 S. W. 938; Winslow v. Winslow, 133 Tenn. 663, 182 S. W. 241. It is only where the husband has no present estate but does have earning capacity that later cases have awarded periodic payments to be made in the future. Brown v. Brown, supra.

The courts of Tennessee have also adopted the rule that the wife can have no additional allowance for alimony on absolute divorce where she has accepted a private settlement agreement providing for her support and maintenance. Russell v. Russell, 3 Tenn. App. 232. “ * * * a validly executed agreement respecting maintenance will effectually deprive the wife of a decree for alimony as such.” Matthews v. Matthews, 24 Tenn. App. 580; 148 S. W. (2d) 3 (1940).

The provision of the Tennessee Code upon which respondent relies Michie’s Tennessee Code of 1938 Annotated, sec. 8446, which apparently appeared for the first time in its present form in the 1932 revision of the code, is as follows:

§8446 4221 (2468). Alimony for support of wife and children. — Whether the marriage be dissolved absolutely, or a perpetual or temporary separation be decreed, the court may make an order and decree for the suitable support and maintenance of the complainant and her children, or any of them, by the husband, or out of his property, according to the nature of the case and the circumstances of the parties, the order or decree to remain in the court’s control; and, on application of either party, the court may decree an increase or decrease of such allowance on cause being shown.

The Supreme Court of Tennessee has recently construed this section. Davenport v. Davenport, 160 S. W. (2d) 406 (1942). It held that this provision authorized the granting of an award for the support of minor children notwithstanding the original decree had made no award or reserved no control or power to modify the decree. In this respect the statute altered prior holdings to the effect that if an award of periodic payments is made the court is without power to modify its decree unless such power is expressly reserved therein. Buchholtz v. Buchholtz, 175 Tenn. 87; 132 S. W. (2d) 208; Going v. Going, 144 Tenn. 303; 232 S. W. 443. But, of controlling significance here, the court limited its holding to provisions respecting the children, since the common law imposed a continuing duty to support the children after the divorce. With respect to the duty to support the wife the court stated:

* ⅜ * The obligation of the husband to the wife is extinguished by a decree of divorce, without provision for alimony, and the holding herein is limited to ⅛⅞ child or children, as to whom, ⅜ * * the obligation of the father exists and continues independent of a decree.

In the instant case, the parties having by agreement made complete provision for the wife’s support and maintenance, the court in its decree expressly stated that “no award is made of alimony * *

We conclude, therefore, that petitioner is not taxable upon the trust income in question.

Decision will be entered under Rule 50.


author: HaeRon :

text:
    Estate of Sallie Houston Henry, Charles J. Biddle and Gerald Ronon, Executors, Petitioners, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 98955, 99053, 104335.
    Promulgated October 7, 1942.

      Frederioh E. S. Morrison, Esg., Joseph H. Grubb, Jr., Esq., Henry B. MoLaughlm, Esq., John W. Bodine, Esq., Andrew B. Yowng, Esq., and Richard K. Stevens, Esq.,.for the petitioners.

      Eugene G. Smith, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated .herewith: S. B\ Houston, and Gertrude Houston Woodward.

   OPINION.

HaeRon :

The question is whether the dividend on the Standard Oil Co. stock which was paid to the trustees in the taxable year and held by them in the trust corpus was income which was to be distributed currently to the beneficiaries, within sections 161 (a) (2) and 162 (b) of the Revenue Act of 1934.

Petitioners contend that the Orphans’ Court adjudication was a determination of property rights in the dividend which is binding upon this Board, and that the court’s holding that the dividend was principal of the trust by virtue of the 1915 family settlement agreement is determinative of the question for purposes of the statute, so that the dividend was not income to be distributed currently to the petitioners. Petitioners rely upon Blair v. Commissioner, 300 U. S. 5, and Freuler v. Helvering, 291 U. S. 35.

Respondent argues that originally such dividends as are here in question were income which was to be distributed to the income beneficiaries of the trust, the life tenants, the Pennsylvania law making that presumption and there being no contrary provision in the will. Respondent cites In re Waterhouse's Estate, 308 Pa. 422; 162 Alt. 295, 296. See also, Jennie Arrott Adams, 44 B. T. A. 408, 414. Respondent then contends that petitioners are taxable on the dividend as income, whether or not it was actually distributed, under the theory that the right to the dividend was in petitioners and their direction to the trustees to retain the dividend in trust principal did not transfer liability for tax on income to the trustees. Respondent cites Corliss v. Bowers, 281 U. S. 376, for the above general principle, although the question here does not turn upon any element of control over income under the particular facts. Respondent contends that the adjudication of the Orphans’ Court is not binding on the Board in determining the issue presented.

“The test of taxability to the beneficiary is not receipt of income but the present right to receive it.” Freuler v. Helvering, supra. We assume, arguendo, that under the testator’s will and the rule of Pennsylvania law to the effect that an extraordinary distribution paid out of earnings belongs to the life tenant as opposed to the remaindermen, the petitioners originally were entitled to receive any and all such dividends. The family settlement agreement of 1915 and the supplemental agreement of 1922 had the effect of an “assignment” or release to the trustees by the life tenants of their right to receive extraordinary dividends. For convenience we may regard the family settlement agreement as such “assignment” by the life tenant. The assignment became irrevocable and forever binding in 1931. That is the ruling of the Orphans’ Court of Philadelphia County. That ruling was a determination of property rights in extraordinary corporate distributions. The executors of the estate of Sallie Houston Henry were demanding distribution of a one-third share of the Mission Corporation stock, an extraordinary dividend, under a claim of right thereto. The Orphans’ Court denied the claim, holding that the dividend belonged to the trustees as principal of the trust under the 1915 agreement, which became binding on Sallie Houston Henry and others in 1931. That holding of the court determined, as between the trustees and the life tenants, the validity of the assignment of certain kinds of dividends to the trustees under the 1915 agreement. In other words, in 1935, when the stock dividend was paid, all right thereto vested at once in the trustees and at no moment did any of petitioners here have any right of property in the extraordinary corporate distribution. It follows that there was no ownership in the petitioners to which income tax attached, since petitioners had no present right in 1935 to receive the dividend. The question is controlled by Blair v. Commissioner, supra.

The determination of the Orphans’ Court, as set forth above, is binding on this Board, because it determined the validity of the assignment by the life tenants to the trustees of all right to certain types of dividends. “The order of the court having jurisdiction of the trust is determinative as to what is distributable income for purpose of division of the tax between the trust and the beneficiary.” Freuler v. Helmering, supra; Susan B. Armstrong, 38 B. T. A. 658; Jennie Arrott Adams, supra; Estate of George H. Balzereit, 46 B. T. A. 959; Blair v. Commissioner, supra.

Respondent seeks to bring this case within the exception to the rule respecting the binding effect of determinations of property rights by state courts recognized in Lewis Spencer Morris, Trustee, 40 B. T. A. 988. The rationale of the Morris case has no application here. In that case the Board refused to apply the state court’s decree in determining the issue because there were criteria established by Congress as to what expenses are deductible for Federal tax purposes. Here, we may not disregard the holding of the Orphans’ Court, for to say that a valid and binding assignment of right to the special dividends to the trustees was not made by the life tenants would be arbitrary, to say the least. Blair v. Commissioner, supra.

There remains only the question whether the life tenants, petitioners, having made a valid assignment prior to the taxable year of part of their interest in the trust, are still taxable upon the dividends in question. That question is controlled by Blair v. Commissioner, supra; Commissioner v. Field, 42 Fed. (2d) 820; Ellen S. Booth, 36 B. T. A. 141; affd., 103 Fed. (2d) 1008. The original right of the life tenants to receive income was an equitable interest, a property right which was alienable in whole or in part. The trustees became the owners of the specified beneficial interest in income of the trust consisting of special' kinds of dividends. In 1935 the trustees received the dividend in ques-' tion as owners thereof. Owning the beneficial interest in the dividend, the trustees could not have distributed it to the life tenants because they no longer owned the beneficial interest. The dividend was not income to be distributed currently. Accordingly, the trustees were taxable on the dividend paid in the Mission stock in 1935. Respondent is reversed.

Decision will he entered wider Rule -50.


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    Countess Laura Sala, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103863.
    Promulgated October 8, 1942.

      Richard J. Cronan, Esq., and M. Robert Gallop, Esq., for the petitioner.

      Z. N. Diamond, Esq., and Richard C. Flesch, Esq., for the respondent.
   OPINION.

Van Fossan:

The issue before us is whether or not the write-down of accounts receivable due from the petitioner to the corporations of which she was the sole stockholder was, in effect, a dividend to her.

There is no controversy between the petitioner and the respondent that under certain circumstances the write-down of an account receivable by a corporation from the stockholder may constitute a dividend. The question here is: Do the facts in the case at bar warrant such a conclusion ? We find that they do.

There is one fundamental fact that stands out with startling significance, one which the petitioner relies upon to absolve her from the proposed tax liability but which has precisely the opposite effect. That fact is that she delegated to her uncle, J. S. Bache, the complete and absolute management and control of her financial affairs. She thus conclusively constituted him her agent and representative.

It is well to review the salient events that occurred in the year 1930. The petitioner’s husband, Edwin S. Bayer, had died in 1928. He left a will establishing certain legacies but not sufficient estate to pay them. The petitioner’s own personal financial situation had become very much involved. She then, in 1930, went to her uncle to seek his advice in solving her fianancial problems. He agreed to help her on the condition, in which she acquiesced, that he be given carte Manche to conduct her affairs as he saw fit, with no interference whatever from her. Thereafter he took over her stock in Broadex and Ideal, secured loans for her, and made all arrangements for the future conduct of all of her business matters.

Bache, with the petitioner’s complete compliance, delegated to Nathan, his own personal attorney and the attorney of all persons and corporations materially involved in the situation, questions of law and policy thought necessary to the successful consummation of Bache’s endeavors. All officers and directors of the corporations, other than Bache and Nathan, were mere figureheads.

During 1930 the petitioner withdrew as loans over $760,000 from both corporations. The record is silent whether she did so on the advice of Nathan, under the direction of Bache, or upon her own initiative. She received $50,000 as the president of Broadex and Ideal, although she denied all knowledge of the operation of the companies and of business affairs in general. She rendered no services whatever to the corporations. She also amassed over $116,000 in stock dividends. The total is over $926,000. She paid no income tax that year. Her return showed an item of over $119,000 as “interest paid” but no explanatory or itemized notation thereon.

The condition of the petitioner’s affairs remained practically the same until 1935, with the exception of the withdrawals which had mounted to over $2,000,000. The withdrawals were entered and carried on the books of Broadex and Ideal as accounts receivable. On January 15 and December 24-, 1935, by the authority of their boards of directors, Broadex and Ideal “wrote down” the petitioner’s accounts receivable by $500,000 and $700,000, respectively. Those amounts were deemed uncollectible. Proper entries were made on the corporate books to evidence such action and the surplus accounts were reduced correspondingly. However, during 1935 and after January 15 of that year Ideal advanced an additional sum of $7,952.40 to the petitioner.

The picture is not complete without reference to the events occurring in 1938. On April 26 of that year, by formal action, the directors of Broadex and Ideal wrote off the entire amounts of their claims against the petitioner “as presently uncollectible” and eliminated those items from their balance sheets. On October 13, 1938, they restored to their books and balance sheets the entire original amounts of their several accounts receivable from the petitioner* as they appeared thereon prior to January 15,1935.

The petitioner submits a many-sided defense the principal points of which are that the write-downs did not constitute a cancellation, forgiveness, or release; that there was no intent to forgive or release any part of the indebtedness; that she had no knowledge of and,expressed no acquiescence in or consent to such write-downs; that her financial condition was not improved; that she had no.control or. voice in the management of Broadex and Ideal; and that the restoration resolutions in 1938 show that the write-downs in 1935 were mere bookkeeping entries.

We are impressed with none of these arguments. They might have some bearing if a different relationship had existed between the petitioner and Bache, Nathan, Broadex, and Ideal. See Waggaman v. Helvering, 78 Fed. (2d) 721; certiorari denied, 296 U. S. 618; Jas. J. Gravley, 44 B. T. A. 722.

. The vital element in the situation here is that the petitioner voluntarily and deliberately turned over all of her affairs, including all moneys and transactions which might affect her income tax, to her uncle and Nathan, who thereupon acted in her place and stead. The petitioner now seeks to be exculpated from the normal and logical tax consequences of her act. Having established Bache and Nathan as the managers of her property and income, the responsibility of their maneuvers rests upon her and no disclaimer of hers can be effective.

To allow a taxpayer to avoid or evade the natural and inevitable results of actions taken by his representatives in his behalf, by the simple expedient of turning over his property and its management to them, would afford an invitation to collusion and fraud. We can not countenance such a scheme.

The petitioner’s attorneys argue that Bache, Nathan, Broadex, and Ideal were motivated only by their own personal interests and had no thought of the petitioner when the various resolutions were adopted and the concomitant book entries made. We can not ignore the multiple capacities in which both Bache and Nathan acted, nor can we believe that when the actions of record were taken they suddenly forgot the petitioner and proceeded solely in the interests of others. The petitioner is charged with the knowledge which her agents possessed — they were acting in matters of vital importance to her welfare and pecuniary benefit. She can not successfully plead ignorance and innocence.

We must remember also that the petitioner was the sole owner of the stock of Broadex and Ideal. For the sake of convenient handling, the stock of these corporations had been deposited with Bache and he apparently was able to vote it whenever a vote was required. Howeyer, she still remained its owner.

We deem it unnecessary to comment at length on the recorded inconsistencies relating to the petitioner’s alleged financial difficulties in 1935 or 1988 resulting in the various book entries. We note that potential or actual tax difficulties arose. That fact is no justification for playing fast and loose with corporate books and records.

We observe that following the resolution of January 15, 1935, adopted by the Broadex directors (the majority of whom were also Ideal’s directors), Ideal advanced to the petitioner almost $8,000. However, we will take the resolutions of January 15,1935, at their face value, consider the petitioner’s accounts receivable partially uncol-lectible, and agree that Broadex and Ideal were warranted in writing the uncollectible portions thereof off their books. In these circumstances the principles announced in Wiese v. Commissioner, 93 Fed. (2d) 921, affirming 35 B. T. A. 101; certiorari denied, 304 U. S. 562; rehearing denied, 304 U. S. 589; Allen v. Commissioner, 117 Fed. (2d) 364, apply.

In those cases it was held that cash withdrawals of corporate funds made by stockholders and treated as accounts receivable, constitute taxable income to the stockholders in the year in which the charge to the stockholders is canceled on the corporation’s books. In the Wiese case the court held:

But if the stockholder borrows money from the company, and subsequently the company cancels the debt, income accrues to the stockholder at the time when the character of the withdrawal changes from a loan to a distribution of profits. Cohen v. Commissioner, 6 Cir., 77 F. 2d 184; cf. Fitch v. Helvering, 8 Cir., 70 F. 2d 583. Petitioner in his brief attempts to distinguish the Cohen case on the ground that the debt there was charged off by formal resolution of the board of directors, while in the instant case the same thing was accomplished by book entries. The distinction is not important. The result is the same whichever method be applied.

We are of the opinion, and therefore find and hold, that the write-down of the accounts receivable by the two corporations resulted in a cancellation or release of the accounts in the amounts written down. We reach this conclusion with full appreciation of the declarations of the witnesses, consistent with petitioner’s theory of the case, that no such result was intended. The explanation of the witness, also urged by counsel, that these “were mere bookkeeping entries” is pregnant with the suggestion of possible fraud. We are impressed more by what was done than by what the witnesses say was intended. We are unable to find any legitimate business reason prompting the 1938 resolutions, by which the corporations first wrote off and then restored the accounts in full.

If it were necessary to consider the petitioner’s contentions not heretofore discussed, on the assumption that her status in the factual situation is other than it is, she still can not prevail. Her argument that there was no intention to forgive the indebtedness is answered by the decision in Hudson v. Commissioner, 99 Fed. (2d) 630; certiorari denied, 304 U. S. 644, under facts very similar to those in the case at bar. There, as here, the book entries confirmed and clarified the resolution to write off a portion of the petitioner’s obligation as uncollectible and thus they effectively overcome petitioner’s theory that no cancellation thereof was made or intended.

The petitioner’s argument that her financial condition was not improved by the cancelations is valueless because of her own failure to establish that condition. The record shows that she possessed property in 1935, but its extent, character, and value are not shown. The mere opinion of her uncle, or of any other person, unsupported by other proper evidence, is not a sufficient basis for the conclusion that she was insolvent or that her financial condition was not improved by the partial write-downs.

Counsel for petitioner boldly pleads the equities of his case. No purpose is served by discussing this phase. But even a casual reading of the facts leads one to conclude that the equities are all with the Government.

The petitioner has not shown that the respondent erred in his allocation of the amounts of the write-downs to earnings available for dividends and the return of capital. Therefore, the determinations of the respondent as they appear in his notice of deficiency are approved.

Decision will be entered for th& respondent.