author:
Steenhagen:
      Disney,

text:
    Richard J. Reynolds, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94108.
    Promulgated January 10, 1940.

      J. G. Korner, Jr., Esq., for the petitioner.

      Rollin H. Tramue, Esq., for the respondent.
   OPINION.

Steenhagen:

The Commissioner determined a deficiency of $33,-878.61 in petitioner’s income tax for 1934, resulting from the use of a lower basis than that used by petitioner in computing the capital gain derived from the sale of securities. The case is submitted under Rule 30 upon a written stipulation.

Petitioner’s father died July 19, 1918, and by his will two-thirds of the residue of his estate was left in trust. The trustee was directed to pay the widow enough of the income to maintain the children until each became twenty-one, then to pay each child $5,000 or more a year until he became twenty-eight, “when each of them shall become entitled to and shall respectively receive * * * a share of the corpus, together with the accumulated income.” Provision was made for distribution in case a child should die before becoming twenty-eight.

The trustee received the trust assets from the estate in 1926 and distributed the proper share of them, including securities, to petitioner on April 4, 1934, when he became twenty-eight. Some of the securities so distributed had been received by the trustee from the decedent’s estate and others had been acquired by the trustee in intermediate transactions. Petitioner sold some of the securities during the year at a profit. In computing gain, he used as basis the value on April 4, 1934, when he received them from the trustee. The Commissioner, however, used as basis the lower value of the securities at the time of the father’s death in the case of those then held by the father, and their cost to the trustee in the case of those which it had acquired thereafter. The decision turns upon the Revenue Act of 1934, section 113 (a) (5): “If the property was acquired by bequest * * * the basis should be the fair market value of such property at the time of such acquisition.”

The petitioner did no doubt receive the very securities only when they were distributed to him in 1934. The question is whether timw of such receipt is what the statute means as the “time of acquisition.” That question must be decided primarily with regard for the fulfillment of the purpose of the statute and not only with regard for the generally accepted meaning of the particular phrase. This was the reasoning of Brewster v. Gage, 280 U. S. 327. In point of fact the direct legatee in that case did not receive the bequeathed property before the distribution of the decedent’s estate, but the Court held that nevertheless the statutory time of acquisition was the date of decedent’s death.

The intendment of the statute requires the same construction here. The intervention of the fiduciary administering the trust involves quite the same difficulties under this very statutory subsection as did the intervention of the fiduciary administering the decedent’s estate. As to both, the dominant legislative purpose was to prescribe a basis which would result in taxing the increment in value of the property upon the occasion of its realization. It is plain that such purpose which was promoted only by judicial construction in Brewster v. Gage, supra, as to bequests delayed by administration and distribution of the estate, would be defeated as to bequests delayed by intervening trusts if the same reasoning were not applied. Elizabeth G. Augustus, 40 B. T. A. 1201.

Petitioner argues that the phrase “time of acquisition” must be construed with regard to whether the interest bestowed upon him by the will was a vested or contingent interest; that if a contingent interest it may not be regarded as acquisition of the property, and that by North Carolina law (Reynolds v. Reynolds, 208 N. C. 578; 182 S. E. 341) his interest was a contingent interest until he received the securities by distribution. The argument must be rejected because the proper application of the statute is not dependent upon whether the interest created in petitioner by the trust was but a contingent interest. Elizabeth G. Augustus, supra; Richard Archbold, 40 B. T. A. 1238. Even if it was contingent, the intendment of the statute was that the securities actually received when distributed are to be regarded as putatively acquired by the beneficiary when the testator died, if their identity has been preserved, or when the trustee acquired them by purchase or exchange if the original securities have been disposed of in such an intermediate transaction. The basis of the beneficiary is, therefore, the value at the date of the testator’s death as to the securities left by the testator and received by the petitioner, and the basis of the trustee as to the securities acquired by the trustee by purchase or exchange.

Reviewed by the Board.

Decision will be entered for the resfondent.

Van Fossan dissents.

Disney,

concurring: I concur in the result. I think that the estate created by the testator for his children was vested, and that opinion should be placed upon that ground. The will recites, under “Item Fourth”, that the residue of the testator’s estate should be divided one-third to his wife “and two-thirds (%) thereof to my children and the living issue of any deceased child, per stirpes, to be equally divided among them, share and share alike.” It is true that it is subject to a trust, but the statement of the trust itself refers to “my children’s shares in my entire estate”; also refers to “the trust estate herein created for their benefit”; and “the trust estate herein created for the benefit of my children.” Later, we find the expression, referring to the children, “out of their respective shares”; also “said trustee will pay to each of my said children, out of his or her share of my estate, and provided he or she shall have arrived at the age of twenty-one (21) years, Fifty Thousand Dollars ($50,000) per annum.” Particularly, however, and immediately following the language last quoted, I note the language “and is directed to accumulate all the balance of said income for his or her respective use and benefit wntil he or she shall respectively attain the age of twenty-eight (%8) years, when each of them shall become entitled to and shall respectively receive from said Trustee his or her share of the corpus of my estate, together with the accumulated income aforesaid.” In my opinion, this language, taken together with the other expressions above quoted, must be construed as a statement as to when the devise, vested at the time of death, should be payable. Such an estate is vested and not contingent. Inasmuch as this matter arose in the State of North Carolina and inasmuch as the majority opinion recites petitioner as relying in part upon the fact of a decision by the Supreme Court of that state in Reynolds v. Reynolds, 208 N. C. 578; 182 S. E. 341, as a determinative ruling, I note the opinion of that court in Hooker v. Bryan, 140 N. C. 402; 53 S. E. 130, holding as follows:

Testatrix devised the residue of her real estate to H. “upon his becoming 21 years of age,” and lent the same to her sister until such event. She also lent to such sister her personal property, in trust for H. until he became 21 years of age. Held, that the clause “upon his becoming 21 years of age” should be construed merely to postpone the enjoyment of the estate, which was a remainder vesting in H. from the date of testatrix’s death.

In Vanderwarker’s Estate, 81 Minn. 197; 83 N. W. 538, a legacy was provided in terms not dissimilar to those involved herein: Five thousand dollars was given, devised and bequeathed to executors in trust, for a grandchild of testator, to be loaned, the interest added to principal until the granddaughter arrived at the age of 21 years, at which time all interest should be paid to her, and the interest thereafter likewise paid to her “until she arrives at the age of thirty years, when I direct my said executors to pay to my said granddaughter, * * * the said five thousand dollars.” Held, the granddaughter had a vested estate, which descended upon her death before receipt, to her heirs.


source: Caselaw Access Project

author: Black: SteRNHagen, Oppee,

license: Public Domain

text:
    Hugh D. Rhodes and J. Jackson Rhodes, Administrators, Cum Testamento Annexo, De Bonis Non of the Estate of Mamie D. Rhodes, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91284.
    Promulgated January 12, 1940.

      Thomas F. McDonald, Esq., and Glande P. Berry, Esq., for the petitioners.

      Charles P. Reilly, Esq., and Homer F. Benson, Esq., for the respondent.
   OPINION.

Black:

The estate tax and the additional estate tax imposed by sections SOI (a) of the Revenue Act of 1926 and 401 (a) of the Revenue Act of 1932, respectively, are “upon the transfer of the net estate of every decedent * * The term “net estate” means the “gross estate” as defined in section 302 of the Revenue Act of 1926 as amended, less the deductions specified in section 303 as amended. See also section 300 (b), Revenue Act of 1926. The respondent determined that, under subdivision (a) of section 302 of the Revenue Act of 1926, the value of decedent’s gross estate was $289,175.79, $242,500 of which represented the value of 5,000 shares of common stock of the International Shoe Co. Subdivision (a) provides as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined „ by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;

What was the decedent’s “interest” in the property the value of which the respondent has included in the decedent’s gross estate? The respondent contends that the decedent was the sole owner of all the property which she attempted to dispose of in her will, including the shares of International Shoe Co. stock assigned to her by her children on or about July 30, 1925, and that the two decrees of the Circuit Court of St. Louis County, Missouri, referred to in our findings, are not binding upon the Board as requiring a holding contrary to the respondent’s determination.

Petitioners contend that the determination of the decedent’s “interest” in the property in question is purely one of the determination of property rights, and, as such, is controlled by the two decrees of the local circuit court.

We agree with the petitioners’ contention. If the decedent owned only a life estate in the International Shoe Co. stock assigned to her in 1925 by her children, no part of the value of such property so assigned should be included in her gross estate, only her own share of the stock which she inherited from her husband’s estate, which was one-fifth, should be included. Article 11 of Regulations 70, 1929 ed. and Regulations 80, 1934 ed., and article 13 of Regulations 80, 1937 ed., all provide: “Nor shall anything be included [in the decedent’s gross estate] on account of an interest or an estate limited for the life of the decedent.” The determination of whether the decedent owned only a life estate in the property assigned to her in 1925 by her children or whether she owned an absolute interest therein is clearly a determination of property rights, and, as such, is controlled by local law. Poe v. Seaborn, 282 U. S. 101; Tyler v. United States, 281 U. S. 497; Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5; Sharp v. Commissioner, 303 U. S. 624, reversing, per curiam, 91 Fed. (2d) 802; Susan B. Armstrong, 38 B. T. A. 658; Estate of Frederick R. Shepherd, 39 B. T. A. 38.

The Circuit Court for the County of St. Louis, State of Missouri, Division No. 2, after a full hearing in the matter, decreed on March 21, 1935, that the assignment executed by the children on July 30, 1925, “be and the same is hereby reformed as of the date of its execution to read” that the children “hereby jointly and severally grant, transfer and assign to our said mother, Mamie D. Rhodes, an estate, for her life only, in and to our joint and several interests in said estate of Taylor Rhodes, deceased * * The assignment as reformed also provided that upon the death of Mamie D. Rhodes “that certain life estate which we hereby assign to her shall terminate and our said joint and several interests shall thereafter be held and owned by us as if this instrument had not not been executed.”

There is no evidence that this decree was obtained for the purpose of defeating any Federal estate tax; or that it was obtained by collusion. Such, evidence as we do have points to the fact that it was a decree rendered after there was a hearing on the merits and was not a mere consent decree. The respondent has placed in evidence before us the testimony of Leona Kemp, who testified at the hearing before the local circuit court held on March 15, 1935. The substance of her testimony was that she was the secretary to W. E. Baird, the attorney who prepared the original assignment; that Baird had since died; that prior to the preparation of the assignment she remembered seeing “Mr. and Mrs. Paul Rhodes and Mr. Hugh Rhodes” at Baird’s desk, which was adjacent to her own; that she “heard Mr. Paul Rhodes tell Mr. Baird he wanted to have him draw up a document whereby they could give their share of the estate to their mother for the time of her life, and Mr. Baird made a notation on his calendar pad”; that about four or five days later, Baird placed a paper written in long hand on her desk and asked her to copy it; and that the paper thus handed to her was the original assignment. All of the evidence before us, including the recitals in the decree itself, indicates that the decree was rendered after a hearing on the merits and was in every respect regular. It was a decree adjudicating property rights. There is no evidence that it was ever modified or reversed, and, upon the authority of the above cited cases, it must be taken as establishing conclusively that the children assigned to their mother only a life estate in their interest in their father’s estate.

Shortly after the reformation decree J. Jackson Rhodes and Hugh D. Rhodes, individually, and as executors and trustees under the will of Mamie D. Rhodes, deceased, filed a suit in the Circuit Court of the County of St. Louis, State of Missouri, May term, 1935, against Paul T. Rhodes, individually and as one of the trustees under the will of Mamie D. Rhodes, deceased, and Mary B. Rhodes, praying “for a decree of this court determining the ownership of all of the property held in the name of Mamie D. Rhodes at the time of her death on January 22, 1934, as between the estate of said Mamie D. Rhodes on the one hand and the plaintiffs and defendants herein on the other, and for such other and further orders and decrees as to the court may seem just and proper.” The circumstances surrounding this suit are fully set out in our findings and need not be repeated here. Suffice it to say that on June 5, 1935, the court handed down its decree, in which it gave full faith and credit to the decree of the Circuit Court of the County of St. Louis, Division No. 2, heretofore mentioned and discussed.

It is our opinion that the two decrees in evidence before us establish conclusively that the decedent did not own outright any more than one-fifth of the 5,000 shares of common stock of the International Shoe Co. which the respondent has included in her gross estate and we have so found in our findings of fact. Her “interest” in the remaining four-fifths of the 5,000 shares was a life interest, which ceased with her death, and under the above cited provisions of the respondent’s regulations it was error for the respondent to include as a part of the decedent’s gross estate the value of 4,000 shares, amounting- to $194,000. Excluding $194,000 from the net estate as determined by the respondent leaves a net estate (exclusive of the exemptions) of $48,217.74, which is less than the exemption of $100,000 allowed by section 303 (a) (4) of the Revenue Act of 1926 and also less than the exemption of $50,000 allowed by section 401 (c) of the Revenue Act of 1932. It follows that there is no Federal estate tax due. Even if it should be held that the second court decree rendered by Division No. 3, June 5, 1935, was a consent decree because it followed substantially the lines of a written agreement which had been previously entered into by the parties, nevertheless, the first court decree of Circuit Court No. 2, reforming the original instrument of transfer, was not a consent decree and settled the question as to' ownership of the International Shoe Co. common stock and we are bound by it.

The respondent stresses the importance of the fact that the decedent, after the original assignment from her children in 1925, thereafter treated the property as her own. It is true that she so testified in the affidavit referred to in our findings; that she actually sold 3,000 shares of the stock; that she pledged the remaining stock on ¡loans; and that she attempted to dispose of all the stock in her will. As we look at this case, those were the facts for the local circuit court to consider in arriving at its decision in the matter. We may not assume that it did not do so. The decree having been rendered by a court of competent jurisdiction in a suit between adverse parties after a hearing upon the merits, we feel that we are bound by it. Whether the decree ever should have been rendered under the evidence is not a matter for us to decide. The question of property rights there decided is no longer an open question for the Board or the Federal Courts to consider. Freuler v. Helvering; Blair v. Commissioner; Sharp v. Commissioner, all supra.

The conclusion which we here reach is not contrary to our recent decision in Estate of Arthur D. Forst, 40 B. T. A. 876. In that case we held that a decree of the Orphans’ Court of Mercer County, New Jersey, approving a certain claim against the estate was not binding upon the Board as to whether the claim was deductible under section 303 of the Revenue Act of 1926, in arriving at the net estate. That question was altogether different from the one we have here to decide. Congress has established its own criterion as to what claims are deductible. Cf. Lyeth v. Hoey, 305 U. S. 188.

In view of our holding on the first issue, we need not decide the second issue.

Reviewed by the Board.

Decision will be entered for the -petitioners.

SteRNHagen,

dissenting: I do not think that this Board is universally bound by a decree of a state court without regard for the circumstances in which it is rendered. The record in this proceeding does not prove that there was a substantial controversy in which the mother or her estate was unsuccessful in establishing that when she died she owned the International shares and in which the children established against opposition that she had but a life estate. On the contrary it proves that the state court decree was the sanction of a mutually satisfactory agreement in which no one — the administrator ad litem, the creditors, the heirs and legatees, or anyone else — was adversely interested. Whether that was an arrangement deliberately aimed at the Federal Government’s tax interest in the decedent’s estate, it is not possible to say; but that still leaves it less than an adversary proceeding resulting in a judicial decree immune to Federal question. Generally I think my brother Opper has correctly analyzed the state court proceedings and shown the fallacy of recognizing the decree as binding here.

Oppee,

dissenting: The issue before us is one of fact, — Did the' decedent and others perform such acts that she acquired the property by gift or otherwise, and owned it when she died? Once the facets are ascertained, there will be no difficulty in applying appropriate principles of law. It is our function to ascertain the facts.

In this forum the burden of proof rests upon petitioners. Respondent determined by his notice of deficiency that this property belonged to decedent when she died. All facts necessary to reach the opposite conclusion must be proved here, and if there is a material failure of such proof the respondent must prevail. Burnet v. Houston, 283 U. S. 223; Reinecke v. Spalding, 280 U. S. 227; United States v. Anderson, 269 U. S. 422.

In 1934 these petitioners made their oath to the fact that the property which is the subject of this proceeding belonged to decedent when she died and was part of her estate.

Petitioners are here making a claim which is palpably inconsistent with that solemn statement. But the latter is not contradicted by anything that appears in this record. The majority may assume that it is explained away by the reformation decree. But that clearly is no more than an hypothesis. Petitioners did not take the stand. They did not testify that their statement was erroneous. They did not explain the error if there was one. They did not produce a single witness. There is accordingly not a scintilla of evidentiary justification for making that assumption.

But, even if that were the proffered explanation, it would not suffice without more. For all we know decedent’s title may have rested on a transaction totally distinct from the assignment which was reformed in the state court. If that is not true petitioners could presumably have shown it. But merely producing the decree of reformation accomplishes nothing, since the result is purely a negative pregnant. It meets the respondent’s presumptively correct determination, the petitioners’ statement under oath, and the circumstantial proof, to the effect that Mrs. Rhodes owned this property on January 22, 1934, by the claim that she did not get the property on July 30, 1925. The former present the issue here, whatever the state court may justifiably have felt its more limited function to be. Certainly we need not assume, although I recognize that the majority does, that those considerations would have been appropriate or relevant if presented to that court. Cf. Pepper v. Litton, 308 U. S. 295. It seems to me to follow that the reformation decree is of no benefit to petitioners in seeking to persuade us that their own verified admission and the facts appearing from the documents produced, to say nothing of respondent’s determination, should be overthrown.

If the second judgment, the decree of distribution, is relied upon, it affords petitioners no greater comfort. That decree was entered, as the proceeding which engendered it was commenced, by agreement of all the interested parties. No issues were raised by the pleadings. There was no real dispute among the “litigants”, no substantial difference in their property rights under either hypothesis. This Board has consistently held that a state court decree entered under such circumstances is not conclusive, particularly as to a question of fact. This principle was not thought to be impeached by Freuler v. Helvering, 291 U. S. 35. Indeed, that decision makes it clear that it does not apply to a case where “the proceeding in the state court was a collusive one — collusive in the sense that all the parties joined in a submission of the issues and sought a decision which would adversely affect the Government’s right to additional * * * tax”, supra, at p. 45.

Issues of fact are tendered by the parties. They can not be litigated unless they are, and they can not be decided unless they are litigated. It follows that an agreement of the parties to withhold factual issues, whether it be called collusive or not, must have the effect of precluding a decision. Under such circumstances there can be no adjudication which “settles the property rights”, no “judgment which fixed the rights.” It is the agreement,'not the decree, which has that effect, if anything has. Northern Pacific Railway Co. v. Boyd, 228 U. S. 482, 504. Since there was no decision of the factual issue in the state court proceeding because of the agreement, there is no excuse for abdicating our duty to determine the facts. The state court has not done it for us here, even if it could do so under other circumstances. Cf. Lyeth v. Hoey, 305 U. S. 188; First National Bank in Dallas v. Commissioner, 45 Fed. (2d) 509; certiorari denied, 283 U. S. 845.

The agreement was neither alleged in the pleadings nor mentioned in the decree. The effect upon the Government’s tax claim — apparently the only possible practical result of the litigation — was presumably not disclosed. Collusion is a harsh word and we should not be required to apply it. But the proceeding was unquestionably non-adversary, the result obviously a consent decree. It need not be characterized as fraudulent to be considered ineffectual. Northern Pacific Railway Co. v. Boyd, supra. Even if not collusive in the stricter sense, Lord v. Veazie, 49 U. S. 250, it meets the test laid down in Freuler v. Helvering, supra. From either standpoint that decree, like the other, utterly failed to overcome the factual preponderance of the present record. Fidelity & Columbia Trust Co. v. Lucas, 52 Fed. (2d) 298, 301; reversed on other grounds, 66 Fed. (2d) 116; Ford v. Commissioner, 51 Fed. (2d) 206, 207.

Under the circumstances, the least that should be required of petitioners is that they produce evidence, if they can, that these decrees were not entered by consent, and that the estate tax result was not their only purpose; or, in the alternative, that they accept their responsibility as litigants before this Board and furnish it with the primary evidence. Absent such a record, I am of the opinion that petitioners should not prevail because there is nothing before us to warrant the requisite finding of ultimate fact. That is not a technical matter, nor one depending upon an inadvertent omission or careless oversight. Failure to produce these petitioners and their equally interested brothers and sisters as witnesses can not but suggest that their testimony would be less than favorable. It furnishes inadequate support for ignoring the rule which places upon taxpayers the burden of proving necessary facts. Burnet v. Houston, supra. To relax that rule in such a case as this, without an unmistakable mandate in appellate court decisions, can not but result in depriving the tribunals established for that purpose, including this Board, of essential jurisdiction; and, what is of infinitely greater moment, in withdrawing from the administrative arm of the Federal Government the indispensable prerogative of maintaining its position in some judicial forum.

TTtt.t. and Disney agree with this dissent.

       This is demonstrated by the last finding of fact herein.

       The documents introduced show that in December 1925 decedent swore that her children had “assigned to me all their joint and several interests in said estate so that I am now the sole individual person interested * * *”; that in the same month decedent received the full consideration for the redemption of part of the stock; that in April and December, 1926, the remaining stock was transferred into her name; that in 1933 she sold a part of the stock and retained the proceeds and at various times all or parts of it were deposited as coUateral to secure her loans; that some was so pledged when she died, and the remainder stood in her name; and that all is disposed of by her will. See Turnbull v. Payson, 95 U. S. 418, 421; Albrecht & Weaver, Inc., 9 B. T. A. 560.

       Apparently that is petitioners’ real reliance for they did not take the position even in the state court that the reformation decree settled the ownership of the, property as of decedent’s death. The petition in the distribution action, filed after the reformation decree concludes:
      “Whereforh, plaintiffs pray for a decree of this court determining the ownership of all of the property held in the name of Mamie D. Rhodes at the time of her death on January 22, 1934, as between the estate of said Mamie D. Rhodes on the one hand and the plaintiffs and defendants herein on the other, * * [Emphasis added.]

         “Whereas, it is thought necessary that a suit be brought in the Circuit Court of the County of St. Louis, Missouri, for the purpose of determining the property owned by said Mamie D. Rhodes at the time of her death * * *.
      “Now, Therefore, in consideration of the premises and for the purpose of finally determining and settling the rights of the parties hereto in and to the property mentioned in the last preceding paragraph hereof, * * * it is agreed as follows:
      ««$*#**
      “2. The interest of said Mamie D. Rhodes and of the parties hereto in the real estate standing in the name of Mamie D. Rhodes at the time of her death shall belong to the parties hereto in equal shares.
      *******
      “4. The remaining 5,000 shares of said common stock of the International Shoe Company shall be divided equally among the four parties hereto, subject to the payment by each of his part of the said debt of $86,745.00 * * *.

        i * * * * * *
      “6. The above mentioned suit shall be brought by Hugh D. Rhodes and J. Jackson Rhodes individually and as executors of the estate of Mamie D. Rhodes, deceased. * * *.
      “7. No party hereto shall hereafter assert that he is entitled to any greater share of the property herein referred to * * V’

       The rights of lienors and vendees, who would otherwise have been necessary parties, Fowler v. Hart, 54 U. S. 373, 380, were not in issue. The children, by their agreement, had volunteered to observe interests in this respect which were actually inconsistent with their claims. The decree respected and enforced that protection.

       “Moreover, the claimant in the Probate Court and the executor who filed no objections to the claim were one and the same party, a party situation which should not be permitted.” United States v. Mitchell, 74 Fed. (2d) 571, 574.

       This probably accounts for the elusive character of the decree which merely directs distribution in the manner prayed for and makes no finding of ownership.

        Guaranty State Bank of Greenville, Texas, 12 B. T. A. 543, 547; Edgar M. Carnrick, 21 B. T. A. 12, 23; Allie E. Nicholson, Executrix, 21 B. T. A. 795; Theodore C. Jackson, 32 B. T. A. 470, 481; First-Mechanics National Bank of Trenton et al., Executors, 40 B. T. A. 876; Lewis Spencer Morris, Trustee, 40 B. T. A. 988; cf. Edward T. Blair, 31 B. T. A. 1192.

       Both the Jackson and Blair cases were decided after the Freuler case, and purport to follow it. They were written by the same Board Member and both were reviewed by the full Board. They can be reconciled only on one hypothesis, with which the Freuler case, the Blair case in the Supreme Court, 300 U. S. 5, affirming the Board, and Sharp v. Commissioner, 303 U. S. 624, are in complete accord. That is, that a decree entered without contest can not take the place of factual proof.

        Schumacher v. Mehlberg et al., 96 Mo. App. 598; 70 S. W. 910; R. S. Missouri, 1929, sec. 932.

        Freuler v. Helvering, supra, pp. 43, 46.

       “The non-production of witnesses when procurable creates a presumption that their testimony, if procured, would be unfavorable.” Hamel, Practice and Evidence before the U. S. Board of Tax Appeals, sec. 252, citing Alexander v. Blackman, 26 App. D. C. 541; Evans v. Bell, 49 App. D. C. 238.


author: MuRDOck :

text:
    Estate of Eugene L. Bender, Deceased, Charles A. Bahr, Sr. and George Hamman, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91556.
    Promulgated January 16, 1940.

      W. F. Tarver, Esq., and B. G. FuTbright, Esq., for the petitioners.

      Frank B. Sehlosser, Esq., for the respondent.
   OPINION.

MuRDOck :

The Commissioner determined a deficiency of $84,951.55 in estate tax of the above named estate. The following errors have been assigned in the petition:

1. The Commissioner of Internal Revenue erred in his method of computing the deduction for property previously taxed in that he used the net estate of the prior decedent as a basis in determining this deduction whereas he should have used the gross estate.
2. The Commissioner erred in reducing the deduction for debts evidenced by notes on partnership property from three-fourths of $406,000.00 to one-half of $406,000.00.
3. The Commissioner erred in disallowing the deduction of $40,000.00 which sum was paid to settle a claim against the Estate in the form of Mrs. Blanche Bender’s interest in miscellaneous community property holdings which came into this Estate from the Estate of Prank V. Bender.
4. The Commissioner erred in disallowing the deductions of '$61,464.50 and $44,902.40 for Federal Estate tax and State Inheritance taxes, respectively, of the Estate of Frank V. Bender, which amounts became debts of the Estate of Eugene L. Bender.

The parties have stipulated the facts and the Board hereby adopts the stipulation as the findings of fact in this proceeding.

The decedent died on December 1, 1934. His brother, Frank V. Bender, died testate on March 18, 1934. All of the estate of the brother, after excluding the community interest of his wife, was left to the decedent. The two brothers were partners until the death of Frank terminated the partnership. Each owned a one-half interest in the partnership. The Commissioner determined that the value of the gross estate of Frank was $913,147.40 and allowed deductions of $150,650.29, exclusive of specific exemptions, in determining the estate tax liability of Frank’s estate.

The Commissioner, in determining the present deficiency, has held that the value of property identified as previously taxed, that is, the value of the decedent’s interest in the estate of his brother at the time of the death of the decedent, was $649,706.88. He arrived at that figure by deducting $150,650.29, the deductions allowed the estate of Frank, and $108,992.81, Federal estate tax and state inheritance tax on the estate of Frank, from $909,349.98. He included the amount of $649,706.88 in the gross estate of the decedent, representing property identified as previously taxed, and he used the same amount in computing the deduction under section 303 (a) (2) of the Revenue Act of 1926, as amended.

He did not allow the estate of this decedent deductions for Federal estate tax and the state inheritance tax upon the estate of Frank. He allowed a deduction of $203,000 for “notes of partnership property” instead of $304,500 claimed on the return, and he did not allow a deduction of $40,000, or any part thereof, on account of the “amount paid Mrs. Blanche Bender for additional interest in community property.” The following explanation was given in the notice of deficiency for the adjustments just mentioned:

A deduction is allowed in this estate for only one-half of the notes on partnership property for the reason that the estate of Frank V. Bender is liable for one-fourth and Mrs. Blanche Bender is liable for one-fourth. The one-fourth liability of the estate of Frank V. Bender on the partnership notes and the Federal and State estate and inheritance taxes of the estate of Frank Y. Bender are considered in determining the value of the interest of the decedent in the prior estate.
The amount paid Mrs. Blanche Bender for an additional interest in community property in the estate of Frank Y. Bender is not a proper deduction in this estate.

The petitioners in their brief state the points upon which they rely as follows:

(1) The deduction authorized by Section 303 (a) (2) of the Revenue Act of 1926, as amended, is measured by the value of the property inherited from the prior decedent as included in the gross estate of the prior decedent, if said value remains unchanged, to the extent that liens, which existed at the death of the prior decedent, with respect thereto have not been discharged by the time of the death of the present decedent; and said gross value must be used in the ratio by which the arbitrary reduction of the amount otherwise deductible under said Section 303 (a) (2) is effected.
(2) Any and all claims and indebtedness, in respect to property included in the decedent’s estate at its gross value, for which decedent’s estate is liable constitute lawful and proper deductions under Section 303 (a) (1) of the Revenue Act of 1926, as amended.

The Commissioner, in determining the deficiency, has included in the gross estate of the present decedent, Eugene, $649,706.88, representing the value of the property -which Eugene was entitled to receive under the will of his brother Frank, and the Commissioner has used that same figure in computing the deduction under section 303 (a) (2) allowed the estate of Eugene. The first point of the petitioners is that a much larger gross figure should have been used in computing the deduction under section 303 (a) (2). They make no reference to the question of whether or not the same larger amount should be included in Eugene’s gross estate. Section 303 (a) (2) contains a provision that the deduction shall be allowed “only to the extent that the value of such property is included in the decedent’s gross estate.” Clearly, the petitioners, in order to make their contention under section 303 (a) (2), would have to concede that the same larger figure should be included in the decedent’s gross estate. But if the larger amount were used both places, the contention of the petitioners under section 303 (a) (2) would tend to increase the deficiency rather than reduce it. We are puzzled to know why this situation was not recognized and disclosed in the petitioners’ brief. The only benefit which they can gain from this proceeding is the allowance of the deductions which they claim in the second, third, and fourth assignments of error. Perhaps their contention on the first point is a concession against interest, made so that their claim for the latter deductions may appear more reasonable. Since a favorable decision on the first point can not of itself result in any benefit to the petitioners, and since the Commissioner is contending that his own method, which results in a smaller deficiency, is correct, it is really not an issue which requires or justifies a decision by the Board unless and except as it may have some bearing upon the other issues.

The remaining assignments of error refer to deductions claimed for the Federal estate and state inheritance taxes on the estate of the prior decedent, for $40,000 paid to the widow of the prior decedent, and for one-fourth of the notes secured by partnership property. The petitioners do not refer specifically to any of these items in their argument, but claim generally that “all of the liabilities as of the date of death of Eugene Bender which the estate of Eugene Bender has to satisfy, are deductible obligations in computing the net estate.” It does not appear that any of the items contained in the second, third, and fourth assignments of error have to be satisfied out of the estate of Eugene. The only explanation in the record of the item of $40,000 is the explanation given in the notice of deficiency, and the record offers no justification whatsoever for the contention that the Commissioner erred in disallowing that deduction. The Federal estate and state inheritance taxes were charges against the estate of Frank. The fact that the estate of Frank was not settled at the time of Eugene’s death and the taxes might have to be paid out of partnership property, is immaterial in view of the fact that the taxes on Frank’s estate were payable out of his estate, which had ample funds to pay them. The present decedent was entitled to receive what was left of the estate of his brother after those taxes and other items had been paid.

The Commissioner has allowed the estate of this decedent to deduct one-half of the partnership debts represented by the notes. The notes were secured by partnership property. Only one-half of that property belonged to the decedent. One-fourth had belonged to Frank and the other one-fourth belonged to his wife under the community property laws. The Commissioner allocated the liabilities on the notes in proportion to the interests of the three parties in the property securing the notes. His action seems entirely proper under the circumstances. The petitioners do not claim any deduction on account of the portion of the notes allocated to Frank’s wife, but claim that the one-fourth of the debts allocated to the estate of Frank is deductible by the present decedent. Here again it must be pointed out that Frank’s estate was entirely solvent and far more than sufficient to pay his full share of the partnership notes. Thus it appears that the estate of Eugene will not have to pay more than the amount of those debts which has been allowed the estate as a deduction.

The Commissioner included in the gross estate of this decedent not the gross estate of the brother, but the net amount after reducing that estate by amounts necessary to pay all taxes, expenses, and debts due from that estate, including the one-fourth of the partnership debts here in controversy. That action of the Commissioner was entirely proper under section 802 (a) and resulted in including in the estate of the present decedent his interest at the time of his death in the estate of his brother. His interest a that time was merely a right to receive a net amount after all of the taxes, expenses, and debts due from his brother’s estate had been paid. Likewise,, the Commissioner correctly used the same net amount in computing the deduction under section 303 (a) (2) for propei’ty previously taxed within five years. Finally, he did not err in disallowing any additional deduction for partnership debts.

The petitioners seem to think that the following provision of section 303 (a) (2), as amended, has some bearing upon their claim of a right to deduct a larger portion of the debts of the partnership secured by the notes:

Where a deduction was allowed of any mortgage or other lien in determining the gift tax, or the estate tax of the prior decedent which was paid in whole or in part prior to the decedent’s death, then the deduction allowable under this paragraph shall be reduced by the amount so paid.

The purpose of that language was to make certain that any increase in tbe equity or ownership of encumbered property, which, the property might represent in the hands of the second decedent at the time of his death over what it had represented in the hands of the first decedent at the time of his death, would not escape tax as a part of the estate of the second decedent merely because the property itself could be traced from the estate of the first decedent into the estate of the second decedent. The language does not indicate that Congress intended anything more by inserting the provision. Although a small amount was paid on the partnership debts prior to the death of the present decedent, the petitioners do not demonstrate how that circumstance affects the second issue. Even if one-fourth of the partnership notes actually had been collected from the estate of Frank, that circumstance would be no reason for allowing the amount as a deduction to the estate of Eugene. Full and complete recognition has been given by the Commissioner to the share of the partnership debts allocated to the estate of Frank by deducting that portion of the debts from the estate of Frank in computing the value of Eugene’s interest in that estate to be included in the gross estate of Eugene under section 302 (a).

Decision will be entered for the respondent.


author: Sternhagen :

text:
    Clarence Bonynge, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93625.
    Promulgated January 16, 1940.

      LeBoy B. Isermwn, Esq., for the petitioner.

      Z. N. Diamond, Esq., for the respondent.
   OPINION.

Sternhagen :

.The Commissioner determined a deficiency« of $3,835.22 in petitioner’s income tax for 1935, disallowing a deduction taken for a bad debt of $20,000 which the Commissioner held was ascertained to be worthless in 1934.

The facts were all stipulated. Briefly stated, it appears that petitioner’s son had had financial difficulties beginning in 1929, and petitioner was required to guarantee his account with a broker. The son at different times gave time notes to petitioner maturing in different years. The son apparently was unable to get a new foot-bold. Some of bis notes matured in 1934 and petitioner deducted them as debts ascertained to be worthless. The Commissioner allowed the deduction. In the following year, 1935, the year in question, petitioner deducted the full amount of a $20,000 note which became due in that year. The Commissioner disallowed the deduction, and said in the notice of deficiency:

The evidence discloses that your son had assets in excess of $100,000.00 when you guaranteed his account and that the various activities and prospects of your son during the years 1930 to 1933, inclusive, warranted your belief until the end of 1933 that you would be repaid; that your son lost all his property by reason of the collapse of the stock market and that in the year 1934 when demand was made for payment of the notes becoming due during that year he was entirely without property with which to pay the notes.
In view of the above this office is of the opinion that the bad debt of $20,000.00 representing the note becoming due in 1935 was ascertained to be worthless in 1934 and that the deduction may not be postponed until 1935 merely because the notes evidencing the indebtedness did not become due until 1935. (See Income Tax Ruling 2194, Cumulative Bulletin IY-2, page 159 and the decision of the United States Board of Tax Appeals in the case of Robert Smith Corporation, 21 B. T. A., page 1400).

The stipulation says as to each of the notes due in 1934 that petitioner made demand and that “by reason of his financial condition the son was unable to pay the notes and petitioner was unable to enforce collection.” As to the note in question, it is stipulated:

On January 11, 1935, the note for $20,000, dated January 11, 1932, * * * became due, demand for payment thereof being then made by petitioner. The son was unable to pay the note.
*******
the financial condition of the son under which the notes maturing in 1934 were ascertained to be worthless continued throughout the calendar year 1935 without change. * * *

From this it appears that the petitioner was unable in 1934 to collect the note due in that year because of the maker’s financial inability to pay, and the Commissioner has determined that the note due in 1935 was ascertained to be worthless in 1934. It is not shown that in fact the note due in 1935 was not worthless or was not ascertained to he worthless in 1934 or that reasonably it could not have been so ascertained. It is a fair inference that the worthlessness was apparent in 1934. The fact that the debtor’s financial condition made it impossible for him to pay the earlier note in 1934 and that the petitioner knew this when he attemped in 1934 without success to enforce collection supports the Commissioner’s determination that the later note due in 1935 was equally worthless in 1934.

This is not to declare a rule that the worthlessness of a debt maturing in 1934 is conclusive evidence of the worthlessness of debts which may not mature until a later year; for there may be room for a reasonable hope of financial improvement of the debtor before the later note becomes due. On the other hand, however, the lack of maturity of the later note does not preclude such a determination of worthlessness in an earlier year, Avery v. Commissioner, 22 Fed. (2d) 6, and if the determination is made either by the Commissioner, with a presumptive knowledge of the facts, or by the taxpayer, with proven knowledge of supporting facts, the worthlessness of the later note before maturity may reasonably be found, Robert P. White, 4 B. T. A. 995; Robert Smith Corporation, 21 B. T. A. 1400; and Anna Bissell, 23 B. T. A. 572. In the present case, to sustain the petitioner and reverse the respondent’s determination the Board would need a finding of fact supported by evidence that the note due in 1935 was in fact ascertained to be worthless in that year and not in 1934 as the Commissioner has held. The stipulated facts do not support such a required finding, and the Commissioner’s determination must, therefore, be sustained.

Reviewed by the Board.

Decision will be entered* for the respondent.


author: Hill:

text:
    Hammond Iron Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89617.
    Promulgated January 16, 1940.

      E. L. All, Esq., and A. J. Bowron, Jr., Esq., for the petitioner.

      Stanley B. Anderson, Esq., for the respondent.
   opinion.

Hill:

Respondent determined a deficiency in petitioner’s income tax for the year 1933 in the amount of $2,487.25, from which petitioner appeals and assigns as error the action of respondent in disallowing a deduction of $109,950.59 claimed as a capital loss resulting from the sale of a portion of petitioner’s assets to the First National Bank of Birmingham, Alabama, as trustee under the will of Morris W. Bush, deceased, in exchange for shares of petitioner’s own stock, thereafter held as treasury stock.

Petitioner is a corporation, organized under the laws of Delaware, with its principal office and place of business at Birmingham, Alabama.

In 1933 petitioner had issued and outstanding 2,000 shares of common stock, of which 500 shares were owned by the Morris W. Bush estate, and 1,500 shares (less qualifying shares) were owned by one Horace Hammond. In the same year petitioner also had outstanding 4,000 shares of preferred stock, of which the Bush estate owned 1,500 shares and Hammond 2,500 shares.

Morris W. Bush died sometime in 1932, and the First National Bank of Birmingham was appointed trustee under his will. Hammond was the majority stockholder of petitioner and desired to acquire control of the stock held by the Bush estate. At a special meeting of the board of directors of petitioner, held on December 15, 1933, a resolution was adopted authorizing Hammond, as president of the corporation, to purchase in its name the shares of stock held by the Bush estate, and to pay for such stock in cash or other assets of the company, or both.

Under date of December 20,1933, an agreement was entered into between petitioner and the bank, as trustee of the Bush estate, whereby the trustee agreed to sell to petitioner 1,500 shares of its preferred and 500 shares of its common stock, for the price of $103,231.01, and other considerations not involved in the present proceeding. The agreement recited that the price of $103,231.01 was payable by petitioner through delivery to the trustee of certain specified securities then owned by petitioner having an agreed appraised value of $103,231.01. The agreement was duly carried out in accordance with its terms.

There was no active trading in petitioner’s stock on the market, and in December 1933 there had been no recent sales of its stock. The value of the stock received by petitioner under the contract of December 20,1933, in exchange for a portion of its assets, was determined on the basis of the value of the assets back of the stock. The cost of the securities exchanged by petitioner for shares of its own stock was $109,950.59 in excess of the appraised value of the securities" transferred to the Bush estate. The parties have stipulated that the amount of the loss deduction claimed by petitioner is correct, if petitioner is entitled to any deduction on that account:

The 1,500 shares of preferred stock and 500 shares of common stock above referred to have been held, and in all respects treated, by petitioner as treasury stock since the date of acquisition.

Bespondent argues that petitioner is not entitled to deduct a loss on acquisition of its outstanding stock in exchange for a portion of its assets for the reason that the transaction resulted in a partial liquidation of petitioner. Respondent cites United States v. Gendron Wheel Co., 100 Fed. (2d) 57, and Meurer Steel Barrel Co. v. Commissioner, 35 Fed. (2d) 1019, holding in substance that the transfer of assets by a corporation to its stockholders in exchange for shares of the corporation’s own stock is not a sale of assets giving rise to deductible losses but in effect a liquidating dividend. Kespondent also cites article 71 of Regulations 77, Revenue Act of 1932, the pertinent provisions of which are quoted in the margin.

Petitioner says that it is not claiming any loss on account of the purchase or sale of its own stock, but that the loss claimed was sustained in selling its assets. In support of its position petitioner cites Allyne-Zerk Co. v. Commissioner, 83 Fed. (2d) 525; Commissioner v. S. A. Woods Machine Co., 57 Fed. (2d) 635, reversing 21 B. T. A. 818; certiorari denied, 287 U. S. 613; Spear & Co. v. Heiner (U. S. Dist. Ct., Pa.), 54 Fed. (2d) 134; Dorsey Co. v. Commissioner, 76 Fed. (2d) 339; certiorari denied, 296 U. S. 589.

It would be inappropriate and futile for us to discuss herein on their merits the contentions of the parties or the decisions of the lower courts cited by the parties, since the Supreme Court of the United States definitely decided the question involved on January 30, 1939, in Helvering v. Reynolds Tobacco Co., 306 U. S. 110, affirming 97 Fed. (2d) 302, which reversed 35 B. T. A. 949. The Supreme Court in that case held that, under section 22 (a) of the Revenue Act of 1928, gain accruing to a corporation on the purchase and resale of shares of its own stock did not constitute gross income for tax purposes. So far as material here the provisions of section 22 (a) of the Revenue Act of 1932, which governs the instant proceeding, are the same as those of the corresponding section of the 1928 Act. The Court quoted the following provisions from article 66 of Treasury Regulations 74, promulgated under the 1928 Act:

If * * * the corporation purchases any of its stock and holds it as treasury stock, the sale of such stock will be considered a capital transaction and the proceeds of such sale will be treated as capital and will not constitute income of the corporation. A corporation realizes no gain or loss from the purchase or sale of its own stock.

Substantially similar provisions are contained in article 66 of Regulations 77, promulgated under the 1932 Act. Article 66 of Regulations 74 and 77 was amended by T. D. 4430, May 2, 1934, C. B. XIII-1, p. 36, the material portion of the amended regulations being quoted in the Court’s opinion as follows:

Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. * * *
But where a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. * * * Any gain derived from such transaction is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of applicable statutes.

The Court pointed out in its opinion that the administrative construction embodied in the regulation prior to amendment has since at least 1920 been uniform, and “under the established rule Congress must be taken to have approved the administrative construction and thereby to have given it the force of law.” The Court further held that the amended regulation may not be applied retroactively, and that tax liability must be determined in conformity to the regulation in force during the taxable year.

On authority of Helvering v. Reynolds Tobacco Co., supra, the deficiency determined by respondent in the case at bar is approved.

Decision will be entered for the respondent.

       No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since ‘heir acquisition.


author: Hill :

text:
    Forest Glen Creamery Company, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51833, 64637-64639, 64653-64655.
    Promulgated January 16, 1940.

      George J. Dreishe, Esg., for the petitioners.

      Harold D. Thomas, Esg., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Claus Junge; Thomas J. Riley; I. T. Czajke; E. W. Iwicki; George L. Meyer; and Peter J. Wilson.

   OPINION.

Hill :

The Board held in an opinion appearing at 33 B. T. A. 564, that it was without jurisdiction in this case to redetermine the tax liability of the Forest Glen Creamery Co., hereinafter sometimes referred to as the corporation, for the calendar year 1927, since the deficiency notice stated that in accordance with section 279 (a), Revenue Act of 1926, respondent had assessed against the corporation an income tax for the “period ended June 30, 1927.” The United States Circuit Court of Appeals reversed the Board’s decision and remanded the cause for a hearing on the merits, holding that respondent in fact determined the controverted deficiency for the calendar year 1927, and that the Board had jurisdiction to redetermine the tax liability for that year. See 98 Fed. (2d) 968. The court’s decree is now the law of the case, and we are bound thereby. In re Sanford Fork & Tool Co., 160 U. S. 247, 255; Peavy-Byrnes Lumber Co., 31 B. T. A. 985; affd., 86 Fed. (2d) 234; certiorari denied, 300 U S. 674. Our further discussion herein will, therefore, proceed on the premise that the deficiency involved is for the calendar year 1927.

The individual petitioners herein, who are charged with liability as transferees of the corporation’s assets, have alleged in their pleadings, (1) that limitations had run prior to mailing of the notices to petitioners; (2) that petitioners are not liable as transferees; and (8) that there is no deficiency in the tax liability of the alleged transferor corporation.

The issues arising out of allegations (1) and (2) apparently have been abandoned by petitioners, but, if not, they must be decided adversely to their contentions. Assessment of transferee liability was not barred by limitations when the notices were mailed to petitioners on February 17, 1932. The corporate taxpayer filed its return on March 10,1928; hence the period of limitations for assessment against it did not expire prior to March 1931 (section 277 (a) (1), Eevenue Act of 1926), and the period for assessment of transferee liability provided in section 280 (b) (1) did not expire until March 1932.

Likewise, it seems clear that petitioners are liable as transferees for whatever tax, if any, is due from the corporation, since respondent now concedes that the deficiency is less than $22,312.40, and the parties have stipulated that each of the individual petitioners herein received proceeds of sale of the corporation’s assets in excess of that amount, if it should be held that the corporation sold its assets. Thus, the sole issue for decision here is whether or not the transaction consummated in 1927, under the facts and circumstances set out in our findings of fact above, constituted a sale by the corporation of its business and assets, or a sale by the stockholders of their shares of stock in the corporation.

Petitioners contend that respondent’s determination of the deficiency in controversy was based solely upon a revenue agent’s report, in which it was held that the transaction involved was a sale of assets by the corporation and not a sale of stock by the stockholders; that the revenue agent’s conclusion was arbitrary and erroneous because it was based upon his construction of the contract of May 24, 1927, which it is alleged was not carried out but was superseded by a new agreement dated July 20, 1927, called the escrow agreement, under which latter agreement petitioners say they sold their shares of stock and received the consideration paid therefor. Petitioners argue that, since the revenue agent construed the wrong contract, respondent’s determination predicated thereon is so obviously arbitrary and without foundation that it must be disapproved, citing in support thereof Bruce & Human Drug Co., 1 B. T. A. 342; Acorn Refining Co., 2 B. T. A. 253; Index Notion Co., 3 B. T. A. 90; Helvering v. Taylor, 293 U. S. 507.

The Supreme Court in its opinion in the Taylor case stated that “The fact that the Commissioner’s determination of a deficiency was arbitrarily made may reasonably be deemed sufficient to require the Board to set it aside”, citing the three decisions of the Board above mentioned. However, in the Taylor case, the evidence affirmatively disclosed that the Commissioner’s determination was arbitrary and excessive, and the Court therefore held it invalid, saying that the taxpayer should not be bound to pay a tax that confessedly he did not owe because his evidence was not sufficient also to establish the correct amount that lawfully might be charged against him. The doctrine applied in that case, as well as in the cited decisions of the Board, has no application here, because petitioners have not shown that respondent’s determination in the instant case is without rational foundation or excessive.

The burden of proof in the first instance is upon the taxpayer to show that the Commissioner’s determination is invalid. Helvering v. Taylor, supra; Lucas v. Kansas City Structural Steel Co., 281 U. S. 264, 271; Wickwire v. Reinecke, 275 U. S. 101, 105.

Petitioners here have not discharged their burden merely by showing that the revenue agent construed the wrong contract, if indeed such was the case. It might well be that the subject matter of the first contract dated May 24, 1927, was the same as in the latter agreement dated July 20, 1927. If both instruments were in fact contracts by the corporation to sell its business and assets rather than agreements by the stockholders to sell their stock, then the conclusion reached by respondent is correct, and it is immaterial that it was based solely upon a construction of the earlier contract. If the record before us establishes that the deficiency determined by respondent is correct, it is our duty to approve it even though his reasoning is not sound or based upon the correct principle. American Bond & Mortgage Co., 15 B. T. A. 264, 272.

The ultimate issue for decision here is whether or not the deficiency asserted by respondent is lawfully due from the Creamery Corporation; and the primary question, the answer to which disposes of the former, is whether that corporation sold its assets or the stockholders sold their stock.

In order to determine the intention of the contracting parties in so far as it affects the question presented here, we think we may properly look to the terms of both agreements, as well as the attendant circumstances, so far as disclosed. While it may be true that, technically at least, the escrow agreement of July 20 was a new contract, superseding the instrument dated May 24, yet the two contracts must be construed together for the reason that a copy of the earlier contract was annexed to and made a part of the escrow agreement. However, so far as concerns the subject matter of the two agreements, that is to say, the thing agreed to be sold by the one party and purchased by the other, we find no conflict in the provisions of the two instruments. The escrow agreement, broadly speaking, merely amended and supplemented the provisions of the first contract; the essential nature of the agreement, the thing sold, and the consideration agreed to be paid therefor, remain unchanged.

From a careful consideration of the terms of the contracts themselves, we think it is clear that it was the intention of the Creamery Corporation to sell its business and assets for the consideration stated, and that there was no sale intended to be made by the stockholders of their shares of stock, nor was any such sale in fact consummated. The nature of the transaction is not altered by the fact that the stockholders of the corporation, for reasons satisfactory to themselves, provided in the agreements for the proceeds of sale to be distributed directly to them instead of causing the consideration to be paid to the Creamery Corporation and by it distributed to them in liquidation. This merely constituted a cutting of corners, and was probably occasioned by the desire of the purchaser to acquire full and unrestricted control of the selling corporation prior to or at least at the time of the payment of the consideration for the transfer of the business and assets.

The terms of the instruments, we think, are not fairly susceptible of any other construction, and in the light of the plain and unambiguous language used can not be held to constitute agreements for the sale and purchase of stock. The contract of May 24, 1927, recited that the Forest Glen Creamery Co. was the owner of an extensive creamery and milk business, which the other party desired to purchase and take over in its entirety, including all of its real estate, goods, chattels, property, and equipment. Thus, the original intention of the parties was to effect a sale and purchase of the business and assets rather than of shares of stock, the transfer of which by the stockholders appears to have been only incidental to the sale by the corporation of its assets.

We find nothing in the record to indicate that the purchaser desired primarily to acquire control of the Creamery Corporation through purchase of its stock instead of a direct acquisition of its business and assets. The purchaser apparently took over the stock in order to insure that, through dissolution of the Creamery Corporation, the purchaser would derive the full benefit of its good will. At any rate, the shares of stock were worthless at the time of actual transfer, since the Creamery Corporation then had no assets, and it was never thereafter used by the purchaser to carry on any business operations; its charter was permitted to be forfeited in the following year for nonpayment of state franchise tax.

That the payment directly to the stockholders of the proceeds of sale of the Creamery Corporation’s assets constituted a liquidating distribution is indicated by the resolution adopted at a meeting of the stockholders on July 22, 1927, ratifying the contract of May 24, as modified by the supplemental agreement of July 12, in which resolution the stockholders specifically agreed to look solely to the purchase price for their distributive shares in payment of the surrender of all the capital stock of the corporation.

For the reasons indicated, we hold that the transaction in controversy constituted a sale by the Forest Glen Creamery Co. of its business and assets, and not a sale by the stockholders of their shares of stock. The amount of the deficiency due from the taxpayer corporation will be recomputed in accordance with the stipulation of the parties that the taxable net income as determined by respondent should be decreased in the sum of $30,000. We further hold that each of the individual petitioners herein is liable for such deficiency, so redetermined, as a transferee of the assets of the taxpayer corporation.

Decisions will be entered wader Rule SO.


author: Murdock: SterNhageN,

text:
    Ellsworth B. Buck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93330.
    Promulgated January 18, 1940.

      M. Francis Bra/omam,, Esq., for the petitioner.

      Harold F. Noneman, Esq., for the respondent.
   OPINION.

Murdock:

Although the Commissioner in his notice of deficiency referred to both section 166 and section 167 to justify his inclusion of the trust income in the income of the petitioner, he now, apparently, seeks no support for his action in section 167, except as to a small amount mentioned in his alternative contention. Section 167 provides that where any part of the income of a trust is, or in the discretion of described persons may be, distributed or held for future distribution to the grantor or applied to the payment of premiums upon policies of insurance on the life of the grantor, then that part of the income of the trust shall be included in computing the net income of the grantor. All of the income of the trust was payable in this case to the wife of the grantor or to beneficiaries other than the petitioner. He expressly provided' that he should have no power to amend the trust so as to direct that any part of the income of the trust should be distributed to him, held for future distribution to him, or applied to the payment of premiums upon policies of insurance on his life. The terms of the trust denying these powers to the petitioner are equally as broad as the provisions of section 167 and may have been drawn for the very purpose of preventing the income of this trust from being taxable to the petitioner under section 167. We find no justification for taxing the income of the trust to the petitioner under section 167.

The respondent now attempts to justify his determination solely on the following grounds: First, that all of the income of the trust is taxable to the grantor as the income of a revocable trust within the meaning of section 166; second, the trust is without substance and, therefore, the income is taxable to the petitioner as his own income under section 22 (a) ; third, as an alternative, a portion of the trust income paid into an insurance trust was used to pay premiums on policies of insurance on the petitioner’s life and is taxable to him under section 167 (a) (3). His first argument is based upon that provision of the trust instrument, quoted in the findings of fact, wherein the grantor reserved to himself the right to alter or amend the trust provisions relating to the disposition of the income and principal of the trust and to change any beneficial interest under the trust, and upon the other provision whereby any beneficiary was entitled to terminate the trust as to that part of the principal from which he was receiving income, whereupon that principal would go to the grantor. The respondent argues:

He may thus designate, for the purpose of terminating the trust, a compliant person as the recipient of the income of the entire trust, who will then terminate the trust, whereupon the petitioner will receive that which he theretofore had transferred to the trustee. This the respondent submits gives the petitioner the right to revest title to the entire corpus in himself.

He cites a number of cases in support of this argument, but claims that the one most nearly in point is that of Ralph Pulitzer, 36 B. T. A. 964, a division decision now on review in the Second Circuit. Pulitzer created a trust and named his wife as life beneficiary, with remainders to their children. He expressly provided, however, that he could designate some third party who would have the power to revoke the trust in whole or in part, and upon such termination the trustee Avas to pay the funds, in so far as the trust was terminated, to the one designated. The Board, observing that the power to revest need not be expressly reserved in the instrument, held that the grantor actually had a power to revest because he could contract with a third person to have that third person receive the power of revocation, revoke the trust, receive the property, and transfer it to the grantor. The deed in the present case does not contain provisions corresponding closely to those contained in the Pulitzer deed, although a beneficiary is permitted to revoke as to the corpus from which he receives income. The Pulitzer deed did not contain provisions similar to the following contained in the present deed:

Provided, however, that the grantor shall have no power to revoke this trust in whole or in part, or to revest in himself title to any part of the principal of the trust estate, and provided further that he shall have no power to amend this indenture so as to direct that any part of the income of the trust be distributed to him or held or accumulated for future distribution to him, or so as to direct that any part of the income of the trust be applied by the trustee to the payment of premiums upon the policies of insurance on his life.

The Pulitzer case may be distinguishable or, at least, may not be an authority for another reason. If it be assumed that the petitioner might contract with a “compliant person” so that when he exercised his power to amend and named that person as beneficiary, that person in turn would agree to terminate the trust, nevertheless, he did not enter into any such contract during the taxable years, and, until he found a suitable compliant person to act as his puppet and bound that person by contract, this assumed power in him was potential only, was contingent, and did not exist. Corning v. Commissioner, 104 Fed. (2d) 329. Consequently, section, 166 would not apply even under the interpretation of tbe trust deed urged by tbe Commissioner.

There is a canon of construction that a deed of trust must be interpreted in accordance with tbe intent of tbe grantor gathered from tbe entire trust instrument. The interpretation placed upon this trust instrument by the respondent would give to the grantor indirectly and in conjunction with a puppet, powers which he expressly denied himself in the trust instrument. That interpretation, which would permit him to dry up the trust to his own advantage and to the disadvantage of the beneficiaries, seems strained and unreasonable. Cf. Knapp v. Hoey, 24 Fed. Supp. 39; affd., 104 Fed. (2d) 99. If he did not bind the puppet by agreement, the person would have an adverse interest. The record does not suggest that this trust, which indicates great care on the part of the petitioner to provide for his wife and their descendants, was set up as a subterfuge. We are unwilling to hold that this petitioner had the intention, which the respondent would attribute to him, of reserving to himself the powers necessary to bring this case within section 166.

The courts and the Board have held in other cases somewhat similar to this one that the income of trusts was not taxable to the grantor. See Knapp v. Hoey, supra; Phebe Warren McKean Downs, 36 B. T. A. 1129; Henry A. B. Dunning, 36 B. T. A. 1222; appeal dismissed June 10, 1938; Ralph L. Gray, 38 B. T. A. 584. The grantor in the Knapp case had denied himself the right to amend so that the “income be paid to or for the use of the party of the first part [himself].” That case seems indistinguishable from the present case. Judge Patterson, now a member of the Circuit Court of Appeals, in deciding the Knapp case in the District Court, said :

On the face of the deed the grantor retained effective control over the disposition of the income of the trust, with only one limit: he could not make any change whereby the trust income would become payable to himself. He was the one person in the whole wide world who could not become a beneficiary. Olearly there was no intention that any part of the income might, “in the discretion of the grantor of the trust, * * * be distributed to the grantor or be held or accumulated for future distribution to him”. So the income was not made taxable as his income by reason of section 167. It is equally clear that the trust was not revocable in terms; no power was reserved by the grantor to revest in himself title to any part of the corpus. So the case is not one of a revocable trust under section 166. These conclusions are in accord with decisions of the Board of Tax Appeals in Downs v. Commissioner, 36 B. T. A. 1129; Dunning v. Commissioner, 36 B. T. A. 1222, and Blodgett v. Commissioner, 37 B. T. A. -, decided March 11, 1938.
The defendant makes a labored argument to the effect that the plaintiff, with power to cancel the interest of any beneficiary in income and in corpus, may cancel all such interests and leave a total void in beneficiaries, thereby making the trust revocable at his pleasure by force of section 213 of the New York Personal Property Law, Consol. Laws, e. 41. * * * The defendant’s argument comes down to saying that the grantor may do indirectly what he might not do directly.

Section 166 deals with revocable trusts and provides that where the power to revest in the grantor title to any part of the corpus of the trust is vested in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of that part of the corpus or the income therefrom, or in any person not having a substantial adverse interest in the disposition of that part of the corpus or the income therefrom, then the income from that part of the trust for the taxable year shall be included in computing the net income of the grantor. The grantor in the present case did not have power to revest in himself title to any part of the corpus of the trust nor was such a power vested in the grantor or in any other person, nor was it vested in any person not having a substantial adverse interest in the disposition of the corpus of the income therefrom. Though there was a power to revoke in the beneficiaries, their interests were adverse. Consequently, section 166 does not apply in this case.

The next argument of the respondent requires little discussion. He says this trust lacks substance. The petitioner did not retain the beneficial ownership of the trust property. All of the income was paid to and used by his wife as she saw fit. The fact that he signed most of the checks on one of her three bank accounts as a convenience to her and to pay her bills, seems unimportant here. Cf. Poe v. Seaborn, 282 U. S. 101. He reserved the power to vote the Wrigley stock and also power over the disposition of that stock, but in doing so he did not deprive the trust of substance so that it should be disregarded for income tax purposes. Cf. Henry A. B. Dunning, supra. It is a separate entity for tax purposes. The facts here do not present a situation similar to that found in Benjamin F. Wollman, 31 B. T. A. 37; William C. Rands, 34 B. T. A. 1107; Estate of A. C. O'Laughlin, 38 B. T. A. 1120; Stoddard v. Eaton, 22 Fed. (2d) 184, or in any of the other cases cited by the respondent. Likewise, the alternative contention of the respondent is without merit. Any of the trust income which was used to pay premiums on insurance policies upon the life of the petitioner was used for that purpose, not in accordance with or. as directed by the provisions of the trust deed, but because the petitioner’s wife in the exercise of her rights of ownership, after receiving the money from the trustee, chose to use it for that purpose by paying it into a trust which she had created. Frederick K. Barbour, 39 B. T. A. 910; George Washington, Sr., 36 B. T. A. 74, 81. Funds used for this purpose under these circumstances are not taxable to the grantor under section 167 (a) (3).

The facts involved in the second issue have all been stipulated. The respondent concedes that those facts bring this case squarely within our decision in Sidney W. Winslow, Jr., 39 B. T. A. 373. We hold, following that decision, that the annual installment, exclusive of interest, received by the petitioner in 1934 as principal under a life insurance contract, is exempt from income tax under section 22 (b) (1) of the Revenue Act of 1934.

Reviewed by the Board.

Decision will he entered under Rule 50.

SterNhageN,

dissenting: In my opinion, the power reserved by the settlor in the indenture is approximately equivalent to ownership and control of the corpus and income, and therefore he is properly taxable under sections 166 and 167.

By indenture, the settlor has the right “to alter or amend in any respect whatsoever the provisions of this indenture relating to the disposition of the income and principal of the trust estate or of the separate shares into which the same may be divided, and to change any beneficial interest hereunder.” This is restricted by the proviso “that the Grantor shall have no power to revoke this trust in whole or in part, or to revest in himself title to any part of the principal of the trust estate” and “that he shall have no power to amend this indenture so as to direct that any part of the income of the trust be distributed to him or be held or accumulated for future distribution to him, or so as to direct that any part of the income of the trust be applied by the Trustee to the payment of premiums upon policies of insurance on his life.” By a separate provision, any beneficiary may terminate the trust to the extent of his interest, in which event the trustee is required to transfer such portion of the principal to the settlor.

Thus the settlor is at all times in a dominant position with regard to both the principal and the income, for no one, whether he be a present beneficiary or not, has a superior control except by the settlor’s voluntary action or inaction. He may, if he chooses, change any or all of the beneficiaries and substitute whomsoever he will to receive income upon any conditions he chooses to name. A beneficiary who holds by such sufferance can not, it seems to me, be regarded as one having a substantial interest adverse to that of the settlor. Rollins v. Helvering, 92 Fed. (2d) 390, 394, 395. I see no obstacle to prevent the settlor from ousting any or all of the beneficiaries or requiring a beneficiary to terminate the trust as to the portion of the principal from which he has been designated to receive the income and thereby bringing about an express trust for the grantor fro tcurvto or a resulting trust for failure of a beneficiary. For the purpose oí the revenue act, it is no answer to surmise that the settlor had no such intention when he executed the indenture. Indeed, the power of attorney over his wife’s bank account and its use gives some support to an inference of his intention to control the use of the income, for in 1933 he drew 300 of the 302 checks on the account and in 1934, 332 of the 338. In every substantial sense it seems to me that the settlor retained the power to revest the corpus in himself and to control the disposition of the income so that it might, at his election, come to him. This is clearly within the intendment of sections 166 and 167, and I think may properly be regarded as within the language.

It is also a corollary of the proposition that the reserved power to change the beneficiaries precludes the transfer from being regarded as so complete as to be subject to the gift tax, Estate of Sanford v. Commissioner, 308 U. S. 39, or as to prevent the imposition of estate tax upon the trust principal at his death, Porter v. Commissioner, 288 U. S. 436. The Sanford case expressly left the present question undecided, and I think the imposition of the income tax upon the settlor is necessary if the several sections of the revenue act are to be harmoniously applied.

Mellott, Hill, DisNet, and OppeR agree with this dissent.


author: Leech:

text:
    First Trust & Deposit Company and Gwynn W. Hoyt, as Guardians of the Property of Willard C. Lipe, Jr., Petitioners, v. Commissioner of Internal Revenue, Respondent. First Trust & Deposit Company and Gwynn W. Hoyt, as Guardians of the Property of Gordon C. Lipe, Petitioners, v. Commissioner of Internal Revenue, Respondent. First Trust & Deposit Company and Gwynn W. Hoyt, as Guardians of the Property of Suzanne H. Lipe, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90749, 90750, 90751.
    Promulgated January 19, 1940.

      Benjamin E. Shove, Esq., for the petitioners.

      Thomas H. Lewis, Jr., Esq., for the respondent.
   OPINION.

Leech:

Respondent bas included one-third of the trust income from the insurance trust for the years 1933, 1934, and 1935, in the income of each of the wards of these petitioners. He has also' refused to allow the trustee to deduct from the 1933 gross income, said to be distributable to the guardians of the three children, an amount paid as interest in 1933 on a Federal estate tax deficiency as well as amounts paid in 1933 on account of Federal estate taxes and New York inheritance taxes.

Petitioners assume that, because the proceeds of the insurance paid to the insurance trust were a part of decedent’s statutory gross estate for Federal estate tax purposes, the insurance trust income includes the income of the estate of W. Charles Lipe, deceased, the settlor of that trust. From this premise they argue that section 161 (a) (3) and section 162 (c) of the Revenue Acts of 1932 and 1934, apply and the conclusion then follows, they say, that since none of the contested income was “properly paid or credited” during any of the taxable years to the beneficiaries, the respondent erred in including any of this income in that of any of the beneficiaries during those years.

We agree with respondent that petitioners have misconceived the issue and the controlling statutory provisions.

Although it is true that the statutory gross estate for Federal estate tax purposes did include the proceeds of the insurance paid to the trust, as well as the remainder of its corpus (Revenue Act of 1926, sec. 302 (c)), the estate of the deceased settlor, during the period of its administration, is wholly different and distinct, for Federal income tax purposes, from the insurance trust, with the income of which, alone, we are here concerned. Robert P. Scripps, 33 B. T. A. 963; affirmed on this issue, 96 Fed. (2d) 492; certiorari denied, 305 U. S. 625; Albert W. Russell, 35 B. T. A. 602; Woolley v. Malley, 30 Fed. (2d) 73.

Thus respondent has proceeded on the theory that the contested income of the insurance trust was currently distributable within section. 161 (a) (2) of tbe Revenue Acts of 1932 and 1934, and, therefore, on its receipt by the trust, this income was taxable to the beneficiaries to whom it was so distributable, “whether distributed to them or-not”, under section 162 (b) of the same revenue acts. See Freuler v. Helvering, 291 U. S. 35.

Our inquiry then is whether the income of the insurance trust for 1933, 1934, and 1935 was “to be distributed currently” under the terms of the trust. See Central Hanover Bank & Trust Co. et al., Executors, 34 B. T. A. 741. We think not.

A careful scrutiny of that document indicates that, normally, the corpus was to go outright in equal shares to the children of W. Charles Lipe upon the death of the survivor of him and his wife. The trustee was directed to collect the trust “income” and, after paying the expenses of administration of the trust and the premiums on the life insurance policies, was directed to distribute the balance in quarterly installments to the grantor or his surviving widow. It was then provided that, “Upon her death or in case she shall have predeceased the Grantor [the. trustee was] to divide the capital together with all accumulations into as many equal parts as there are children of the Grantor and the said Eloise and the issue of any such deceased children per stirpes and not per capita and to pay over, deliver and convey one of such equal parts to each child and one of such equal parts to the issue of each deceased child, share and share alike.” This discloses an intention that any income realized by the trust after the death of the survivor of the grantor and his wife should go to the guardians of the three children only as and when accumulations on corpus were so distributable.

The settlor and his wife died simultaneously in 1929. Normally, the corpus of the trust and its accumulations would then have been distributable. However, the trust conclusively evidences that one of its primary purposes and functions was the payment of the settlor’s estate and transfer taxes out of its corpus. Thus, the life of the trust was extended beyond the death of the survivor of the settlor and his wife. Eespondent concedes this.

However, his position seems to be that the trustee was not justified in withholding distribution of the income because, after the death of the settlor and his wife, no reason existed therefor since the only purpose for extending the life of the trust was the payment of the estate and inheritance taxes which could only be made from corpus— so, from the time of the deaths of the settlor and his wife, the income was currently distributable when received by the trust. He cites Freuler v. Helvering, supra, and other authorities to the same effect, holding that it is the right to receive a distribution of trust income and not its actual receipt upon which taxability to the beneficiaries depends. Undoubtedly, if the premise were correct, the conclusion for which those cases stand would follow. But the stated premise does not exist here. The insurance trust income, after the death of the settlor and his wife, was distributable only if, as, and when the corpus was distributable.

The corpus was to be used for the payment of taxes arising upon the death of the settlor — the amounts of which were not all determined nor paid until August of 1934. Certainly, before that time no corpus and therefore no income was currently distributable.

In May 1935, the trustee of the insurance trust instituted a proper action for a judicial settlement of its account as trustee. This account was not so settled during 1935. Final distribution therein was ordered by the court on September 24,1937, which order was obeyed by the trustee on September 25, 1937.

This record, in our judgment, satisfactorily establishes that there was no unreasonable delay in this administration, at least until after the close of 1935, the last year involved here. Without such delay, under the law controlling in this procedure, no distribution was legally enforceable until after that time. So, in Deering v. Pierce, 149 App. Div. 10; 133 N. Y. S. 582, where a trust provided for the payment of corpus to a remainderman upon the death of a life beneficiary, it was held that the remainderman could not compel payment of the trust fund or any part thereof until the trustee had accounted. See also In re Beeckman, 133 Misc. 601; 233 N. Y. S. 418; Manning v. Sheehan, 133 N. Y. S. 1006; In re Hilton, 160 N. Y. S. 55.

Since the current distribution of the trust income for none of the three tax years could have been compelled, it was therefore not “to be distributed currently.” This is so whether the view of the Board in Adolph Bernard Spreckels, 37 B. T. A. 709, be followed, or that of the reversing Circuit Court of Appeals in 101 Fed. (2d) 721,

It may be, as respondent seems to suggest, that the trustee could have distributed trust income during the tax years without judicial interference. However, even if that be so, it could not have been forced. Such distribution would have been only discretionary in the trustee (Lynchburg Trust & Savings Bank et al., Trustees, 27 B. T. A. 1182; reversed on another point, 68 Fed. (2d) 536), and the same tax result would follow here since no trust income was paid or credited to the petitioning guardians of the children for any of the taxable years. Revenue Acts of 1932 and 1934, sections 161 (a) (4) and 162 (c), supra. In this statement we disregard the apparent exception in the fact that in December 1935 a court order directed the trustee to pay the guardians of the children $15,000 from income for each of the children, which was paid.

The inference from the record is that the income to which this order was directed was that of years prior to Í933 and thus not involved here. Moreover, the respondent has not even suggested at any time the taxation of any income to the guardians of the children on any theory other than that it was “to be distributed currently.” Thus, although the fact that this order was made and obeyed indicates that the trustee did not consider the income even discretionarily distributable, any significance in the fact is ignored by us as it was and is now by respondent.

Respondent erred in taxing the trust income to the guardians of the children for those years. This conclusion obviates any necessity of deciding the second issue.

Decisions will be entered for petitioners.

       SEC. 161. IMPOSITION OF TAX.
      (a) Application op Tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
      *******
      (3) Income received by estates of deceased persons during the period of administration or settlement of the estate,

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * ******
      (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

       SEC. 161. IMPOSITION OP TAX.
      (a) Application op Tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
      «***$*♦
      (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * # v ¡r * • *
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

       SEC. 161. IMPOSITION OF TAX.
      (a) Application of Tax. — The taxes Imposed by this title upon individuals shall apply to the income of estates or of any Idnd of property held in trust, including—
      w * * * * * *
      (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

       See also sections 161 (a) (2) and 162 (b) of the revenue acts, (supra), as to taxability of trust income collected by a guardian of an infant “which is to be held or distributed as the court may direct * *