author: Murdock:

text:
    Carl J. Schmidlapp, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98895.
    Promulgated March 6, 1941.

      Watson Washburn, Esq., for the petitioner.

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

Murdock:

This case presents a controversy revolving around the New York statutory rule against perpetuities. The Commissioner contends that the original instrument dated July 16, 1926, violated that rule and, therefore, was entirely invalid. Thus, he reasons that no valid gift was made in 1926 and the entire value of the property in 1935 is taxable as a gift made in that later year. The petitioner concedes that those provisions of the 1926 deed which were to the •effect that the trust property should be held in trust during the lives of persons not in being at the time the' instrument was executed, offended the rule. He- - contends, nevertheless, that the instrument created at least a valid trust for the life of the grantor; further, that the instrument was valid in so far as it.related to the two daughters who were living on July 16, 1926; and, in any event, it was validly supplemented as of July 16, 1926, by the- instrument dated December 31,1935. He concludes that, a valid completed gift of some kind was made in 1926 which could not be taxed as a gift in 1935.

The Hew York rule relating to limitations upon the vesting of absolute title to personal property appears in section 11 of the Personal Property Law, and is in part as follows:

The absolute ownership of personal property shall not be suspended by any limitation or condition, for a longer period than during the continuance and until the termination of not more than two lives in. being at the date of the instrument containing such limitation or condition, or, if such instrument be a last will and testament, for not more than two lives in being at the death of the testator; * * *

The provisions of the 1926 deed which directed that a portion of the trust property should be held in trust during the life or lives of children or grandchildren who were not in being at the time of the -execution of the trust violated the rule. However, it does not follow that the de'ed was invalid in its entirety. The courts of Hew York have frequently held one part of an instrument valid even though •other portions were invalid because they would suspend the absolute -ownership of property for too long a period. Tiers v. Tiers, 98 N. Y. 568; Kalish v. Kalish, 166 N. Y. 368; 59 N. E. 917; Hascall v. King, 162 N. Y. 134; 56 N. E. 515; Carrier v. Carrier, 226 N. Y. 114; 123 N. E. 135. The law of New York on the subject of partial validity of testamentary instruments which contain provisions offending the rule against perp'etuities is summarized as follows in In re Durand’s Will, 250 N. Y. 45; 164 N. E. 737:

The citation of authorities is of very little use in cases of this kind upon the fundamental principles of the law of wills. All the authorities cited are a mere repetition of these rules. The difference in the opinions is in their apiili-eation to varying facts. What constitutes a suspension of the power of alienation is to be determined by the facts. The law is plain. Matter of Chittick’s Will, 243 N. Y. 304, 153 N. E. 83. That we must consider in determining the application of section 11 of the Personal Property Law, not what the actual conditions now are, but what may happen, is well established. Matter of Mount’s Will, 185 N. Y. 162, 77 N. E. 999. If -the dominant purpose is the creation of a single trust to continue during more than two minorities, absolute ownership is illegally suspended and the trust in its entirety is void, even though in some contingencies it 'may end within the statutory term. Matter of Horner’s Will, 237 N. Y. 489, 143 N. E. 655. In some instances it has been possible to disregard that .portion of the will which rendered the trusts illegal, and preserve the rest. Matter of Trevor’s Will, 239 N. Y. 6, 145 N. E. 66; Matter of Horner, supra. These eases express no new rule, hut merely apply long-standing and well-recognized rules to new facts. The dominant, underlying principle in all these cases is to carry out as far as possible within the meaning of the statute the intention of the testator. If we can read into a will an intention to preserve any part of it, even with the illegal portions stricken out, the court will do so. In such a case we try to determine whether the maker of the will would have created the trust if all his express purposes could not be accomplished. This is not strictly law; it is a matter of good judgment, the judgment of men who according to our judicial system must in the last analysis determine the question. In declaring a testator’s intention, however, the courts are limited to the words which the testator, himself, has used in his will.

Although the Commissioner recognizes that there is a rule permitting severance in some cases, he argues that the mere possibility that the instrument might call for a violation of the rule invalidates the whole and he cites a number of New York cases on this subject. He points out that the petitioner might have another child or one or more of his children might predecease him leaving issue and, in either event, the life estate provided for such child or issue of a deceased child in the 1926 trust instrument would suspend the absolute ownership of that portion of the trust property for a period longer than two lives in being at the date of the instrument. He further contends that the rule of severance applies only to testamentary dispositions, not to inter vimos transfers, and that it does not apply where the valid and invalid provisions relate to the same property. He fails to cite authorities, however, in support of these last two propositions. The case of Carrier v. Carrier, supra, cited by the petitioner, holds to the contrary on both points. Other authorities that the rule of severance applies even though the valid and invalid provisions relate to testates in the same property are In re Colegrove’s Estate, 221 N. Y. 455, 117 N. E. 813; In re Trevor, 239 N. Y. 6, 145 N. E. 66; In re Lyons' Will, 271 N. Y. 204, 2 N. E. (2d) 628; In re Gorham’s Will, 283 N. Y. 399, 28 N. E. (2d) 888. The courts of New York, however, have refused to apply this saving rule of severance where to do so would distort the intention of the grantor as indicated in the instrument.

Decisions indicating when a gift is complete for gift tax purposes must also be kept in mind. Transfers which are not complete until the death of the transferor removes the possibility that the property will revert to him are subject to estate tax, Helvering v. Hallock, 309 U. S. 106, and are not complete gifts for gift tax purposes in some year prior to his death. A completed gift for gift tax purposes means one not coupled with a possibility of reverter which may defeat it before it ever reaches the donee. Helvering v. Hallock, supra; Lorraine Manville Gould Dresselhuys, 40 B. T. A. 30; Emily Trevor, 40 B. T. A. 1241; William T. Walker, 40 B. T. A. 762; Maars McLean, 41 B. T. A. 1266; Margaret White Marshall, 43 B. T. A. 99. Cf. Klein v. United States, 283 U. S. 231; Sanford v. Commissioner, 308 U. S. 39; Hughes v. Commissioner, 104 Fed. (2d) 144; Hesslein v. Hoey, 91 Fed. (2d) 954; Van Vranken v. Helvering, 115 Fed. (2d) 709. One of the thoughts back of those decisions was that since section 510 makes the donee of a gift personally liable to the extent of the value received by him, he should not be taxed on a gift which he might never be able to receive and enjoy.

There are provisions of the 1926 deed which are valid and which may be conveniently and properly severed from those which were invalid or which are of doubtful validity. Those provisions which created a trust for the benefit of the children and their issue during-the life of the grantor did not violate the New York rule against perpetuities, and it is reasonable to assume that the grantor would! have desired to preserve that trust even though the remaining purposes of his deed could not be attained. The instrument provided! for a rather distinct change immediately after the death of the petitioner. The trust property was to be divided at that time into as. many portions as he had children or issue of deceased children then living. This probably meant separate trusts. Cf. United States Trust Co. of New York v. Commissioner, 296 U. S. 481; In re Colegrove’s Estate, supra; Vanderpoel v. Loew, 112 N. Y. 167; 19 N. E. 481. Even if these latter provisions were wholly invalid, nevertheless, the courts of New York would probably hold that the trust which could not survive the grantor was valid. Carrier v. Carrier, supra. The trust to which we refer was to consist of the entire-property and was to last for the life of the grantor or was to terminate sooner “if at any time during the life of the Grantor no children- or grandchildren of the Grantor shall be living.” There was no-possibility of that trust being defeated by reverter. An actuary might conclude that the birth of additional children or of grandchildren would increase the duration and value of this estate, but the-birth of such persons would not defeat it. Nor would the death of' the decedent defeat it, since by its very terms it was to end not later than at his death. Thus, the petitioner, by the 1926 deed, made a valid completed gift of an estate in the property measured by the-joint lives of himself and the survivor of an unbroken line of children and grandchildren. He could not again make a gift of that estate in 1935. The Commissioner erred in taxing the entire value-of the transferred property as a gift in 1935.

The petitioner would have us conclude that completed valid gifts,, in addition to or of greater value than the one which we have described in the preceding paragraph, were made under the 1926 deed.. He argues, for example, that the 1935 instrument merely supplemented the 1926 deed and was effective retroactively as of July 16, 1926. He cites no authority which directly supports this view. The argument is unsound for present purposes. The 1985 instrument became effective, for gift tax purposes at least, in 1935 and not in 1926. The other contention of the petitioner is that the 1926 deed was entirely valid in so far as it relates to the living daughters and estates for them and their issue in case they survived the petitioner. He says that the courts of New York would not declare the deed invalid in any respect as long as suspension of absolute ownership was not actually dependent upon the life of any person not in being July 16, 1926. He argues that it was improbable that any other children would be born to the petitioner or that there would be any issue of a deceased child living at the date of the death of the petitioner. He cites In re Mount's Will, 185 N. Y. 162; 77 N. E. 999, and Mount v. Mount, et al., 196 App. Div. 508; 188 N. Y. S. 170; affirmed without opinion, 234 N. Y. 568, to show that the courts of New York would wait to see what the circumstances will actually prove to be at the date of the death of the petitioner, and if the survivors at that time are only Frances and Jean, the deed would be held valid in its entirety. He does not go on to discuss what the situation would be if there were at that time another child of the grantor or issue of a deceased child, except to admit that the trusts for those persons would be held invalid. The Commissioner argues that the validity of the deed, and of any severable part of it, is determinable at its inception by assuming the most unfavorable possibilities. This difference between the parties presents an extremely difficult question and some equally difficult corollaries, all of which we believe may be avoided at this time as unnecessary to the decision of the case.

The 1926 deed provided that the property should revert to the petitioner during his lifetime upon the first occasion that he had neither children nor grandchildren living. Thus, there was a possibility that the entire property would revert to the petitioner during his lifetime, and for this reason we are unable to say that any estate greater than an estate for the life of the petitioner was the subject of a completed gift under the 1926 instrument. The estate which we have described above as a completed valid gift was in a sense a lesser estate, being dependent upon the joint lives of the petitioner and the last survivor of an unbroken line of children and grandchildren. The 1935 instru-also contained the provision that the property should revert to the grantor “if at any time during the life of the Grantor no child or children of the Grantor be living.” Thus, there was the same possibility of reverter under the 1935 instrument that there was under the 1926 deed, and we are unable to say that the petitioner made a completed gift of any greater estate under the later instrument than he did under the earlier one.

Since we can not be sure to what extent the courts of New York would hold the 1926 deed valid, some discussion of the tax consequences of holdings other than the one we have adopted seems proper. If the contention of the petitioner that he made a greater gift in 1926 is sound, the result would be the same as the one which we have reached. A different result would be reached only in the event that some greater estate was given in 1935. We are unable to identify any such estate. The respondent contends that there was a gift in 1935 of life estates measured by the lives of the two daughters who were then living. Perhaps an actuary would attribute to an estate for the lives of the two daughters a value greater than the value he would attribute to the estate which we have held was the subject of a completed gift in 1926. But solution of the question before the Board is not advanced by an attempted comparison of those estates. The fact of the matter is that the petitioner, both in the 1926 deed and in the 1935 supplement, recognized the possibility that he might outlive his two daughters, and expressly provided that in that event the entire property should revert to him. Furthermore, it must be remembered that the two daughters were persons in being on July 16, 1926, and the petitioner is arguing that the trusts for their lives provided by the 1926 deed do not offend the rule against perpetuities and, therefore, those trusts were valid gifts in 1926. Also, if the petitioner made such a gift in either year, the next question would be whether he didn’t make a completed gift of the remainder interests also. We do not see how the gift of the life estate could be complete and valid under either instrument any more than the gift of the remainder interest would be complete and valid. This brings us back to the answer which we have already given, namely, that, since there was a possibility of reverter in the petitioner during his life, there was no completed gift of any estate which would extend beyond his life, and, also, we have concluded that he did not make any completed gift in 1935 greater than he had theretofore made in 1926.

The income of the trust up to December 31, 1935, did not belong to the petitioner and he could not make any gift of that income. The third paragraph of the trust provided that in no event should any payment of income be made to him. That income had to be accumulated for Frances and Jean and was payable to them when they became twenty-one years of age. The parties finally realized that and set it up as accumulated income. It would not benefit the Commissioner to argue that this income could be used to discharge an obligatioto. of the petitioner, that is, to maintain and support his two daughters. The same argument could be applied just as well under the 1935 trust instrument, because neither daughter had reached her majority in 1935.

Furthermore, any possible error in the decision of this case which would not exceed $60,000 in value of property would not change the result. The petitioner, in making gifts through these trusts in any calendar year, was entitled to two exclusions of $5,000 each. Wilton Rubinstein, 41 B. T. A. 220. It is not important whether or not he claimed the two $5,000 exclusions in any year. The act, in section 504 (b) of the Bevenue Act of 1932, provides that “the first $5,000 of such gifts to such person shall not * * * be included in the total amount of gifts made during such year.” Thus, it appears that any additions in 1933 and 1934 could not possibly have exceeded the two $5,000 exclusions and the petitioner comes to 1935 with his specific exemption of $50,000 allowed in section 505 (a) intact. Since he made no gifts in any year in excess of the exclusions, he never was required to make any election in regard to the $50,000 exemption. Cf. Lunsford Richardson, 39 B. T. A. 927. The question of principal commissions on the trust property does not require decision.

Decision will be entered, under Rule 50,


source: Caselaw Access Project

author: Keen :

license: Public Domain

text:
    Red Wing Potteries, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97674.
    Promulgated March 6, 1941.

      O. R. Folsom-Jones, Esq., and H. M. Temple, O. P. A., for the petitioner.

      Jonas M. Smith, Esq., for the respondent.
   OPINION.

Keen :

Petitioner was on the accrual basis and the primary question is whether all the circumstances which fix its liability for the tax had occurred in a year before 1936, when the tax was paid and the deduction for it claimed. The alternative question of recoupment must wait our answer on this.

The tax was laid on money and credits held by the taxpayer and was paid for the years 1929 to 1933, inclusive. The facts indicate that petitioner had not made a full disclosure of its money and credits for these years; that it was urged to do so by a special state tax investigator on November 5, 1934; that a year later, on November 26, 1935, it had still failed to make full returns and the state tax commission had consequently made a determination of the tax due from its own information; that, no payment having been made, the state thereafter, late in 1935 or in 1936, brought suit; and that the suit was settled by the payments here in question on October 12, 1936. Did the taxes “accrue” before 1936 ?

Petitioner relies on Minnesota law provided in such cases where property has been omitted from the assessment lists, has thereby escaped taxation, and is thereafter returned and assessed, as folloivs (1 Mason’s Minn. Stat. 1921, § 1985):

1985. Omitted property — If any real or personal property be omitted in the assessment of any year or years, and the property thereby escape taxation, when such omission is discovered the county auditor shall enter such property on the assessment and tax books for the year or years omitted; and he shall assess the property, and extend against the same on the tax list for the current year all arrearage of taxes properly accruing against it, including therein, in the case of personal property taxes, interest thereon at the rate of seven per cent, per annum from the time such taxes would have become delinquent, when the omission was caused by the failure of the owner to list the same. If any tax on any property liable to taxation is prevented from being collected for any year or years by reason of any erroneous proceedings or other cause, the amount of such tax which such property should have paid shall be added to the fax on such property for the current year.

Petitioner contends that under this provision of state law the tax did not accrue until the year in which collection was made, but this assertion is contrary to the construction put upon this section by the state courts. In In re Barber, 31 Minn. 256; 17 N. W. 473 (1883), the Supreme Court of Minnesota said, at page 475:

Every piece of property (not exempted) owes to the state its proportionate share of the amount necessary to be raised by taxation for the expenses of the government. Although for any cause the proportionate share for any one year of any piece of property may not be enforced, or even ascertained, the debt remains, and it may be ascertained and enforced in any subsequent year; and the owner cannot object to any particular mode adopted by the state for ascertaining such share, and enforcing payment of it, unless such mode operate unequally or unjustly.

That case, it is true, involved only real property, and some doubt, twenty years later, was thrown upon the application of this doctrine to personalty by the decision of the Supreme Court of Minnesota in State ex rel. Vossen v. Eberhard, 90 Minn. 120; 95 N. W. 1115, but with the express overriding of that decision by State v. O'Connell, 170 Minn. 76; 211 N. W. 945, no further doubt can be entertained that a tax previously omitted and later assessed against personalty is accrued under Minnesota law in the year in which it should have been assessed, and this is so although the exact extent of the property taxes is unascer-tained in the prior year. In CConnelVs case the court said (p. 946) :

* * * While only omitted real estate was involved in County of Redwood v. Winona & St. Peter Land Co., supra, what is there said applies with equal force to omitted personal property. To be sure, the tax upon personal property is not a lien upon the property but only a personal liability of the owner. Tet the owner of personal property omitted from the tax rolls becomes liable for the tax upon it at the time it ought to have been placed thereon, and this liability continues until discharged by payment. In the present case the decedent became liable for these taxes in his lifetime. It was an obligation which did not abate at his death.

See also the Eighth Circuit’s opinion in Lifson v. Commissioner, 98 Fed. (2d) 508, 510.

Was this particular tax on money and credits on the state statute book from 1929 to 1934, inclusive? No claim is made by the petitioner that it was not. Sections 2337 to 2349, inclusive, of the 1927 edition of the Minnesota statutes, provide for the imposition and collection of such a tax. Section 2338 provides that listing shall be done in the manner prescribed by section 1999, which in turn lays the duty on the taxpayer of listing all personal property, including money and credits. The petitioner here complains in his brief that “The State taxes, the deduction of which in 1936 is in controversy, * * * were not brought to the petitioner’s attention until November 26, 1935, by letter from the Secretary of the State Tax Commission * * *; although a preliminary investigation had been instituted by the State in 1934 * * It will be seen that the duty of making proper returns was imposed on the petitioner from the beginning and that what it complains of here is the tax commission’s failure to draw attention earlier to the taxpayer’s own delinquency. In fact, however, the letter of the tax commission of November 1934, stipulated in evidence, stated that the required forms “for listing and return of money and credits were mailed to you. The date set for filing of this listing and return has passed, and we have neither the return or request for an extension of time from you.” The letter then goes on to say that the tax commission under the inquisitorial powers conferred on it by sections 2364 to 2370, inclusive, of the State statutes, was “making this investigation of money and credits for prior years.”

The taxpayer must have a bold face, indeed, who in these circumstances can come before us and claim that it was ignorant of any liability to the state before 1936. The petitioner here- may not intend to claim so much, but it insists on brief, as if that were in itself a valid reason, that “the county treasurer has no authority to receive or collect taxes before the tax lists are delivered to him; taxes are not due until such delivery and penalties accrue only after the delivery”, citing Nelson v. Becker, 63 Minn. 61; 65 N. W. 119 (1895), and State v. Sage, 75 Minn. 448; 78 N. W. 14 (1899). The first of these cases holds merely that the executor may not be held personally liable for a tax that has not been levied and ascertained before his discharge, and the second that penalties for unpaid taxes on omitted property will not accrue until they are placed on the regular tax list. But neither of these cases supports the petitioner’s contention, for we are not concerned- with the liability for taxes of a fiduciary as compared with the true party in interest or with the time when taxes are due and payable, but only with the time when the liability to pay them arises.

The question whether a taxpayer is liable for a state tax, and hence has the right under the Federal tax statute to “accrue” its deduction is, as we have said, one of local law; and any doubt that the deduction is allowable under the Federal income tax act when and only when the liability for the tax sought to be deducted arises and not when it becomes due and payable was long since put to rest by the Supreme Court’s decision in United States v. Anderson, 269 U. S. 422, where it was said:

* * * In a technical legal sense it may be argued that a tax does not accrue until it bas been assessed and becomes due; but it is also true that in advance of the assessment of a tax all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it.

Since the principle of law is now well settled, we think it unnecessary to discuss the various Board and lower court cases cited by the parties. (A recent case, Floyd, Inc., 43 B. T. A. 101, collects the more recent authorities.) We, therefore, hold that the state taxes for the several years here were accrued and should have been deducted in the years in which the property was knowingly omitted by petitioner from its returns.

The remaining question is whether the petitioner may be allowed by way of recoupment against the respondent’s deficiency for the year 1936 the amount of these state taxes which it can not now deduct from its Federal income tax for the years 1929 to 1933, inclusive. The statute of limitations has now run against adjustment of the tax for those years. The petitioner relies on Bull v. United States, 295 U. S. 247 (1935), and on the recent decision of the Circuit Court of Appeals for the Sixth Circuit in Dixie Margarine Co. v. Commissioner, 115 Fed. (2d) 445; and the decision of the U. S. District Court for the Northern District of New York in Mills v. United States, 35 Fed. Supp. 738. Despondent contends that in any event the matter of equitable recoupment for prior years lies beyond our jurisdiction, citing Helmuth Heyl, 34 B. T. A. 223, where we held that an overpayment for a year not before us could not be determined by us and applied as a credit against deficiencies which we had sustained for years properly before us through appeal in ordinary course from them by the taxpayer, under the limited jurisdiction conferred on this Board by sections 272 (g) and 322 (d). In that case we said:

In Bull v. United States, supra, the Court recognizes that situations might arise wherein the sovereign would retain a tax, taken unjustly and in violation of its own statute, and in which Congressional action would be the taxpayer’s sole avenue of redress. This is apparently such a situation.
While the equity of petitioner’s contention appeals to us, we have no alternative but to construe the acts of Congress precisely as written. We have held that the year 1922 is not before us for any purpose, and any overpayment made for such year can not be used to reduce the deficiency for the years 1918 and 1921. It is stipulated that such deficiency is correct. It follows that it must be, and is, approved.

Clark, J., of the Third Circuit Court of Appeals, dissenting in the recent case of Lyeth v. Hoey, 112 Fed. (2d) 4, but on a point not here involved, made the following comment on HeyVs case, at page 10:

* * * It is a matter of substance, to wit, what agency of government has the responsibility of passing on difficult questions of equitable recoupment beyond the fairly simple situations covered by section 322 (a). To date the principles of such recoupment have been only partially developed by the Supreme Court. It seems therefore that those are problems for the courts. Indeed, the Board of Tax Appeals has held that it has no authority to apply principles of recoupment, Heyl’s Appeal, 34 B. T. A. 223, and this view, I take it, is supported by United States ex rel. Girard Trust Co. v. Helvering, 301 U. S. 540.

We hold, therefore, that we have no jurisdiction in the premises to allow recoupment.

Judgment will be entered for the respondent.


author: Opper :

text:
    Warren S. Booth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101336, 101883.
    Promulgated March 6, 1941.

      Arthur L. Evely, Esq., and Raymond), E. Berry, Esq., for thd petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Opper :

These consolidated proceedings involve deficiencies in petitioner’s income tax for the calendar years 1936 and 1937 in the respective amounts of $550.66 and $2,604. The contested issue for each year is the same. All of the facts have been stipulated and as so stipulated are hereby found.

The question is whether petitioner is entitled to credits for dependents on account of his four children, each of whom is under 18 years of age and throughout the taxable years resided with petitioner and was supported solely by him. The single ground on which respondent contests the claim is that in May 1936 a trust originally created by the children’s great-grandfather fell in, and the children as remaindermen received the right to the principal of the trust fund and with it to income which in both taxable years amounted to a sizeable sum.

The parties agree that there is no authority directly in point. But this is less startling than might at first appear. For petitioner’s situation falls squarely within the language not only of the statute but also of respondent’s regulations. It is petitioner’s position, which we accept because respondent in no wise questions it, that under Michigan law petitioner was responsible for the support of his minor children as far as his resources were sufficient, in spite of their possession of independent means. See Chubb v. Bradley, 58 Mich. 268; 25 N. W. 186; Mich. Comp. Laws, 1929, sec. 15771. That being the case there was legal dependency. But there was more than “mere legal dependency” because the facts show that the children were actually supported entirely by petitioner’s funds, so that during the relevant period there was also “actual financial dependency.” And these children did not “receive half or more of their support from a trust fund or other separate source” under the stipulated facts. We see no basis upon which respondent’s position can be maintained. The credits should be allowed.

Other issues having been disposed of by the stipulation,

Decision will be entered wider Bule 50.

       SEC. 20. CREDITS OF INDIVIDUAL AGAINST NET INCOME.
      * * * * * * *
      (b) Credits for Both Normal Tax and Surtax. — There shall be allowed for the purposes of the normal tax and the surtax the following credits against net income: ***#*♦♦
      (2) Credit for dependents. — $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective.

       Art. 25-6. [Regulation 94.] Credit for dependents.- — A taxpayer, other than a nonresident alien who is not a resident of Canada or Mexico (see section 214), receives a credit of $400 for each person (other than husband or wife), whether related to him or not and whether living with him or not, dependent upon and receiving his chief support from the taxpayer, provided the dependent is either (a) under 18, or (6) incapable of self-support because defective.
      The credit is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose children received half or more of their support from a trust fund or other separate source is not entitled to the credit.


author: Opper:

text:
    Trust Under the Will of Sigmund Neustadt, Deceased, for the Benefit of Agnes Neustadt; Agnes Neustadt, John M. Schiff, and Donald S. Stralem, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99935.
    Promulgated March 11, 1941.

      Harry SiT/oerson, Esq., for the petitioners.

      Harold D. Thomas, Esq., for the respondent.
   opinion.

Opper:

This proceeding was brought for a redetermination of a deficiency of $4,430.53 in petitioners’ income tax for the year 1937.

The sole question presented is whether petitioners realized a taxable profit on the exchange in 1937 of 6 percent Paramount Pictures, Inc., sinking fund debentures due January 1,1955, for an equal face amount of newly authorized 314 percent Paramount Pictures, Inc., convertible debentures due March 1, 1947. Paramount Pictures, Inc., hereinafter is sometimes referred to as the corporation.

All of the facts are stipulated and are hereby found accordingly. Petitioners during the year in question were the testamentary trustees of a trust for the benefit of Agnes Neustadt and filed their income tax return with the collector of internal revenue for the second district of New York.

On and prior to March 9,1937, petitioners owned $125,000 par value of 6 percent sinking fund debentures of the corporation due January 1, 1955. The debentures, which were of the coupon type, were dated as of January 1, 1935, and bore interest at the rate of 6 percent per annum, payable semiannually on January 1 and July 1 of each year. At the beginning of 1937 approximately $22,865,000 of such debentures were outstanding.

On or about February 18, 1937, Paramount Pictures, Inc., offered to the holders of its 6 percent sinking fund debentures to exchange $15,000,000 face amount thereof for a like amount of its newly authorized 3% percent convertible sinking fund debentures due March 1, 1947, and issued a printed circular to that effect. The new debentures were to be dated as of March 1,1937, and were due March 1,1947. They were the coupon type and bore interest at the rate of 3% percent per annum, payable semiannually on March 1 and September 1 of each year. At the option of the holders they were convertible into fully paid nonassessable $1 par value voting common stock at $3Sys per share, until March 1,1942; and thereafter and until February 23, 1947, at $40 per share. In the event of conversion the new debentures, turned in were to be canceled.

The' obligation of the corporation to pay principal and interest on the new 3% percent convertible debentures ranked equally with its obligation to pay the principal and interest on the 6 percent sinking fund debentures.

The offer provided that in the event more than $16,000,000 principal amount of the outstanding 6 percent debentures were presented for exchange, the exchange would be pro rata. At the close of the taxable year there were outstanding approximately $12,000,000 of the new 3^4 percent debentures and approximately $10,000,000 of the 6 percent debentures.

The fair market value of the common stock of Paramount Pictures, Inc., on February 18,1937, as determined by purchases and sales on the New York Stock Exchange, was approximately $26.50 per share. At no time between February 18, 1937, and the date of expiration of the offer of the exchange, March 9, 1937, did the price of the stock on the Exchange exceed that figure.

On or about March 9, 1937, petitioners accepted the offer and exchanged their $125,000 face amount 6 percent sinking fund debentures for the new 3% percent convertible debentures of a like face amount.

The offer and exchange of debentures in controversy herein was not a part of any other “plan of reorganization.”

In their return for the calendar year in question petitioners reported no taxable gain on the exchange. Eespondent determined that petitioners realized a gain of $58,672.82 on the exchange and that the portion thereof recognized under section 117 (a) of the Revenue Act of 1936 was $34,606.23.

We are confronted here with the question, said to be without precedent, whether an exchange of bonds for bonds in the same corporation, pursuant to a formal offer addressed to all bondholders similarly situated, gives rise to a gain recognized for tax purposes under section 112.

There seems to be no dispute that the formality and scope of the offer to exchange one series of corporate bonds for another, in the acceptance of which petitioners participated, is sufficient to characterize it as a “plan.” Respondent places his reliance squarely upon the denial that the term “recapitalization” in the definition of reorganization furnished by the Revenue Act of 1986, section 112 (g) (l), is broad enough to include the present transaction; so that he says, in effect, while petitioners’ exchange was made pursuant to a plan, this was not a plan of reorganization. In that respect the case is materially narrower than Walter H. Field, 41 B. T. A. 183.

It is said that the capital of a corporation consists only of its stock; hence to recapitalize involves a rearrangement of the capital stock; and hence a plan envisaging only a rearrangement of the bonded indebtedness can not be a recapitalization. It is on that theory that respondent seeks to distinguish such cases as Lelia S. Kirby, 35 B. T. A. 518, and presumably Edith M. Greenwood, 41 B. T. A. 664. This is the hook on which the whole case hangs. For once the plan is seen to involve a “reorganization” within the meaning of section 112 (g) (1), the conclusion that this exchange is covered by the nonrecognition provisions follows without difficulty. Since “securities” include at least long term bonds, section 112 (b) (3) expressly authorizes nonrecognition, for it describes the case where bonds “in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for * * * securities [bonds] in such corporation * *

If we were concerned only with the bare language of subsection (g) (1) there would still be ample authority for ascribing to the word “recapitalization” a broader meaning than that urged by respondent. But it seems to us more than this is involved. The purpose of the intricate provisions relating to reorganizations was to remove “the danger that taxable sales can be cast into the form of a reorganization, while at the same time legitimate reorganizations, required in order to strengthen the financial condition of the corporation, will be permitted.” When we are required to deal with transfers of assets from one owner or group to another, the dangers first suggested must be recognized. Cf. LeTulle v. Scofield, 308 U. S. 415; Commissioner v. Kitselman (C. C. A., 7th Cir.), 89 Fed. (2d) 458. But here there was no transfer of assets, no change in corporate control, no possibility that a taxable sale was lurking in disguise. For the very reason that no change in ownership of the capital stock was proposed, the significance of the “continuity of interest” concept pales. And as to petitioners, their interest as bondholders continued as such. In that posture of the facts the reorganization sections may thus safely be given the broadest possible scope; a conclusion we ihink fortified by the synonyms of a reorganization which include not only a recapitalization but, in the language immediately following, “a mere change in identity, form or place of organization, however effected.” This would seem to mean that the less drastic the planned rearrangement of corporate interests, the more probably Congress intended no gain or loss to be recognized.

The present plan may have been one merely of refinancing, as respondent suggests. But this is frequently the most cogent need of faltering enterprises, one which a “reorganization” is specifically designed to meet. To say that one occurs, for example, under section 77B of the Bankruptcy Act but not under the revenue acts seems to assume an unnecessary legislative inconsistency. If the nonrecognition sections would operate' here, had the proposed refinancing included changes in the capital stock — which we understand respondent to concede — it can not be consistent to say that they are less operative merely because “desirable business readjustments” demand a less radical plan contemplating merely a rearrangement of the funded debt.

Decision will be entered for the petitioners.

       Stipulation states “1935” but both parties on brief agree that “1955” is correct.

       SEC. 112. RECOGNITION OB GAIN OR LOSS.
      *******
      (g) Definition of Reorganization. — As used in this section and section 113—
      (1) The term “reorganization” means (A) a statutory merger or consolidation, or (B) the acquisition by one corporation in exchange solely for all or a part of its voting stock; of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of another corporation; or of substantially all the properties of another corporation, or (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of organization, however effected.

       See Lelia S. Kirby, supra; affirmed on this issue (C. C. A., 5th Cir.), 102 Fed. (2d) 115; cf. L. & E. Stirn, Inc. v. Commissioner (C. C. A., 2d Cir.), 107 Fed. (2d) 390.

       SEC. 112. RECOGNITION OB GAIN OR LOSS.
      *******
      (b) Exchanges Solely in Kind.—
      *******
      (3) Stock for stock on rborganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       See 15 Fletcher Cyclopedia of Corporations (1938 ed.) 353; 2 Paul and Mertens, Law of Federal Income Taxation, 208; Graham and Dodd, Security Analysis, 461; Stewart v. Utility Investing Corporation (C. C. A., 3d Cir.), 78 Fed. (2d) 279.

       Report of Ways and Means Committee (73d Cong., 2d sess., H. Kept. 704, p. 14) relating to the 1934 Act:
      *******
      ■i* * * [The amended section) will limit reorganizations to (1) statutory mergers and consolidations; (2) transfers to a controlled corporation, ‘control’ being defined as an 80-percent ownership ; and (3) changes in the capital structure or form of organization.
      “By these limitations the committee believes that it has removed the danger that taxable sales can be cast into the form of a reorganization while at the same time, legitimate reorganizations, required in order to strengthen the financial condition of the corporation, will be permitted. Furthermore, the. retention of the other reorganization provisions will prevent large losses from being established by bondholders and stockholders who receive securities in a newly reorganized enterprise which are substantially the same as their original investments.” (Emphasis added.)
      Report of Senate Finance Committee (73d Cong., 2d sess., S. Rept. 558, p. 17) relating to the 1934 Act:
      *******
      “* * * If the reorganization provisions were omitted from the bill, many stockholders and bondholders could take large losses, although they might retain substantially their former interests in the enterprise. Hence, the Treasury has little or nothing to gain by the elimination of these provisions, while, on the other hand, some legitimate and desirable business readjustments would be prevented.” (Emphasis added.)

       Although the new bonds were convertible into stock, respondent does not rest his argument on this feature and in fact takes the position, which is not without justification, that that element is of no significance under the facts shown here.

       See footnote 2, supra.

       See e. g. Farlee & Co. v. Springfield-South Main Realty Co. (C. C. A., 1st Cir.), 86 Fed. (2d) 931; In re Gibson Hotels, Inc., 24 Fed. Supp. 859.


author: TURNER: Black,

text:
    E. M. Peet, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. A. Ruehlman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 96594, 96596.
    Promulgated March 11, 1941.

      Raymond A. Smith, Esq., and John LeRoy Peterson, Esq., for the petitioners.

      Benjamin L. Bird, Esq., for the respondent.
   OPINION.

TURNER:

The petitioners contend that, by reason of the agricultural depression, the change of the corporation from a long term credit business to a cash and short term credit business, which resulted in the accumulation of a large amount of cash and the decision of the stockholders in 1935 to postpone indefinitely the completion of plans for expansion, the payment of $25,000 made in 1935 by the corporation in connection with the acquisition of 2,500 shares of its stock does not come within the provisions of section 115 (g) of the Eevenue Act of 1934. The respondent contends that the facts here bring the payments within the provisions of section 115 (g), and that the amounts so received by the petitioners are under that section taxable as dividends.

The question whether a given payment or distribution by a corporation comes within the intendment of similar provisions of the various revenue acts has been considered in numerous cases-and, as often pointed out, the question is to be determined on the facts of each individual case. The petitioners urge that there was good faith on the part of the stockholders in increasing the capital stock of the corporation in 1931 by the issuance of a large stock dividend and that there was no thought or continuing plan for a later purchase or acquisition of all or a portion of such stock dividend by the corporation. The respondent does not contend that bad faith was employed by the corporation or its stockholders. He does contend, however, that the absence of bad faith, artifice, or subterfuge or of a casual relationship between the issuance of the stock and its redemption alone is not determinative of the question. In this we think he is correct. See J. Natwick, 36 B. T. A. 866, and cited cases.

A consideration of the history of the corporation discloses that it began business in 1917 with an authorized capital stock of $30,000, at least $24,000 of which, if not all, was issued in that year apparently for cash; that in 1918 the authorized capital stock was increased to $60,000, all of which increase was subsequently issued, and that at least $15,545 of the increase, if not more, was issued by means of stock dividends; that in 1931 the authorized capital stock was increased to $250,000, the issuance of all of such increase of $190,000 being by means of a stock dividend. Therefore of the corporation’s authorized and outstanding capital stock of $250,000 in 1931 and as late as September 1935, at least $205,545, or 82 percent, represented former earnings of the corporation. We are not informed as to what cash dividends were paid prior to 1925, but the evidence shows that during the years 1925 through 1930 the net income of the corporation amounted to $261,-398.24 and that in four years of that six-year period the corporation paid cash dividends totaling only $33,000, or approximately one-eighth of its earnings for the period. While the corporation sustained substantial losses during the years 1931 through 1933, its surplus and undivided profits amounted to $168,522.89 at the end of 1933 and by the end of 1935 had increased to $195,741.24. The amount of the corporation’s cash on hand increased from $92,480.72 at December 31, 1930, to $165,695.41 at December 31,1934, and amounted to $162,602.44 at December 31,1935, after payment of $25,000 had been made by the corporation in acquiring shares of its stock. During the years 1933 through 1935, when the corporation was operating principally on a cash basis, the cash on hand at the end of each year was in excess of the gross from sales, both cash and credit, and substantially so at the end of the years 1933 and 1934. The net income of the corporation for 1934 was $11,198.33 and for 1935 was $15,341.95, a total of $26,540.28, or $1,540.28 in excess of the amount paid by the corporation in 1935 for its stock. Subsequent to 1930 and prior to the distribution here in question there had been no cash distribution to the stockholders. Peet testified that in their discussions the stockholders of the corporation first considered having the corporation acquire $50,000 par value of its stock, but concluded that the corporation had better retire only $25,000 par value at a time as conditions might change so as to require the corporation to extend “quite a bit” of credit. He testified further that he knew at the time the stockholders authorized the acquisition by the corporation of shares of its stock that, if the corporation declared a cash dividend payable to himself and the other stockholders, such a distribution would be taxable to them.

In short, we find that in 1935 the stockholders of the E. M. Peet Manufacturing Co., desiring distribution of a part at least of the idle funds of the corporation and having decided to postpone indefinitely any further execution of the plan for expansion which had been the cause for capitalizing the earnings in 1931, decided to retire 2,500 shares of the stock qf the corporation pro rata instead of declaring a cash dividend payable out of surplus and undivided profits as they then existed. The effect of such action was merely a reversal in part of what was done in 1931 in furtherance of a plan never carried out and a restoration of the amount represented by the said 2,500 shares of stock to earnings, followed by the payment of a dividend therefrom. It is our conclusion that the facts bring this case within the purview of section 115 (g), supra, and that the distributions herein are taxable to petitioners as dividends. McGuire v. Commissioner, 84 Fed. (2d) 431; certiorari denied, 299 U. S. 591, wherein a similar conclusion was reached, is in our opinion directly in point. See also Flanagan v. Helvering, 116 Fed. (2d) 937; Hill v. Commissioner, 66 Fed. (2d) 45; Goldstein v. Commissioner, 113 Fed. (2d) 363; and William H. Grimditch, 37 B. T. A. 402. Cf. Commissioner v. Cordingley, 78 Fed. (2d) 118; and Commissioner v. Quackenbos, 78 Fed. (2d) 156. For a contrary view holding for an extreme limitation of the application of section 115 (g), supra, see Patty v. Helvering, 98 Fed. (2d) 717.

Reviewed by the Board.

Decisions will be entered for the respondent.

DiSNey concurs only in the result.

Black,

dissenting: I respectfully dissent from the conclusion reached by the majority opinion.

Section 115 (g) quoted in the majority opinion is a familiar statute and has been often construed by the Board and the courts. In Commissioner v. Cordingley, 78 Fed. (2d) 118, in construing and applying this statute the court, among other things, said:

* * * Under these acts it is the settled view of the Board of Tax Appeals that sums paid in retirement of stock were not taxable as dividends, unless the retirement was made in pursuance of a plan formed' at the time when the stock was originally issued or as a cloak for the distribution of earnings. * * *

See also Commissioner v. Quackenbos, 78 Fed. (2d) 156. To the same effect is our decision in Orie B. Kelly, 36 B. T. A. 507 (reversed on another point, 97 Fed. (2d) 915). These cases, I think, lay down ihe correct rule that section 115 (g) is only applicable where the cancellation or redemption of a corporation’s stock is made in pursuance of a plan formed at the time when the stock was originally issued, or, if there is no such plan, then where the disbursement is made as a cloak for the distribution of earnings.

Of course, it requires no authority to support the proposition that the Commissioner, having in his deficiency notice determined that the redemption of the stock in question was made in such a manner as to make the redemption essentially equivalent to the distribution of a dividend, the burden of proof to show to the contrary is on petitioners. Have they met that burden of proof? I think they have. It seems to me that they have proved that the increase of capital stock of the E. M. Peet Manufacturing Co. from $60,000 to $250,000 in 1931 was for entirely legitimate business purposes and that at the time the increase was made no plan was formed for the later retirement of all or part of the stock so as to make it essentially equivalent to the distribution of a dividend. Thus the first named device in the above mentioned cases was not present.

Even though it be conceded that when the stock in question was issued, there was no such plan formed, was its later redemption determined upon in 1935 nevertheless a mere cloak for the distribution of a dividend? I willingly concede that there can be such cases even where the original issue of the stock was for entirely proper and legitimate business purposes. See W. & K. Holding Corporation, 38 B. T. A. 830. I think, however, that petitioners in the instant case have proved an entirely legitimate business reason for the redemption of the 2,500 shares of stock in question in 1935 and that it was not done as a cloak for the distribution of earnings. Under these circumstances it seems to me that the redemption of the stock was a partial liquidation of the corporation as defined by section 115 (i) of the Eevenue Act of 1934 and should be taxed accordingly, and not taxed under section 115 (g) of the same act.

Leech agrees with this dissent.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      *******
      (g) Redemption of Stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.


author: Hill :

text:
    Frances C. Brooks, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99708.
    Promulgated March 11, 1941.

      Lester 'Whitmore, Esq., for the petitioner.

      Edward G. Adams, Esq., for the respondent.
   OPINION.

Hill :

We are called on here to say, viewing the evidence which has been presented to us, whether petitioner must report as her income one-half of the fees and salaries received by her husband during the taxable years. The answer to this question depends on whether we are able to make out a definite, binding agreement between petitioner and Brooks which set apart as the latter’s separate property his director’s fees and salaries. The effect of such an agreement, if proof of it is made, is to make separate income of what is otherwise community property. State ex rel. Van Moss v. Sailors, 180 Wash. 269; 39 Pac. (2d) 397; Helvering v. Hickman, 70 Fed. (2d) 985; so much is agreed. Without such a contract earnings from personal services are community property and must be reported one-half by each spouse for income taxation. Sec. 6892, Washington Revised Statutes (Remington, 1932); Poe v. Sanborn, 282 U. S. 101; Goodell v. Koch, 282 U. S. 118; Graham v. Commissioner, 95 Fed. (2d) 174, 175.

The evidence before us we deem insufficient to show a definite agreement between petitioner and her husband affecting the earnings of Brooks arising from personal services. Proof is made only that petitioner’s husband, at the time of the agreement, stated that they “did not have to file community property returns” and it was thereupon agreed that “each would keep his own income and each file their own separate returns.” The meaning of these statements, taking all of the testimony into account, is not plain. It appears that Brooks had largely in mind the mere mechanics of reporting the income, whether by joint or separate return, which does not affect the character of the income. Prior thereto it is stated and emphasized that petitioner and Brooks made joint returns and, thereafter, utilized separate returns. If it be assumed, however, that in the statements of the parties may be found contemplation that the character of the income was altered, we are yet unable to make out an agreement which reaches the conclusion argued by the petitioner. The contract so far as disclosed does not in itself purport to alter the nature of the income. This was thought by Brooks to be done by operation of law, both of Washington and of the Federal Government. Evidence of this is found in the affidavits filed with reference to these deficiencies in which it was stated by petitioner that it was her contention that under Poe v. Sanborn, supra, the taxpayer has a right to either divide his earned income with his wife or report it entirely in his own return, with or without an agreement to that effect. This position is reiterated in the petition in this proceeding. The agreement here involved, therefore, appears to be no more than an understanding of the parties that, in view of their conception of the law giving a freely exercisable option, each should report his or her income separately. The contract thus can not stand alone when deprived of the support of the law and can have no effect on the nature of the income here in question.

Petitioner’s efforts to make clearer the meaning of the contract here involved through proof of petitioner’s method of listing Brooks’ estate on inventory can not, we think, avail her here. No question is made that Brooks’ securities were his separate property. The bank deposits alone appear significant and even these lose their significance when no proof is made of their source, whether or not arising from personal services.

The whole evidence adduced is insufficient to justify our sustaining petitioner’s contentions for an agreement altering the community nature of Brooks’ earnings during the taxable years. Accordingly, respondent’s position must be sustained.

Petitioner’s requests for credits for personal exemption and for dependents appear from the deficiency notice here involved to have been taken into account by respondent in computing the additional tax due. In the absence of more specific criticism or faets on which to base such a criticism of respondent’s computations, these contentions of petitioner must also be passed over.

Decision will be entered for respondent.


author: Smith :

text:
    William M. Irish, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100694.
    Promulgated March 11, 1941.

      H. B. McCawley, Esq., for the petitioner.

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

Smith :

This is a proceeding for the redetermination of deficiencies in income tax for the years 1935 and 1936 of $193.16 and $1,140.52, respectively. The petitioner alleges that the respondent erred in including in his gross income the capital gains of a trust created by the petitioner1 on June 29, 1935, of which trust the petitioner was entitled to receive the income for life.

All of the facts in the case are covered in a written stipulation of facts, which is incorporated herein by reference.

Petitioner has his residence at Green Hill Farms, Overbrook, Pennsylvania. He filed his income tax returns for the years 1935 and 1936 with the collector for the first district of Pennsylvania, at Philadelphia.

On June 29, 1935, the petitioner executed a trust in the city of Philadelphia, transferring securities having a value of approximately $250,000 to trustees and reserving to himself the income of the trust for life. Upon his death the trust was to pay small annuities to two individuals, provided such amounts did not exceed 20 percent of the net income of the trust, and pay the remainder of the net income equally to the grantor’s son and daughter. Upon the death of the two annuitants the trust was to terminate and the corpus was to be distributed equally to the grantor’s son and daughter. The trust also provided cross remainders to the son and daughter or their issue, both as to income and principal. The grantor reserved no power whatsoever over the management of the trust, leaving the conduct thereof to three trustees, one his son, the second his son-in-law, and the third Norman S. McCausland, who was not related to the grantor by blood or marriage. This third trustee was named managing trustee and it was provided that, in the event of an emergency, of which he should be the sole judge, he might, with the approval of one of the other trustees, transact any business of the trust with the same force and effect as if all three trustees had joined therein.

The trust indenture, in addition to providing that the income of the trust should be paid to the grantor for life, contained a provision permitting “the withdrawal by Settlor from the principal in any one year of a sum not exceeding $18,000, such right of withdrawal not to be cumulative.”

It was further provided that:

13. This deed shall be irrevocable except in the event of the death of both William M. Irish, m, and Desire Irish Muller in the lifetime of Settlor, in which event, at the option of Settlor, this deed may be revoked.

During the years 1935 and 1936 the trustees made sales of a part of the securities of the trust corpus, upon which net taxable capital gains were realized of $644.20 in 1935, and $2,073.67 in 1936.

The petitioner made no withdrawals from the corpus of the trust during the years 1935 and 1936.

The parties have stipulated that:

8. The fair market value of the corpus of the trust on June 29, 1935, and December 31 in each of the years 1935 and 1936, and the average value of said corpus of the trust was as follows:
6/29/35 - Yalue as per Gift Tax Returns_$249,933.41
12/31/35-Market Value of Securities— $273,864. 88
Cash on Hand_ 5,447. 83 279,312.71
Average value for the year 1935_$264, 623. 06
12/31/36 - Market Value of Securities— $347, 303.75
Cash on Hand_ 584. 07 347,887. 82
Average value for the year 1936_$313,600.26

The respondent has determined that the petitioner is taxable on all of the income of the trust, including the capital net gains on the sales of the corpus, stating in his deficiency notice that:

Inasmuch as by the terms of the trust you have power to revest title to part of the corpus of the trust in yourself, you are deemed liable to income tax with respect to the income resulting from sales of corpus assets. See Section 166. Revenue Acts of 1934 and 1936.

Counsel for the respondent stated at the hearing that the respondent further relies upon sections 167 and 22 (a) of the Revenue Acts of 1934 and 1936. The pertinent provisions of the statute read in part as follows:

SEO. 166. REVOCABLE TRUSTS.
Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
(1) in the grantor, * * *
then the income of such part of the trust shall be included in computing the net income of the grantor.
SEO. 167. INCOME FOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust—
(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; * * *
SEC. 22. GROSS INCOME.
(a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

The petitioner raises no question as to his tax liability on the distributable income of the trust, which was reserved to him for life, and he concedes in this proceeding that he is taxable under section 166 above on the ca/pital gains of that portion of the trust corpus which he had the power to revest in himself under the terms of the trust indenture.

It is petitioner’s contention that under the laws of the Commonwealth of Pennsylvania, which govern the administration of the estate as to the determination of distributable income (Freuler v. Helvering, 291 U. S. 35), the capital gains derived from the sale of trust corpus did not constitute income of the trust distributable to him as life beneficiary, but were accretions to corpus. In this contention the petitioner relies upon In re Nirdlinger's Estate, 290 Pa. 457; 139 Atl. 200; In re Waterhouse's Estate, 308 Pa. 422; 162 Atl. 295. The ruling of the Supreme Court of Pennsylvania in those cases was that so much of the proceeds from the sale of stock by a trustee as are required to preserve the “intact value” of the trust estate go to the trustee for corpus and that the balance of such proceeds, that is, the increase, is to be apportioned between the life tenant and the re-mainderman (corpus), the life tenant being entitled to receive as distributable income that portion of the increase attributable to accumulated earnings and the remainderman the portion attributable to enhancement in value. In its opinion in In re Waterhouse's Estate, supra, the court said, citing In re Nirdlinger's Estate, supra, and other cases, that:

Where stock that produces income owned by the estate is sold for a price greater than the intact value (as defined and considered above), and such greater price is due to an accumulation of income, the proceeds are apportion-able; that is, so much of the proceeds as are necessary to preserve the intact value (as defined) go to the trustees for the corpus, and only so much of the balance that represents income goes to the life tenant.
But where the greater value is due to the stock’s earning power, good will, or its intrinsic, speculative, or enhanced market value, all the proceeds are part of the corpus and belong to the remainderman; the increase is capital gain.

See also Amy H. DuPuy, 32 B. T. A. 969.

In the instant case the stipulated facts do not show what securities of the trust estate were sold or whether the capital gains derived from such sales were due to the accumulation of earnings against such securities while held by the trustee or the enhancement in value. We are unable, therefore, to determine on the evidence of record that all of the capital gains in question were not distributable to the petitioner as life beneficiary of the trust. The respondent’s determination that they were so distributable, and therefore taxable to the petitioner, being prima facie correct, must be sustained.

Decision will be entered for the respondent.