author: Sternhagen:

text:
    Estate of Isaac Fish, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96527.
    Promulgated June 28, 1940.

      Richm'd H. Levin, Esq., for the petitioner.

      Alvm B. Peterson, Esq., for the respondent.

       Harris Trust and Savings Bank, a Corporation, Louis Eta Hokin and Abraham J. Pflaum, as Executors of the Estate of Isaac Fish.

   OPINION.

Sternhagen:

The Commissioner held that the decedent had retained power to revest in himself title to the corpus of the trust, in that he could revoke the trust if he survived his wife, and on this ground cited section 166, Revenue Acts of 1934 and 1936, to support the inclusion in the petitioner’s income of part of the income of the trust. In this the respondent was in error. For the purpose of discussion it may be assumed, in exaggeration of the fact, that the entire corpus of the trust had been contributed by the decedent. However, by its terms the income was all to be distributed to his wife and the corpus was only to revert to him in the event that he survived her and exercised the power to revoke. Thus the power to revest in himself any part of the corpus of the trust was contingent upon his survivorship of his wife. Such a power it has been held is not within section 166. Corning v. Commissioner, 104 Fed. (2d) 329; John Edward Rovensky, 37 B. T. A. 702.

Before his wife’s death the power to revest any part of the corpus in the grantor rested not alone in the decedent but in him and his wife together. She was the beneficiary of the entire trust income and, at her demand, of 5 percent of the corpus in any year. She was, therefore, unquestionably a person having a substantial adverse interest. Thus the condition of section 166 has been clearly avoided. Margaret A. Holmes, 27 B. T. A. 660; cf. Arthur F. Morton, 41 B. T. A. 742.

The portion of the trust income which, as shown by the notice of deficiency, was included in the decedent’s gross income for each of the years in question was improperly so included.

Decision will he entered vmder Rule 50.

Reviewed by the Board.

       See p. 1448 for dissenting opinion.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Bennet B. Bristol, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96289.
    Promulgated June 28, 1940.

      D. H. Blair, Esq., and George D. Brabson, Esq., for the petitioner.

      Ralph D. Smith, Esq., for the respondent.
   OPINION.

Van Fossan:

The issue for our determination is whether or not certain properties and annuities transferred by petitioner to his wife upon marriage were gifts subject to tax. Petitioner contends that no taxable gifts were made during the taxable year, asserting that he exchanged the properties and annuities in question for his wife’s relinquishment of the statutory rights she would acquire by marriage in certain stock and other property and that the transaction amounted to a sale or exchange rather than a gift.

Bespondent argues that the exchange was not for “adequate and full consideration in money or money’s worth” and that the properties were given to the wife. He urges that although the relinquishment of the wife’s statutory interest might be sufficient consideration to support her antenuptial agreement, it was not enough to cause the transfers to be excluded from the gift tax provisions of the Revenue Act of 1932 as amended (secs. 501 and 503 *).

That the release of a widow’s statutory rights is sufficient consideration to support an antenuptial contract in Massachusetts is clear. Jenkins v. Holt, 109 Mass. 262. The agreement between the petitioner and Agnes S. Thompson was a contract embodying such a release. However, in order to comply with the statutory requirement to exempt from gift tax, the contractual consideration must be adequate and full in money or money’s worth. Lillian T. Latty, Executrix, 23 B. T. A. 1250; affd., 62 Fed. (2d) 296; Sellar Bullard, Executor, 34 B. T. A. 243; affd., 303 U. S. 297; Stella S. Housman, 38 B. T. A. 1007; affd., 105 Fed. (2d) 973.

The difference between the parties in this case arises partly from the parallelism between certain language used in the gift tax law and that found in the estate tax law. The provision “adequate and full consideration in money or money’s worth” appears in both statutes. By section 804 of the Revenue Act of 1932 the estate tax law of 1926 was amended to provide that the release of dower, or similar interests, “shall not be considered to any extent a consideration in money or money’s worth.’’ The amendment so made has been held to be “declaratory of the law as it existed in the act of 1926 * * Empire Trust Co. v. Commissioner, 94 Fed. (2d) 307, affirming 35 B. T. A. 866. See also Sheets v. Commissioner, 95 Fed. (2d) 727, affirming 35 B. T. A. 220; Helvering v. United States Trust Co., 111 Fed. (2d) 576, reversing 39 B. T. A. 783. There is no comparable provision in the gift tax law.

Counsel for respondent urges that, despite this omission of the quoted provision from the gift tax sections, we should construe the words “adequate and full consideration in money or money’s worth” in the instant case involving gift tax the same as though we were applying the estate tax sections. We are unable to agree. The gift tax under consideration was imposed by the Revenue Act of 1932, the same act that amended the 1926 Act respecting estate tax as above noted. Both the gift tax provisions and the estate tax amendment were considered in the same Congressional Committee reports. Nevertheless, the amendment was made specifically applicable to the estate tax and was omitted from the gift tax provisions. The only logical conclusion in the light of such facts is that, with both taxes before it, the Congress did not intend the interpretative restriction placed around the estate tax to apply to the gift tax and that the omission thereof from the gift tax provisions was deliberate. We are of the opinion, accordingly, that the relinquishment of dowef or other marital rights may, under the gift tax statute, be adequate and full consideration in money or money’s worth. The adequacy of the consideration in a given case is a question of fact.

The petitioner was a man 69 years of age. He became engaged to Agnes S. Thompson. He owned stock, valued at over $781,000, in a family company whose control he desired to keep in the Bristol family. To accomplish that end, he executed a will, assented to by Agnes S. Thompson, by which he bequeathed all of his own stock in the company (and also any under his control) possessed by him at the time of his death, to his son and a bank, as trustees, for the benefit of his children. He also bequeathed one-third of the residue of his estate to Agnes S. Thompson. Under the same date she executed an acknowledgment, the effect of which was a waiver of her statutory rights. Upon the execution of the will and Agnes S. Thompson’s assent thereto and the acknowledgment thereof, the petitioner purchased for her two annuities costing about $104,000 and caused two residence properties to be conveyed to her and himself as tenants by the entirety. The value of her right in the real estate at the time of the transfer was $19,550.

Thus, Agnes S. Thompson upon marriage received property whose cost or value aggregated over $123,000 and also the right to receive one-third of the petitioner’s residual estate upon his death. In exchange she relinquished her statutory rights in all of the petitioner’s estate.

Under the laws of Massachusetts (ch. 190, sec. 1 (2), General Laws of Massachusetts, 1932) the surviving wife of a husband dying intestate and leaving issue, takes one-third of the personal and one-tliird of the real property. Section 9 of chapter 191 provides that “the marriage of a person shall act as a revocation of a will made by him previous to such marriage, unless it appears from the will that it was made in contemplation thereof.”

By paralleling Agnes S. Thompson’s rights before and after the execution of the agreement in the form of a will, we find that, in the absence of the will and agreement, she would have been entitled to one-third of the petitioner’s Foxboro Co. stock and one-third of his remaining property (since he would have become intestate by the operation of section 9, chapter 191), while after such execution she preserved the same rights as to the remaining property but received assets worth $104,000 in lieu of her prospective rights to one-third of the stock.

By applying the same method of calculation as that used by the respondent in determining the value of her rights in the real estate, we find that her prospective rights in the stock which she relinquished were worth $149,764.50. By this simple arithmetical comparison it appears that the consideration for the transfer by petitioner of the real estate to his wife as a tenant by the entirety and for the procuring of the two annuity contracts in her behalf, was full and adequate in money or money’s worth.

Accordingly, the respondent erred in his determination that the petitioner made a gift of an interest in real estate to his wife in the year 1937 by causing the title to the two residence properties to be conveyed to her as a tenant by the entirety. Since the value of the annuity contracts did not constitute a gift, the petitioner made an overpayment of his gift tax for the year 1937.

Reviewed by the Board.

Decision will be entered under Bule 50.


author: ÁRUNDeií :

text:
    St. Marys Oil & Gas Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93977.
    Promulgated June 28, 1940.

      Frederick L. Pearce, Esq., for the petitioner.

      Frank B. Schlosser, 25⅛, for the respondent.
   OPINION.

ÁRUNDeií :

In the memorandum opinion heretofore entered we held that the interest paid in 1935 was “attributable to the mineral property” within the meaning of article 23 (m)-l (A) of Regulations 86, and, therefore was to be deducted in determining the net income from the property under section 114 (b) (3) of the Revenue Act of 1934.

The petitioner contends that for purposes of computing the allowable depletion interest paid should not be deducted from gross income from the property. The effect of this, if sustained, will be to allow a greater depletion deduction than allowed by the Commissioner.

The basic statutory provision in this case is section 23 (m) of the Revenue Act of 1934 which grants “in the case of * * * oil and gas wells * * * a reasonable allowance for depletion * * This broad grant is limited by section 114 (b) (3), which allows as a depletion deduction 27½ percent of the gross income from the property, provided, however, that: “Such allowance shall not exceed 50 per centum of the net income of the taxpayer ⅜ * * from the property.”

Pursuant to authority granted in section 23 (m) the respondent promulgated Regulations 86, and in article 23 (m)-l (A) defined net income from the property as follows:

* * * Net income of the taxpayer * * * from the property * * * means the gross income from the property * * * less the allowable deductions attributable to the mineral property upon which the depletion is claimed * * *, including overhead and operating expenses, development costs properly charged to expense, depreciation, taxes, losses sustained, etc. ⅜ * *. Deductions not directly attributable to particular properties or processes shall be fairly allocated.

Counsel for the petitioner emphasizes the fact that interest is not among the items specified in the quoted article as deductions from gross income in determining net, and further urges that good accounting practice does not sanction such a deduction. As to the first point, it seems obvious that article 23 (m)-l (h) does not purport to give an all-inclusive list of items deductible in computing net income from the property for the purpose of computing the maximum depletion deduction allowable. By the use of the abbreviation “etc.” the respondent has left the way open to determine, as occasion arises, what items, in addition to those specified in the regulations shall be classified as “allowable deductions attributable to the mineral property.” In this case he has made his determination that the interest item belongs in the category of deductions attributable to the oil property in respect of which depletion is claimed. The petitioner has the burden of establishing that such treatment deprives it of the reasonable allowance granted by section 23 (m). We are not convinced by the petitioner’s argument that the respondent erred either in providing by regulation for the deduction of items attributable to the property or in his classifying the interest in dispute as such an item. By definition, to attribute is to “ascribe (something) as due and belonging” (Funk and Wagnalls); “to impute; to assign; to consider as belonging to” (Webster). The interest paid by this petitioner was for money borrowed and used to purchase the very property on which are located the wells the operation of which produces the income which it is now seeking to reduce by depletion deductions. Thus it seems to us entirely reasonable to attribute the interest as directly related to the mineral property producing the income. It is not attributable to any other property or to any operation other than the production of the oil which is the source of the income. The further provision of the regulations, that deductions not directly attributable to particular properties or processes shall be fairly allocated, supports our view. We find here no other property or process. The Commissioner’s classification of the interest item as an allowable deduction attributable to the mineral property seems to us to be entirely proper.

As to the petitioner’s argument that established accounting practice treats interest otherwise than the Commissioner has done here, it is perhaps sufficient to quote Mr. Justice Holmes in Weiss v. Wiener, 279 U. S. 333:

The income tax laws do not profess to embody perfect economic theory. They ignore some things that either a theorist or a business man would take into account in determining the pecuniary condition of the taxpayer.

But in order that there may be no misapprehension as to our understanding of the petitioner’s views, we- think it proper to point out that the basic assumption on which the- argument rests is' wrong* That assumption is that net income from the property for depletion purposes is synonymous with net operating profit. That was the view of the Circuit Court of Appeals for the Ninth Circuit in Ambassador Petroleum Co. v. Commissioner, 81 Fed. (2d) 474, cited by petitioner. But the Fifth Circuit Court disagreed with that holding, Commissioner v. F. H. E. Oil Co., 102 Fed. (2d) 596, and it was affirmed by the Supreme Court, 308 U. S. 104. So this branch of the argument is left without support.

Finally, it is said there is a glaring inconsistency between the’ Commissioner’s treatment of interest in this case and his treatment of interest in the regulations issued for administration of the Vinson Act, 48 Stat. 503, as amended. For the purpose of administering section 3 of the Vinson Act (Title 34, U. S. C. A. §496) a number of treasury decisions have been issued. One of the more-comprehensive ones, T. D. 4723, 1927-1 C. B. 519, 525, provides:

Among the items which shall not be included as a part of the cost of performing a contract or subcontract or considered in determining such cost are the following: * * * interest incurred or earned 'r bond discount or' finance charges * * *.

The statute before us-,, says- the petitioner, should be construed the same way as the Vinson Act, as both have the same objective, namely, the determination of income from a particular operation. On that analogy it is said that interest should not be- taken into account in figuring the income in this case. This argument ignores the- dissimilarity of the ultimate objectives of the two statutes. The statute under which the petitioner claims is' purely a revenue producing enactment. The Vinson Act is not designed to be a producer of revenue. In its original form it had no provision in it to limit profits on Government contraéis. The first amendment in this direction was offered from the floor of the- House and was intended to remove the “menace of inordinate profits in the production of ships and munitions of war.” The Senate Naval Affairs Committee offered the amendment which* later beeame section 3 of the Vinson Act, requiring payment of excess profits into the Treasury.' In view of the entirely different purposes of the two statutes, we think there is no merit to the argument that because of a superficial analogy between the two, the treatment of interest under both must be the same. Analogies under but one statute have been held not determinative. In Hughes Oil Co. v. Bass, 62 Fed. (2d) 176, the taxpayer had wells drilled on its property under turnkey contracts and sought to take the cost as current deductions under provisions of the regulations that permitted the deduction of drilling costs under footage contracts but were silent as to the deduction of turnkey costs. The court said:

* * * We are not concerned Rere with the question of whether the regulation invoked by analogy is reasonable or unreasonable. Sterling Oil & Gas Co. v. Lucas (D. C.) 51 F. (2d) 413; Old Farmers’ Oil Co. v. Commissioner, 12 B. T. A. 203; Ramsey v. Commissioner, 26 B. T. A. 277. We have here only the question whether appellant has sustained the burden of showing that the action of the Commissioner is unreasonable and invalid.

The quoted holding is applicable here. The reasonableness of the regulations under the Vinson Act is not before us for decision and whether they are right or wrong they afford no basis for determining whether the respondent has allowed the correct amount of depletion in this case.

Moreover, the petitioner can claim nothing on any theory of liberality on the part of Congress in allowing depletion deductions. There was for a period of time, as noted in Burnet v. Thompson Oil & Gas Co., 283 U. S. 301, an “increasing liberality” in the statutory depletion provisions. That case arose under the Revenue Act of 1918. Since that time the changes made have been toward the restriction of depletion allowances. Beginning with the 1921 Act, when discovery depletion was allowable, depletion deductions were limited to the amount of the net income from the property; the 1924 Act reduced the allowance to 50 percent of the net income. Discovery depletion on oil wells was omitted, beginning with the 1926 Act. In the 1932 Act the gross income was required to be computed by excluding royalties paid or incurred for purposes of figuring the 27½ percent. In thus limiting depletion, Congress has given us no ground for here attempting to give any unusually liberal interpretation in the petitioner’s favor.

As the petitioner has not convinced us that the Commissioner’s determination does not result in the contemplated statutory reasonable allowance for depletion, we adhere to the conclusion heretofore announced.

This report supersedes the memorandum findings of fact and opinion heretofore entered.

Reviewed by the Board.

Decision will he entered, for the respondent.

       Gross income from the property is defined in Helvering v. Elbe Oil Land Development Co., 303 U. S. 372, as “gross income received from the operation of the oil and gas wells by one who has a capital investment therein * *

       The corresponding provision Qf Regulations 77 requiring the deduction of “development costs properly charged to expense” has been sustained in F. H. E. Oil Co. v. Helvering, 308 U. S. 104, following Helvering v. Wilshire Oil Co., 308 U. S. 90, which sustained a slightly differently worded provision of Regulations 74.

       Cong. Rec., 73d Cong. 2d sees., p. 1629.

         Id., p. 3793. See Foster Wheeler Corporation, 40 B. T. A. 1, for a discussion of section 3 of the Vinson Act.


author: Stérnhagen :

text:
    John H. Beasley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99113.
    Promulgated June 28, 1940.

      J ohn H. Beasley, Esq., pro se.

      Luden W. Shaw, Esq., F. B. Shearer, Esq., and J. P. Wenchel, Esq., for tlie respondent.
   OPINION.

Stérnhagen :

The Commissioner determined an individual liability of petitioner for the deficiency in 1935 income tax of the decedent of whose estate petitioner had been the administrator. In the Commissioner’s notice the ground is stated as follows:

The information on file id this office indicates that all of the assets of the above-named estate Were disposed of and the debts were settled without first having satisfied the tax due the United States from 'the estate as provided under Revised Statutes 3467,
The above amount represents your liability under section 311 (a) (2) of the Revenue Act of 1934 for unpaid income tax due from the estate of John T. Beasley, deceased for the taxable year ended December ⅞1, 19'35.

The essence of petitioner’s contention is that his discharge by the probate court terminated his liability, since the Government was. aware of the administration proceedings and had not enforced its. claim or objected to the final order of the probate court.

The liability- determined by the Commissioner was not the liability of the estate or of the executor of the estate. It was the personal1, liability of the petitioner by reason of Revised Statutes, section 3467, and such liability is being enforced by the Commissioner in the manner prescribed by section 311 (a) (2), Revenue Act of 1934. The case fits squarely within section 3467, for the petitioner was an administrator who paid the other debts of the estate without satisfying-the estate’s debt for taxes due to the United States (of which he admits he had knowledge). He therefore is answerable in his own person and estate to the extent of such unpaid tax, Helen Dean Wright, 28 B. T. A. 543; Lillia L. Morris, 36 B. T. A. 516, and such liability is by section 311 (a) (2) determinable by the Board, Phillips v. Commissioner, 283 U. S. 589. Cases which consider the liability of the estate or the executor after discharge are manifestly not in point, cf. Hulburd v. Commissioner, 296 U. S. 300; Elna S. Evans, Administratrix, 12 B. T. A. 334; Elnora C. Haag, 19 B. T. A. 982; affd., 59 Fed. (2d) 514; Estate of Lee R. Farrell, 35 B. T. A. 265; William B. Weigel et al., Trustees, 34 B. T. A. 237, affd., 96 Fed. (2d) 387; Puget Sound National Bank of Tacoma, 36 B. T. A. 386.

Decision will be entered for the respondent.

       Every executor, administrator, or assignee, or other person, who pays, in whole or in1 part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the united States from such person or estafe, shall become' answerable in -his own person and estate to the extent of such ¡payments for the debts; so due to the united States, or for so much thereof as may remain due and unpaid. (R. S. § 3467, amended May 10, 1934, c. 277, 8 518 (a), 48 Stat. 760.) (U S. C., Title 31, § 102.)


author: Van Fossan :

text:
    George H. Deuble, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92055, 95044.
    Promulgated June 28, 1940.

      Albert B. Arbaugh, Esq., Homer E. Black, Esq., Paul E. Shorb, Esq., and Marion P. Wormhoudt, Esq., for the petitioner.

      Thomas F. Callahan, Esq., and W. W. Kerr, Esq., for the respondent.
   OPINION.

Van Fossan :

The issue is the taxability of the income of certain trusts established by petitioner for the benefit of his wife and children.

Petitioner asserts that the trusts in question were valid and irrevocable during the taxable years and that no part of the income from those trusts was taxable to petitioner. Respondent argues that all of the trusts amounted to no more than temporary assignments of income and were without substance. Respondent further contends that the income of the Helen C. Deuble and the children’s trusts should be taxed to petitioner on grounds that the trust property would revert to petitioner within a short time and that all the trusts were created and the income therefrom used to discharge a legal obligation of the petitioner.

For purposes of clarity we shall discuss the various trusts separately.

Helen C. Deuble Trust.

Though relying in part on sections 166 and 167 of the Revenue Acts of 1934 and 1936, the respondent lays greatest stress on the applicability of the decision of the Supreme Court in Helvering v. Clifford, 309 U. S. 331, which held the income there in question taxable to the grantor under section 22 (a).

The Helen C. Deuble trust was similar to the one considered in Helvering v. Clifford, supra, in that the wife was the beneficiary and the trust was for a short term. Here petitioner was not the trustee, as was the grantor in the Clifford case, but upon exercise of his reserved right to remove the then trustee and appoint successor trustees might have appointed himself trustee. We are of the opinion that in our consideration we must assume the exercise of this power with all its consequences. Other features of the instant trust which are found in the trust considered in the Clifford case are the retention by petitioner of the right to vote stock and the reserved right to instruct the trustee in regard to investment and reinvestment of the trust property.

Certain indicia of control by the grantor appeared in the Clifford case which do not appear so clearly in the trust presently before us. There petitioner could lend cash or securities of the trust without security; he was not restricted because of the speculative character of proposed investments; he might hold property in his own name as an individual or in the name of any other person; he was not liable for loss of any kind other than that caused by his own willful and deliberate violation of duties as trustee; and, finally, in his absolute discretion he might distribute the income to the beneficiaries at any time during the period of the trust.

The decision reached by the Supreme Court in Helvering v. Clifford, supra, was not based solely on any one of the factors present in the trust before it. Rather, it was based on the aggregate of all factors of control. In that case the Court said that whether or not the settlor may be treated as the owner of the corpus “must depend on an analysis of the terms of the trust and all circumstances attendant on its creation and operation.” Applying this formula to the facts present in the Helen C. Deuble trust, we are of the opinion that the requisite vital elements of control by the petitioner are here present and that it falls within the rale of the Clifford case. The consequence is that the trust income is taxable to petitioner. It therefore becomes unnecessary to discuss the applicability of sections 166 and 167.

The Children's Trusts.

The principal provisions of thesa trusts in effect during the taxable years are substantially similar to those in the Helen C. Deuble trust and the conclusion announced above likewise follows as to them. There is no controlling differentiation. We, therefore, hold that the income of the children’s trusts is taxable to petitioner.

The Income Trusts.

The income trusts are irrevocable and are not to be classified as short term trusts. Petitioner has retained very few incidents of ownership in the trust property. The corpora of the trusts do not revest in petitioner within a few years but, on the other hand, will be distributed to the beneficiaries upon their attaining specified ages. The trustee was given broad powers of administration over the income trusts. The chief similarity which these trusts bear to the trust .considered in tlie Clifford case is that the beneficiary of each of the income trusts is a member of the family group.

Originally these trusts contained no provision for changing the trustee. On May 12, 1932, petitioner executed a purported amendment to each of the trusts, .reserving the right to change the trustee. The trustee .assented to these amendments, but the beneficiaries did not so assent. The trusts being irrevocable, the attempted change in the terms of the trusts was legally ineffective without the consent of the beneficiaries. It follows that the power to change the trustee is not present as in the other trusts hereinbefore considered. In .these trusts petitioner had no power to lend without security, speculate, or hold property in his own individual name. The corpus of .the trusts arose from the receipt and investment of the income of the children’s trusts. We are of the opinion, and hold, that petitioner was not in substance the owner of the corpora of the income trusts and that their income is not taxable to grantor under section 22 (a).

By the terms of the income trusts, Helen C. Double, or any guardian of the person of the respective beneficiaries, during the minority of the beneficiaries, could require the trustee to pay over reasonable amounts for the support, maintenance, and education of the beneficiaries. Respondent contends that the entire income of these trusts is taxable to petitioner under section 167 (a) (2) of the Revenue Acts of 1934 and 1936, under the principles laid down in Douglas v. Willcuts, 296 U. S. 1. We ‘have hold, however, that the grantor in .such situations is taxable only on amounts actually used for maintenance, support, and education. E. E. Black, 36 B. T. A. 346; Martin F. Tiernan, Trustee, 37 B. T. A. 1048; Alfred C. Berolzheimer, 40 B. T. A. 645; Percy M. Chandler, 41 B. T. A. 165. Tire proof is that none of the income was so used in the present cases.

Here the sum of $204.63 was paid to the insurance company to satisfy a premium on a policy of .insurance on the life of petitioner by the trustee from each of the income trusts during each of the years 1934, 1935, and 1936. These sums are taxable to petitioner under section 167 (a) (3) of the Revenue Acts of 1934 and 1936.

Reviewed by the Board.

Decisions will he entered wwder Rule 50.


author: Txson :

text:
    Herbert W. Hoover, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90974.
    Promulgated June 28, 1940.

      Albert' B. Arbaugh, Esq:, Homer E. Black, Esq., Paul E. Shorb, Esq., and M. P„ Wormlioudt, Esq., for the petitioner.

      Paul A. Sebastian, Esq., and W. W. Kerr, Esq., for the respondent;
   OPINION.

Txson :

Although respondent .contends that sections .166 and 167 of the- Revenue Act of 1934 are applicable .here, he relies, also on the decision of the United States Supreme Court in Helvering v. Clifford, 309 U. S. 331, which held section 22 (a) of that act to be controlling on the facts there presented.

The question as to whether the; 1934 income'from the. , five trusts Nos. Ill to. 115,. both inclusive, is taxable to petitioner for that year under section 22 .(a), of the,.Revenue.Act of 1934 was, presented on the motion by petitioner, for ;the,enlargement of the record.and the stipulation of facts submitted, upon the granting of that motion and.was so treated,by both parties in oral argument and on brief.

, On this question the facts show: That the various periods, during which the trusts operated, under both the original trust .instruments and their extensions apd modifications, were.short if the trugfor. was living at the end of each. of. such periods; that-the .trustor, individually retained -the right to control investments: that he individually •retained the right to vote-the .stocks owned by the trust; that lie individually, retained the right at any time to. appoint a trustee,in .lieu of the one named, in the. trust instruments and could, .by the exercise of the latter right, appoint himself as trustee, thereby acquiring all the powers of the trustee in addition to his retained .powers as trustor, ;thus becoming, vested with all such control .of fhe trust corpus as he had had. as. owner thereof prior to its. conveyance in trust;.and that there was a.reallocation.of income within a .family group the members of. which.would.be,.entitled to the property of the .trustor should,he die intestate. ■ It is ,also plearly indicated, although not so shown by direct testimony, that petitioner , in .creating the trusts, was,not without .consciousness of their tax effect, as evidenced by the fact .that the various trusts were from their incipience designed to endure for short periods only, -provided the trustor was living at the expiration of those periods, and by the .further fact that the trust instruments provided for the payment out of the funds of the respective trusts of any tax which might be assessed against the trustor, petitioner, on the income from the trusts. Cf. MacQueen Co. v. Commissioner, 67 Fed. (2d) 857; Raoul H. Fleischmann, 40 B. T. A. 672, 686.

We are of the opinion, and so find, that the facts of record establish that petitioner continued to be the owner of the corpus of the five trusts Nos. Ill to 115, inclusive, for the purposes of section 22 (a) of the Revenue Act of 1934, and that he is taxable on the income therefrom, under the broad provisions of that section, with the exception of the income from certain portions of the corpora of two of the trusts withdrawn in the taxable year by Polly L. Hoover and Jane S. Hoover, as is hereinafter set out. Cf. Helvering v. Clifford, Jr., supra; City National Bank & Trust Co. v. United States, 109 Fed. (2d) 191; Penn v. Commissioner, 109 Fed. (2d) 954; First National Bank of Chicago v. Commissioner, 110 Fed. (2d) 448; Cox v. Commissioner, 110 Fed. (2d) 934; Helvering v. Hormel, 111 Fed. (2d) 1; and Morton Stein, 41 B. T. A. 994.

Having held that petitioner is taxable on the income from the five trusts Nos. 111 to 115, inclusive, under section 22 (a), supra, it becomes unnecessary to consider whether or not he is taxable on such income under sections 166 and 167, supra.

Under the terms of trust instruments Nos. 113 and 114, for the benefit of Polly L. Hoover and Jane S. Hoover, they each had the irrevocable right prior to January 1, 1938, to, at various times, withdraw certain fractional parts of the corpus of those trusts, contingent upon their attainment of certain ages and upon the approval of trustor’s wife or one of his two brothers. They had no fixed rights to so make any withdrawals after that date, since if the petitioner was then living the trust would terminate and the corpus would revert to him. While similar rights to withdrawals, at certain ages, were also given James C. Hoover and Herbert W. Hoover, Jr., in the respective trusts of which they were the beneficiaries, such rights could not have been exercised by either of them prior to January 1, 1938, because neither would have attained the ages requisite to the exercise of such rights prior to that date. They, consequently, did not have such rights to make withdrawals of corpus prior to January 1, 1938, as did Polly L. Hoover and Jane S. Hoover.

Under the terms of trust instrument No. 113, as stated in the paragraph next preceding, Polly L. Hoover, as the beneficiary thereof, withdrew on July 12, 1933, one-fourth of the corpus of that trust and on December 31,1934, she withdrew one-third of the then remaining corpus. Similarly, Jane S. Hoover, as beneficiary of trust No. 114, withdrew on December 31, 1934, one-fourth of the corpus of that trust and on April 16, 1937, she withdrew one-third of the then remaining corpus.

It is assumed, in the absence of any proof to the contrary, that no part of the income on the one-fourth of the corpus withdrawn by Polly L. Hoover on July 12, 1933, was included by respondent in his computation of the deficiency herein. We are however of the opinion, and so find, that the income attributable to those portions of the corpus in their respective trusts which were withdrawn by the two daughters in December 1934 is not taxable to petitioner, because, under the terms of the trust instruments providing for such withdrawals, petitioner throughout the taxable year 1934 had no control over such portions of the trust, since prior to January 1, 1934, the two daughters had attained the requisite ages entitling them to withdraw such portions, as they did, with the approval of their mother, the trustor’s Avife. Accordingly, we hold that one-third of the income of trust No. 113 for the benefit of Polly L. Hoover and one-fourth of the income of trust No. 114 for the benefit of Jane S. Hoover, for the year 1934 are not taxable to the petitioner.

No issue has been raised herein as to whether petitioner is liable for any tax on the 1934 income from “income trusts” Nos. 1013 and 1014 for the benefit of Polly L. and Jane S. Hoover.

With reference to “income trusts” Nos. 1012 and 1015, for the benefit of H. W. Hoover, Jr., and James C. Hoover, minors, the facts show that they received as “principal” the 1934 distributions of income from the main trusts Nos. 112 and 115, and we have hereinabove held that income to be taxable to petitioner. The facts do not disclose that “income trusts” Nos. 1012 and 1015 had any taxable income “arising from the assets constituting the corpus of the Income Trust” other than the amounts of $1,253.37 and $1,299.13, respectively, Avhich were actually expended for the maintenance and education of the two minor beneficiaries pursuant to the terms of those trusts. Having been so expended in discharge of a legal obligation of petitioner, it is clear that those stated amounts are taxable to petitioner for 1934 under the principle announced in Douglas v. Willcuts, 296 U. S. 1; Commissioner v. Grosvenor, 85 Fed. (2d) 2; Martin F. Tiernan, Trustee, 37 B. T. A. 1048; petition for review dismissed June 12, 1939; E. E. Black, 36 B. T. A. 346; Alfred C. Berolzheimer, 40 B. T. A. 645; and Percy M. Chandler, 41 B. T. A. 165. This conclusion renders it unnecessary to consider whether the income of the four “income trusts” Nos. 1012 to 1015, inclusive, would be taxable to petitioner under the provisions of section 22 (a), supra.

Keviewed by the Board.

Decision will he entered under Bule 50.


author: Disney ;

text:
    Estate of Sallie E. Walton, Deceased, The Pennsylvania Company for Insurances on Lives and Granting Annuities, Emma Walton Hallowell and Albert J. Bussenius, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94787.
    Promulgated June 28, 1940.

      Harold T). Saylor, Esq., for tbie petitioners.

      Eugene G. Smith, Esq., for tKe respondent;
   OPINION.

Disney ;

This is a proceeding for the redétermination of a deficiency in Federal estate tax in the sum of $9,-332.80 on the estate of Sallie E. Walton, deceased.

The sole issue is whether certain securities of the approximate value of $50,000, given by the decedent to her daughter about- seven months before decedent’s death, were transferred in contemplation of death within the meaning of section 302 (c) of the Revenue Act of 1926, as amended by section 803 (a) of the Revenue Act of- 1932.

From the record herein we find the facts as hereinafter- set forth.

Sallie E. Walton, the decedent herein, was 74 years oh age at the time of her death, in December 1935. She was a large woman and the cause of death was cerebral thrombosis; or apoplexy. She had been a widow since May 1919. At the date of decedent’s death she owned property of the value of approximately $250,000, not including the securities which were the subject of the gift here in question. Her only child, a daughter, Emma Walton Hallowell, one of the executors herein, was also a widow, having two children, daughters, born May 1,1918, and May 3, 1920, respectively.

Emma Walton Hallowell’s husband' died in 1925 and in the same year Sallie E. Walton took up residence at her daughter’s home in Merion, Pennsylvania, and continued to live there until about June 1935. During the period of about ten years residence at her daughter’s, decedent contributed about $200 monthly towards the support of the daughter and grandchildren. She also paid tuition for one of the grandchildren at school, though for what period and in what amount the record does not disclose.

In December 1934, a year before her- death, Mrs. Walton had a slight stroke, caused by cerebral thrombosis, which stroke confined her to her bed for about a week and left her with a slight thickness in her speech and a somewhat impaired left arm. She soon got about again as before, being up most of the time, but confined to bed for brief periods, such as a day or two at .a time, to rest. At the -time of her stroke and thereafter, she had at least one nurse at all times. Her daughter felt that she needed some one to look after her, but she did not want the responsibility of being with her mother all of the time.

In 1985 her grandchildren were entertaining to some extent, coming in and going out of their home, which disturbed her and made her unhappy. She had been irritable and said to her daughter: “I am going down to the shore for the summer. I am just going to do what you want me to do. I am going to the shore. I know that this money [referring to the-money or securities she gave -her -daughter] would help you and I will not have to -bother with this monthly cheek” — which she had -been .giving her daughter. Mrs. Walton went to Atlantic City about the first of June 1935 to spend the summer and did not thereafter return to her daughter’s residence to live. Before going, and in May 1935, she gave her daughter securities of a value of somewhat less than $50,000. The gift supplemented the daughter’s own income, which was from $16,000 to $18,000 a year. The daughter, asked what the mother said at the time as to the reason for the gift, answered: “She did not want to be .bothered with a check every month. She was getting older and she wanted -to get relieved -from a certain amount of responsibility.” After the gift the mother ceased to make monthly contributions to her daughter. About September 1, 1935, Mrs. Walton went from Atlantic City to the Belgravia Hotel in Philadelphia, Pennsylvania, where she continued to reside until her death'.

Decedent died on December 23,1935, of cerebral thrombosis, caused by arteriosclerosis. She had been out Thursday or Friday before her death the following Monday and contemplated spending Christmas Day at Merion -with her daughter. She had complained of indigestion two days earlier, had been in bed-the previous day, and was sitting up when she fell over on the floor and died very suddenly.

Dr. Bussell S. Boles had treated the decedent for about seven years, beginning in 1928. In 1931 he prescribed for her because of high blood pressure. In her last years he treated her for infirmities of old age and toward the end for blood pressure, general failing, circulation, etc. Her -blood pressure at times would get to 220 or 230. The physician would refer casually to her high blood pressure, but never permitted her to feel alarmed about it. 'He cautioned her about overeating and -gave her instructions about rest, quiet, and the amount of meat she should eat. He-called upon her about once a week after the stroke in December 1934 and after her return to Philadelphia from Atlantic City, where he had seen her about once a month and had kept in touch with her through correspondence, nurses, and personal visits. There was no radical change in her condition or conduct after May or June 1935 until her death. Almost up to the last day Mrs. Walton was permitted to do almost everything that she wanted to do, but not everything, because she was active and wanted to do things at times that in the opinion of her physician she should not do. Decedent did not suffer from headaches nor from indigestion, except that about two days before she died she thought something she had eaten gave her indigestion. The doctor originated visits to her. She was not given to calling upon him or any other doctor. He had had many patients who lived more than a year after slight strokes and some who lived ten years or more. It was his opinion that a person who has had one such stroke is more likely to have another than a person who has never had one.

Albert Bussenius always made out decedent’s taxes and matters of that nature. He was executor of the estate of her husband. Decedent took care of the remainder of her own business. The amount or extent of such business and the form of her property are not shown. She went to moving pictures, called on people, and had callers, friends, to see her, and went out for motor rides, using her daughter’s car and chauffeur. At Atlantic City she had her lunch and dinner in the dining room and her breakfast in her room. During her stay at the Belgravia Hotel her daughter, who lived some miles away, called on her daily and the mother visited the daughter about once a week and was during the year 1935 as active as most people in their seventies. Mrs. Walton never talked about death to her daughter, doctor, or a nurse who testified, and the doctor and daughter considered her of an optimistic nature. The decedent was a phlegmatic, unemotional type of person, not given to hysteria or instability.

Agnes Rafferty, one of the two nurses who attended the decedent while she was living at the Marlborough-Blenheim Hotel in Atlantic City and thereafter until her death, was called in by decedent’s daughter, but took her instructions from Dr. Boles. He wanted some one to be with Mrs. Walton because of her age and the fact that at times she was unwell. She had a suite of rooms with the decedent. Prior to that time, the decedent had a surgical nurse. After Agnes Rafferty went to Atlantic City, another nurse came and the decedent was attended by two nurses, each with a twelve-hour duty. The doctor and decedent’s daughter wanted some one to be with her. The nurses gave her her bath and helped her dress. Decedent could not walk so well as the nurse, but she could “get around.” She sometimes walked with a cane. She took no long walks. Decedent read extensively and did some fancy work. Before leaving Atlantic City, Mrs. Walton spoke about returning the following summer and stated that she intended to stay in the Blenheim part of the hotel rather than in the Marlborough part because more of her friends were in the Blenheim part.

The principles governing the determination whether a gift mter vivos is made “in contemplation of death” are discussed in United States v. Wells, 283 U. S. 102. In cases like the instant one, the petitioner or taxpayer must overcome not only the presumption of the correctness of the Commissioner’s determination, but also must overcome the statutory presumption of section 803 (a) of the Kevenue Act of 1932, which provides:

* ⅛ * Any transfer of a material part of Ms property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

With respect to the above provision of the statute, the court in Farmers’ Loan & Trust Co. v. Bowers, 98 Fed. (2d) 794, 799, said:

* * * This provision was intended to and does place upon the taxpayer the burden of proving by a fair preponderance of evidence that the transfer within two years of death is not made in contemplation of death.

The statutory presumption is rebuttable, as is the determination of the Commissioner that a gift has been made in contemplation of death. United States v. Wells, supra; Frederick P. Ader et al., Executors, 40 B. T. A. 582, 586. “The words ‘in contemplation of death’ mean that the thought of death is the impelling cause of the transfer, and while the belief in the imminence of death may afford convincing evidence, the statute is not to be limited, and its purpose thwarted, by a rule of construction which in place of contemplation of death makes the final criterion to be an apprehension that death is ‘near at hand.’ ” United States v. Wells, supra. That case says :

* * * The best evidence of the state of the decedent’s health at the time the transfers were made is the statement of his doctor. The best evidence of the decedent’s state of mind at that time and the reasons actuating him in making the transfers are the statements and expressions of the decedent himself, supported as such statements are by all the circumstances concerning the transfers.

Here the petitioner has adduced evidence of the doctor as to condition, showing that it was critical, necessitating constant care, with a nurse 24 hours a day, and resulting in death after a few months, but has adduced almost a minimum of evidence as to statements or expressions of the decedent as indicative of reasons actuating the transfer. We have above quoted verbatim the only expression from the decedent bearing" upon the transfers. The fact that decedent did not express to the doctor, the daughter, and a nurse what she may haye thought as to death is patently of little or no import, particularly since she is shown to have been a phlegmatic, unemotional nature, not given to hysteria. An ordinary person of that description probably would not have disclosed her state of mind. Even if we assume as a fact that she was an optimistic person, as her daughter and doctor considered her, such fact would not be of any great effect. In Clarence A. Neal et al., Executors, 16 B. T. A. 1058, 1065, we said:

* * * rpjjg petitioners urge that mental alertness, continued interest in business activities and plans for future pleasure and general optimism are opposed- to the i>roposition that the deeedent in any way anticipated, contemplated or suspected that death was to- be expected in the close or “reasonably distant” future and these facts are, of course, of importance, but we do not regard them as conclusive of the issue before us, since man sometimes exudes optimism and courage when pessimism and fear exist within. In many cases this may be an unnatural condition, but it is, nevertheless, true that outward appearances are no infallible index to man’s inner consciousness. As was Said by the court in Rosenthal v. People, 211 Ill. 306; 71 N. E. 1121:
His physician did not tell him he was going to die. He did not ask the physician what was the matter with him, and the physician did not tell him. He talked about going abroad to recuperate, and said nothing about his death. There was no talk by him or his wife, or any one, on that question.
# # * ⅜ * * ⅛ *
* * * While the widow and physician testified that the deceased did not expect to die, they also said that it was not the subject of conversation at all, and in view of his condition it is a fair inference that he was not so dull of comprehension as to suppose that he would get well.

In tbe Neal case, as herein, the decedent had some plans for the future, but they were not considered by us as negativing contemplation of death. Of course it is not material that decedent, two or three days before Christmas, expected to spend it with her daughter, for under the Wells case, supra, contemplation of death is not confined to the thought of immediate decease.

The only expression from the decedent, as above seen, is, in substance, that she knew the money would help the daughter and that she, the decedent, would not have to bother with a monthly check; to which may possibly be added what may be, not decedent’s expression, but the opinion of the daughter, that she was getting older and wanted to get rid of a certain amount of responsibility. Does this evidence meet petitioners’ burden of proving that the transfer was not in contemplation of death ?

There is a line of cases which indicates that if a gift is made in consonance with a general practice to make gifts of that kind and commensurate in amount therewith, the..gift will not be considered made in contemplation of death. Obviously, the logic is that, since throughout.life there.has been a custom of mating such gifts, the •particular gif tin-question-is thereby indicated to be merely a customary act, and not one in contemplation of -death. However, the logic seems inverted where as here the customary gift has been about $200 a month a.nd the .gift in- question is $50,000, equal to $200 per month for. about 20 years. In such- case the gift by its very size is indicative, not of a mere conformity to custom or habit, but affirmatively of a breaking of that custom, and an indication that some unusual reason prompted -it. The.- present case, theréfore, resembles that of Frederick P. Ader et al., Executors, supra, where we said:

* ⅜ * Decedent, for reasons- unknown, in August 1935 departed from her express poliey to not make any. gifts while her assets were worth-not in excess of $100,000, i. e., in August 1935 her assets were not worth a “substantial amount over $100,000.” She decided, for reasons not known, to make gifts to her sons, regardless of lack of increase in values of her assets. * * *

We concluded that a showing of freedom from contemplation of death had not been made. As in the instant case, the decedent was aged, suffered a complication óf a disease seldom curable, and made gifts shortly thereafter, representing about one-fourth of her holdings.

There are cases which uphold gifts as not in contemplation of death if made to escape business cares, worries,. or management. The evidence here wholly fails to justify such a conclusion. The decedent, by making the gift of $50,000, merely escaped the burden of writing a check for about $200 once a month. Such a case can not with logic be placed’ in the same category with those where weighty business cares and management were escaped by gifts made. Moreover, the frailty of this idea is emphasized by the fact that the daughter to whom-the checks had' been made and the gift was made lived in the same -house-with her until after the time of the gift, saw her mother daily while she was in Philadelphia after returning from a summer in Atlantic City, and saw her there apparently frequently, since the daughter testified-about her mother’s habits there. It is obvious, therefore, that no more than a trivial burden was -escaped by making the gift, instead of an occasional check. Yet that, in effect, is the only reason ever announced by the-decedent"for-making the gift. We consider it insufficient to sustain the burden of showing that the Commissioner’s determination was error.

The gift, as above seen, was equivalent, roughly, to- monthly checks of $200 for about twenty years, and the reasonable indication is that of apprehension that the donor would not be available to give such checks, i. e., a contemplation of death, rather'than indication of -disproof thereof.

About five months before the gift the decedent had had a stroke, affecting speech and one arm. It was likely to recur. It did recur about seven months later and was fatal. She was 74 years of age, with a nurse with her 24 hours a day. It is obvious that the doctor, who felt it was his duty to keep the decedent under observation, and decedent’s daughter, who wished some one to be with her mother, feared the sudden death which did overtake the decedent. The decedent was slowly failing. She was phlegmatic by nature, and her failure to discuss death means little, if anything. Her mode of life, as shown, is consistent rather than inconsistent with expectation of death. It is not comparable with active business life, found in many cases where contemplation of death was negatived, nor with the activities which in the Neal case, supra, we considered insufficient to meet the burden of proof. We think she did not act without consideration of her condition and the attention she was receiving.

In the light of the entire record, we are of the opinion and hold that the statutory presumption of contemplation of death and the presumption of the correctness of the Commissioner’s determination have not fairly been overcome by the facts and circumstances shown in the record, and that under such presumption the transfer of the securities made by decedent to her daughter was made “in contemplation of death” within the meaning of the revenue statute. The action of the respondent is, therefore, approved. Armin L. Kelly, Administrator, 8 B. T. A. 1193.

Reviewed by the Board.

Decision will be entered for the respondent.

Arundell and Leech dissent.


author: Hill:

text:
    Swain and Myers, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94477.
    Promulgated June 28, 1940.

      David Altman, Esq., for the respondent.
   OPINION,

Hill:

The question for decision here is whether or not petitioner is entitled to accrue and deduct from its gross income for the taxable year ended September 80, 1935, in computing its Federal income tax, an amount representing the tax imposed by the Illinois Retailers’ Occupation Tax Act (Jones Illinois Stat. Ann., sec. 119.450 et seq.) in respect of the uncollected portion of the sales price of merchandise sold in the taxable year. The pertinent provisions of the Illinois statute are quoted in the margin.

Petitioner was engaged in the business of selling at retail store fixtures and equipment, and kept its books of account on an accrual basis. In determining the deficiencies respondent has allowed deduction of the full amount of the state tax accrued on petitioner’s gross receipts in the taxable year, without regard to whether the tax was paid in such year, but petitioner contends that, since it included in the sales price an amount equivalent to the tax imposed on the gross receipts when collected and accrued such gross amount as income, it is entitled also to accrue and deduct as business expense the amount of the Illinois tax in order to reflect its true income. This contention can not be sustained.

The fallacy of petitioner’s argument lies in the fact that the full gross amount of each sale made by it, which included an amount equal to the tax here in controversy, became a definitely fixed obligation of the vendee at the time of sale, and hence such amount was properly accrued by petitioner as gross income. But petitioner did not become liable to pay the state tax until it made collection from its customers. The Illinois statute clearly imposed the tax only upon gross receipts from sales, and petitioner does not contend otherwise. Hence, prior to collection, petitioner’s liability to pay the tax in respect of credit sales was wholly contingent, and the fact that it set up on its books a reserve to cover such contingent liability does not change the legal effect of the situation, “Contingent liabilities are not accruable for income tax purposes.” Sunburst Oil & Refining Co., 23 B. T. A. 829, 836, and authorities cited. We have repeatedly held that a reserve set up on a taxpayer’s books to take care of a contingent liability is not deductible in computing Federal income tax. See Reuben H. Donnelley Corporation, 22 B. T. A. 175, and authorities cited at page 180.

The facts in the Donnelley case are, in all material respects, similar to those involved here. There the taxpayer was engaged in the business of publishing classified business telephone directories, and derived its income from sales, through agents, of advertising space. The commissions to be paid to the salesmen for procuring advertising contracts were not due until the amounts of the contracts were paid. The amounts due on the contracts were immediately charged by the taxpayer to its customers’ accounts and accrued as income. We held that such amounts constituted gross income, but that the salesmen’s commissions on the unpaid accounts were not accruable or deductible. In that connection we said:

It may be inquired why such items should be accrued as income and the amounts due salesmen as commissions on these advertising' contracts should not be accrued as expense. We think the answer lies in the fact that the accounts for advertising were unconditionally due when the directories were published, whereas the amounts due salesmen for commissions were contingent upon the customers paying their accounts.

Petitioner in the instant case strenuously insists that since it accrued the Illinois tax as gross income, the true net income will not be reflected unless it is permitted to accrue and deduct the amount of the State tax, citing in support of this contention, United States v. Anderson, 269 U. S. 422. It is obvious, we think, that to permit the deduction claimed in respect of petitioner’s accounts receivable would result in a distortion of income if and to the extent that such accounts were not thereafter collected. Furthermore, in no event would petitioner have to bear the burden of double taxation in respect of uncollected accounts, since it would be entitled to deduct in a subsequent year any worthless debts, which would include pro tanto the accrued State tax. Not only is it unnecessary to accrue a contingent liability in order clearly to reflect income, but any system of bookkeeping which accrues such item distorts income. Reuben H. Donnelley Corporation, supra; Kaufmann Department Stores, Inc., 11 B. T. A. 949; Crescent Cap Co., 10 B. T. A. 1.

Nor do we think that United States v. Anderson, supra, lends support to petitioner’s argument. That case involved a reserve for taxes on profits from sales of munitions in 1916, which taxes were not due and payable until 1917. The taxpayer sought to take a deduction in 1917. The Supreme Court held that the amount was properly ac-cruable and deductible in 1916 for the reason that in the economic and bookkeeping sense the taxes had accrued in that year, saying:

In a technical sense it may be argued that a tax does not accrue until it has 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.

The present case differs from the facts in the Anderson case in that here, prior to the close of the taxable year, all events which fixed the amount of the tax and determined the liability of petitioner to pay it had not occurred. Both the amount of the tax and petitioner’s liability to pay were dependent upon collection. The Anderson case involved an unconditional liability; the case at bar involves a contingent liability.

The deficiencies determined by respondent are approved.

Decision will be entered for respond,ent.

       119.451. A tax is imposed upon persons engaged in the business of selling tangible personal property at retail in this State at the rate of two per cent (2%) of the gross receipts from such sales in this State of tangible personal property made in the course of such business upon and after the taking effect of this Act and prior to July 1, 1985, and at the rate of three per cent (3%) of the gross receipts from such sales on and after July 1, 1935 * * «.


author: Van Foss an: Opper,

text:
    Valley Tractor & Equipment Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95878.
    Promulgated June 28, 1940.

      Louis Janin, Esq., for the petitioner.

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

Van Foss an:

The only issue for our determination is whether or not petitioner is entitled to a dividends paid credit for the year 1936. Petitioner contends that it is entitled to credit for a cash dividend paid by check. It maintains that even if we should find that the dividend was not paid in cash, the payment was made in petitioner’s obligations having a value equal to the face amount of the checks. Respondent argues, however, that there was no actual payment of a dividend during the taxable year and, hence, no credit is allowable.

The applicable provisions of the statute are section 27 (a) and (d) and section 115 (a) of the Revenue Act of 1936.

The fact that petitioner had a surplus out of which to declare the dividend is not questioned, nor is the action of the board of directors in the declaration disputed. The issue turns upon whether or not a dividend was, in fact, paid' during the taxable year.

At the hearing, respondent indicated his position to be that since petitioner did not have sufficient cash on hand to cover the face amount of the checks, no dividend was paid. It is clear, however, that a corporation need not have sufficient cash on hand to meet a declared dividend. In A. D. Saenger, Inc. v. Commissioner, 84 Fed. (2d) 23, certiorari denied, 299 U. S. 577, the Circuit Court of Appeals for the Fifth Circuit said:

* * * A. & J., Inc., did not carry cash on hand sufficient to pay what it had unreservedly put to the credit of A. D. Saenger, Inc., is unimportant. It could on demand have borrowed it or raised it by sale of some of its investments. No case of refusal to pay appears. * * *

In Baker v. United States, 17 Fed. Supp. 976, the Court of Claims stated:

The cash balances of the Baker Ice Machine Company, Inc., as shown by the books of its Omaha and Bos Angeles offices, were not sufficient at all times during the years 1924 . and 1925 to pay the dividends credited to plaintiff’s account, but the cash position alone is not conclusive as to the ability of the company to pay. It is only one of the items going to make up its capital and surplus, Jacobus v. United States, 9 F. Supp. 41, 80 Ct. Cl. 357; A. D. Saenger, Inc. v. Commissioner, (C. C. A.) 84 F. (2d) 23, and the fact that the cash balances may at times fall below the amount of dividends standing on the books to the credit of a stockholder does not of itself establish that the amounts so credited to the stockholder are not available to him. * * *

In both the Saenger and Baher cases the dividend was held includible in the shareholders’ gross income even though the corporation declaring the dividend did not have sufficient cash balance to meet the dividend. Under these holdings, the fact that cash on deposit was not sufficient to pay the dividend checks is not enough to cause the dividend to be ineffective.

Article 42-3 of Regulations 94 provides that “dividends on corporate stock are subject to tax when unqualifiedly made subject to the demand of the shareholder.” There would seem to be no question as to the liability of the stockholders for tax on the dividends in question and, as a matter of fact, they returned them and paid tax accordingly. There is no question of the solvency of the corporation. Though it did not have cash on hand, it had ample credit at the bank. We find no evidence of an agreement that the checks would not be cashed or presented for payment. Petitioner’s president testified that at the time the checks were received it was the intention of the two stockholders to cash them immediately. Definite arrangements for a loan were made. Cf. Eagleton v. Commissioner, 97 Fed. (2d) 62. The reason the loan was not consummated and the checks cashed forthwith was twofold, the lack of necessity for immediate funds by the stockholders and a change in the policy of the bank as to carrying loans on petitioner’s contracts. We are of the opinion that the dividend was paid and that credit claimed was allowable. It is thus unnecessary to consider petitioner’s alternative contention that if the dividend does not come within section 27 (a) as a dividend paid in the taxable year, the case comes within the terms of section 27 (d) as a dividend paid in obligations of the corporation.

Reviewed by the Board.

Decision will Toe entered under Rule 50.

DisNey concurs only in the result.

Opper,

concurring: The stockholders having actually received their dividend checks prior to the end of the taxable year, there would seem to be no question that they were liable as individuals for the income tax thereon. Their failure to call for the funds placed at their disposal would not relieve them from that liability under the doctrine of constructive receipt. Hiram C. Wilson, 17 B. T. A. 976; Harvey H. Ostenberg et al., Administrators, 17 B. T. A. 738, 745; cf. Avery v. Commissioner, 292 U. S. 210; Elvira Scatena, 32 B. T. A. 675, 679; affd. (C. C. A., 9th Cir.), 85 Fed. (2d) 729. It appears from the statement of facts that the stockholders recognized this liability and included the dividends in their individual income for that year. These seem to me the strongest reasons for granting the dividends paid credit to the petitioner corporation, since the basic purpose of sections 14 and 27, Revenue Act of 1936, was fulfilled by the procedure adopted. See Foley Securities Corporation, 38 B. T. A. 1036; affd., 106 Fed. (2d) 731. The dividend being taxable to the shareholders, credit for its payment should be available to the corporation.

       SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
      (a) Dividends Paid Credit in General. — For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.

      (d) Dividends in Obligations of the Corporation. — If a dividend is paid in obligations of the corporation, the amount of the dividends paid credit with respect thereto shall be the face value of the obligations, or their fair market value at the time of the payment, whichever is the lower. If the fair market value is lower than the face value, then when the obligation is redeemed by tile corporation, the excess of the amount for which redeemed over the fair market value at the time of the dividend payment (to the extent not allowable as a deduction in computing net income for any taxable year) shall be treated as a dividend paid in the taxable year in which the redemption occurs.
      SEC. 115. distributions BY CORPORATIONS.
      (a) Definition of Dividend.. — The term “dividend” when used in this title (except in seelion 203 (a) (3) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.


author: Disney:

text:
    Purdon Smith Whiteley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92901, 92902.
    Promulgated June 28, 1940.

      Frederick H. Spotts, Esq., A. C. Newlin, Esq., and Robert C. Fluhrer, Esq., for tbe petitioner.

      Brooks Fullerton, Esq., for tbe respondent.
   OPINION.

Disney:

These proceedings were consolidated for bearing and report and involve tbe redetermination of deficiencies in income tax in tbe amounts of $4,226.04, $4,607.88, and $2,770.80 for the respective years 1933, 1934, and 1935. All of tbe facts were stipulated. The issue is whether all of the income of a trust executed on May 19, 1932, by Beauchamp E. Smith is taxable to petitioner.

On May 19,1932, Beauchamp E. Smith, a brother of the petitioner, created a trust by transferring to the Western National Bank of York, Pennsylvania, as trustee, 20,000 shares of common stock and 6,000 shares of preferred stock of the Commonwealth & Southern Corporation, seven life insurance policies of the aggregate amount of $225,000, and a note of the petitioner for $250,000. The common stock was represented by two certificates dated in 1930 for 10,000 shares each. The stock was owned by and registered in the name of the petitioner and tbe certificates were endorsed by her in blank. The preferred stock consisted of two certificates dated in 1930, one for 5,000 shares owned by and registered in tbe name of the trustor and the other for 1,000 shares owned by and registered in the name of the petitioner. Tlie certificates were endorsed in blank. The policies of insurance were on the life of the petitioner, with Beau-champ E. Smith as beneficiary, and were issued in 1931 and 1932 on applications made by Beauchamp E. Smith. The note was dated September 22, 1931, was executed under seal, and was payable to Beauchamp E. Smith on demand.

The income of the trust after payment of the expenses of the trust, including premiums on the life insurance policies, was payable to the petitioner for life, and in addition thereto the trustee was directed to pay and deliver to her from time to time, subject to the written consent of the trustor, if living, and if deceased, the trustee, “such further amounts from the principal of this Trust as she shall deem proper and necessary, for her maintenance, support, comfort and enjoyment.” Subject to the control and written directions of the trustor and/or the beneficiary, the trustee was authorized to:

1. Vote and exchange the stock.
2. Consent to reorganizations, consolidations, etc.
3. Pay assessments, etc., to protect its interests as holder of the securities.
4. Exercise options and stock rights.
5. Exercise generally all rights lawfully exercisable by any person owning similar property.

Upon the death of the beneficiary all or any part of the net income and principal of the trust was payable to such of her children and in such proportions as she should by her last will appoint. In case of failure of the beneficiary to exercise the power of appointment the entire net income and principal or any balance not appointed was to go in equal parts to her husband and children in a specified manner. Any part or all of the principal of the trust was payable at any time to any beneficiary upon his written application accompanied by the written consent of the trustor, if living, and if not, the trustee.

The beneficiary was authorized to direct the trustee in writing to hypothecate, sell, exchange, or loan the property of the trust to her husband and to such firms or corporations as she should designate and upon such terms as she should designate. The beneficiary was appointed cotrustee of the trust. The trustee had no authority to lease, sell, transfer, invest, reinvest, mortgage, or encumber the property of the trust without the written consent of the cotrustee.

Paragraph ninth of the trust instrument reads as follows:

Tbe Donor expressly surrenders all right and power to amend, modify, or revoke this Trust, and upon the execution of this Indenture no part of the corpus of the Trust property shall be retained by the Donor, and he shall have no power over the disposition or distribution of the principal or the income thereof.

The dividends paid on the preferred stock after the execution of the trust, amounting to $36,000 in 1933, a like amount in 1934, and $22,500 in 1935, were received and reported by the trustee. No income was realized from the trust from the common stock during the taxable years. During 1932, 1933, and 1934 the petitioner paid interest on the note at the rate of $15,000 per year or 6 percent per annum, and in 1935 paid $7,500 interest on the note. The interest was claimed as a deduction in income tax returns filed by the petitioner and was reported as income by the trust. No premiums were paid on the policies of insurance by the trust in 1932. In 1933,1934, and 1935 the trustee paid the premiums out of income of the trust estate. The trust paid an income tax on the amounts used to pay insurance premiums and not distributed to any beneficiary. The remainder of the income, less minor deductions, realized by the trust each year was paid to the petitioner, who paid an income tax upon it.

On May 21,1932, the petitioner executed an instrument transferring to the Western National Bank of York, Pennsylvania, in trust, 10,000 shares of common stock and 5,000 shares of preferred stock of the Commonwealth & Southern Corporation and a note of Beauchamp E. Smith dated February 23, 1932, payable to petitioner, in the amount of $250,000. The common stock was represented by one certificate issued in 1930, owned by and registered in the name of Beauchamp E. Smith and by him endorsed in blank. The preferred stock belonged to the petitioner and was under loan to her husband, who had pledged it as collateral for an account with E. W. Clark & Co., who held the certificates in street names. Pursuant to instructions received by E. W. Clark & Co. on May 27, 1932, the certificates were transferred to the name of the trustee and were delivered to the trustee on June 2, 1932.

The income of the trust, after payment of necessary expenses, including premiums on any life insurance policies held in the trust, was payable to Beauchamp E. Smith for life. Other provisions of the trust respecting withdrawal, disposition, and control of the corpus gave the beneficiary, in all material respects, the same rights as were given the petitioner in the trust created for her benefit by Beauchamp E. Smith.

The dividends paid on the preferred stock from May 21, 1932, to the close of 1935 were received and reported by the trustee. No income was realized during the taxable years from the common stock.

The maker of the note paid as interest thereon $12,833.34 in 1932, $15,000 each in 1933 and 1934, and $7,500 in 1935. He claimed the interest as deductions in income tax returns and the trust reported the amounts as income in its returns. The note has been withdrawn from the trust and has been destroyed.

All of the net income of the trust was paid to and reported by the beneficiary for income tax purposes.

In his determination of the deficiency the respondent taxed all of the income of the Beauchamp E. Smith trust to petitioner on the ground that the corpus belonged to her prior to the formation of the trust and that she received all of the benefits and controlled the disposition of the principal of the trust. He contends here that petitioner should be regarded as the grantor of the trust; that she had power to revest all of the corpus of the trust within the meaning of section 166 of the Revenue Act of 1932, and that section 167 also applies to the income used to pay premiums on the policies of insurance on her life, she having returned as income the amount distributed to her. He also contends that the income of the trust is includable in her gross income within the meaning of section 22 (a) . The petitioner concedes that she was the grantor of the trust to the extent of 20,000 shares of common stock and 1,000 shares of preferred stock owned by her prior to the creation of the trust and that she is taxable on the income from the preferred stock used to pay premiums on insurance covering her life. Ho income was received by the trust on the common stock. Should it be held that the petitioner was and continued to be the owner'of the remaining property, namely, the 5,000 shares of preferred stock, the note, and the fife insurance ?

The situation is similar to that prevailing in Lehman v. Commissioner, 109 Fed. (2d) 99; certiorari denied, 310 U. S. 637, in which identical cross trusts of a like amount and kind of property were executed by the decedent and his brother. In holding that the amount of $150,000 'which the decedent had power to withdraw from the trusts was properly includable in his gross estate within the meaning of section 302 (d) of the Revenue Act of 1926, the court said: “The fact that the trusts were reciprocated or ‘crossed’ is a trifle, quite lacking in practical or legal significance”, that “The law searches out the reality and is not concerned with the form”, and that “ ‘A person who furnishes the consideration for the creation of a trust is a settlor, even though in form the trust is created by another. Scott on Trusts, section 156.3.’ ”

In Helvering v. Clifford, 309 U. S. 331, the grantor declared himself trustee of securities under a short term trust for the exclusive benefit of his wife. The Court held the income of the trust to be taxable to the grantor under the broad terms of section 22 (a), upon the ground, in general, that the trust created no substantial change in the ownership of the property. The Court said: “Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue.”

The 5,000 shares of preferred stock were owned by and registered in the name of Smith at the time he created the trust, and as payee he also held petitioner’s demand note for $250,000. At the same time petitioner owned a like number of shares of the same stock and Smith’s demand note for $250,000. On May 19, 1932, Smith placed the stock and note held by him, together with stock of petitioner (as to which petitioner admits she was the settlor) and the insurance on the life of petitioner in trust for the benefit of petitioner. Two days later petitioner created a trust for Smith’s benefit, using 5,000 shares of her own preferred stock, Smith’s note, and common stock owned and registered in the name of Smith. In all material respects the terms of the trusts were identical.

The stipulated facts, constituting the only evidence before us, do not specify the consideration given for the notes or directly show the reason or circumstances surrounding their execution. Petitioner argues upon brief that the consideration and occasion for the notes are immaterial, it being enough that petitioner’s note, having been executed under seal, is a binding and enforceable obligation, citing William Park, 38 B. T. A. 1118. We view the point differently. If an adequate and full consideration in money or money’s worth had passed for petitioner’s note, obviously there would be less reason to consider the reciprocity in the use of the two notes of like amount in the two trusts and to conclude from the remaining facts that petitioner was the real grantor. Lack of direct proof on the point, as to which the petitioner had the burden, operates against, not for, the petitioner. The eight insurance policies on the life of petitioner were executed at different times, commencing December 12, 1931. It may be that the note was executed on September 1, 1931, for the purpose of providing income with which to pay the initial premiums. The Park case involved deductibility of interest paid on a sealed note delivered as a gift, an entirely different question, and the rule announced therein does not control the question here. The note executed by Smith is not in evidence. It was withdrawn from petitioner’s trust and destroyed at a time or times and under circumstances not disclosed by the record. 'Plie significant thing is that each note was placed in trust by the payee at approximately the same time for the benefit of the maker. One note offset the other.

The substance of the situation respecting the preferred stock does not differ from that as to the notes. What petitioner lost by the transfer to the trust created by her for Smith’s benefit she recovered as beneficiary of Smith’s trust.

It thus appears that, with the exception of the insurance policies, which will be discussed later, and the common stock, about which there is no controversy, there was an exchange of notes of a like amount and, in effect, an exchange of like preferred stock for the purpose of creating reciprocal trusts. There appears to be no other motive for the transaction. The fact that there was more stock in the Smith trust than was transferred to the trust executed by petitioner is of no significance. The obvious purpose was to provide income to carry the life insurance on petitioner, there being none on Smith’s life m petitioner’s trust.

The petitioner contends, however, upon brief that no issue was raised by the pleadings that petitioner should be regarded as the grantor of the trust upon the ground that Smith created the trust in consideration of the formation by petitioner of a similar trust for his benefit and that there was no proof in the record that one trust was created in consideration for the creation of the other.

In her petition petitioner alleges as error the action of the Commissioner in “Taxing the entire income from a trust created by Beauchamp E. Smith to the petitioner, although the entire income was not distributed, or distributable, to the petitioner.” In his answer to the petition the respondent denies that he erred in the manner alleged. Under the issue as thus raised the question is the broad one of whether the income of the Smith trust should be taxed to petitioner. The point raised by the petitioner is governed by Raoul H. Fleischmann, 40 B. T. A. 672.

We have only the stipulated facts before us and they contain no agreement that the instruments are reciprocal trusts. The petitioner does not specifically deny that they were reciprocal. The burden was upon the petitioner to show otherwise. In our opinion such showing was not made.

The stipulation of facts does not show the payer of the initial premiums on the insurance policies, although in the preparation of the document provision was made to stipulate the fact. Some of the applications for the policies provide for payment of premiums by Smith, who applied for all of the insurance. Petitioner regards a statement appearing in the opening remarks of counsel for the respondent as an admission that Smith paid the initial premiums. The statement is not reasonably to be considered as intended as an admission of a fact which the parties for an unexplained reason left blank in their stipulation and which is not free from ambiguity and is not in form a solemn admission. The statement does not appear to have been made for the purpose of dispensing with the proof. Horseshoe Mining Co. v. Miners' Ore Sampling Co., 147 Fed. 517; 22 C. J. 394. We will not treat the statement as amounting to an admission. It is doubtful whether the point is material, in view of the fact that the insurance was held by Smith as beneficiary at the time he created the trust.

The motive for obtaining the insurance is the pertinent factor. The stipulation contains no direct evidence on the point. In the applications made to the Equitable Life Assurance Society of the United States, the petitioner, in response to a question asking for whose benefit the insurance was desired and what loss the initial beneficiary would sustain in the event of the insured’s death, answered as follows: “Brother. Loss on note due him and loss to my estate upon my decease if stock held had to be sold to pay note to brother.” This statement of petitioner clearly discloses knowledge by her that the insurance would be assigned by the beneficiary in such a manner as to enable her estate to receive the proceeds in case of her death, for it is obvious that if Smith had retained the note and insurance in their original form he could at any time have demanded payment of the note and would have been entitled to the cash surrender value of the policies prior to the insured’s death, and the face amount of the policies upon petitioner’s death. The application to another company recites as a reason for the insurance the fact that Smith was petitioner’s brother and creditor. It does not appear that petitioner was indebted to Smith under any obligation other than the note for $250,000, the legal effect of which could have been nullified under the terms of Smith’s trust.

The policies had been taken out within about five months prior to the execution of the trust instrument and the record does not disclose that any of them had a cash surrender value when they were transferred in trust. If the policies had any value the amount was small in comparison with, the value of the other property. Even if the insurance policies had potential value, they were not income-producing assets and petitioner does not attribute any of the income in controversy to the policies. The inference from the facts is that the primary purpose of the trust was to provide income to pay the annual premiums on the policies. Under the circumstances, we do not think that the presence of the insurance in the trust is of sufficient significance to overcome the finding of the respondent that petitioner was the owner of all of the assets placed in trust. Accordingly, we sustain the determination of the respondent that petitioner should be regarded as the grantor of the Smith trust.

The transfer of the property in trust did not create any substantial change in the dominion and control over the property. The petitioner as beneficiary was entitled to receive all of the income of the trust after payment of expenses thereof, including premiums on the insurance policies. Subject to the Written consent of the trustor, she was entitled to distribution of the principal at any time for any purpose. She was not only entitled to appoint corpus by will, but acting alone could direct the trustee to hypothecate, sell, exchange, or loan the principal to her husband or any firm or corporation upon her own terms and the trustee had no power to lease, sell, transfer, invest, reinvest, or mortgage the corpus without her written consent. Such income as was not distributed to petitioner or used to pay other expenses in administering the trust was used to pay premiums on insurance policies subject to petitioner’s appointment. Her right to sell corpus to her husband, or any firm or corporation, on her own terms was equivalent to a right to revest at least so much of the proceeds of sale as was less than fair value, her husband being a member of a family unit and there being no restriction against a sale to a corporation wholly owned by petitioner. See Percy M. Chandler, 41 B. T. A. 165. Such a power brings the case squarely within section 166, even though the nominal trustor, Beauchamp E. Smith, subject to whose written consent petitioner was entitled to distribution of corpus, is regarded as having a substantial adverse interest.

Did the nominal settlor, however, have a substantial adverse interest? We think not. The petitioner had created a trust for the benefit of the settlor, the terms of which were similar in all material respects to the Smith trust. The effect of the two trusts was, as above held, to make the petitioner the real settlor of the trust ostensibly set up by her brother, leaving him a mere figurehead. He was not a beneficiary of his own trust and had nothing more than a remote interest in its income and, principal. His connection with the trust was not enough to constitute a substantial adverse interest. Mary A. Cushing, 38 B. T. A. 948; Henry A. Loeb, 40 B. T. A. 517; Fulham v. Commis sioner, 110 Fed. (2d) 916. Section 166 therefore applies, and the income of the trust must be included in the net income of the petitioner.

Also, we having held that petitioner should be regarded as the grantor of the trust within the meaning of section 166, it follows that so much of the income of the trust as was used to pay premiums on the policies of insurance covering petitioner’s life is also taxable to her under the provisions of section 164 (a) (3). Burnet v. Wells, 289 U. S. 670.

Considering the nature of the trusts, the reservation of dominion and control by petitioner, and lack of reality of the device used to alter the source of the income, the question, in our opinion, is also covered by the ruling of the Court in Helvering v. Clifford, supra.

Reviewed by the Board.

Decision will be entered for the respondent.

       SBC. 160. REVOCABLE TRUSTS.
      Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition or such part of the corpus or the income therefrom,
      then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

       SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      * * ⅜ * * * *
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.

       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. In the case of Presidents of the United States and judges of courts of the United States taking office after the date of the enactment of this Act, the compensation received as such shall be included in gross income; and all Acts fixing the compensation of such Presidents and judges are hereby amended accordingly.


text:
    William J. Garland and Grace O. Garland, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93589, 95547.
    Promulgated June 28, 1940.

      Robert N. Miller, Esq., and Melvin D. Wilson, Esq., for the petitioners.

      Byron M. Coon, Esq., for the respondent.
   OPINION.

Hill:

The question first presented for our decision is whether the petitioner is taxable on the income distributed to his divorced wife in the years 1934 and 1935 from the trust established on March 25, 1931. One of the contentions of respondent is that this income is taxable to the petitioner on the basis of Douglas v. Willcuts, 296 U. S. 1, and Helvering v. Leonard, 310 U. S. 80, in each of which cases the settlor of a trust, entered into in contemplation of divorce, was held taxable on the income used to discharge a continuing obligation to support a divorced spouse. We deem it unnecessary to pass on this contention of respondent since, in our view, the petitioner must be held taxable on such income on a totally different ground. He reserved to himself the right to borrow from the trust corpus, without security, amounts aggregating $100,000, or to borrow that amount from outside sources with security furnished by the trustee. These provisions, regardless of the express terms of the instrument by which the trust was made “irrevocable and un-amendable”, render the trust pro tanto revocable for taxation purposes.

The petitioner had the power, in effect, to revest himself with the corpus up to the amount specified and “to retain and use for his own personal use all moneys obtained therefrom.” There is no requirement that loans made directly from the trust be repaid, although it is provided that, in the event of the trustor’s default by virtue of which there is a sale of the trust corpus pledged as collateral, the right to borrow any additional amounts shall cease. In these circumstances the present case is controlled by the same principle under which we have held that the reservation of the right to purchase assets of the trust at a price named by the settlor renders the trust revocable under section 166 of the Revenue Act of 1934. Percy M. Chandler, 41 B. T. A. 165; Charles T. Fisher, 28 B. T. A. 1164; 34 B. T. A. 1215; affd., 108 Fed. (2d) 707; Sarah A. W. Coursey, 33 B. T. A. 1068. Cf. Frederic H. Frazier, 41 B. T. A. 146. The express provisions of the declaration of trust by which the trust is made irrevocable must give way before the realities of the situation.

This conclusion is strengthened by the provision reserving to the trustor the right “ — without consent of the trustee — to receive all payments, dividends, surrender values and benefits accrued or which may accrue to the insured during his life, and may exercise all of the insured’s rights, options, and privileges under such policy.” The reservation of these rights is tantamount to a reservation of the right to revest in the trustor that part of the corpus which consisted of insurance policies.

In face of the lack of evidence showing- that the value of the corpus exceeds $100,000 and the value of the insurance policies over which petitioner reserved control, we must hold the petitioner taxable on the entire income of the trust. In view of this conclusion it becomes unnecessary to consider the additional contentions of the respondent that the reservation of rights in the insurance policies transferred, the provision for the payment of certain debts of the petitioner out of the corpus, and the application of a part of the income to the payment of insurance premiums make the trust so unsubstantial as to render the grantor taxable under Helvering v. Clifford, 309 U. S. 331, as though the trust income arose from petitioner’s own independent business dealings.

The final issue — that of the taxability of the interest received by the trust on the California Improvement District bonds held by it— must be resolved in favor of the petitioner. In District Bond Co., 39 B. T. A. 739, we had before us the question of the taxability of bonds issued, as those here, under the California Municipal Improvement District Act of April 20, 1915. It was held there that the interest paid on these bonds was tax exempt and we think that case is controlling here. See also Morrison Bond Co., Ltd., 41 B. T. A. 669. Accordingly, we hold that the petitioner is not taxable on any amounts received by the trust as interest on the bonds in question.

Reviewed by the Board.

Decision will be entered under Bule 50.