author: Harkon :

text:
    Walter E. Buck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87922.
    Promulgated September 8, 1939.

      Norman A. Eisner, Esq., for tbs petitioner.

      Arthur L. Murray, Esq., for the respondent.
   OPINION.

Harkon :

The Commissioner determined a deficiency in petitioner’s income tax for the year 1933 in the amount of $1,170.42. In his income tax return the petitioner reported as income the entire proceeds from the sale, in 1933, of rights to subscribe to additional common stock of the American Commercial Alcohol Corporation, which treatment he thereafter claimed was error in protests addressed to the Commissioner and in the petition to this Board. The Commissioner, in determining the deficiency, refused to allow petitioner to correct the purported error by applying a method provided in article 58 of Regulations 77 (Act of 1932) for ascertainment of cost of the rights to subscribe and for computation of gain or loss upon sale of the rights, on the ground that petitioner, having elected to report as income the entire proceeds of the sale of the rights, is estopped from claiming a loss. Petitioner claims that he sustained a loss in 1933 upon sale of the rights.

The facts have been stipulated and they are as follows:

The petitioner, as of February 28, 1929, acquired 2,040 shares of common stock of the American Commercial Alcohol Corporation, the cost basis of which is $77 per share, or a total of $157,080. Subsequently, on September 14, 1929, rights to subscribe to additional shares of the common stock of the above mentioned corporation were issued to stockholders of record. Petitioner, as a stockholder of record, received his pro rata share of these rights, which he sold during the same year for $1,874.34. In his 1929 income tax return the petitioner reported this $1,874.34 as income, without deducting therefrom the cost of the rights sold. The return so prepared reflected no tax due.

Prior to June 14, 1933, petitioner received 100 additional shares of common stock of the same corporation as stock dividends on the original 2,040 shares, thereby increasing the number of shares held to 2,140, as of June 14, 1933. The corporation issued to stockholders of record on June 14, 1933, additional rights to subscribe to common stock. The petitioner received, in 1933, his pro rata share of new rights. He sold the rights in 1933 for $4,815.

Petitioner’s 1933 Federal income tax return was prepared by a bookkeeper in his employ and in the preparation thereof the entire amount of $4,815 was included as income, without deduction of the cost basis of the rights sold.

According to the method provided in article 58 of Eegulations 77, Eevenue Act of 1932, for ascertainment of the cost of rights to subscribe and for computation of gain or loss upon the sale thereof, the percentage of cost basis of the stock applicable to the rights received by the petitioner and sold in 1933 is 7.536765 percent, or $11,838.75 (7.536765% of $157,080). The excess of the cost basis over the proceeds of the sale is therefore $7,023.75 ($11,838.75 — $4,815.)

The foregoing facts are not in dispute. The only question involved is whether petitioner is estopped from claiming a deduction for a loss sustained from the sale of the rights to subscribe because he originally reported the entire proceeds from such sale as income in his 1933 income tax return.

Article 58 of Eegulations 77 (at page 18), promulgated under section 22 (a) of the Eevenue Act of 1932, in so far as applicable herein, is as follows:

The taxpayer may at his option include the entire proceeds from the sale of stock rights in gross income, in which case the basis for determining gain or loss from the subsequent sale of the stock in respect of which the rights were issued shall be the same as though the rights had not been issued.

The petitioner contends that there is no right or basis under the law to include the gross selling price of rights to subscribe to stock as income, and that a regulation is invalid which, gives a taxpayer the right to include in income that which is not in fact income.

In Miles v. Safe Deposit & Trust Co. of Baltimore, 259 U. S. 247, the taxpayer had sold a right to subscribe to stock for $12,546.80. The Commissioner determined that the entire amount was income for the year and determined a tax accordingly. The Supreme Court held that “the subscription right of itself constituted no gain, profit or income taxable without apportionment under the Sixteenth Amendment” and that only so much of the proceeds of sale as represented a realized profit over and above cost constituted taxable income.

The same question which is present here was before the court in Continental Bank & Trust Co. of New York v. United States, 19 Fed. Supp. 15. The court held that the portion of article 58 of the regulations which grants the taxpayer the option to include as income that which is not income would appear to be invalid. After referring to Miles v. Safe Deposit & Trust Co., supra, and Eisner v. Macomber, 252 U. S. 189, the court stated as follows:

* * * Sections 111 (a) and 113 (a) of the 1928 Revenue Act, * * * provide that the gain from the sale of property shall he the excess of the amount realized over the cost of the property. Therefore, that portion of Article 58 of the Regulations which grants to the taxpayer the option to include as income that which is not income would appear to he invalid since it exceeds and is inconsistent with the law. * * *
It follows from this that the plaintiff is not bound by the determination of its predecessor to report the entire proceeds of the sale as income. There are no elements of estoppel in the ease and no amount of administrative expediency or convenience would justify precluding the plaintiff from asserting an overpayment.
* * * Under the statute, there was only one legal method of reporting the profit on the sale of the stock subscription rights and the method adopted by plaintiff’s predecessor was improper. Plaintiff cannot be bound by any such claimed election.

The case, Lebolt & Co. v. United States, 67 Ct. Cls. 422, relied upon by respondent, holds that where there are two methods of making an income tax return, either one of which is legal and proper, and the taxpayer has made his return in accordance with one of these methods, no change to the other method may be made thereafter. That case involved two methods of accounting pertaining to the deduction of customs duties, both of which methods were legal and proper. However, under that part of the regulation herein involved, the respondent gives an option to taxpayers to treat the entire proceeds from the sale of rights to subscribe as income without legal or statutory authority. Furthermore, section 111 (a) of the Eevenue Act of 1932 specifically provides that:

* * * the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b), and the loss shall be the excess of such basis over the amount realized.

The cases, Sylvia S. Strauss, 33 B. T. A. 855; affd., 87 Fed. (2d) 1018, and Grant v. Rose, 24 Fed. (2d) 115; affd., 39 Fed. (2d) 340.; certiorari denied, 283 U. S. 867, cited by the respondent, are not applicable. Both cases involved rights of election granted by law, the first involving the right under section 44 (b), 1928 Act, to report income from installment sales on either the completed transaction basis or installment basis, and the second involving the right given in section 223 (b), 1921 Act, to a husband and wife living together to file either joint or separate returns.

In our opinion the part of article 58, supra, is invalid in so far as it grants the right to include in gross income the entire proceeds from the sale of subscription rights. The authority given the Secretary of the Treasury to make rules and regulations for the administration of the revenue laws does not include the power to alter or amend such laws. Morrill v. Jones, 106 U. S. 466. The part of the regulation which purports to allow a taxpayer to include in gross income the entire proceeds of sale of subscription rights does not, if erroneously followed, bar a taxpayer from correcting the error and applying other, valid parts of the regulation in determining the cost basis of the rights and computing gain or loss upon sale thereof.

We therefore hold that the petitioner is not estopped from claiming the loss of $7,023.75 sustained in 1933 from the sale of the subscription rights. The loss was sustained and it is deductible in 1933.

Decision will be entered under Rule 50.

       The value of $77 per share was determined in Walter B. Buck, B. T. A. memorandum opinion entered December 27, 1934; affd., 83 Fed. (2d) 786.

       * » * “Gross income” includes gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * *


source: Caselaw Access Project

author: MurdocK :

license: Public Domain

text:
    The Continental Insurance Company, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92569, 92570, 92571, 92572, 92573, 92574.
    Promulgated September 8, 1939.

      Pressly R. Baldridge, Esq., for the petitioners.

      B. M. Brodsky, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: First American Fire Insurance Company; Fidelity-Phenix Fire Insurance Company of New York; Niagara Fire Insurance Company; Fidelity and Casualty Company of New York; and Maryland Insurance Company.

   OPINION.

MurdocK :

Tbe Commissioner determined the following deficiencies in income tax for 1934:

The issue presented is whether the petitioners are entitled to credits for taxes paid to the Dominion of Canada., The facts in each case have been stipulated and are hereby found as stipulated.

Each case has in it exactly the same question that was decided for the taxpayer in Queen Insurance Co. of America, 40 B. T. A. 484, and following that decision we hold that the total amount due under the Canadian Income War Tax Act, including the amount credited thereon but paid originally as premium tax, is a proper credit under section 131 (a) (1).

That disposes of all of the cases except the first and the last, in which payments of premium tax under the Canadian Special War Eevenue Act exceeded the amount due under the Canadian Income War Tax Act. The Continental Insurance Co. paid $66.84 more as premium tax under the Canadian Special War Eevenue Act than it owed as income tax under the Canadian Income War Tax Act. A similar excess in the case of the Maryland Insurance Co. was $646.94. These two proceedings present, on account of these excesses, the question of whether the Canadian Special War Eevenue Act, in imposing a tax upon annual premiums on Canadian business in the case of certain insurance companies, imposed an income tax. This question was not decided in the Queen Insurance Co. case and was conceded by the Government in favor of the taxpayer in the case of United States Fidelity & Guaranty Co., 5 B. T. A. 23. But here it must be decided.

The tax is tested by our standards of an income tax. Biddle v. Commissioner, 302 U. S. 573. Income, as defined by our courts and statutes, is now generally understood to mean something quite different from gross receipts. Eisner v. Macomber, 252 U. S. 189; sec. 22 (a), Revenue Act of 1934. Cf. Doyle v. Mitchell Brothers, 247 U. S. 179; I. T. 2596, C. B. X-2, p. 184. The law in question imposed a tax of one percent upon the net premiums received hy an insurance company in Canada, less net premiums paid for reinsurance to other companies subject to the act. Net premiums were defined as gross premiums received, less rebates and returns. Tbus tbe tax was imposed upon tbe gross premiums for risks taken by the company. ,The insurance did not have to result in a profit to subject the company to the tax. It was more like an excise tax upon the privilege of doing business than like an income tax. Pacific Insurance Co. v. Soule, 7 Wall. 433; Equitable Life Assurance Society v. Pennsylvania, 238 U. S. 143; Provident Savings Life Assurance Society v. Kentucky, 293 U. S. 103; Brown v. Protective Life Insurance Co., 188 Ala. 166; 66 So. 47. It was not an income tax within the meaning of section 131 (a) (1) of the Revenue Act of 1934.

Decisions will be entered under Bule 50.


author: Haeron:

text:
    American Foundation Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88664.
    Promulgated September 12, 1939.

      George M. Naus, Esq., and N. L. McLaren, O. P. A., for the petitioner.

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

Haeron:

In computing its “undistributed adjusted net income” under section 351 of the. Revenue Act of 1934, for the purpose of determining its surtax liability as a personal holding company, the petitioner deducted the amount of $157,529.90, being the total of payments made during 1934 on an indebtedness which had been reduced to judgment on July 16, 1931, as “Amounts used or set aside to retire indebtedness incurred prior to January 1, 1934” pursuant to subsection (b) (2) (B) of section 351.

The respondent determined that the amount involved did not constitute an allowable deduction under section 351, and in particular under article 351-4 of Regulations 86, upon the ground that it represented payment of a “commercial loan.” In article 351-4 of Regulations 86', the term “indebtedness” as used in subsection (b) (2) (B) of section 351 of the Revenue Act of 1934, was restricted in meaning to “bonds, debentures, or similar obligations * * * for the purpose of raising capital.” No such restriction or limitation in connotation of the term is contained in the statutory provision involved. That it was not the intention of Congress to so limit the term appears from Report No. 558 of the Committee on Finance, 73d Cong., 2d sess., p. 15, wherein it is stated:

* * * Considerable hardship has been avoided by permitting the deduction from the adjusted net income of a reasonable amount used or set aside to retire indebtedness incurred prior to January 1, 1934. This will substantially and properly relieve personally owned corporations which have outstanding bonds or other indebtedness that must be met from current earnings before distributions can be made. [Emphasis supplied.]

Although section 351 (b) (2) (B) of the Revenue Act of 1936 remained the same as the corresponding section of the 1934 Act, Congress in tbe Bevenue Act of 1987 changed the corresponding section of that act (section 855 (b)) to read as follows:

(b) Amounts used or irrevocably set aside to pay or to retire indebtedness of any Icwid incurred prior to January 1, 1934, if sucb amounts are reasonable with reference to tbe size and terms of sucb indebtedness. [Emphasis supplied.]

Both the Committee on Ways and Means and the Committee on Finance refused to carry out the recommendation of the Joint Committee on Tax Evasion and Avoidance to eliminate in the 1937 Act the deduction allowed in section 351 (b) (2) (B) of the 1934 Act in arriving at undistributed adjusted net income of a personal holding company, for the following reasons:

* * * While recognizing tbe reasons which impelled tbe joint committee to make this recommendation, your committee feels, from further study of the question, that the denial of this deduction would cause hardship in numerous cases where due to the particular circumstances of the corporation, a dividend distribution cannot be made because of a necessity for legal reasons of using the earnings and profits to discharge the debts. Moreover, any loss of revenue caused by the continued allowance of this deduction cannot increase, since indebtedness incurred after 1933 cannot be used as a basis for the deduction. * * * *

In November 1937, article 351-4 of Begulations 86 (footnote No. 2, supra) was amended in Treasury Decision No. 4777, C. B. 1937-2, p. 197. Therein the term “indebtedness” was defined as “an obligation, absolute and not contingent, to pay, on demand or within a given time, in cash or other medium, a fixed amount.”

The authority given to the Secretary of the Treasury to make rules and regulations for the administration of the revenue laws does not include the power to alter or amend such laws. Morrill v. Jones, 106 U. S. 466. A regulation to be valid must be consistent with the statute and also reasonable. A regulation, which “operates to create a rule out of harmony with the statute, is a mere nullity.” Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129. Where a regulation does not carry into effect the will of Congress as expressed in a statute, a subsequent amended regulation, which does so, becomes “the primary and controlling rule in respect to the situation presented.” Manhattan General Equipment Co. v. Commissioner, supra.

On brief the respondent admits that the change made by Congress in the 1937 Act and the explanation of such change as contained in Report No. 1242, of the Committee on Finance, supra, indicate strongly the disapproval of Congress of the administrative construction of section 351 (b) (2) (B) of the Bevenue Act of 1934 contained in article 351-4 of Regulations 86, and that consequently it is probable that the restrictions in such regulation, limiting the deduction to bonds or debentures, is subject to revision. He contends, however, that an indebtedness to be deductible under section 351 (b) (2) (B), supra, must be “reasonable with reference to the size and terms of such indebtedness.”

The purpose of section 351, enacted for the first time in the Revenue Act of 1934, was to prevent tax avoidance by means of an “incorporated pocket book”, i. e., the formation of a personal holding company by an individual for the purpose of turning over to it, in exchange for its stock, his personal holdings in stock, bonds and other income-producing property. By so doing individuals had theretofore escaped payment of surtax on income which without the intervention of such corporations would have been payable by them individually. (See footnote No. 3, supra.)

The evidence discloses that the petitioner was organized to acquire, rehabilitate, and operate the Murchie mine and other property. It was not until about the latter part of 1929 that the mine was in condition to operate with any degree of success. Up to that time it had not been able to accumulate any surplus income. How successful the operations were thereafter, the record fails to disclose. However, the testimony is that the income from the mine was never enough at any time to cover the amounts expended for its development and operation. In any event it was deemed advisable to sell all of the assets of the petitioner in December 1931, at which time there was outstanding, in addition to other indebtedness, the indebtedness herein involved of over $315,000, plus interest and costs, which it was required to pay. In 1932 the evidence discloses that the petitioner had income of $73,089.25, including dividends from the Empire Star Mines Co., Ltd., of $25,750, and also received $60,000 under the contract of sale. In 1933 it received dividends from the Empire Star Mines Co., Ltd., of $20,395 and $44,707.53 on its contract of sale. In 1934 it received dividends of $90,000 and realized a profit of $95,000 on the sale of 5,000 shares of stock of the Empire Star Mines Co., Ltd., received under the contract of sale. The balance sheet in its 1934 return shows a deficit of $975,654.74 as of December 31, 1934. So far as the record shows it had no surplus available for dividends in 1934 or prior thereto.

Petitioner did not become a personal holding company as defined in section 351 (b) (1) of the Revenue Act of 1934 until January 1, 1932, upon the sale of all its assets. Prior to that time the indebtedness involved had been reduced to judgment. The judgment did not provide any time for payment. The postponement of execution on a judgment is not unusual. Payments were made on the judgment with reasonable promptness whenever cash was available for that purpose.

Upon all the evidence it is held that the indebtedness of the petitioner to Van Loben Seis was an indebtedness incurred prior to January 1, 1934, and that the amount paid in 1934 was reasonable with reference to the size and terms of such indebtedness within the meaning of section 351, sufra, and article 351-4 of Regulations 86, as amended by Treasury Decision No. 4UT, sufra. The petitioner is therefore entitled to the deduction claimed.

Decision will he entered for the fetitioner.

       SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES.
      (a) Imposition of Tax. — There shall be levied, collected, and paid, for each taxable year, upon the undistributed adjusted net income of every personal holding company a surtax equal to the sum of the following:

      (b) Definitions. — As used in this title—

      (2) The term “undistributed adjusted net income” means the adjusted net income minus the sum of:

      (B) Amounts used or set aside to retire indebtedness incurred prior to January 1, 1934, if such amounts are reasonable with reference to the size and terms of such indebtedness; * * *

       Art. 351-4. Amounts used or set aside to retire indebtedness imcwrred prior to January 1, lSSh. — Tt, pursuant to a bona fide plan for tbe retirement of its bonds, debentures, or similar obligations representing indebtedness incurred prior to January 1, 1934, for the purpose of raising capital (or assumed prior to that date in connection with the acquisition of capital assets by which such indebtedness is secured) the taxpayer—
      (1) retires during the taxable year an amount of such indebtedness, or
      (2) establishes a sinking fund or reserve for the retirement of such indebtedness during the taxable year, and sets aside in such fund or reserve an amount for the retirement ofi such indebtedness—
      in determining the undistributed adjusted net income for the taxable year, a deduction from the adjusted net income is allowable in a reasonable amount in respect of the amount so paid or set aside in such fund or reserve during the taxable year.
      The amount allowable as a deduction in any case must be reasonable, considering the nature, purposes, scope, conditions, amount, maturity, and other terms of the indebtedness. No deduction is allowable unless it appears, either from the covenants of the obligations or from a recognized business and accounting practice respecting the retirement of such indebtedness, that provision for retirement must be made out of earnings for the taxable year before distribution of such earnings may be made. The reasonableness of the deduction shall be determined by existing conditions known at the close of the taxable year. The fact that amounts have not been used or set aside in prior years will not entitle the taxpayer to deduct in any taxable year a greater amount than would otherwise be allowable. Amounts paid or set aside to discharge current liabilities for expenses, salaries, wages, taxes, interest, the purchase of any property for resale, dividends, balances due brokers, bank or other commercial loans, or any other current liability (whether represented by negotiable instruments, balances on account, or otherwise) do not constitute allowable deductions. This is true as respects liabilities which are payable at the convenience of either the debtor or the creditor, or on the demand of either.
      No deduction will be permitted under this article with respect to any item for which a deduction is otherwise allowable under Title IA or Title I of the Act or under any applicable prior income tax Act.

       Report No. 1546, Committee on Ways and Means, 75th Cong., 1st sess., p. 11.
      Report No. 1242, Committee on Finance, 75th Cong., 1st sess., p. 13.


author: Murdock:

text:
    Southern Maryland Agricultural Fair Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94741.
    Promulgated September 12, 1939.

      Vernon Oooh, Esq., for the petitioner.

      Charles H. Curl, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner has determined that the petitioner had certain income, is liable for certain deficiencies and penalties, and was not exempt from tax as an agricultural or horticultural organization, during the years 1921 to 1935, inclusive. The petitioner does not contest the correctness of the amount of income determined or the correctness of the computation of the tax and penalty for any year. It does not contend that it was in fact and in law exempt from tax as an agricultural organization or otherwise. Therefore, the Board must assume that the income, deficiencies, and penalties determined are correct in amount and that in fact and in law the petitioner was never an exempt corporation. The petitioner seeks to defend itself against the assessment and collection of the deficiencies and penalties on the grounds, first, that the statutes of limitation bar assessment and collection, and, second, that the Commissioner had no authority to change the ruling of his predecessor and hold in 193T that the petitioner was not an exempt corporation.

The petitioner concedes in its brief that the period of limitation had not run as to 1934 and 1935 when the Commissioner made his determinations in the notice of deficiency. The returns for 1921 and 1922 were due before the Commissioner made his ruling of January 18, 1924, and the petitioner has failed to show any reason whatsoever for its failure to file timely returns for those years. It has not filed returns for any of the years and, therefore, the penalties must stand, if any of the deficiencies may be properly assessed. See section 3116 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926; section 291 of the Revenue Acts of 1928, 1932, and 1934; National Contracting Co., 37 B. T. A. 689; affd., 105 Fed. (2d) 488; Scranton, Lackawoarma Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519; certiorari denied, 297 U. S. 723; E. M. Green, 11 B. T. A. 185; John T. Sline, 9 B. T. A. 1222. Although the petitioner probably could have avoided the penalties by filing returns after the ruling of March 6, 1937, Searles Real Estate Trust, 25 B. T. A. 1115, it chose not to do so, thinking, perhaps, that the filing of returns might give the Commissioner additional time to assess and collect the taxes imposed upon it by the various revenue acts.

The Revenue Act of 1921 and subsequent acts have required “every corporation subject to taxation under this title” to file a return within a prescribed time. See section 239 of the Revenue Act of 1921. Although a corporation exempt from taxation under the statute is not required to file any return, the petitioner was not exempt and, therefore, was required by the statute to file a return. Section 250 (d) of the Revenue Act of 1921 provided that “taxes due under any return made under this Act for the taxable year 1921 or succeeding taxable years shall be determined and assessed by the Commissioner within four years after the return was filed” and provided further that there should be no time limit in the case “of a failure to file a required return.” The provisions of later acts are, for present purposes, substantially similar. The statutory period of limitations upon determination, assessment, and collection of a deficiency is initiated under these provisions by the filing of a return. Keystone Automobile Club Casualty Co., 40 B. T. A. 291. The only exception, where the shareholders report the net income of the corporation, is not urged by the petitioner and the record contains no evidence to support that exception. The petitioner concedes that it is not within the letter of the statutes, since it filed no returns. The point which it attempts to make is that it was excused from filing returns by the ruling of the Commissioner that it was exempt and the statutes should be read as if they provided a period of limitation beginning when the return for the particular year was “filed or excused.” It cites no case in point.

The petitioner relies upon the regulations of the Commissioner as authority for adding the words “or excused” to the statute. The regulations have provided, at all times material hereto, that a corporation claiming exemption shall first make certain proof to the Commissioner “to establish its exemption, and thus be relieved of the duty of filing returns of income and paying the tax” and “when an organization has established its right to exemption, it need not thereafter make a return of income or any further showing” so long as it does not change its character. See, for example, article 511, Regulations 45 and 62, and article 521, Regulations 74. The Commissioner issued some kind of a ruling on January 18, 1924, holding that the petitioner was exempt from tax, apparently as an agricultural organization. The argument of the petitioner -is that it had “established its right to exemption” on January 18,1924, and “it need not thereafter make a return of income,” since it never changed its character thereafter.

This brings up the question of whether the regulations were ever meant to add the words “or excused” or whether they could add anything to the words of the statute. The Commissioner by his regu-i lations can not change the law. Koshland v. Helvering, 298 U. S. 444; Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129; Lynch v. Tilden Produce Co., 265 U. S. 815; United States v. Powell, 95 Fed. (2d) 752; certiorari denied, 805 U. S. 619; Helvering v. Safe Deposit & Trust Co. of Baltimore, 95 Fed. (2d) 806; Colson Co., 37 B. T. A. 1031, 1036; Cereal Products Refining Co., 39 B. T. A. 92; John D. Biggers, 39 B. T. A. 480, 484. Cf. Panama Refining Co. v. Ryan, 293 U. S. 388; Schechter Poultry Corporation v. United States, 295 U. S. 495. Corporations actually exempt under the revenue acts were not required to file any returns and were not affected by any period of limitation or penalty for failure to file returns, since, in no event, would they owe any tax or penalty. The Commissioner could not change their status by regulations and no words need be read into the limitation provisions for their benefit. The Commissioner could, of course, make reasonable regulations to assist him in administering the act and deciding whether a particular corporation was or was not exempt by the statute. That is what he has done. Articles 511 and 521 just mentioned were intended to be and were administrative, not legislative. The inference should not be drawn from those provisions that he intended to write into the limitation provisions of the acts the words “or excused” for the benefit of those corporations which he might erroneously conclude were exempt. He could not thus change the law if he so desired. He can decide what documents he will accept as returns but, in the absence of returns, he has no authority to permit the statute of limitations to start running against him by some means not provided by statute. The petitioner was not exempt under the statute or the regulations and was required to file returns and pay taxes. The Commissioner made an erroneous ruling that it was exempt and for a number of years did not demand returns or tax. The record does not show how the error was made or who was at fault. However, the erroneous ruling did not relieve the petitioner from filing the returns and paying the taxes as the statute provided, and it did not start the running of any statutory period of limitation. The Supreme Court said in Lucas v. Pilliod Lumber Co., 281 U. S. 245, affirming 7 B. T. A. 591:

* * * Under the established general rule a statute of limitations runs against the United States only when they assent and upon the conditions prescribed. Here assent that the statute might begin to run was conditioned upon the presentation of a return duly sworn to. * * * The necessity for meticulous compliance by the taxpayer with all named conditions in order to secure the benefits of the limitation was distinctly pointed out in Florsheim Bros. etc v. United, States.

Here, likewise, the condition prescribed by Congress to secure the benefits of the limitation was the filing of a return and, since the taxpayer filed none, it receives no benefits under this particular statutory provision.

Although this petitioner was encouraged by the action of the Commissioner to believe that it would not have to file returns for 1923 and subsequent years, nevertheless, it was never prevented from filing returns. It could have filed returns and might thereby have started the period of limitations, though still claiming exemption. Some taxpayers take such precautionary steps. There is no inequity in requiring this petitioner to pay the taxes actually imposed upon it by the revenue acts. It could have avoided the inequity of the penalties by filing returns promptly after it learned of the correctness of the ruling in 1937, but it chose not to file any returns for the years here involved, apparently hoping thereby to avoid both tax and penalty. Having made the choice, it must abide by it and take the consequences.

The conclusion here reached that the statute never started to run is consistent with prior decisions that a return is required to start the period of limitations. Ginn-Coleman Co., 12 B. T. A. 550; Henry R. Fishel, 14 B. T. A. 87; Cantrell & Cochrane, Ltd., 19 B. T. A. 16; Eli Kirk Price, Executor, 23 B. T. A. 1192; Employees Industrial Loan Association, Inc., 27 B. T. A. 945; Axel Holmstrom, 35 B. T. A. 1092; Keystone Automobile Club Casualty Co., supra. The Circuit Court of Appeals for the Second Circuit recently reversed a decision of the Board on this subject. See Balkan National Insurance Co. v. Commissioner, 101 Fed. (2d) 75, reversing 36 B. T. A. 1183. The facts there were that the Alien Property Custodian had seized all of the records of a foreign corporation prior to the time the return for 1918 was due. The corporation filed no return. The court held that the statute had run in 1934 against assessment of a deficiency for 1918, since the Government had made it impossible for the taxpayer to file any return for 1918. The present petitioner might well have cited that case and quoted language used in the opinion. However, the present case is not like that case, but is less strong factually for the taxpayer. The Board is not disposed voluntarily to reverse further the consistent position which it has taken upon this subject.

When the Commissioner determined in 1937 that the petitioner was not exempt and never had been, it was his duty to determine, assess and collect the tax due for all years not barred by the statutes of limitation. The conclusion reached and announced by his predecessor in 1924 was not binding upon him. It did not exempt the petitioner from tax. This same point was decided in this way in Stanford University Bookstore, 29 B. T. A. 1280; affd., 83 Fed. (2d) 710. See also Arthur H. Lamborn, 13 B. T. A. 177,186; affd., 43 Fed. (2d) 814; Frances P. McIlhenny et al., Executors, 13 B. T. A. 288; affd., 39 Fed. (2d) 356; Sweets Co. of America, Inc., 12 B. T. A. 1285; affd., 40 Fed. (2d) 436; James Couzens, 11 B. T. A. 1040; Old Farmers Oil Co., 12 B. T. A. 203; Estate of W. S. Tyler, 9 B. T. A. 255; Yokohama Ki-Ito Kwaisha, Ltd., 5 B. T. A. 1248. The ruling of the Interstate Commerce Commission on the reasonableness of a rate thereafter used by shippers and carriers was quite a different thing and the decision in Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Railway Co., 284 U. S. 370, holding that a later change in ruling could not be retroactively applied, is not in point.

Decision will be entered for the respondent.

       See section 231 (1) of the Revenue Act of 1921 and identical provisions of later acts.

       The period of limitation under the 1918 Act started when the return “was due or was made.” See Florsheim Brothers Drygoods Co. v. United States, 280 U. S. 453.


author: Smith:

text:
    Emerit E. Baker, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92366, 94401.
    Promulgated September 13, 1939.

      Valentine Pearson, G. P. A., and Francis J. Dwyer, O. P. A., for the petitioner.

      Gerald W. Brooks, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in petitioner’s income and excess profits tax for 1934,1935, and 1936, as follows:

The principal facts have been stipulated.

The petitioner was organized as a nonprofit corporation under the laws of the State of Illinois (see chapter 32, § 159, Cahill’s Illinois Revised Statutes, 1931) on December 15, 1924. Its principal organizer, Emerit E. Baker, was the founder and major stockholder of the Kewanee Boiler Co., of Kewanee, Illinois. The purposes for which the petitioner was organized are set forth in its articles of incorporation, as follows:

2. The object for which it is formed is to use its property, funds and income for any or all of the following purposes: To establish, build, improve and maintain parks, public grounds, public buildings, public baths and play grounds, and contribute to the support of any of the foregoing described projects or institutions; to help and aid crippled children; to render financial aid to worthy young people seeking an education; to receive and accept gifts, bequests and devises. * * *

In addition to the objects and purposes stated in the articles of incorporation, the bylaws provided:

* * * to render financial aid to corporations and institutions which have for their purpose the care of the sick and injured, providing for recreation and athletic games, or the development of the minds and bodies of the boys and girls in the city of Kewanee; to render financial aid to the needy and aged workers and their families; to aid the Public Library of Kewanee, Illinois; to support musical concerts, and public lectures upon useful subjects; to contribute to the Community Chest fund of Kewanee, Illinois; and to support and render financial aid to any institution, corporation or movement which, in the judgment of the Board of Directors, has for its purpose the improvement and betterment of the people of Kewanee, Illinois; to receive and accept gifts, bequests, and devises.

Emerit E. Baker and six of bis associates, wbo were also named as organizers in the articles of incorporation, were appointed directors. The directors served without compensation except for one, who acted as secretary of the corporation and received a salary of $1,000 a year. Petitioner had no issued stock. Its only assets were 2,088 shares of the common stock of the Kewanee Boiler Co., which were transferred to it by Emerit E. Baker on January 12, 1925. During the years 1925, 1926, 1928, and 1929 those shares of stock were converted into cash in the total amount of $602,584.49.

Petitioner’s operations were conducted strictly in accordance with the declared purposes for which it was organized until January 1, 1929. On that date Emerit E. Baker died, leaving a will in which he appointed the petitioner executor and trustee of his residuary estate. The will provided in clause sixth, after making certain provisions for testator’s wife, as follows:

Sixth : I give, devise and bequeath unto the Executors and Trustees hereinafter named, all the rest, residue and remainder of my estate and property of all kinds wheresoever situated, in trust, nevertheless, for the following uses and purposes:
(a) To pay the sum of Twelve Thousand Dollars ($12,000.00) per year in quarterly installments in advance to my wife, Jennie H. Baker, as long as she shall live. This annual payment to my wife shall be a first charge on the entire residue of my estate and shall be taken out of the income of my estate if the same is sufficient for that purpose. If at any time such income should prove insufficient for that purpose, then so much of the principal as may be necessary from time to time shall be used for such payment.
(b) If at the time of my death I shall be paying all or part of the expenses of any pupils in school, such payment is to continue until the graduation of such pupils, provided that in the opinion of the Executors and Trustees named herein they are worthy.
(c) If for any reason the payments hereinbefore provided for should not wholly or in part require all of the income from my property, it is my desire and I hereby direct that my said executors and trustees shall use any unex-pended portion of the income from my property for the benefit of the said City of Kewanee and its inhabitants by way of establishing or improving the parks or public grounds, or constructing or aiding in the construction of, or contributing to the support of public buildings and institutions, or public baths or play grounds of said city; also to help and aid crippled children, and also to assist young people to obtain an education, as my said trustees and executors in their discretion shall deem best, and upon the death of my said wife my said trustees and executors shall use the entire residue and remainder of my said estate for the purposes of this clause mentioned. Said trustees may establish a permanent fund, the income from which to be used as herein directed.
(d) It is my wish that my estate and property be used for local purposes and especially for the people of Kewanee, and not to be used otherwise except in case of a state or national calamity. I am especially friendly to St. Francis Hospital in Kewanee because of the good they have done the citizens of Kewanee in the past, and wish them to be given from time to time such sums as my trustees and executors think proper. I am also interested in the helping of crippled children, and desire my trustees to be liberal in their support of that cause. I wish that such part of my estate and property as the trustees may think wise be used for educational purposes, preferably for the children of employees of Kewanee Boiler Company in the High Schools or in higher schools and and colleges if my trustees and executors think best. If any of the funds be used for this higher education I wish that it be used only with the children who have shown a disposition to work, as I have a great deal of faith in the plodder and very little in the genius.
I wish so much of my property and estate as my wife shall direct be used in the education of her nieces and nephews, and I especially wish her niece, Janet Hill, to receive the help that may be necessary to complete her education, the manner of doing this to be approved by my wife.
(h) I wish none of my estate or property to be used in the building or support of churches or of sectarian schools, unless such schools are intended for the benefit of orphans or poor children who otherwise would not receive an education.
(i) If at any time the income from the estate is not enough to provide for these payments, I wish the principal to be spent as liberally as is approved by my executors and trustees.

Clause seventh of the will provided in part:

Seventh : I hereby nominate and appoint Emeeit E. Baker, Inc., a corporation organized under the laws of the State of Illinois, to be the executor of this Will and the Trustee of my residuary estate, and I hereby give to and invest it and its successors in trust with such powers over and such title and estate in ' and to the property in this Will devised and bequeathed as may be necessary and convenient to carry into full effect my intentions and designs in the execution of this Will, and in the several devises, donations and legacies herein specified and made; * * *

After probate of the decedent’s will, which occurred on February 4, 1929, petitioner’s charter was amended on July 7, 1930, to read as follows:

2. The object for which it is formed is to use its property, funds and income for any or all of the following purposes: To establish, build, improve and maintain parks, public grounds, public buildings, public baths and play grounds, and contribute to the support of any of thei foregoing described projects or institutions; to help and aid crippled children; to render financial aid to the worthy young people seeking an education; to render1 financial aid to corporations and institutions which have for their purpose the care of the sick and injured, providing for recreation and athletic games, or the development of the minds and bodies of the boys and girls in the City of Kewanee; to aid the needy and aged workers and their families; to aid the Public Library of Kewanee, Illinois; to support musical concerts and public lectures upon useful subjects; to contribute to the Community Chest fund of Kewanee, Illinois; and to support and render financial aid to any institution, corporation or movement which, in the judgment of the Board of Directors, has for its purpose the improvement and betterment of the people of Kewanee, Illinois; to receive and accept gifts, bequests and devises.

Decedent’s widow, Jennie H. Baker, in lieu of asserting ber dower rights to which she was entitled under the laws of the State of Illinois, agreed to accept an annual payment of $19,200 which was $7,200 in excess of the annual payment provided for in the will. The date of birth of Jennie EL Baker was September 29, 1861.

Assets of the decedent’s residuary estate of a total value of $1,385,-509.82 were transferred to the petitioner by the administrators in 1930, 1931, and 1932. These assets belonging to the residuary estate and the assets which had been transferred to the petitioner by the decedent in his lifetime were commingled by the petitioner and handled as a single fund. It is stipulated that “No segregation as to income or disbursements of Emerit E. Baker, Inc., and the Estate of Emerit E. Baker was made.”

Income received by the petitioner from all sources and the disbursements made from all of the assets in its possession from petitioner’s inception to December 31, 1937, were as follows:

The student loans were all secured by promissory notes payable to petitioner six years from date, with interest at 6 percent per annum from the date of maturity. In keeping its books petitioner charged the loans to expenses in the years when made and repayments of the loans were accounted for as income in the years when received. Petitioner’s books and accounts were kept on the cash receipts and disbursements basis. In determining the deficiencies herein the respondent has restored to income each year the net amount of the loans charged off, that is, the excess of loans made over the repayments received in each year.

Petitioner filed income and excess profits tax returns for the years 1934, 1935, and 1936, but each of the returns showed no taxable income. Petitioner’s 1934 return showed a net loss of $27,390.44. The respondent in his deficiency notice restored to income of that year $30,135.51 of bad debts charged off in respect of the student loans, and made no further adjustments. Petitioner’s 1935 return showed a net loss of $5,896.59, while the respondent determined a net income of $20,741.54, after disallowing $20,457.20 of bad debts claimed in respect of the student loans, and $6,180.93 claimed as a loss on bank deposits in closed banks. Likewise, a net loss of $10,910.61 was reported by the petitioner in its 1936 return, while the respondent by disallowing $14,726.42 of bad debts charged off determined an income of $3,815.81.

In these proceedings the petitioner protests the disallowance of the bad debt deductions in all three of the years involved and further contends that it is a tax exempt corporation under the provisions of section 101 (6) of the Revenue Acts of 1934 and 1936. This provision of the statute reads as follows:

■(6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.

Respondent contends that the petitioner fails to qualify as an exempt corporation by reason of the fact that in all of the years involved it was obligated to make and did make annual payments to Jennie H. Baker, widow of Emerit E. Baker, and other payments for the educational expenses of her nieces and nephews, and therefore was not operated exclusively for the purposes specified in the statute.

There can be no doubt, and apparently the respondent does not contend otherwise, that the objects and purposes for which the petitioner was organized meet the requirements of the statute for exemption from tax. They were purely charitable and educational. Their charitable nature was not in any way affected by the charter amendment in 1930. However, to qualify as an exempt corporation a taxpayer must meet a twofold test. It must be both organized and operated for the purposes specified in the statute. James Sprunt Benevolent Trust, 20 B. T. A. 19; Berkeley Hall School, Inc., 31 B. T. A. 1116. Trusts or corporations organized and operated for the benefit of the donor’s relatives or in general for personal and private purposes rather than for public charities are not within the Statute. See James Sprunt Benevolent Trust, supra; Henry C. DuBois, 31 B. T. A. 239. Was the petitioner here operated exclusively for the purposes set forth in the statute?

Before ruling upon this question it might be well to point out certain facts which, possibly, give rise to a procedural or jurisdictional question not raised in the pleadings.

Both the petitioner and the respondent have regarded the petitioner as the beneficial owner of the assets of the residuary estate of Emerit E. Baker. It is stipulated that the assets of the residuary estate were commingled with petitioner’s previously acquired assets. The deficiencies involved are the petitioner’s corporate and excess profits taxes and they were determined on the basis of corporation income and excess profits tax returns for 1934,1935, and 1936, in which petitioner reported as income the earnings from all of the property in its possession, including the assets of the residuary estate.

It is plainly evident from the terms of the decedent’s will, however, that he intended his residuary estate to be held and administered as a trust estate, at least until the death of his wife. The will so provided in clause sixth, subdivision (c) above, and further provided that “upon the death of my said wife my said trustees and executors shall use the entire residue and remainder of my said estate for the purposes in this clause mentioned.”

There is a serious question, we think, whether the petitioner corporation and the residuary trust did not constitute separate tax entities during the taxable years before us, the petitioner operating under its corporate charter with respect to the assets originally transferred to it by the decedent in 1925 and as trustee in respect of the assets comprising the decedent’s residuary estate which were transferred to it by the administrators in 1930, 1931, and 1932. Petitioner suggests in its brief that it is not impossible at this time to make such a segregation of the assets and points out that in such event the petitioner as a separate corporate entity would clearly be exempt from tax under the statute, since its organization and its operations outside of the activities incident to the administration of the trust estate were obviously within the statute, and that as trustee of the residuary estate petitioner would have no tax liability for the years involved, since in each year it made expenditures of trust income and corpus, which would be deductible under section 162 of the Revenue Acts of 1934 and 1936, in excess of the trust income (see statements of income and expenditures set out above).

While petitioner was prohibited under the laws of the State of Illinois from acting in the capacity of executor of the will of Emerit E. Baker, as ruled by the probate court, it apparently acted as trustee of decedent’s residuary estate.

The question raised, however, is not vital to our disposition of the proceedings before us, since in any event we are of the opinion that the petitioner qualifies as an exempt corporation with respect to the administration of the assets of the residuary estate as well as the conduct of its strictly corporate activities. Petitioner’s only activity during the taxable years which was not strictly of a charitable or educational character was the payment of the allowance to the decedent’s widow and the educational expenses of her nieces and nephews. We do not think that that alone defeats its classification as an exempt corporation under the statute. The payment of these amounts was merely incidental to and was a means of furthering the charitable and educational purposes for which the petitioner was organized. It was in no sense a part of its corporate activities. The payments made to the widow and nieces and nephews were a charge not upon the petitioner’s net earnings but against the entire corpus of the residuary estate.

In Lederer v. Stockton, 260 U. S. 3, the Supreme Court held that the income received by a hospital from property devised to it subject to certain annuities was exempt from tax under the provisions of section 11 (a) of the Income Tax Law of 1916 (Comp. Stat., § 6336k), saying:

This residuary fund was vested in the Hospital. The death of the annuitant would completely end the trust. For this reason, the trustee was able safely to make the arrangement by which the Hospital has really received the benefit of the income subject to the annuity. As the Hospital is admitted to be a corporation, whose income when received is exempted from taxation under section 11 (a), we see no reason why the exemption should not be given effect under the circumstances. To allow the technical formality of the trust, which does not prevent the Hospital from really enjoying the income would be to defeat the beneficent purpose of Congress.

The statutory provisions of the earlier act granting the exemption from tax of the income of charitable organizations are the same in general purpose and substantially the same in form, so far as material here, as those of the 1934 and 1936 Acts. Even assuming that the beneficial interest in the funds of the decedent’s residuary estate was vested in the petitioner corporation when turned over to it by the administrators, subject only to the annuity payments to the widow and the payments to the nieces and nephews, petitioner would be exempt from tax under the ruling of the Court in Lederer v. Stockton, supra.

Holding as we do that the petitioner is an exempt corporation under section 106 above, it is not necessary to decide the other issues relating to specific deductions.

Decisions of no deficiencies will he entered.


text:
    Zaida Clay, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93356.
    Promulgated September 15, 1939.

      M. E. Kilpatrick, Esq., for the petitioner.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $87.78 in the petitioner’s income tax for 1934. The issue for decision is whether the Commissioner has the right to include in the income of the petitioner undistributed income of a personal holding company in excess of the amount reported by the petitioner on her return where she elected to be taxed under section 351 (d) of the Revenue Act of 1934. The facts have been stipulated and are found in accordance with the stipulation.

The petitioner owned all of the stock of the C. E. J. Holding Co., a personal holding company within the meaning of section 351 of the Revenue Act of 1934. Three shares of the 100 were in the name of directors. The holding company reported on a personal holding company income tax return for 1934 that its adjusted net income was $7,440.79 and that the pro rata shares of the stockholders in that amount were as follows:

Zaida Olay_$7,217.57
R. G. Olay_ 74.41
Mrs. R. G. Olay_ 74.41
A. S. Olay_ 74.40

The petitioner reported upon her return for 1934 that she had received dividends of $7,307.54 consisting of “C. E. J. Holding Company, Atlanta, $3,000, distributed. C. E. J. Holding Company, At-lauta, $4,307.54, undistributed. Eeported under Section 351 (d), Eevenue Act 1934.”

The Commissioner in determining the deficiency increased the adjusted net income of C. E. J. Holding Co. and added $1,680.44 thereof to the income of the petitioner. The correct adjusted net income of C. E. J. Holding Co. for 1934 was $7,582.84, or $142.05 more than was shown upon its return and $275.30 more than was reported by the petitioner.

Section 351 of the Eevenue Act of 1934 imposes a heavy tax upon personal holding companies. Subsection (d) thereof provides:

(d) Payment of Stjktax on Peo Bata Shakes. — The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the “adjusted net income” of the corporation for such year. Any amount so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his pro rata share, be exempt from tax in the amount of the share so included.

The petitioner obviously intended and tried to comply with subsection (d) so that her corporation might escape tax. The slight discrepancy between the income reported by her and that shown on the return is not explained in the record. But that discrepancy can not be used to the advantage of the taxpayer. She reported on her return as dividends more than the actual distributions to her and must have intended to report her entire pro rata share of the adjusted net income of the corporation for 1934. It was determined thereafter that her entire pro rata share of the adjusted net income of the corporation was slightly more than the amount she reported. May the Commissioner include the excess in her income over her objection? The petitioner argues that this may not be done because the amount was not income to her under the Sixteenth Amendment and may not be taxed to her without her consent.

Although the same question could have arisen under section 102 (d) and similar provisions of earlier acts, no case in point has come to our attention. It was raised but not decided in Jennie King Mellon et al., Executors, 38 B. T. A. 1259. The Board held in Automobile Loans, Inc., 36 B. T. A. 809, that the provisions of section 351 (d) are not met by the filing of amended returns in which for the first time the stockholders indicate their election to report their shares of the adjusted net income of the corporation. See also Regulations 86, article 351-7, issued under the Eevenue Act of 1936. The willingness of a sole stockholder to have the adjusted net income of the corporation included in his income is not sufficient to relieve the corporation from tax where his return and that of the corporation indicate no intention to have the tax assessed under section 351 (d). Collateral Mortgage & Investment Co., 37 B. T. A. 630. But both those cases differ from this one, in that there the original returns gave no indication of an election to be taxed under section 351 (d), while here that intent is clearly shown by the original returns of the sole stockholder and of the corporation.

The statute permitted the sole stockholder to elect whether she would be taxed under section 351 (d) or whether the corporation would be taxed under section 351 (a). She chose the latter, and from her choice must be implied her consent to have all necessary and proper adjustments made in the income of the corporation and in her own income. Any other interpretation would work unreasonable hardships upon the Commissioner and the taxpayers and would not carry out the intent of Congress. Cf. Estate of Cyrus H. K. Curtis, 36 B. T. A. 899; Pacific National Co. v. Welch, 304 U. S. 191. Congress did not intend that a taxpayer, desiring to invoke section 351 (d), is to lose the benefit of the section if, through reasonable error, he incorrectly computes the adjusted net income of the corporation and reports on his return an amount slightly different from the amount finally determined to be his entire share of the adjusted net income of the corporation. Neither did it intend that the taxpayer, having made the election, should not be bound to accept all proper adjustments. See section 57. Even though the income is not the income of the stockholder, it may be taxed to him where he has chosen that method. He may not change his election or have a part only taxed to himself. Cf. Commissioner v. Moore, 48 Fed. (2d) 526; C. C. Ratliff, 13 B. T. A. 644; Pacific National Co. v. Welch, supra; Chicago Telephone Supply Co. v. United States, 23 Fed. Supp. 471; certiorari denied, 305 U. S. 628. Installment payments are sometimes taxed to the recipient before title to the goods has passed and the Commissioner may make proper adjustments in the amounts reported where the recipient has chosen to report on the installment method. Pacific National Co. v. Welch, supra. The same general rule applies here and requires the Commissioner to accept the method chosen by the taxpayer and permits him to make necessary and proper adjustments in the amount reported. Otherwise he could not allow the statute of limitations to run against the corporation until he had closed forever the case of the stockholder. Furthermore, if such were not the proper interpretation, he could reject the election and tax under section 351 (a) whenever he found the slightest increase in adjusted net income. The reasonable and natural interpretation of section 351 (d) is that once the taxpayer makes an election he is bound to accept proper adjustments under that method of taxation and the Commissioner is also bound by the election.

Decision will be entered under Rule BO.


author: Melloit :

text:
    H. Lewis Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87744.
    Promulgated September 28, 1939.

      E. Lewis Brown, Esq., pro se.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Melloit :

Petitioner contends that respondent erred in including the $20,900 in his gross income. He argues that the assignment of his interest in the claim of the partnership for stock in the Eastern Chemical Corporation constituted a nontaxable exchange under section 112 (b) (5) of the Revenue Act of 1932. Hence, he says, no taxable gain is to be attributed to him from the exchange. The respondent contends, and we think correctly, that there is no reason to discuss the applicability of this section; for he did not determine the deficiency in tax upon the theory, nor does he now urge, that the exchange gave rise to taxable gain. He merely determined that the amount, “representing a fee for personal service, which was transferred to Eastern Chemical Corporation, is income to you who earned it.” In making this determination he relied upon the rule enunciated and applied by the courts in such cases as Lucas v. Earl, 281 U. S. 111; Van Meter v. Commissioner, 61 Fed. (2d) 817; Harry A. Daugherty, 24 B. T. A. 531; affd., 63 Fed. (2d) 17, and others. If the rule of the cited cases is applicable, the deficiency should be upheld; otherwise it should be set aside. The issue, therefore, may be resolved by determining whether or not such rule is applicable.

Lucas v. Earl, supra, applies literally the section of the revenue act imposing a tax upon the net income of every individual, including “income derived from salaries, wages or compensation for personal service * * * of whatever kind and in whatever form paid.” (Cf. sec. 22, Bevenue Act of 1932.) It holds that the import of the act is to tax income to those who earn it and to prevent the escaping of the tax “by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earns it.”

Van Meter v. Commissioner, supra, follows the Earl case and holds that the “earner” of income — “the one whose personal efforts have produced it” — is taxable upon such income. Two other situations in the same category are income from owned property (Corliss v. Bowers, 281 U. S. 376) and income derived from combined personal effort and property (Burnet v. Leininger, 285 U. S. 136).

Harry A. Daugherty, supra, applied the same general rule, holding that an assignment by a husband to his wife of an undivided one-half interest in a contract of employment “effected merely an equitable assignment of petitioner’s possible future income” and that the amount received was taxable income to the assignor.

It would serve no useful purpose to list and discuss the various cases applying the principles of the above cases. Suffice it to state that they hold, as succinctly stated by the Court of Appeals for the Fifth Circuit, that “No device or arrangement, be it ever so shrewdly and cunningly contrived, can make future earnings taxable to any but the earner of them, can make future income from property taxable to any but the owner of the right or title from which the income springs.” Saenger v. Commissioner, 59 Fed. (2d) 631. Cf. Wallace Groves, 36 B. T. A. 14; affd., 99 Fed. (2d) 179; Gerald A. Eubank, 39 B. T. A. 583.

But, says petitioner, the facts in the instant proceeding bring the income in question within the rule of such cases as Hall v. Burnet, 54 Fed. (2d) 443; Helvering v. Seatree, 72 Fed. (2d) 67; Shamley v. Bowers, 81 Fed. (2d) 13; and Matchette v. Helvering, 81 Fed. (2d) 73. Other cases to the same general effect are J. V. Leydig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494; Nelson v. Ferguson, 56 Fed. (2d) 121; certiorari denied, 286 U. S. 565; Commissioner v. Ross, 83 Fed. (2d) 18; Julius E. Lilienfeld, 35 B. T. A. 391; Louis Boehm, 35 B. T. A. 1106; Fontaine Fox, 37 B. T. A. 271; and Blair v. Helvering, 300 U. S. 5. These cases stand for the general principle that property, which in and of itself is a producer of income, together with any income theretofore produced by it but not yet reduced to possession by the owner, may be assigned without subjecting the assignor to the income tax upon the income ultimately collected by the assignee. Petitioner recognizes the scope of the above decisions and argues that the income in question is not taxable to him because, as he expresses it, “the thing assigned was not income but was a capital asset, itself a producer of income.”

Petitioner cites New York cases — Gilbert v. Ackerman, 159 N. Y. 118; 53 N. E. 753; In re Delaney, 256 N. Y. 315; 176 N. E. 407 — and statements by textbook writers to the effect that a chose in action, a right to recover money or property under a contract, and similar rights, constitute property and are assignable. But we are of the opinion that the answer to our question is not to be found in generalities. We are not concerned with the question whether petitioner did or did not have an assignable right in the claim for compensation. The question, as correctly stated by the petitioner, is whether the thing which was assigned was itself a “producer of income” or whether what was assigned was the income itself. In determining this question the transaction should be examined in the light of the revenue acts rather than by merely determining whether or not the assignment is considered to be a property right under the laws of the state.

Section 182 (a) of the Revenue Act of 1932 provides that there shall be included, in computing the net income of each partner, “his distributive share, whether distributed or not, of the net income of the partnership for the taxable year * * *.” The partnership of Burroughs & Brown, though dissolved by the death of Burroughs in June of 1929, had an income of $41,800 in 1933. If there had been no assignment by petitioner of his right to receive his aliquot portion of such income, he would probably not deny that it was taxable to him as “net income of the partnership”, or as his share of partnership earnings. At first blush it may seem to be somewhat anomalous that a partnership may have income notwithstanding the fact that it has been dissolved by the death of a partner; but “the winding up of the business of the firm is the precise result which is contemplated by the [partnership] agreement.” Williams v. Whedon, 109 N. Y. 333; 16 N. E. 365. As pointed out by the Court of Appeals for the Second Circuit in Rossmoore v. Commissioner, 76 Fed. (2d) 520, “on dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.” Thus, when petitioner instituted and carried on the suit in the Supreme and Appellate Courts of New York in his capacity of surviving partner, he was, as the partnership agreement contemplated, attempting to recover the income which the partnership had earned. The dissolution of the partnership by the death of Burroughs did not have the effect of vesting a one-half interest in all of the partnership property in his executors and a like interest in petitioner. Their rights were fixed by the partnership agreement; and even “the representatives of the deceased partner have no legal interest in [the firm] assets and no legal right to interfere in their administration, so long as the survivor is prosecuting the business of closing up the estate and applying its proceeds in the payment of firm debts.” Williams v. WJiedon, supra. In other words, it could not be ascertained whether the partnership would, or would not, have anything to distribute until its various claims were collected and its debts paid. This of necessity was dependent upon the outcome of the litigation which was being carried on by the surviving partner.

Petitioner’s argument, that the services had been rendered prior to the taxable year and that therefore the income resulted from the “property” which had been transferred, is not convincing. The income resulted from the performance of legal services by the partnership. Petitioner did not attempt to assign anything but his “undivided one-half interest in and to a certain claim of Burroughs & Brown.” The evidence does not show that Davis or the trust company ever had any notice of the assignment nor does it disclose that the assignee ever took any part either in carrying on the litigation or in making settlement of it. The litigation was carried on by the surviving partner for the benefit of the partnership and it received the fee. The fact that petitioner chose to recognize the assignment which he had made to his wholly owned corporation and to turn the check over to it is immaterial. The income was the income of the partnership in the year it was received. The only alternative to this conclusion, which seems to suggest itself, is, that the partnership realized income in an earlier year; but petitioner does not argue that any such conclusion should be reached, for in that event the income to the partnership would antedate the assignment and be taxable to him.

Burnet v. Leininger, supra, and Rossmoore v. Commissioner, supra, seem to justify including the amount in controversy in petitioner’s income for 1933. Here, as in the Leininger case, “that which produced the income was not [the assignor’s] * * * individual interest in the firm, but the firm enterprise itself. * * * There was no transfer of the corpus of the partnership property to a new firm with a consequent readjustment of rights in that property and management.” The assignee may have become the beneficial owner of one-half of the income which the assignor received from the firm enterprise, but “it is still true that * * * [the assignor] and not * * * [the assignee] was the member of the firm and that * * * [the assignee] had only a derivative interest.” As pointed out in the Bossmoore case, the theory that a partner’s interest is “like that of a shareholder in a company * * * — a right against the ‘firm entity’ and assignable as such” is incompatible with the whole idea of partnerships under the revenue acts; for they “have consistently retained the common-law view, treating all income of the firm as taxable to the partners, whether distributed or not, and ignoring the firm as a taxpayer except for purposes of information.”

Petitioner’s contention that “the thing assigned was a producer of income” is not sustained merely by a showing that the assignee received the amount from the assignor after he had collected it. The activities of the partnership produced the income and the thing assigned “produced” nothing.

Petitioner’s contention, that the firm, prior to the assignment, had done everything necessary to make the fee payable and hence that the income had been completely “earned” before the assignment, is materially weakened, if not entirely negatived, by the showing that it was necessary to carry litigation to enforce its collection to a successful conclusion before the amount was payable. If the firm had abandoned all efforts to enforce collection, the present controversy would probably never have arisen; for in that event it is quite likely that the fee would not have been collected by anyone.

We are of the opinion and hold that the respondent did not err in including the amount in controversy in petitioner’s gross income for the year 1933.

Eeviewed by the Board.

Judgment will be entered for the respondent.


author: Black :

text:
    Frank A. Maddas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82403.
    Promulgated September 28, 1939.

      Earle F. Reed, Esq., and Lee W. EeJeels, Esq., for the petitioner.

      Henry G. Glark, Esq., for the respondent.
   OPINION.

Fraud and the Statute of Limitations.

Black :

The first question for our determination in this proceeding is whether petitioner’s income tax returns for each of the taxable years in question were false and fraudulent, with intent to evade tax. If they were not, then the statute of limitations bars any deficiencies which may be due and the respondent so concedes.

Section 601 of the Revenue Act of 1928 places the burden of proving fraud upon the respondent, and this burden he assumed at the hearing. The respondent, having asserted fraud, is charged with the duty of establishing it by more than a mere preponderance of the evidence. The evidence must be clear and convincing. Drawoh, Inc., 28 B. T. A. 666; Henry S. Kerbaugh, 29 B. T. A. 1014; affd., 74 Fed. (2d) 749; Budd v. Commissioner, 48 Fed. (2d) 509; National City Bank of New York, Executor, 35 B. T. A. 975; affd., 98 Fed. (2d) 98.

To establish his charge of fraud, respondent introduced the testimony of numerous witnesses and also introduced numerous exhibits, such as bank accounts and other records bearing upon the controversy. Petitioner and Walter A. Sebring, his accountant, testified for petitioner. To establish that petitioner received large amounts of income in each of the taxable years which he did not report for taxation, respondent relies principally upon the testimony of Carl E. ;Sunder, plus corroborating testimony of other witnesses and documentary exhibits. Sunder testified that during the years in question he was secretary and treasurer of the Victor Brewing Co. and that during that time the company manufactured real beer and sold it to customers as such, but retained for itself only the near beer price and paid over to petitioner the difference. The circumstances detailing how this was done are set out in our findings of fact and need not be repeated here. Sunder testified that in 1920 he paid over in this manner to petitioner, or someone representing him, in excess of $700,000; in 1921, in excess of $500,000; and in 1922, in excess of $500,000. None of these amounts was reported by petitioner in his income tax returns for those years.

Petitioner’s counsel, in their brief, urge that we discard Sunder’s testimony and refuse to believe it because he was confessedly engaged in the illegal liquor traffic along with petitioner and the rest during the time in question and because he was an extortioner, since several years later he compelled petitioner to purchase Sunder’s stock in the Victor Brewing Co. at very much more than it was worth, by threatening to expose the events and transactions of 1920, 1921, and 1922 and petitioner’s connection with them to the tax authorities of the Federal Government.

If Sunder’s testimony stood alone, we think there would be great force in petitioner’s argument, but it does not stand alone. There is much evidence in the record to corroborate it.

Perhaps the strongest evidence in the record to support Sunder’s testimony is the bank accounts standing in petitioner’s name and in the names of those who were proved to be acting for petitioner. At the time respondent introduced these bank accounts in evidence he stated that he was not seeking to establish the amounts of the income which petitioner received in each of the taxable years by the bank deposit method, but that he was introducing this evidence for the purpose of corroborating Sunder’s testimony as to the amounts paid over to petitioner in each of the taxable years.

We think such evidence does corroborate Sunder’s testimony and shows that in each of the taxable years petitioner received large amounts of income which he did not report for taxation. Petitioner admits the receipt of this money, but pleads that it was paid over to him for the purpose of purchasing protection for the brewery from bribe-taking, faithless Government prohibition officials, and was not income to him 'but was income to the prohibition officials who got it. The testimony unmistakably shows that some of it was thus used, but it falls far short of showing that, all of it was thus used. Petitioner did not show how much of it was thus paid out, or give any figures by which we might calculate it, yet asks us to hold that none of these large amounts which admittedly he received were taxable income to him.

We think that what we said in M. Rea Gano, 19 B. T. A. 518, 533, is applicable to the facts of the instant case. Among other things, we there said:

A failure to report for taxation income unquestionably received, such action being predicated of a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose.

As we have already indicated, petitioner’s principal defense is that the money which respondent has proved was paid over to him was not paid over for his personal use, but in sort of a trust capacity, to be disbursed on behalf of the brewery to purchase “protection” from bribe-taking, corrupt prohibition officials. That petitioner did disburse an unproven part of the funds for that purpose we have already indicated, but we think the evidence falls far short of establishing that the large amounts in question, when paid over to petitioner, were impressed with such, a trust as to make petitioner not the owner of the income, but the mere conduit through which payments passed from the corporation to others who were the real owners of the income. Cf. O'Laughlin v. Helvering, 81 Fed. (2d) 269; National City Bank of New York, Executor, supra.

Therefore, we hold that petitioner’s income tax returns for each of the years 1920, 1921, and 1922 were false and fraudulent, with intent to evade tax. Petitioner’s plea of the statute of limitations is not sustained.

Amount of Petitioner's Unreported Income for Taxable Years.

Not only does petitioner contest the fraud issue and plead the statute of limitations, but he also contends that there is no deficiency or penalty for either year because petitioner reported all of his taxable income for taxation and paid the tax thereon. As to the items of income reported on petitioner’s income tax returns for the respective taxable years and the deductions taken thereon, there is no contest.

The controversy, as we have already stated, relates to the large sums of money paid over to petitioner as a result of the illegal sale of beer by the brewery. In the deficiency notice the Commissioner determined that petitioner received $921,264.23 in 1920, $597,529.33 in 1921, and $501,440.20 in 1922 from this source, and the deficiencies were computed accordingly. In the absence of anything else, the presumption is that the determinations thus made by the Commissioner in his deficiency notice are correct. Avery v. Commissioner, 22 Fed. (2d) 6.

We think, however, that it is unnecessary to base our decision on the presumption of correctness referred to by the court in the Avery case and by this Board and the courts in subsequent cases. The question of how much income petitioner received from the illegal sale of beer in the manner set out in our findings of fact was the subject of much testimony at the hearing and at the conclusion of the evidence the respondent voluntarily abandoned his claim of the amounts of income determined in his deficiency notice and asked that the Board find instead that petitioner’s unreported income for each of the taxable years in question was as follows: $500,000 for 1920, $100,000 for 1921, and $400,000 for 1922.

Even if we assume, without deciding, that in view of these circumstances respondent is no longer aided by any presumption as to the correctness of the determination made in his deficiency notice and the question becomes whether or not respondent has proved the amount of income, if any, which petitioner received in the taxable years and did not report, Tex-Penn Oil Co. v. Commissioner, 83 Fed. (2d) 518; Helvering v. Taylor, 293 U. S. 507, we think respondent has proved his case.

As has already been stated under our discussion of tbe fraud issue, respondent bas proved, by bis witness, Carl E. Sunder, that be paid over to petitioner more than $700,000 in cash in 1920 from tbe illegal sale of beer. The bank accounts in evidence corroborate this testimony. Of this amount, Sunder testified that petitioner turned back to the¡ brewery $27,000 in 1920. Eespondent makes full allowance for this turn-back of funds and more besides, and asks only that tbe Board find that petitioner’s unreported income for 1920 was $500,000.

For 1921 Sunder testified that be paid over to the petitioner from tbe illegal sale of beer more than $500,000. The bank deposits introduced in evidence corroborate this testimony. Sunder testified that of this amount petitioner turned back to tbe brewery or to tbe brewery’s stockholders $400,000 in cash and that this $400,000 was used to finance an increase in the brewery’s capital stock of that amount. Eespondent makes full allowance for this $400,000 turned back, although he might well have contended that the portion used to pay for stock which was issued to petitioner, approximately $180,000, was income to petitioner in 1921. Petitioner concedes as much in his brief, although denying that there was any fraud in petitioner’s failure to report it for taxation. But respondent does not contend that this $180,000 was income to petitioner in 1921 but only that the difference between the $500,000 paid to petitioner and the $400,000 turned back be adjudged to be the amount of petitioner’s unreported income for 1921.

Sunder testified that in 1922 he paid over to petitioner from the illegal sale of beer more than $500,000, and this testimony was corroborated by the bank deposits which were introduced in evidence. Of this amount, Sunder testified that petitioner turned back $80,000 in 1922. The circumstances of this turn-back were that at various times during the year the Victor Brewing Co. invoiced to the Greens-burg Ice Co., another corporation which petitioner dominated, $80,000 worth of ice in excess of what was actually sold and delivered and that petitioner paid over to the Victor Brewing Co. at various times the $80,000 in question. Sunder testified that the reason these fictitious ice sales were made was because petitioner wanted the sales of ice by the Victor Brewing Co. to appear in excess of what they really were. At any rate, whatever the cause, respondent has made full allowance for this $80,000 turned back and more besides, because he asks only that the Board find that petitioner’s unreported income for 1922 be held to be $400,000.

As has already been stated, under our discussion of the fraud issue, the petitioner claims that he paid out large amounts of the funds which he thus received in each of the taxable years to purchase “protection” for the brewery to carry on its illegal traffic. He has not disclosed how much he thus paid out nor has he given us any facts or figures upon, which, we could make an estimate. Even if he had done so, we think the allowance of any deduction based thereon would be against public policy. Cf. Tunnel Railroad of St. Louis v. Commissioner, 61 Fed. (2d) 166; Chicago, Rock Island & Pacific Railway Co., 13 B. T. A. 988; affd., 47 Fed. (2d) 990; Burroughs Building Material Co. v. Commissioner, 47 Fed. (2d) 178; Great Northern Railway Co. v. Commissioner, 40 Fed. (2d) 372; H. 8. Anderson, 35 B. T. A. 10; United States v. Sullivan, 274 U. S. 259.

Bespondent’s action at the hearing, in conceding allowances for all the amounts which the evidence showed that petitioner had turned back to the brewery in each of the taxable years, fully takes care of any deductions and eliminations on that score which are sustained by the record.

We, therefore, think respondent’s contention, that petitioner was in the: receipt of income for 1920 of $500,000, for 1921 of $100,000, and for 1922 of $400,000 which he did not report for taxation, is sustained by the evidence and we so hold. We also hold that part of the deficiencies for each of the taxable years is due to fraud with intent to evade the tax. We, therefore, sustain respondent’s contention that 50 percent of the deficiency should be added as a fraud penalty for each of the taxable years in question. See section 250 (b) of the Revenue Acts of 1918 and 1921.

Reviewed by Board.

Decision will be entered u/nder Rule 50.


author: TTarRon :

text:
    Frederick P. Ader and Leon H. Ader, as Executors of the Last Will and Testament of Mathilde Ader, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89873.
    Promulgated September 29, 1939.

      M. W. Dobrzenshy, Esq., Donald K. Quayle, Esq., and Louis V. Shinner, Esq., for the petitioners.

      Arthur L. Murray, Esq., for the respondent.
   OPINION.

TTarRon :

The gifts in question were made after decedent suffered a fracture of her arm and a lapse into a semicomatose condition, which required that decedent be confined to her bed and undergo treatments for complications of her diabetic condition. The illness brought on by the fracture was the first one of any seriousness which decedent suffered after it had been discovered that she had diabetes.

Decedent was 81 years old at the dates of the making of the gifts in question. The gifts were made less than three months prior to the date of death.

Section 803 of the Revenue Act of 1932 is applicable. Subsection (c) provides, in part:

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

The significance of the statutory provision quoted above has been stated to be as follows:

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. [Farmers Loan & Trust Co. v. Bowers, 98 Fed. (2d) 794, 799.]

The statutory presumption is rebuttable, as is the determination of the Commissioner that a gift has been made in contemplation of death. It is necessary, therefore, to determine from the evidence whether the petitioners have proved “by a fair preponderance of evidence” that the gifts were not made in contemplation of death.

Whether or not the gifts were made in contemplation of death depends upon decedent’s motive in making the gift. It is a difficult matter to determine the motive of a deceased person. In searching for the predominant motive, all the evidence must be considered, including the circumstantial evidence. The tests to be applied have been set forth in United States v. Wells, 283 U. S. 102, and we apply here the tests and the rule set forth in the Wells case

One of petitioners’ theories is that the gifts in question were made at the particular dates in 1935 because decedent thought that she would avoid paying a higher gift tax if she made gifts prior to January 1, 1936, the effective date of amendments to the gift tax law. The evidence shows that decedent stated to her son, Leon, that she wanted to make a gift to him, that she had been intending to make the gift, and that she had finally gotten around to making the gift; that decedent stated only to her son, Frederick, that she wished to make a gift to him before the new gift tax went into effect. But the part of the evidence relating to what decedent said at the time she made the gifts must be considered with other evidence. Taken with the testimony of Leon Ader to the effect that decedent read financial pages of the papers daily, that Leon explained, in July 1985, a bank circular about gift taxes to decedent, that statements in the circular indicated that gifts of a value of $40,000 would be exempt from gift tax, it must be assumed that decedent knew the value of each gift at the date of gift and that decedent knew that the total value of the two gifts was less than $40,000 and that the gifts were, therefore, exempt from gift tax.

It is a fact that section 505 of the Revenue Act of 1932, which was applicable to the year 1935, exempted gifts of a value of $50,000 from the computation of net gifts for tax.

Decedent surely must have learned, prior to making each gift, that she did not have to pay any gift tax. She had her bank make a transfer of the stock certificates into the names of the donees, and she apparently told the bank clerk that she was going to make a gift of the stock. It is reasonable to believe that, since decedent was interested in and knew about gift taxes, and knew the current values of her stocks, and was considered to be a keen business woman (according to testimony of a bank employee), she would have inquired at the bank whether the gifts would be subject to gift tax.

Assuming then that decedent said to one son that she wanted to make the gift to him prior to the effective date of new gift taxes, it does not follow that the statement should be given much weight. In view of the general knowledge of decedent on the matter of gift taxes, which the record shows she had, the statement means very little here, in so far as it is relied upon to reveal a predominant motive in the making of one or both of the gifts. It is noted that decedent did not refer to the effect of new gift taxes when she made the gift to Leon.

We, therefore, attach little weight to the reference to gift tax made by decedent at the time she made the gift to Frederick.

Another of petitioners’ theories about the motive of decedent in making the gift is that decedent in 1935 was putting into execution an intent she had entertained for about nine years to give to each son a part of the estate that she had inherited from her deceased husband. The evidence shows that decedent’s expressions of an intent to make gifts to her sons, in 1925 and in subsequent years, were vague. The intent of actually making the gifts was vague. Decedent stated, as far back as 1925, that all the property would go to the two sons when she died and that decedent wanted to keep enough to be sure that she would be well provided for. In May 1935 decedent indicated that she wanted her net assets to amount to at least $100,000, and that she was not going to give any of her property to her sons until there should be a “substantial amount over $100,000”, and that at such time decedent was going to give the excess above $100,000 to her sons.

Decedent did not carry out any intent to make gifts to her sons during the period between 1925 and 1935, when the value of her assets was as high as $175,000 and $125,000. As far as the record shows, decedent did not make any gifts to her sons during the above stated period. She was not in the habit of making gifts to her sons. She was a frugal person and apparently was much interested in the values of her assets.

Therefore, little weight can be given to the indefinite expressions made by decedent on a few occasions to the effect that she intended making gifts to her sons. In 1932 decedent executed her last will. In the will she gave all of her estate, above bequests totaling $10,000, to her two sons. There is no evidence to show that in 1932 decedent had any definite intention of making any inter vivos gifts to her sons.

We turn, then, to consideration of the circumstances under which decedent made the gifts in 1935. (a) The decedent’s physical condition had been bad within five months prior to making the gifts. In February decedent was ill, confined to bed, and, for a short time, was in a semicomatose condition. That was the first instance of any complications from diabetes. It is reasonable to believe that decedent knew that she had been in a semicomatose condition, and that this was a complication of the diabetic condition, (b) Decedent, for reasons unknown, in August 1935 departed from her express policy 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. (c) The evidence does not show that either Leon or Frederick was financially in need of any assistance at the dates the gifts were made. (d) The gifts were made a short time after decedent attained the age of 81 years. She became 81 years of age on August 18, 1935. It is not outside the realm of the possible that decedent believed that she was approaching the late hours of the evening of her life.

The evidence here is neutral. It does not reveal any positive state of mind of the decedent, as of the date of the gifts in 1935, that decedent believed that she had long to live, or that she believed that she was soon to die. The two theories presented by petitioners as to the motives behind) the making of the gifts do not stand up well under analysis. In fact, the evidence which is presented weakens, rather than strengthens, the theories. Stripped to clear facts, the situation is simply that an aged woman, a short time after she had suffered a broken arm and a complication of a disease which is seldom curable, made gifts which in value represented about one-fourth of her holdings in securities. There has not been presented a “fair preponderance of evidence” to prove that the gifts were not made in contemplation of death. It must be concluded that the gifts, substantial in amount and made within three months of the date of death, were made in contemplation of death, under the statutory presumption contained in section 803 (c), which has not been refuted. It is so held, and respondent’s determination is sustained. Cf. Flack v. Holtegel, 93 Fed. (2d) 512; Purvin v. Commissioner, 96 Fed. (2d) 929; Updike v. Commissioner, 88 Fed. (2d) 807; Hunter v. United States, 14 Fed. Supp. 523.

Decision will be entered for the respondent.