author: Opper :

text:
    Edith Henry Barbour, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100714.
    Promulgated July 29, 1941.

      John M. Hudson, Esq., and Samuel E. Gawne, Esq., for the petitioner.

      Homer J. Fisher, Esq., for the respondent.
   OPINION.

Opper :

This proceeding involves a deficiency in income tax for the year 1937 in the amount of $816.11 and a claimed overpayment for the same year in the amount of $5,655.

Petitioner filed her income tax return for the year in question with the collector of internal revenue for the district of Michigan.

Two questions are presented: Whether a sum paid to petitioner as “interest” on a condemnation award is taxable as ordinary income, or as part of the capital gain from the condemnation, and whether petitioner, who retained possession of the condemned premises after the condemnation judgment and until payment of the award, is entitled to an allowance for the depreciation of the condemned premises during that period.

We adopt as our findings the stipulated facts. From these it appears that petitioner acquired by inheritance in 1922 an undivided one-half interest in three parcels of real estate ‘ fronting on Woodward Avenue in Detroit, upon which were located three buildings which since that time have been used in petitioner’s trade or business.

In July 1927, following the approval by the voters of the city of Detroit of a plan for widening Woodward Avenue, the city’s common council passed a resolution of necessity for the improvement, the resolution being conditioned upon the signing of financing agreements by at least 75 percent of the property owners to be affected. Such agreements were necessary because of the inability of the city to comply with title VIII, chapter I, section 16 of its charter and section 3801, Compiled Laws of Michigan, 1929, requiring payment for condemned property to be made within one year after confirmation of the condemnation award and prohibiting the taking of possession until payment has been made. The required number of property owners signed such agreements, although petitioner and her joint owner did not.

Pursuant to its charter provisions relating to condemnation, the city, on or about November 17, 1927, filed with the recorder’s court of the city a petition setting forth that the city had declared the necessity for widening Woodward Avenue and that to accomplish that purpose it was necessary to condemn certain property, including 20 feet of the premises occupied by the three buildings in question. The proceedings were thereafter brought on for trial, resulting-in a written jury verdict rendered on February 16, 1932, finding the taking of the requisite portions of the three parcels to be necessary and awarding the compensation therefor, the sum of $180,935.90 being fixed for the condemned portion of the parcel occupied by one of the buildings. On July 21, 1932, the verdict as to necessity and damages or compensation was confirmed by the recorder’s court, resulting in the condemnation of 20 feet of the premises occupied by the three buildings.

On November 26, 1937, the city paid to petitioner and her joint owner the sum of $180,935.90, being the amount of the award for the condemned portion of one parcel as aforesaid. This sum was deposited by the joint owners in a special building account with a bank, and petitioner duly filed with the Commissioner of Internal Revenue an application to establish a replacement fund with respect to her share of $90,467.95. On November 26, 1937, her share of the award exceeded her portion of the cost basis of the land and building which had been condemned and for which the award was paid. The judgment award for the condemned portions of the other two parcels had not been paid by the city at the time of the hearing herein, and possession of no part of the condemned portions of any of the three parcels had as yet been taken by the city at that time.

On December 21, 1937, the city paid to petitioner and her joint owner the further sum of $48,345.97, being interest upon the award of $180,935.90 from July 21, 1932, the date of confirmation of the award, to December 21, 1937, at the rate of 5 percent per annum, as prescribed by section 14555, Compiled Laws of Michigan, 1929. Petitioner appropriated to her own uses her one-half share of the $48,345.97, and upon her income tax return for 1937 she reported $24,172.98 representing her share of the interest, as income taxable in full. She now contends that the sum of $24,172.98 is taxable as capital gain rather than as ordinary income.

During the years 1932 to 1937, inclusive, petitioner received and retained her one-half share of the rentals of the entire three buildings, and beginning with the year 1933 the city eliminated the condemned portion of the properties from city taxation.

This case is similar to and controlled by Estate of Edgar S. Appleby, 41 B. T. A. 18, unless distinctions between the procedure in Michigan, as pursued in the present case, and in New York in the Appleby case, require a different result. See also Henry A. Kieselbach, 44 B. T. A. 279; Seaside Improvement Co. v. Commissioner (C. C. A., 2d Cir.), 105 Fed. (2d) 990; certiorari denied, 308 U. S. 618. In the Appleby case property of the petitioners was acquired in condemnation proceedings by the city of New York. After the acquisition $683,555.50 was awarded for the property. When payment was made “the city paid to the petitioners $751,129.45, of which $67,573.95 was an increase in the original condemnation award because of the lapse of time between condemnation and payment.” The Board held that the latter item “is part of the award and not interest.” The question here is the same. If petitioner is correct that the amount added to the original award is not interest, her proposed treatment of the amount as capital gain must be approved.

Respondent seeks to distinguish the Appleby case on two grounds, first, that the New York law permits taking prior to payment, whereas in Michigan the public authorities are not permitted to enter upon the property until payment has been made or set aside; and, second, that under New York law the “interest” is declared by statute to be payable “as a part of the compensation” whereas in Michigan it is treated as similar to interest upon a judgment.

In our view neither of these distinctions is persuasive. We are unable to accept the requirement that compensation must be paid before entry as adequate to distinguish the cases. The compensation is paid for the property, which includes both title and the right to possession. Without attempting to consider whether there was a passage of title upon completion of the condemnation proceedings, see Cleaver v. Board of Education, 263 Mich. 301; 248 N. W. 629, it is at least clear that under Michigan law there was a “constructive taking” at that time. Campau v. City of Detroit, 225 Mich. 519; 196 N. W. 527. From the standpoint of depriving the owner of the ordinary rights of disposition and management, this seems to us sufficiently to resemble the actual taking which occurs in New York. And, if the city must make payment prior to acquiring possession as the final element of ownership, there is, if anything, an added reason for concluding that all items of the payment made at that time are components of the compensatory price received by the owner for parting with the complete bundle of rights constituting ownership.

Respondent contends, in effect, that it is only where the property is taken prior to payment that “it appears to be ‘uniformly held’ that payment of interest constitutes a payment of ‘damages’ and is part of the ‘just compensation’ required by the Constitution.” If in fact, however, the total amount received by the petitioner for the property was greater by reason of an addition to the original award caused by delay in payment, it seems to us to make little difference whether this additional compensation was required by the Constitution or proceeded from some statutory provision or public policy of the State of Michigan.

Respondent does not contend that for tax purposes a distinction should be drawn between “just compensation” for the property, as a capital item, and “just compensation” for the use of petitioner’s money, as an income item, and the cases dealing with the adequacy of compensation generally to which he refers attempt no such classification. If he did, the same objection could be taken to the result reached in the Appleby case. Nor does he dwell upon the possibility that even where possession precedes award, there may be a further interval prior to payment, as there was in the Appleby case, compensation for which can not presumptively- be included in the original award. We think it clear that the amount received by petitioner, including that attributable to the delay in payment, was compensation. Whether it was constitutionally required can not, in our view, aifect the question before us, which is the extent to which it may be .considered as a capital gain on the one hand or ordinary income on the other.

Nor do we regard as an adequate distinction the failure to specify that the “interest” is part of the award. That it is compensatory appears with sufficient certainty, as we have seen, from the requirement of payment before entry. Thus the minor difference in Michigan’s statutory structure is without significance. True, there is no express provision that the additional payment is to be included in the award. But under Compiled Laws of Michigan (1929), section 8801, there must be set aside in the city treasury before the city can take possession of the property “the amount required to make compensation.” This includes such additional sum as is required by law on account of delay in payment. Rosen v. City of Detroit, 242 Mich. 690; 219 N. W. 726. Whether there be two awards or one, the whole is necessary to pay for the property. It follows that the respondent’s action in this respect was error.

The second issue relates to petitioner’s claim for depreciation on the property subsequent to the condemnation proceedings and prior to relinquishment of possession. On this item we think respondent’s action was correct. While ownership may not be a prerequisite to the right to a depreciation deduction, see Helvering v. Lazarus & Co., 308 U. S. 252, it is conversely true that not even ownership necessarily entitles the owner to deduct depreciation. The test is whether the claimant to depreciation is in such a position as to suffer an economic loss as a result of the decrease in value of the property due to the depreciation. Weiss v. Wiener, 279 U. S. 333; Atlantic Coast Line Railroad Co., 31 B. T. A. 730; affd. (C. C. A., 4th Cir.), 81 Fed. (2d) 309; certiorari denied, 298 U. S. 656. Here we think it apparent that petitioner can not bring herself within such a classification.

When judgment was entered upon the award and no appeal taken, the rights and obligations of the parties were legally adjudicated and fully fixed. The amount of defendant’s indebtedness for the land it compelled plaintiff to sell was as finally and forcibly determined as by any other' judgment ⅜ * *. [Campau v. City of Detroit, supra; Rosen v. City of Detroit, supra.]

The date of payment of the condemnation awards might be uncer: tain, and even their ultimate amount for that reason incapable of computation; yet there is nothing to indicate that they will be diminished by reason of any change which may take, place, in the character of the property, and still less, by reason of any of the natural processes of deterioration compensation for which is theoretically furnished by the depreciation deduction. Since petitioner will never be the poorer by reason of depreciation, there is no necessity of permitting her to deduct an amount from current income for the purpose of making herself whole in that contingency.

Reviewed by the Board.

Decision will he entered under Bule 50.

Artjndell and Black dissent for the reason set forth in their dissent in Henry A. Kieselbach, 44 B. T. A. 279.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Harris Hyman, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Helen E. Hyman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101106, 101107.
    Promulgated July 29, 1941.

      Robert G. Polack, Esq., for the petitioners.

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

Murdock:

The petitioners must show that the payments come within some provision Of the statute allowing a deduction. New Colonial Ice Co. v. Helvering, 292 U. S. 435, 440. This they have failed to do. If the seats were used in a business regularly carried on by them, the cases cited would be in point. Carrying charges, such as interest and taxes, are deductible because there is a specific statutory provision allowing them. But there is no such provision covering these dues. The record does not show that the petitioners had any business of which these were an ordinary and necessary expense. Higgins v. Commissioner, 312 U. S. 212.

Decision will be entered, for the respondent.


author: Black :

text:
    Aldus C. Higgins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101542.
    Promulgated July 31, 1941.

      Lawrence E. Green, Esq., for the petitioner.

      W. Herdmam Schwatha, Esq., and Edward L. JJpdihe, Esq., for the respondent.
   OPINION.

Black :

This proceeding involves a gift tax deficiency of $299,103.47, determined by the respondent against petitioner for the calendar year 1938.

On March 15, 1939, petitioner filed with the collector of internal revenue for the district of Massachusetts a gift tax return for the calendar year 1938. In this return he did not report any gift tax liability, but in lieu thereof made the following statement:

On March 10, 1938, amendments were made in Higgins Trust #2 and Higgins Trust #3. Copies of said trust instruments, including the said amendments, are filed with this return. I do not consider that said amendments constitute taxable gifts but am reporting the facts for determination by the Commissioner. This return is filed under protest to avoid any penalty.

The deficiency here involved is due primarily to the respondent’s determination that petitioner’s release and relinquishment on March 10,1938, of all the powers reserved by him in Higgins Trust #2 and Higgins Trust #3, which trusts petitioner had created on July 9, 1920, had the effect of completing the gifts of the properties placed in trust so as to subject such transfers of property by gift to the gift tax imposed by section 501 of the Revenue Act of 1932, as amended. Among other things, the respondent determined that the value of the property transferred to Higgins Trust #2 on the date of gift, March 10, 1938, was $722,834.39; that the value of the property transferred to Higgins Trust ⅜3 on the date of gift, March 10, 1938, was $751,068.32; that the net gifts for preceding years were $119,103.82; and that the tax on net gifts for preceding years was $9,635.74. Petitioner assigned four errors, (a) to (d), inclusive. Assignment of errors (c) and (d) were settled by stipulation, and effect will be given thereto under Rule 50. The assignments of error remaining for our consideration are as follows:

(a) The Commissioner erroneously determined that an amendment made by the petitioner on March 10, 1938 in Higgins Trust #2 constituted a taxable gift by the petitioner on that date.
(b) The Commissioner erroneously determined that an amendment made by the petitioner on March 10, 1938 in Higgins Trust #3 constituted a taxable gift by the petitioner on that date.

On January 26, 1940, petitioner, without waiving any rights and before any assessment, made a payment of $285,000 on account to the collector of internal revenue with respect to any gift tax liability which might be found to be due after hearing, in order to stop the running of interest in the event that the Board determines a gift tax to have been due.

The facts were stipulated. We adopt the stipulation as our findings of fact and will set forth herein only those facts that are necessary for an understanding of assignment of errors (a) and (b).

Petitioner is an individual and resides at Worcester, Massachusetts. He was born in 1872.

Elizabeth B. Angelí, sometimes called Elizabeth B. Higgins and sometimes called Elizabeth B. Chapin, petitioner’s daughter, was born in 1900, and has two children, Richard Chapin, born in 1923, and Aldus Higgins Chapin, born in 1930, all of whom are living.

Milton P. Higgins, petitioner’s son, was born in 1903, and has two children, Milton P. Higgins, 3rd, born in 1938, and Prentiss Coonley Higgins, born in 1939, all of whom are living.

On July 9, 1920, petitioner created two trusts designated Higgins Trust #2 and Higgins Trust #3. Both trusts were originally identical, except that Higgins Trust #2 was created for the benefit of petitioner’s daughter Elizabeth, her children and their issue, and Higgins Trust #3 was created for the benefit of petitioner’s son Milton, his children and their issue. Each trust provided that unless sooner terminated by distribution to the beneficiaries it should continue until the death of petitioner’s respective child and until every child of such respective child should reach 21 or die, at which time the principal should be distributed among the surviving children of such respective child and their issue, and upon the total failure of issue of such respective child “the trust fund shall thereafter be held for the sole benefit of myself, my heirs, executors, administrators and assigns.” In each trust the trustees had discretion to accumulate the income, or to apply it in any way for the support, comfort, and education of the beneficiaries or any of them, or to pay it over to the beneficiaries or any of them.

Petitioner’s only interest in either of the trusts as originally drawn, except for the powers which he reserved and which will be more fully hereinafter described, was a bare possibility of reverter if petitioner should survive his respective child and all the descendants therefrom before the time fixed for termination. On November 22, 1935, petitioner assigned all his said interest, either vested or contingent, except reserved powers, in Higgins Trust #2 to designated charities; and on March 10, 1938, petitioner assigned all his said interest, either vested or contingent, except reserved powers, in Higgins Trust #3 to his son Milton.

As originally drawn petitioner retained three sets of powers in each trust, the release of which by amendment on March 10, 1938, the respondent has determined to constitute taxable gifts of the properties held by the two trusts. By article 2 he reserved power to remove trustees and to appoint successor and additional trustees. By article 6 (a):

I hereby reserve to myself full power and authority to appoint to any beneficiary the whole or any part of the principal of the trust fund. This power may be exercised by will, or by a written instrument signed and sealed by me and acknowledged in the manner prescribed for the acknowledgement of deeds of real estate and delivered before my death to the trustees hereunder, or—so long as I shall be the sole trustee under this instrument—by the delivery or payment to any beneficiary for the time being of the whole or part of the principal of the trust fund. * * *

Article 8 of each trust provided:

8. Modification of Tkust: I hereby reserve to myself the power, by will or by a written instrument signed and sealed by me and acknowledged in the manner prescribed by law for the acknowledgment of deeds of real estate, to modify the terms of this instrument either as to the powers of the trustees with respect to investments or as to their powers with respect to the distribution of income or principal among the beneficiaries herein named or described prior to the termination of the trust.

On November 18, 1937, petitioner, in accordance with the power reserved in article 2 of Higgins Trust #2, appointed Buth H. Tucker to be cotrustee with him. On March 10, 1938, petitioner resigned as trustee of Higgins Trust #2, and appointed Katharine H. Biley to act as trustee in his stead.

On August 20, 1935, petitioner modified paragraph (a) of article 6 of Higgins Trust #3 by striking out that article and inserting in lieu thereof the following:

I hereby reserve to myself the power from time to time during the life of my son, Milton P. Higgins, to appoint to him the whole or any part of the principal of the trust fund and after his death the power to appoint to his children and issue by right of representation the whole or any part of the trust fund. Such appointment may be made from time to time. This power may be exercised by any written instrument signed and sealed by me and acknowledged in the manner prescribed for the acknowledgment of deeds of real estate and delivered! before my death to the trustees hereunder, or—so long as I shall be the sole trustee under this instrument—by the delivery or payment to any beneficiary for the time being of the whole or part of the principal of the trust fund. * * *

On November 22, 1935, petitioner, in accordance with the power reserved in article 2 of Higgins Trust #3, appointed his son Milton to be cotrustee with him during his life. On November 18, 1937, petitioner appointed Buth H. Tucker to be cotrustee with him and his son of Higgins Trust #3. On March 10, 1938, petitioner resigned as trustee of Higgins Trust #3.

By an amendment to each trust dated March 10, 1938, petitioner modified the trust instruments with respect to the trustees’ power as to distribution of income and principal so as to permit the trustees to make payments of income and principal until the termination of the trusts to and among the named beneficiaries as they in their discretion might see fit, with power to omit any one or more of the beneficiaries in making such payments. By this amendment petitioner also released and relinquished all powers reserved or given to him by any and all of the provisions of both trusts as amended. These provisions are identical in the case of both trusts (except as to the names of the respective beneficiariés of each trust), and in the case of Higgins Trust #3, they read as follows:

In accordance with the powers given me in said trust instrument, I hereby strike out Article 5 and paragraphs (b) and (c) of Article 6 of the original trust instrument as amended, and provide in lieu thereof as follows:
Until the termination of the trust, the trustees may in their discretion pay all or any part of the net income, accumulations, and principal of the fund in such proportions and amounts as they in the exercise of their discretion deem proper to and among said Milton P. Higgins and his children and' issue living at the time of each payment, with power in their discretion to omit from participation in any such benefit any one or more of the persons among whom they have power to distribute. At the termination of the trust, the trustees if they in their discretion deem it advisable, may increase or. decrease the shares of one or more of the peráons entitled to distribution by such amounts as the trustees in the exercise of their discretion may deem appropriate in order to adjust any inequalities in distributions of income, accumulations, or principal previously made to any one or more of them or any of their ancestors or descendants. Any income accumulated from time to time may, in the discretion of the trustees, be added to principal; and shall upon the termination of the trust be added to principal. The discretion herein given to the trustees shall be absolute and uncontrolled, and not subject to review by any court.
I release and relinquish all powers reserved or given to me by any and all of the provisions of said trust instrument and all modifications thereof and amendments thereto. Without limiting the generality of the foregoing, I release and relinquish all powers reserved or given to me by Article 2, by paragraph (a) of Article 6, and by Article 8 of the trust instrument as amended.

The respondent determined that by these amendments of March 30, 1938, petitioner made a gift of the entire value of the property under each of the trust agreements upon which a gift tax is imposed by section 501 (a) and (b) of the Revenue Act of 1932. As. further authority for his determination the respondent relies upon Sanford's Estate v. Commissioner, 308 U. S. 39, and article 3 of Regulations 79 (1936 Edition) as amended by Treasury Decision 5010, Cumulative Bulletin 1940-2, p. 293. The material provisions of T. D. 5010 are set out in the margin.

Petitioner contends that article 3 of Regulations 79 (1936 Edition) as it existed on March 10,1938, which was prior to T. D. 5010 (approved September 19,1940) is decisive of the issues here involved; that under such regulations .the gifts made to the trusts in 1920 were completed gifts at that time and hence there were no gifts in 1938, when petitioner relinquished his limited reserved powers. Petitioner also contends that if the transfers were not complete prior to the release of said powers in 1938, they were no more complete after the release than they were before.

,We agree with the respondent’s determination. It is our opinion that the question presented by assignments of errors (a) and (b) is controlled by Sanford’s Estate v. Commissioner, supra, and Rasquin v. Humphreys, 308 U. S. 54. Cf. Orrin G. Wood, 40 B. T. A. 905; Estate of Giles W. Mead, 41 B. T. A. 424; petition for review to Ninth Circuit dismissed under Rule 16 of the Rules of Practice of Ninth Circuit, 116 Fed. (2d) 278; Doris Bond Sherman, 41 B. T. A. 898; Amelia Solomon, 43 B. T. A. 234; Herzog v. Commissioner, 116 Fed. (2d) 591.

The 1936 edition of Regulations 79 was approved February 26, 1936, and released March 5, 1936. Petitioner primarily rests his case upon article 3 thereof as it existed until amended by T. D. 5010, supra. This edition of the regulations was therefore in effect for the year 1937, which was the year involved in Estate of Giles W. Mead. supra. And if the property transferred in 1936 in the Sherman case was transferred after February 26,1936, that edition of the regulations would likewise have been the regulations to consider in deciding the effect of the 1936 transfers in the Sherman case. Yet in both of these cases we held that our decision was controlled by the Sanford case. Petitioner concedes that much to be true, but argues that the controlling effect of the 1936 edition of article 3, Regulations 79, as it existed in 1936 and 1937, was not pressed in the Mead and Sherman cases as petitioner is doing here. Petitioner, therefore, insists that in deciding the instant- proceeding we must, give full effect to article 3 as it existed between February 26, 1936, and September 19, 1940, and that T. D. 5010 can not be applied retroactively, citing Helvering v. Reynolds Tobacco Co., 306 U. S. 110.

We think petitioner can not prevail in this contention. In Rasquin v. Humphreys, supra, the Supreme Court commented upon the 1936 edition of article 3 of Regulations 79 in the following language:

* * * Whatever validity the amended regulation of 1936 may have in its prospective operation, we think it is so plainly in conflict with the statute as to preclude its application retroactively so as to subject to tax such, transfer as was made by the creation of the trust in 1934. Cf. Helvering v. R. J. Reynolds Tobacco Co., 306 U. S. 110.

If the regulation was plainly in conflict with the statute we think it can not be applied either retroactively or prospectively; A regulation which conflicts with the statute is a nullity. Manhattan General Equipment Co. v. Commissioner, 291 U. S. 129. In that case the taxpayer invoked the regulation in force at the time the transaction there involved occurred, whereas the Commissioner contended that an amended regulation promulgated almost two years later should apply. The case turned entirely upon the question whether a certain loss was to be determined in accordance with the original, or amended regulation. The Supreme Court decided that the original regulation was contrary to the intent of the statute, whereas the amended regulation effectuated the legislative intent. The Court then went on to say that a regulation which did not carry into effect the will of Congress as expressed by the statute was a mere nullity. Relative to the retroactive effect of the new regulation, the Supreme Court said :

The contention that the new regulation is retroactive is without merit. Since the original regulation could not he applied, the amended regulation in effect became the primary and controlling rule in respect of the situation presented. It pointed the way, for the first time, for correctly, applying the antecedent statute to a situation which arose under the statute. See Titsworth v. Commissioner of Int. Rev. (C. C. A.) 73 F. (2d) 385, 386. The statute defines the rights of the taxpayer and fixed a standard by which such rights are to be measured. The regulation constitutes only a step in the administrative process. It does not, and could not, alter the statute. It is no more retroactive in its operation than is a judicial determination construing and applying a statute to a case in hand.

Cf. Guggenheim v. Rasquin, 312 U. S. 254, where the applicable regulation was “somewhat ambiguous” and the Supreme Court interpreted the statute unaided by an interpretative regulation.

Petitioner has called our attention to the case of Commissioner v. Prouty, 115 Fed. (2d) 331, and argues that it would seem unjust to tax him upon the powers here released and not to tax the donor in the Prouty case upon the powers she released. The Prouty case is readily distinguishable from the instant proceeding. There the power reserved by the donor (Trust #1) was in conjunction with one having a substantial adverse interest. In the instant proceeding the reserved power which was released on March 10, 1938, was in the donor alone.

Petitioner also contends that, if the transfers were not complete prior to the release of the powers in question, they were no more complete after the release than they were before, for the reason that petitioner merely shifted the powers reserved by him to the trustees. Under this point petitioner refers to the secondary liability for gift taxes imposed upon donees by section 510 of the Revenue Act of 1932, which provides in part that “If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift”, and to that part of the Supreme Court’s opinion in Sanford's Estate v. Commissioner, supra, wherein the Court said:

* * * It can hardly be supposed that Congress intended to impose personal liability upon the donee of a gift of property so incomplete that be might be deprived of it by the donor the day after he had paid the tax.

The point here made by petitioner was involved and decided against petitioner’s contentions in Orrin G. Wood, supra, and Herzog v. Commissioner, supra. Furthermore, we do not think the Supreme Court ever intended the tests which it applied in the Sanford case to be controlling without exceptions. For instance the principal test applied in the Sanford case was whether the particular transfer was of a type which would cause the property to be included in the gross estate for estate tax purposes. The Supreme Court recognized that even this test has its exceptions, one of which is a transfer in contemplation of death. Such a transfer would be subject to both estate tax and gift tax, with a credit being given on the estate tax for the gift tax paid. So it is reasonable to suppose that any secondary test which might be applied to determine gift tax liability would also have its exceptions. In any event, as the court said in Herzog v. Commissioner, supra, we need not now decide whether the trustees or the beneficiaries would be secondarily liable for the tax as donees if the donor failed to pay.

Petitioner’s assignments of errors (a) and (b) are not sustained. As to the matters therein contested the Commissioner’s determination is approved.

Reviewed by the Board.

Decision will he entered wnder Bule 50.

       Article 3 of Regulations 79, 1936 edition * * * is hereby amended by striking out the second and third paragraphs thereof reading as follows:
      As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to cause the beneficial title to be revested in himself, the gift is complete. But a transfer (in trust or otherwise), though passing both legal and beneficial title, is still in essence merely formal so long as there remains in the donor a power to cause the revesting of the beneficial title in himself, and the gift, from the standpoint of substance, remains incomplete during the existence of the power. * * *
      and substituting in lieu thereof the following:
      As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change the disposition thereof, whether for his own benefit or for the benefit of another, the gift is complete. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over the disposition thereof, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and their scope determined.
      A gift is incomplete in every instance where a donor reserves the power to revest the beneficial title to the property in himself. A gift is also incomplete where and to the extent that a reserved power gives the donor the right to name new beneficiaries or to change the interests of the beneficiaries as between themselves. * * *
      The relinquishment or termination of a power to change the disposition of the transferred property, occurring otherwise than by the death of the donor (the statute being confined to transfers by living donors), is regarded as the event which completes the gift and causes the tax to apply. * * *


author: ARUNdeul :

text:
    Ronrico Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103859.
    Promulgated July 31, 1941.

      Douglas D. Felix, Esq., for the petitioner.

      F. L. Van Haaften, Esq., for the respondent.
   OPINION.

ARUNdeul :

The parties have agreed that $19,660.94 preproduction expenses claimed as a deduction by petitioner are not deductible, and that “other expenses” of $2,095.25 and directors’ compensation of $8,309 claimed by petitioner as deductions are deductible. In the event our decision is that petitioner received income from sources within the United States, these two last named expenses are to be allocated in accordance with the allocation made in the deficiency notice herein.

The principal issue in this case is whether the petitioner, a foreign corporation, had gross income from sources within the United States during the taxable year on which it is taxable under sections 231 (a) and 119. of the Revenue Act of 1934. The respondent proposes to tax petitioner on its revenues from the sale of its Ronrico rum to McKesson & Bobbins, Inc., alleging that the sales from which the income arose were made in the United States. Both parties seem agreed that the place of the sale indicates the geographical source of the income, Compania General v. Collector, 279 U. S. 306. Thus the narrow point of contest is: Where, viewing the contracts, orders, and conduct of the parties thereunder, did the sales of petitioner’s rum take place?

At the outset, we may discard as without significance the circumstance that negotiations leading to, and the execution of, the agreements, transpired in this country. No sale was effected by these transactions; they were merely preliminary to the actual sales and are important only in that the substance of the contracts governed the conduct of the parties in their more significant dealings. These contracts employ terms of well recognized commercial usage and providé for c. i. f. sales. By this term it is understood that the seller shall place the goods to be sold aboard a common carrier, prepay the freight, procure proper insurance on the goods, deliver the bill of lading to the buyer, and collect a lump price which includes freight and insurance costs which the seller has paid. Under such contracts title to the goods and the risk involved pass to the buyer at the point of shipment provided the shipper has complied with the requirements set out. Thames & Mersey Insurance Co. v. United States, 273 U. S. 19; Williston on Sales (2d ed. 1924), sec. 280c; Commissioner v. East Coast Oil Co., 85 Fed. (2d) 322, 323. The buyer is obligated thereupon to pay the agreed price when the documents are delivered to him in proper form, even though they arrive before the goods. Arctic Ice & Coal Co. v. Southgate, 287 Fed. 48; Seaver v. Lindsay Light Co., 233 N. Y. 273, 276; 135 N. E. 329.

Sales under the agreement in the instant case followed the c. i. f. pattern provided. Orders were transmitted by the purchaser to the petitioner in Puerto Bico indicating the quantity of rum desired, the point of destination and, in most instances, the vessel to be used in shipment. The petitioner in filling these orders appropriated to them rum which was kept in bulk, and it bottled, packed, and shipped the quantity ordered. It procured the necessary shipping documents and insurance and forwarded these to the purchaser. The sale was thereupon consummated. The petitioner had then completed its performance of the contract of sale and was entitled without more to be paid by the purchaser. The final acts essential to the sale—the shipment of the goods and the forwarding of the documents—thus took place in Puerto Eico, and it was there that we must regard the sale as made.

The present case, so far considered, is largely similar to East Coast Oil Co., S. A., 31 B. T. A. 558; affd., 85 Fed. (2d) 322. There the taxpayer, a Mexican corporation, sold oil under c. i. f. contracts for shipment and use in the United States. We held that since the sales were completed in Mexico the profits therefrom were not from sources within the United States. It is there stated:

* * * These sales were made under c. i. f. contracts (often Judicially defined) ; that is, contracts in which the agreed price includes cost of goods, insurance upon them during transit, and the freight from point of shipment. Under such contracts, the seller has performed his part when he has loaded the goods on the carrier, secured the insurance, and forwarded to the purchaser the proper shipping documents. At that time, and at the place of shipment, title passes to the purchaser; thereafter the goods, and the risks, are his. The record shows that petitioner fully performed in Mexico all its obligations under these contracts. It follows that property in the oil passed in Mexico to the purchasers, and the sales were there made. Consequently, the profits from those sales, made without the United States, are not subject to the tax respondent seeks to impose.

An added circumstance in the present case requires some mention. The bills of lading and insurance policies in all save two of the sales here in question, unlike those in the strict c. i. f. transaction, were made out in the name of the shipper or to his order, thereby leaving in him, after shipment, title to the goods which otherwise would have passed then. Strictly considered, therefore, title to petitioner’s rum did not pass in these transactions until the delivery of the bills of lading to the buyer in the United States. It is well recognized that where this method of dealing is followed only for the purpose of giving some security to the seller, it does .not prevent the passage of beneficial ownership and risk in the goods to the buyer at the point of shipment. Harper v. Hochstim, 278 Fed. 102, 104; Mee v. McNider, 109 N. Y. 500; 17 N. E. 424; Adams v. Grundy & Co., 252 Mass. 135; 147 N. E. 598; Ruttonjee v. Frame, 205 App. Div. 354; 199 N. Y. S. 523; Smith Co., Ltd. v. Moscahlades, 193 App. Div. 126; 183 N. Y. S. 500; Williston on Sales (2d ed. 1924), sec. 280 c-e. In the present case the agreements provided for c. i. f. sales. The documents were discounted, forwarded and paid by the purchaser, usually before the arrival of the goods. These circumstances indicate that the parties did not intend to accomplish a sale of the goods at the point of destination. The ownership was the purchaser’s from and after the time of shipment and payment was made, not at the time of the arrival of the goods but earlier, when the documents were received. Cf. Cundill v. A. W. Millhauser Corporation, 257 N. Y. 416; 178 N. E. 680.

Considering these facts it must be concluded that the parties did not intend, by taking the documents in the shipper’s name, to change the time when ownership customarily passes, and accordingly the conclusion which we have reached above is not altered.'

Accordingly, our holding on the issue stated must be for the petitioner.

As the petitioner made no sales to anyone in the United States other than to McKesson & Robbins, Inc.,' it follows that it had no income from sources within the United States. Accordingly, an alternative issue as to liability for excess profits tax need not be decided.

Decision will be entered, for the petitioner.


author: Sternhagen:

text:
    Estate of William Macpherson Hornor, Deceased, Julia C. Hornor, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102931.
    Promulgated July 31, 1941.

      F. Raymond Wadlinger, Esq., for the petitioner.

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

Sternhagen:

1. The petitioner contests the Commissioner’s inclusion in the gross estate of the value of the real properties held in trust after the transfer in 1935 by decedent and his wife as tenants by the entirety. Decedent had originally acquired the properties individually and had then transferred them into entirety ownership. The propriety of the inclusion in the gross estate seems clear upon any one of several grounds.

The Commissioner has held that the transfer by the decedent to the trust in 1935 was made in contemplation of death. The transfer was less than two years before the death, and the statute, section 302 (c), Revenue Act of 1926, expressly presumes that it was made in contemplation of death “unless shown to the contrary.” The evidence fails to show to the contrary, and for this reason, if for no other, the property transferred is within the gross estate.

Had the property been held directly by the decedent and his wife as tenants by the entirety, it would have been within the gross estate by virtue of section 302 (e) of the Revenue Act of 1926, as an interest in property “held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse.” Tyler v. United States, 281 U. S. 497; United States v. Jacobs, 306 U. S. 363. The petitioner seeks to escape this provision of the statute by reason of the intervention of the trust set up in 1935. But, other than the creation of a purely legalistic title in fche spouses and tbeir son as trustees instead of the spouses alone as owners, the trust, for present purposes, accomplished nothing. Until the first decedent died, it was revocable; and until both settlors died, the income was distributable to them. These reservations deprived the trust of substance sufficient to withhold it from the gross estate. A trust created by joint tenants or tenants by the entirety has no greater force to keep the property from the gross estate of one of the settlors than would a similar trust created by an individual. Eevocability and reservation of income for life leave the property in the settlor’s gross estate as effectively in one case as in the other. Property held in a revocable trust is within the gross estate, Porter v. Commissioner, 288 U. S. 436; Reinecke v. Northern Trust Co., 278 U. S. 339; Chase National Bank v. United States, 278 U. S. 327. So is property of which the decedent has a possibility of reversion, Helvering v. Hallock, 309 U. S. 106.

All of these considerations unite to require that the property held in trust as the result of the transfer by decedent and his wife as tenants by the entirety be included within his gross estate. The Commissioner’s determination is sustained.

2. Three items were included by the Commissioner in the gross estate, of which one, amounting to $885, should, it is stipulated, be eliminated from the gross estate.

a. The amount of $4,900 was held in the trustees’ bank account, having been transferred by decedent and his wife from their entirety bank account, where it had been deposited upon its receipt by them as rents from the real property held in the name of the trust. The petitioner contends that the amount may not be included in the gross estate because it belonged to the trustees. The answer is the same as that which requires the real property to be included in the gross estate, i. e., that the trust may not be recognized as providing insulation against the tax.

b. This is likewise the decision in respect of the $281.70 which was received by the decedent and his wife from the fire insurance company as a distribution of earnings attributable to the deposited premiums. The petitioner’s contention, that because the insured properties were owned by the trust, the distributions may not be attributed to the husband and wife so as to be included within the husband’s gross estate, must be rejected.

The determination as to the two items is sustained.

3. When the trust was created in 1935 and the entirety property was transferred to it by the decedent and his wife, gift taxes were paid amounting to $55,673.11, of which the decedent paid $11,457.38 and the wife $44,215.73. The petitioner, on the estate tax return, took as the credit provided by Revenue Act of 1932, section 801, the entire amount of $55,673.11. The respondent, however, disallowed the $44,215.73 paid by the wife, and thus reduced the credit to $11,457.38, paid by the decedent.

While ordinarily a deduction for taxes is only available to him who pays it, this is not a deduction but a credit for the manifest purpose of avoiding multiple tax in respect of the same transfer. The gift tax and the estate tax are cognate, and an inter vivos transfer of property which by special statutory provision is included in the gross estate and thus subject to the estate tax is not independently treated as subject to an entirely separate gift tax. To impose both taxes without regard to each other would operate so harshly as to justify the belief that such an intention would be unmistakably expressed. Instead, the contrary intention is clearly indicated by the section. We think that the tax of $55,673.11 paid upon the gift must be credited in the manner provided by the section against the estate tax, notwithstanding the fact that $44,215.73 was paid by the wife, who was the other tenant by the entirety.

The determination disallowing the credit is reversed.

4. Apparently the gift tax just considered was paid for the decedent after his death and carried interest for late payment. The total amount of interest so paid was $694.49, of which $568.37 was attributable to the period between the due date and the death. The Commissioner disallowed the rest. This is correct, since the interest which accrued after the taxpayer’s death can not be regarded as a claim against the estate, Florence Scofield Stone et al., Executrices, 38 B. T. A. 51 (reversed and remanded, C. C. A. 2d Cir., on stipulation not covering this point): Old Colony Trust Co. v. United States, 15 Fed. Supp. 417.

5. The petitioner contests the inclusion in the gross estate of more than one-half of the amounts held by the trustees as undistributed income and rents. This contention is founded upon the joint interest of decedent and his wife in the trust, or the entirety interest in the real properties placed in trust. In either aspect, the inclusion of the entire amount in the husband’s estate was proper. Since the trust may for present purposes be properly ignored, as has been held, the interest in the income from the properties was held either jointly or by the entirety. If the trust were not to be ignored, nevertheless the income was distributable jointly to petitioner and his wife, and hence this joint property is by the same statute to be included within the gross estate. So, in any event, there is no ground upon which any part of this amount may be excluded from the gross estate.

The Commissioner’s determination is sustained.

6. Each of the three bank accounts described in the findings was owned jointly or by the entirety and is, therefore, subject to the considerations heretofore stated and properly within the gross estate. The Commissioner’s determination is sustained.

7. The value of the perpetual fire insurance policy covering real estate transferred by the entirety to the trust is for the same reasons properly within the gross estate. The Commissioner’s determination is sustained.

8. The residence property had been owned by the decedent, and its subsequent conveyance by him to his wife in 1921 was without consideration. Therefore, her entirety ownership at the time of his death does not serve to keep any part of its value from his gross estate. The Commissioner’s determination is sustained.

9. The $250.78 expenses of administration paid by the executrix is conceded by respondent in his brief to be a deduction.

In summary, the determination is sustained except for the $885 in item 2, which is to be excluded from the gross estate, the gift tax credit of $44,215.73 of item 3, which is to be allowed, and the $250.78 of item 9, which is to be deducted.

Reviewed by the Board.

Decision will be entered wider Rule 60.

       SEC. 801. CREDIT OE GIRT TAX ON ESTATE TAX.
      Section 301 of the Revenue Act of 1926 is amended by inserting after subdivision (a) a new subdivision to read as follows :
      “(b) (1) If a tax has been paid under Title III of the Revenue Act of 1932 on a gift, an'd thereafter upon the death of the donor any amount in respect of such gift is required to be included in the value of the gross estate of the decedent for the purposes of this title, then there shall be credited against the tax imposed by subdivision (a) of this section the amount of the tax paid under such Title III with respect to so much of the property which constituted the gift as is included in the gross estate, except that the amount of such credit shall not exceed an amount which bears the same ratio to the tax imposed by subdivision (a) of this section as the value (at the time of the gift or at the time of the death, whichever is lower) of so 'much of the property which constituted the gift as is included in the gross estate, bears to the value of the entire gross estate.”


author: Hill:

text:
    Reginald B. Parsons, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97908.
    Promulgated July 31, 1941.

      Charles T. Donworth, Esq., for the petitioner.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

Hill:

The first issue is whether or not petitioner is taxable on the entire income of trusts A and B. Petitioner contends that these trusts were established in complete discharge of all obligations which he owed his first, wife. He maintains that the Latvian laws and the trusts have given him a complete discharge from all duty to support his first wife. Respondent argues that petitioner had a continuing obligation under the laws of Latvia to support his wife. He contends also that the trust agreements constitute continuing obligations to support petitioner’s first wife. He maintains that in any event petitioner has not shown by “clear and convincing proof” that the law of Latvia gave him a complete discharge of duty to support his former wife.

It is apparent that disposition of this issue must be controlled by one of two Supreme Court cases, Helvering v. Fitch, 309 U. S. 149, or Helvering v. Fuller, 310 U. S. 69.. The former case laid down the rule that the taxpayer must give clear and convincing proof that the local law and the trust instrument gave the taxpayer a complete discharge of all obligation to support his divorced wife. In the latter case the Supreme Court applied the doctrine of Helvering v. Fitch, supra, and held that the taxpayer had shown that local law and the trust instrument imposed no obligation upon him to support his former wife.

The local law applicable with respect to this issue is that of Latvia. The pertinent statutes are sections 41, 49, 50, 56, 60, 63, 67, and 76 of Lettlands Book of Civil Laws.

The doctrine of Helvering v. Fitch, supra, imposes upon petitioner the burden of proving that both the law of Latvia and the trust instruments gave petitioner a complete discharge of the duty to support his first wife. It appears on the facts here that the obligation, if any, of petitioner to support his first wife ceased upon her remarriage within a few days after the divorce in so far as • such obligation may have existed by reason of the laws of Latvia. Sec. 60, Lettlands Book of Civil Laws, supra. Thus, if petitioner had an obligation to support his first wife in any of the taxable years, the obligation must have arisen from contract.

The controlling agreements are trusts A and B. Each of these trusts refers to a prior property agreement and the creation of each trust discharges an obligation of petitioner to perform a duty imposed by the property agreement. The income of the trusts, however, discharges no duty of petitioner to support his first wife. The trusts themselves are irrevocable and contain no guaranty of income. The trusts, therefore, are not mere security devices for the payment of obligations. See Helvering v. Leonard, 310 U. S. 80.

Trust A does not lack substance and petitioner has no such control over its corpus which might bring it within the scope of Helvering v. Clifford, 309 U. S. 311. The fact that there is a possibility of reverter does not give petitioner such power over the trust as to make him taxable as its virtual owner. Petitioner at no time had the power to revest the corpus of trust A in himself, and section 166 of the Revenue Acts of 1934 and 1936 is therefore not applicable. Sections 167 (a) (1) and (2) of the Revenue Acts of 1934 and 1936 do not apply for the reason that no income could be accumulated for or distributed to petitioner under this trust.

Trust A, however, was created “for the benefit of [Geneva Parsons] and Reginald Stribling Parsons.” The parties have stipulated that the sum of $3,750 annually may be deemed to have been devoted to the support of the son from the income of trust A. This sum was annually paid in discharge of petitioner’s obligation to support his minor child and must be taxed as income of petitioner in each of the taxable years. Helvering v. Schweitzer, 296 U. S. 551. We hold that the income of trust A in excess of $3,750 in each of the taxable years is not taxable to petitioner.

Trust B differs from trust A in that under its terms petitioner’s first wife receives a stipulated sum annually out of income of the trust and upon the death of the first wife the corpus was to be transferred to a trust of which petitioner was the beneficiary, or if that trust were not existent, was to revert to petitioner..

The income of this trust does not discharge a legal obligation of petitioner and can not be taxed to him under the doctrine of Helver ing v. Fitch, supra. See Helvering v. Fuller, supra. So far as the legal obligation theory is concerned, trust B stands on the same footing as trust A.

The fact that the corpus of trust B will revert to petitioner or be transferred to a trust in his favor is no reason for the application of Helvering v. Clifford, supra. This was a trust for a lifetime with a beneficiary who was no longer a member of the “intimate” family group. Petitioner exercised no control over the corpus and was not trustee. Although respondent has suggested the applicability of sections 166 and 167 of the Revenue Acts of 1934 and 1936, the facts that petitioner had no power to revest corpus of trust B at any time and that no part of the $6,000 income could be accumulated for his benefit or distributed to him are sufficient to deny application of those sections. Accordingly, we hold that petitioner is not taxable on that part of the income of trust B which was paid in the taxable years to the woman who had been petitioner’s first wife.

The second issue is whether or not the sum of $1,000 a month paid to petitioner’s second wife from income on certain securities deposited in escrow by petitioner is taxable to petitioner. Petitioner contends that the legal effect of the annulment of his second marriage was a judicial declaration that no marriage had ever existed and that therefore he was never under any obligation to support his second wife. He maintains that the payments under the escrow agreement were gratuitous and for that reason were not taxable to him.

Adopting, for the sake of argument, petitioner’s premise that the payments were gratuitous, still we are of the opinion that they were includable in his gross income. Petitioner retained legal title to the securities and merely made an irrevocable assignment of a portion of his income. He directed the distribution of the fruit while retaining ownership of the bearing tree. The situation is not unlike that which would arise if petitioner had paid the amounts to the former wife from income on securities not in escrow. The cases of Helvering v. Horst, 311 U. S. 112; Helvering v. Eubank, 311 U. S. 122, and Lucas v. Earl, 281 U. S. 111, clearly govern this matter and require that the amounts be taxed to petitioner. We hold that the monthly payments to the second wife from the escrowed securities are taxable to petitioner.

As a further basis for our holding on this issue we note that by the contract entered into between petitioner and his second wife prior to the annulment petitioner assumed an obligation to pay her $1,000 a month. The contract is referred to in the escrow agreement and the $1,000 monthly income from the securities in escrow was clearly paid in discharge of the obligation assumed by petitioner in the agreement made prior to the annulment. Each payment of income from the escrowed securities to the wife discharged pro tanto the obligation of petitioner to pay her $1,000 a month and the payments are taxable to petitioner under the general principles enunciated in Douglas v. Willcuts, 296 U. S. 1. This is true in spite of the provision in the contract made prior to the annulment which would allow petitioner to escape personal liability in the event he were in such reduced circumstances that he could no longer earn a suitable living for himself.

The final issue is whether or not capital gains realized upon sale of securities of the 1932 trust of which petitioner is the sole beneficiary are taxable to petitioner. Petitioner contends that under New York law capital gains must be added to corpus and therefore can not be taxed to him, the life beneficiary. Respondent argues that these capital gains are taxable to petitioner under section 22 (a) of the Revenue Acts of 1934 and 1936.

In his notice of deficiency respondent included the amount of the capital gains from the sale of securities of this trust in petitioner’s gross income for the years 1936 and 1937. In his answer to petitioner’s petition in this proceeding, respondent made claim for an additional deficiency for the year 1935 based upon the inclusion of capital gains of this trust for that year in petitioner’s gross income. Petitioner’s reply pleaded the statute of limitations as a bar to the increased deficiency for 1935. We hold that sections 272 (e) and 277 of the Revenue Act of 1934 permit respondent to request an additional deficiency and give us jurisdiction to determine such deficiency, even though asserted after the time within which the statutory period might have expired if the statute of limitations had not been suspended by section 277.

We are of the opinion that the capital gains of the 1932 trust are taxable to petitioner under section 22 (a) of the Revenue Acts of 1934 and 1936. Petitioner must be regarded as in substance the owner of the trust corpus. While it seems apparent that the trust is irrevocable, petitioner is entitled to the entire income and has the right to dispose of the corpus by will. In addition, he may direct the trustee to sell or otherwise dispose of the securities comprising the corpus of the trust and cause the trustee to consult with him or his nominee before investments or reinvestments should be made. These rights are substantial and, we believe, sufficient to cause the income to be taxable to petitioner under Helvering v. Clifford, supra.

The fact that the trust is for petitioner’s lifetime does not change the result. Morton Stein, 41 B. T. A. 994. On our theory of this issue it becomes unnecessary to consider the question of whether Few York law and the trust instrument require the capital gains to be added to corpus. We hold that the capital gains of the 1932 trust are taxable to petitioner in each of the taxable years. ■

Decision will be ,entered under Bule 50.

       41. The court can declare a divorce only in cases provided by law.
      Note: Marriages sanctioned by Bolshevik institutions in Lettland remain in force. After the establishment of a marriage bureau at the domicile of the couple such cases of divorce must be registered anew. Proof of the legal divorce must be submitted by copy of the decree or by witnesses. In doubtful cases divorce may only be effective by order of the court.
      * * * * * * *
      49. Couples have the right to a divorce in case cohabitation becomes intolerable. In such cases divorce may be granted independent from the guilt of the man.
      In case only one party causes the intolerant conditions, only the other party has a right to sue. If both parties are at fault or neither one, each party can sue for divorce.
      50. Uninterrupted separation for three years is ground for divorce.
      * * * * * * *
      56. Parental authority over the children belongs to the one who was left with the children. Each one of the parents has the duty to support the children who have been assigned to the other parent and must contribute to their support as circumstances permit.

        *******

      60. After divorce the wife has the right, if without means, to demand support. The same right has the man if without means and the wife has sufficient means.
      *******
      The duty for support of the spouse lapses if he enters a new marriage.
      *******
      63. Complaints about annulment of marriage or for divorce (except those mentioned in Art. 80) and for separation are adjudicated by the civil court by procedure founded upon the general promulgations for civil process with the exception of the following:
      * * - * * * * *
      67. Demand for custody by the plaintiff of the children or the right for retaining the family name in a case for annulment, for divorce or for separation, must be part of the complaint. '•
      .Other demands, especially.for alimony, are not permitted to be part either of the complaint or of the cross-complgint.
      * * * * * - * *
      76. In case the marriage has been declared as annulled, divorced or as separation of the spouses, the verdict must point out who has the custody of the children.
      The decision also relates to matters under Art. 80.
      In case of divorce on the ground of guilt of either or both spouses the verdict must refer to it.

       SEC. 272. PROCEDURE IN GENERAL.
      ****** *
      (e) Increase of Deficiency After Notice Maided.—The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount or addition to the tax should be assessed—if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.
      SEC. 277. SUSPENSION OF RUNNING OF STATUTE.
      The running of the statute of limitations provided in section 275 or 276 on the mailing of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under section 272 (a)) be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Board, until the decision of the Board becomes final), and for sixty days thereafter.


text:
    Robert W. Wilmot, Petitioner, v. Commissioner of Internal Revenue, Respondent. Caroline Stanton Wilmot, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. S. Hecht, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lynne Watkins Hecht, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 105169, 105170, 105171, 105172.
    Promulgated July 31, 1941.

      Charles M. Trammell, Jr., Esq., for the petitioners.

      James L. Backstrom, Esq., for the respondent.
   OPINION.

Murdock:

The amount of the deduction in controversy in each of these cases is not more than one-half of $9,749.84, the amount disallowed by the Commissioner. This is claimed as an “indemnity or underwriting loss” in the assignments of error. The participants in the two syndicates acted for themselves, not as guarantors for others. They agreed to purchase up to a specified number of shares of stock and that is what they did. They did not guarantee or indemnify anyone. The cases cited by the petitioners relating to guarantee and indemnity contracts, where the guarantor has to pay the debt of another, are not at all in point.

The above really disposes of the only issue raised by the pleadings. The petitioners also argue in their briefs that these syndicates were associations taxable as corporations and the participants had losses upon dissolution. This could be denied because it was not placed in issue by the pleadings. But it is without merit in any event. The syndicates bore little resemblance to and never professed to be corporations. They had nothing equivalent to stock, held no regular meetings, provided for no transfer of interests, held title to no property as far as the record shows, and did not in fact limit the liability of the participants to the number of shares each agreed to purchase. Cf. Morrissey v. Commissioner, 296 U. S. 344; Commissioner v. Whitcomb Coca-Cola Syndicate, 95 Fed. (2d) 596, affirming 35 B. T. A. 1031; Harry E. MacConaughey, 41 B. T. A. 408; American Cities Power & Light Corporation, 38 B. T. A. 74; E. L. Cord, 38 B. T. A. 1372; Pierre S. duPont, 37 B. T. A. 1198; affd., 118 Fed. (2d) 544.

The determination of the Commissioner is supported by the statute and decisions. Section 1001 (a) (3) of the Eevenue Act of 1936 defines “partnership” to include a syndicate, pool, group, and joint venture. This syndicate was like a partnership in many respects. Section 113 (a) (13) provides that property distributed in kind to a partner takes as a basis in the hands of the partner an allocable part of the basis for his interest in the partnership. Since this was a complete liquidation of the partnership, the shares would take the entire basis. No gain or loss is recognized under such circumstances until the stock is sold. Annie Laurie Crawford et al., Executors, 39 B. T. A. 521; Regulations 94, art. 113 (a) (13)-2.

Decision will be entered, for the respondent.


text:
    James E. West, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101404.
    Promulgated August 5, 1941.

      H. B. Jones, Esq., and George O. Kiwnear, Esq., for the petitioner.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

Hill:

This case was submitted upon testimony, exhibits, and a written deposition offered at the hearing. Eespondent moved to strike a portion of the deposition relating to the divorce proceedings. We reserved decision on this motion. We hereby deny the motion and have admitted testimony material to the issues as reflected in our findings of fact.

The first issue is whether or not petitioner was entitled to report income and deductions in the taxable year on the community property basis. Petitioner contends that the decree of the Superior Court dated April 14, 1938, vacating its former decrees of interlocutory and absolute divorce, had the effect of eradicating completely the divorce decrees so that during the year 1937 petitioner was married and entitled to file on the community property basis. He maintains that full credit must be given to the later decree and contends that the decree rendered void the property settlement entered into by petitioner and his wife in contemplation of divorce. Eespondent argues that we are bound to recognize the divorce decrees and ignore the vacating decree. He contends that the Court was without jurisdiction to set aside its former decrees. He argues further that, even if we should find that the vacating decree was valid, it could have no effect on petitioner’s tax status in 1937, since the decree should not be retroactively applied in a manner detrimental to the rights of the Federal Government. By amended answer respondent set up the further defense of estoppel.

The interlocutory and final decrees of divorce entered April 9 and October 16, 1935, respectively, in the case of petitioner as plaintiff and his wife as defendant were valid and effective decrees of a court of competent jurisdiction. The parties hereto so concede. By virtue of those decrees petitioner became an unmarried person on October 16, 1935, and continued as such throughout the taxable year 1937. By virtue of the agreement between petitioner and his wife in settlement of their property rights and the approval thereof by the court in the interlocutory and. final decrees of divorce all of their property, except certain household furniture, became the separate property of petitioner. Such agreement and decrees disposed of all community interest in the property and there was no property owned in common or jointly by petitioner and his former wife after the date of the final decree of divorce and prior to the end of the taxable year. All income which came to petitioner during the taxable year 1937 from investments, business transactions, salary, or any other source was his separate property when received and unquestionably continued as such until the court entered its decree on April 14, 1938, vacating the final decree of divorce and all other proceedings in the divorce action. Prior to the entry of the vacating decree the (Federal) income tax act of 1936 imposed a normal tax and surtax on such income as the separate property of petitioner and created an obligation on him to pay the same on such amount as should be ascertained by computation in accordance with the provisions of the taxing act. The tax was due March 15, 1938, but petitioner secured an extension of time ' in which to report his income and pay the tax. The return of his income for the taxable year 1937 was filed June 15, 1938—subsequent to the entry of the vacating decree.

Respondent contends that the vacating decree was void for want of jurisdiction of the court to enter it and cites Washington statutes and decisions of the Supreme Court of that state which he claims support his contention. The statutes and cases cited do not, in our opinion, negative the jurisdiction of the court to vacate the decree of divorce on such state of facts as it acted upon in the proceeding between petitioner and his former spouse. We recognize, therefore, the validity of the vacating decree as between petitioner and Felita M. West. . It was effective as between them to the full extent of its provisions and as between them it expunged entirely the divorce proceedings and property settlement. It did not and could not affect the Government’s right to the tax imposed by Federal statute on the income in question as the separate property of petitioner. This tax was imposed and the right of the Government thereto was vested on the basis of the ownership of such income in the taxable year and prior to the entry' of the ’ vacating decree. The separate ownership of such income by petitioner at the time of the vesting of the Government’s right to tax it as such resulted directly from the property settlement between petitioner and his wife and the interlocutory and final decrees of divorce entered by the court in 1935. The validity and effectiveness of the decrees to that end are conceded by the parties hereto.

The petitioner contends that the effect of the vacating decree entered April 14, 1938, was to wipe out completely all prior proceedings and decrees in the divorce action between petitioner and Felita M. West and to effectuate retroactively the uninterrupted marital and property status that would have obtained had the divorce proceedings not been instituted; also, that the vacating decree retroactively annulled the right of the Government to tax as the separate property of petitioner the income which he received as such in the taxable year.

A number of cases are cited and relied upon by petitioner in support of such contention, but in none of the cases cited is it held that the intervening rights of a third party in respect to the subject matter of a valid decree can be adversely affected by its vacation. On the other hand many of the cases cited specifically state that such right can not be so affected.

Among the cases cited by petitioner in support of his contention are Githings v. Githings (Colo.), 239 Pac. 1023, and Dane v. Daniels, 28 Wash. 155; 68 Pac. 446. In the Githings case the court vacated a decree of divorce after a lapse of 14 years from the date of such decree on the joint request of both parties to the divorce action. In that case the court said:

No rights of third parties are involved. While we have no statute upon the subject—at least our attention is not called to any—the court had inherent jurisdiction at any time after the decree was rendered, and where only the rights of the parties themselves are concerned, to set aside and annul this decree of divorce, when the parties as here, joined in the written request therefor.

The case of Dane v. Daniels involved the validity of a vacating decree. The decree vacated in that case was a void decree for want of jurisdiction over the community because of lack of service on one of the spouses. The proceeding to vacate the decree in that case was an adverse proceeding. In support of its action in entering the vacating decree the court said in part:

It is not shown that any one has obtained rights or interests by reason of any act or neglect on her (plaintiff’s) part, but the subject-matter in litigation is in the same condition with respect to all parties before the court as it was when she commenced this action. * * *

It is our opinion that respondent properly determined that for purposes of the Federal income tax for the taxable year 1931 the income involved herein was the separate property of petitioner. We so hold.

The second issue is whether or not respondent erred in .denying petitioner’s claimed deduction for a loss on drums purchased for resale but abandoned in the taxable year as unfit for sale. The amount of the claimed loss for which petitioner took a deduction was $1,018. We have found that he sustained a loss in the taxable year in respect of such drums in the amount of $620. It follows that petitioner is entitled to a deduction for such loss in that amount and that respondent is sustained in disallowing the deduction for the remainder of the claimed loss.

The final question is whether or not petitioner is entitled to a deduction from gross, income of the taxable year for expenditures for legal fees and accounting services. Petitioner has not shown that these items were ordinary and necessary expenses paid or incurred in carrying on a trade or business. The proof, in fact, indicates that the expenditures were personal in nature and hence denied deductibility by section 24 (a) (1) of the Revenue Act of 1936.

Reviewed by the Board.

Dedsion will be entered winder Ride BO.


author: Leech :

text:
    E. M. Funsten, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102068.
    Promulgated August 5, 1941.

      Stanley S. Waite, Esq., for the petitioner.

      Carroll Walker, Esq., for the respondent.
   OPINION.

Leech :

Kespondent contends that these two sales of stock by petitioner were not sales on the installment plan. He argues that the obligation in each case made no definite provision for installment payments but merely bound the purchaser to pay the total amount on or before five years from the date of purchase, and that the provision for the application of dividends paid on the stock to the reduction of principal of the notes was a purely contingent obligation which would only arise in the event that a dividend was declared and paid. He takes the position that unless the transaction is an installment sale the gain thereon is taxable in full in the year of the transaction and does not fall within the provisions of section 44 (a) or (b) of the Eevenue Act of 1936.

In ⅛⅛ respondent overlooks the fact that the sales here are not by an individual who regularly sells personal property on the installment plan but are casual sales of personal property. The right to return the income therefrom on the installment basis is to be determined under section 44 (b), which does not require that the sale be one providing for the payment of the purchase price in fixed installments, but requires merely that it be a casual sale of personal property for a price exceeding $1,000, where the initial payments do not exceed 30 percent of the selling price. That section defines “initial payments” as the payments received in cash or property other than the evidences of indebtedness of the purchaser during the taxable period in which the sale is made.

It is quite evident that the transactions in question are squarely within the provisions of subsection (b) since, we have decided that payments made within the taxable year of the sale, although not required in the contract, must be considered as includable in the initial payment. Wagegro Corporation, 38 B. T. A. 1225; Mrs. W. M. Bludworth, 7 B. T. A. 495. The fact that casual sales such as those present, though not sales upon the installment plan, come within the provisions of subsection (b) appears to have been recognized by respondent. Article 44—1 of Regulations 94 provides in part that:

The income from a casual sale or other casual disposition of personal property (other than property of a kind which should properly he included in inventory) may be reported on the installment basis only if (1) the sale price exceeds $1,000 and (2) the initial payments do not exceed 30 per cent of the selling price.

See also G. C. M. 1162, VI-1 C. B. 22.

Respondent argues that the decision of the present question is controlled by James McCutcheon & Co., 30 B. T. A. 1117; Thomas F. Prendergast, Executor, 22 B. T. A. 1259; and Walnut Realty Trust, 23 B. T. A. 850. We think none of these three cases are in point. In the McCutcheon case the sale was by a security company and manifestly occurred in the regular course of business. It did not fall within subsection (b) because it was not a casual sale and our denial of the right to return the income upon the installment basis was premised upon our holding that the transaction was not an installment sale. Wal/nut Realty Trust involved facts wholly dissimilar to those here. There the total consideration was received in the taxable year and the mere fact that a portion of it consisted of notes of others than the purchaser did not eliminate these notes as a' part of the initial payment and, upon that basis, such payment was far in excess of 30 percent of the purchase price. In Thomas F. Prendergast, Executor, the sale was of real estate to a corporation for a consideration consisting of two of its corporate $50,000 bonds payable ten years after date.' In that case neither were installments or an initial payment within section 44 (b), supra, contemplated and none was made. Here such payments were both contemplated and made.

We hold petitioner entitled to return upon the installment basis the capital gain realized upon these sales of stock.

Decision will be entered v/nder Bule 50.

       SEC. 44. INSTALLMENT BASIS.
      (a) Dealers in Personal Property.—Under regulations prescribed by the Commissioner with the approvel of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price.
      (b) Sales op Realty and Casual Sales op Personalty.—In the case (1) of a casual sale or other casual disposition of personal property (other than property of a hind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 30 per centum of the selling price (or, in case th'e sale or other disposition was in a taxable year beginning prior to January 1, 1934, the percentage of the selling price prescribed in the law applicable to such year), the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term “initial payments” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.


author: Opper:

text:
    Cumberland Portland Cement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101941.
    Promulgated August 5, 1941.

      George E. H. Goodner, Esq., Scott P. Or amp ton, Esq., and Paul E. Schaub, O. P. A., for the petitioner.

      John B. Stivers, Esq., for the respondent.
   OPINION.

Opper:

Considering first the related issues of depletion of minerals and of development expense, we have found the facts in petitioner’s favor as to the disputed extent of the limestone deposit apparently available for profitable removal. The result has been reached not so much through acceptance of petitioner’s contention that mineral deposits not subject to extraction within a 40-year period are valueless as on categorical evidence of the actual quantity of limestone present. That this appears to coincide approximately with the amount of anticipated use in 40 years, we must regard as accidental. Facts or estimates as to total cost, as to the value of surface land, of plant site, and of clay deposit, and as to the quantity of clay, being undisputed or not seriously contested, the allocation of the proportion of the investment applicable to the limestone and the ascertainment for purposes of measuring depletion of the cost applicable to each ton of mineral consumed is a matter of mere mathematical calculation. As its measure of depletion of development costs, petitioner advances an allocation of these costs as between limestone and clay which is undisputed, and then computes annual deductions upon the same assumptions as to mineral quantities as it used in figuring depletion of the mineral. For the same reasons it is our view that these figures maybe accepted. Petitioner’s computation of depletion deductions is accordingly approved.

We have accepted petitioner’s figures in the main on the depreciation question also. The parties are in agreement that the use of the “unit of production” method in arriving at the depreciation figure for each year was proper; and apparently respondent does not question petitioner’s selection of a barrel of “clinker”—a mixture of clay and limestone—as an appropriate unit. The parties are in dispute as to the probable life of the plant and as to the number of units which it should be assumed that the plant will produce during that life.

The finding which we have made as to the anticipated life of the plant as a whole is a conclusion drawn from the entire record. Testimony on behalf of petitioner was given by one of its officers. It was to the effect that “from our- experience and the replacements that have been made and those that are planned for the immediate future, we have knowledge that we could not expect more than 20 years for the life of that plant.” That is a somewhat less than satisfactory factual basis for a finding by the Board. Primrose Tapestry Co., 20 B. T. A. 702; Woodside Cotton Mills Co., 13 B. T. A. 266, 269. On the other hand, respondent’s witness, an engineer apparently familiar with plants of the general type to which petitioner belongs, had worked in plants where the equipment used “is quite old, in fact it varies probably between 25 and 30 years.” In a document filed earlier with respondent petitioner assumed for the useful “Entire Life” of its plant “1927-1951—23½ years.” On all the evidence the figure which we have adopted, 22½ years, seems to us a reasonably conservative estimate of probable useful life.

The apparently inadvertent use by petitioner of a full year for its operations at the time it commenced production, instead of the half year (or less) indicated by the facts, requires some change in the length of the period of past experience upon which the total units which the plant is capable of producing are to be estimated. We have used for that purpose all of the company’s history which appears in the record, thus adopting a 12^year period instead of the 12 years used by petitioner. The total number of units produced during that time of course likewise varies somewhat from the figure employed by petitioner. However, ascertainment of the average annual unit production in the past and multiplication of that figure by the years of anticipated life will give the figure which seems to us most nearly to approximate the total unit production which is reasonably to be expected from the plant. The cost of the plant being undisputed, the portion thereof attributable as depreciation to each unit is likewise merely a problem in arithmetic. And there being no dispute as to the number of units produced in each taxable year, the depreciation to be allowed for the years before us may readily be fixed.

On the last issue petitioner claims to be entitled to a credit under either section 26 (c) (1) or 26 (c) (2). Its contention under the former section is that the first and second mortgages to which its property was subject were contracts preventing it from declaring and paying dividends out of its earnings and profits. It constructs that conclusion as follows: The mortgages excepted earnings from the operation of the indentures until possession should be taken by a receiver, by the trustee or otherwise under the first mortgage; and until default, under the second. Petitioner argues that the functioning of a bondholders’ committee constituted the equivalent of the action necessary to bring the earnings and profits within the scope of the mortgaged property, and thereby to preclude their use for distribution as dividends. For the sake of the argument we may assume that to be true, although, as respondent points out, the bondholders’ committee did not take possession of the property, but acted in a purely advisory capacity, leaving the corporation and its officers to manage and operate petitioner. But, in any event, the action relied on is insufficient to satisfy the statutory requirement that the contract should in the first instance “expressly” deal “with the payment of dividends.” There is nothing in the contract making any reference to the declaration of dividends either before of after possession of the corporate property is relinquished by the debtor. Such action, of course, could have the practical effect of foreclosing the corporation from the ability to operate; and, among other things, incidentally, to declare dividends. But the statute requires that the contract expressly deal with the payment of dividends and no language in it has been or can be pointed out by petitioner which fulfills that condition. There are many other situations where as a practical matter a corporation1 is prevented from the declaration of any dividend, but, unless Congress has seen fit to include such a case within the carefully limited language of the sections authorizing the credit, it has been repeatedly held that the credit is not available. See, e. g., Crane Johnson Co., 38 B. T. A. 1355; affd. (C. C. A., 8th Cir.), 105 Fed. (2d) 740; affd., 311 U. S. 54.

Thus, when petitioner asks the rhetorical question: “Will any one seriously argue that this [bondholders’] committee would allow petitioner to pay dividends while it was in default as to principal and interest on its bonds?”, it is voicing what is perhaps the inevitable practical effect of the situation in which it found itself. But, as the Board pointed out in Belle-Vue Manufacturing Co., 43 B. T. A. 12, 16:

It is probably true that, under the circumstances and consistently with the spirit of the trust agreement and the contract extending the time for payment of the notes, no dividends would be declared by petitioner because the controlling trustee-creditors would not permit it; and that a request for such permission “would have been a vain and purposeless thing.” Kilby Steel Co., 41 B. T. A. 1237. But petitioner never agreed to refrain from declaring a dividend. « * * Even though its financial condition was an effective obstacle to any such payment, .the statute provides only for a contractual inhibition. * * * The directors, however, had full power to declare a dividend if the petitioner’s condition warranted it. It was the financial condition and not a contractual prohibition that prevented the payment of a dividend. Section 26 (c) (1) provides for no credit in such case.

There is a further attempt to rely on a contract in writing executed by the corporation in 1937, by reason of the inclusion therein of the phrase “continuing the agreement which has existed.” Since we have concluded that no such agreement existed or that, if it did, it was oral and not written, no arrangement made after the event can supply the missing requirement of a written agreement executed prior to May 1, 1936. Otherwise the meticulous care used by Congress in limiting the scope of the credit provisions could be completely frustrated.

Petitioner also claims that the sinking fund provisions of the indentures require the allowance of a credit under section 26 (c) (2) for portions of petitioner’s earnings paid or set aside to discharge indebtedness incurred prior to May 1, 1936. The amended agreement required deposit in a sinking fund of stipulated amounts for each barrel of petitioner’s product “manufactured and shipped.” In order to comply with the statute it must be found that this provision “expressly deals with the disposition of earnings and profits of the taxable year.” The Board has in several instances proceeded to great lengths in imputing to contractual provisions the intention expressly to deal with earnings and profits, and even went so far in Moloney Electric Co., 42 B. T. A. 78, as to meet with the disapproval of the Circuit Court on review (Helvering v. Moloney Electric Co. (C. C. A., 8th Cir.), 120 Fed. (2d) 617. However, in that case and in Michigan Silica Co., 41 B. T. A. 511, the Board was able to find in other provisions of the contract evidence that the parties intended that the payments in question should be made from earnings and profits of the taxable year.

In Moloney Electric Co., supra, the Board said (p. 87) :

The paragraph of the trust agreement set out in our findings does expressly deal with the disposition of earnings and profits of the taxable year even though the provision * * * taken from its setting, makes no specific reference to earnings and profits. It is apparent, however, the parties intended that petitioner’s net earnings and profits sliould be applied * * * toward the payment of the bonds * * *.

In Michigan Silica Co., supra, certain payments were to be made to a sinking fund “based upon the sand produced and sold during the preceding month. As showing that the payments were to be made out of the proceeds of sale”, the Board said (p. 513) :

* * * it was provided that in ease the company had not received payment for the sand sold, it might defer payment to the trustee until it had received such payment, but for not more than 60 days. It further provided that at such times as the trustee requested, petitioner must render an account of all sand sold and payments received therefor. * * *

In G. B. R. Oil Corporation, 40 B. T. A. 738. and Joell Co., 41 B. T. A. 825, the provision required application to the indebtedness of all of the debtor’s receipts. It was concluded that the greater must include the less and that within the receipts would be found all of the year’s earnings and profits.

It is impossible to discover any such aids to leniency in the present record. The amount to be paid was measured not by sales, but by shipments. There is no showing that the two coincided. For all we know, shipments could have been made to warehouses, to consignees, or for purposes entirely unconnected with sale. Payments may have borne no relationship whatever to quantity shipped, either because of credit terms, uncompensated losses in transit, or a host of other possibilities. The minimum payment was required, regardless even of any manufacture or of any shipment. We see no tenable foundation for a determination that payments to the sinking fund were so associated with earnings, profits or even receipts, either in theory or in practice, that it can be inferred that the parties intended the payments to be made out of earnings and profits, and that accordingly there is an express reference thereto. On the contrary, it is entirely evident that the payments in question were called for even though there were no receipts, much less earnings and profits; and, conversely, the sums due could rightfully be paid out of any source within the company’s command. As the Board said in C. A. Roberts Co., 44 B.T.A. 605:

⅜ * * payments will comply with the provisions of the notes regardless of the source from which the payments are made. Thus, the petitioner could have made payments on the notes from any source whatsoever and could have distributed all of its earnings of the taxable years without in any way violating provisions of the notes. * * *

We are accordingly compelled to reject petitioner’s claim under both subsections.

Decision will be entered under Rude 50.


text:
    H. G. Hill Stores, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105204.
    Promulgated August 6, 1941.

      Thomas A. Dub ourg, O. P. A., and Josef h M. Jones, Esq., for the petitioner.

      S. B. Anderson, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $2,790.74 in income tax for the calendar year 1937. The issues for decision are whether the petitioner is entitled to a bad debt deduction in the amount of $18,324.13 and a deduction of $4,900 on stock which became worthless. The facts as stipulated by the parties are hereby adopted as the findings of fact. The return in question was filed with the collector of internal revenue at New Orleans, Louisiana.

The petitioner owned 49 shares of the 50 shares of stock of H. G. Hill & W. E. Penick, Inc. (hereafter called Penick). The operations of Penick had been unprofitable. The petitioner had loaned money to Penick and the amount due the petitioner on December 27, 1937, was $131,934.29. The directors of Penick resolved on that day to transfer all of its assets, subject to its liabilities, to the petitioner “for a sum equal to the net book value of H. G. Hill & W. E. Penick, Inc. as of the close of business on the 29th day of December, 1937, as well as the cancellation by H. G. Hill Stores, Inc. of all indebtedness for advances made to H. G. Hill & W. E. Penick, Inc.” The stockholders of Penick approved and the petitioner agreed to accept the transfer on the terms stated. The transfer was made on December 29, 1937, at which time the value of the assets in excess of liabilities, excluding the debt owed the petitioner, was $21,388.37.

The petitioner eliminated the amount of Penick losses deducted on consolidated returns and claimed a bad debt deduction of the remainder, $18,324.13. It also claimed a deduction of $4,900, the cost of its Penick stock. The Commissioner disallowed both deductions on the ground that section 112 (b) (6) of the Revenue Act of 1936 applied. He does not question amounts or the year of worthlessness. His entire argument is that the amounts were not loans, but contributions of capital, and the transfer of December 29 was a distribution in liquidation within section 112 (b) (6). He cites no case in point. The facts, as stipulated, are that the advances created indebtedness.

The provisions of section 112 (b) (6), upon which the respondent relies, do not and were not intended to cover a sale or transfer of assets to a creditor. They provide that “No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation”, and they also specify at considerable length the circumstances under which a distribution is to be regarded as in complete liquidation. The distribution must be “in complete cancellation or redemption” of the stock. The present petitioner received no property from Penick as a stockholder. The property of Penick which it received was transferred to it, not as a distribution in liquidation of Penick, but for a stated consideration, “a sum” and the cancellation of remaining “indebtedness.” Penick distributed nothing to stockholders. It was insolvent, with a very large deficit, and had nothing to distribute to stockholders. It sold its assets to pay a part of its debts. Since the facts do not support the only basis advanced for the determination of the Commissioner, that determination must be reversed as to these two items. Cf. Houghton & Dutton Co., 26 B. T. A. 52.

Decision will he entered under Buie 50.