author: McMahon:

text:
    Lawrence A. Wagner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48987.
    Promulgated June 29, 1934.

      E. G. Pommerening, Esq., for the petitioner.

      F. A. Surine, Esq., for the respondent.
   OPINION.

McMahon:

The respondent asserts a deficiency in income taxes for the calendar year 1927 against the petitioner in the amount of $2,382.01.

The petitioner alleges that the respondent erred in refusing to allow as a deduction $15,000 on account of a loss incurred in connection with petitioner’s loan business.

The petitioner is an individual, whose address is the Plankinton Building, Milwaukee, Wisconsin.

In the latter part of 1926 the petitioner opened an office in Detroit, Michigan, for the purpose of engaging in the business of lending money. The petitioner invested in such business $15,000, which was paid in three cashier’s checks of $5,000 each of a Milwaukee bank m October and November 1926, payable to the order of the Employees Finance Co., the name under which the petitioner conducted its business in Detroit. The petitioner sent additional money to the Detroit office, including an item of rent which was sent after the office was closed. In November 1926 an amount of $615.30 of the $15,000 was used for the purchase of furniture and fixtures for the Detroit office. No deduction for depreciation of such furniture and fixtures was taken by petitioner on his 1927 return.

During 1927 the petitioner was also engaged in the business of making loans, in partnership with one Gifford T. Vermillion, at Seattle and Spokane, Washington; St. Louis, Missouri; Lexington. Ashland, and Paducah, Kentucky; Houston and San Antonio, Texas; and St. Paul and Minneapolis, Minnesota. He was also engaged in the same business during 1927 at Chattanooga, Tennessee, in partnership with one A. J. Reich, under the name of Central Discount Co.

Loans were made on written contracts, which did not state the rate of interest payable thereunder, but stated the whole amount due from the borrower, principal, or amount of cash loaned, interest, and brokerage charges. The rate of interest charged at the Detroit office was 10 percent a month.

The following statement shows the cash loaned, fees, including interest and brokerage charge, and average rate of fees as shown by petitioner’s records.

The average rate shown above was obtained by dividing the amount of fees by the amount of cash loaned.

The petitioner’s books of account were kept on an accrual basis. The petitioner’s share of the net income from the above listed offices amounted to $21,911.98. In petitioner’s income tax return for the year 1927 the following items are also included in the total income reported of $50,862.27:

1. Salaries, Wages, Commission, etc.
Employees Einance Company, Inc., Baltimore Maryland
Corporation- $700.00
Detroit, Mich., Kansas City, Kansas, Moline, Ill., offices_1,400.00

The loan contracts used in Detroit, as well as in other cities, were in printed form but differed as to contents. The form used in the Detroit office consisted of an Offer to sell account for earned salary or wages ” and an “Assignment of earned salary or wages.” In the offer the borrower offered to sell ” * * * an interest in an account for salary or wages already earned ’’ and as an inducement to purchase such salary or wages, among other things, warranted that he was over 21 years of age, agreed to execute an “ unconditional bill of sale or assignment ” of such salary, and to pay reasonable attorney fees and court costs in the event suit became necessary. The assignment was attached to the offer. The borrower in such assign-merit sold, transferred, and assigned a certain amount “ of an account for salary or wages already earned ”, and authorized the employer to pay such amount to the “ Purchaser.” Among other provisions the assignment contains the following: “I am not a debtor to the Purchaser, and the Purchaser assumes all the risk of loss that may now exist or hereafter arise on account of my said employer being or becoming insolvent or bankrupt.”

The printed form used in offices other than in Detroit was designated “Assignment.” In such assignment the borrower agreed to “ assign, sell and transfer * * * all of my said claim, demand and title ” against his employer for salary until a stated time and guaranteed that he would earn “ the salary hereby sold.”

About June 21, 1927, the Detroit office was raided by the office of the district attorney at Detroit and all records, including loan contracts, were confiscated and the office was closed, because the business as operated by the petitioner was claimed to be illegal. The office furniture and fixtures were not confiscated. Loan contracts at such office in the aggregate were over $10,000 and were kept in that office.

W. A. McMahon, employed in the Detroit office, under date of July 2, 1927, wrote a letter to the accountant of petitioner at his Milwaukee, Wisconsin, office in part as follows:

As you no doubt know, all records were confiscated on the 21st and my cash has been all balled up ever since, in fact, each office here is in the same predicament. The raid happened on Tuesday the 21st, in the forenoon, as I was making up the daily report for Monday the 20th, therefore, I believe the last report you received from me was for the 18th.
If you will send me a duplicate daily report sheet for the 18th, showing the cash and bank balance, I will see what I can do towards straightening this thing up.
I will be here until further notice, in case you want to write me.

Under date of July 14, 1927, W. A. McMahon again wrote such accountant at Milwaukee in part as follows:

Will you send me a draft for my salary due tomorrow? Inasmuch as my bank account is closed, it is hard to get a personal check cashed, so, a draft or cashier’s check would be much better.
I am asking this because these accounts are Nor paying, therefore, I will barely have enough to pay expenses. They simply will not come to the office, those that promise to, always fail to do so, and the rest plainly tell us to go to * * *. All the offices are in the same fix, and I believe this Better Business Bureau has written all the customers advising them not to pay their accounts, for it is surprising the number of good customers that I thought would come in voluntarily and pay up.
I hope you got in touch with Wag and explained to him just what the situation is. All the boys are gradually leaving town and I do not want to be the one to be caught and made an example of. We have all been surprised that there were no more warrants issued but it is not too late yet, and .from the mysterious telephone calls the different offices are getting, there must be something in the wind.
Wag told me he would stop off here on his return trip and we would dope out the future, and I hope he wont get here too late. If necessary, I could get out of here and meet him either in Milwaukee or Chicago, inasmuch as our rent is paid to the end of this month, then, we could later arrange for the storage of these fixtures and- the collection of what notes I have already turned.
I am hoping to collect in enough to carry me, in event I must leave town at once or in a hurry, however, I will leave this to you as you can see by the report just what cash I have on hand and this is not all cash either, as expenses are going along as usual.
* * * * * * *
P. S. Wag seems to think that he can recover all our records, but to tell the truth, Ralph, these are all shot * * *, and I doubt if a dime could ever be collected on them. King and Rosenbush are going to let theirs slide and forget them. In fact, any attempt in the future to collect them would result in the Better Business Bureau starting suits for usury.

In his income tax return for the year 1927 the petitioner deducted $15,000 from gross income. The petitioner attached to such return a letter addressed to the collector of internal revenue, stating as follows:

By way of explanation of the $15,000 loss sustained in Detroit, will say that I opened this office on advise of parties who were conducting similar businesses in various states, they having Supreme Court decisions in various states where they were operating legalizing the businesses. There was a campaign carried on by the Better Business Bureau of Detroit in connection with the District Attorney’s office there to put these offices out of business and the offices were raided by the District Attorney’s office and all records of indebtedness were confiscated. The investment of $15,000 was an entire loss as we were never able to collect any money from these clients as we had no way of knowing who was indebted to us or who had secured the money. And, furthermore, the District Attorney would not allow us to even approach any of these clients for our money if we were able to determine who owed us.
These facts can all be verified through the District Attorney’s office at Detroit, who we understand has destroyed all records of these offices that were raided.
I have also sustained a loss of several thousand dollars as attorney fees which I have not included in this loss, which we paid out to attorneys in Detroit to look after our interests.
This is an entirely different line of business than we are conducting, and knowing that they had been conducting this business in other states for a good many years and had also operated in Detroit for several years before I opened this office, naturally led me to believe that the investment would be sound and profitable.

On April 19, 1929, the petitioner wrote a letter to the collector of internal revenue protesting the disallowance of the claimed loss of $15,000 and stated in part as follows:

I am justly entitled to the deduction of this loss of $15,000. for the following reasons:
(b) That the loss was sustained within the taxable year 1927 on the basis that I abandoned my investment after personal investigation and arriving at the conclusion that any attempt at recovery of the investment would require the expenditure of considerable time and effort and the probability of expensive litigation.
(c) That the loss was incurred in my regular trade or business or a transaction entered into for profit. That I have for many years as an individual, in partnership, and as a stockholder and officer of corporations, been engaged in the loan business and my principal income has been derived from this business. * * * Other loan offices were operating on this basis in Detroit and their apparent success induced me to make the investment.
(d) That the loss was clearly incurred in trade or business or a transaction entered into for profit and should be deducted from income derived from my trade or business.
* * * * * * *

On May 18, 1929, the petitioner wrote a letter to D. W. Reynolds, internal revenue agent in charge at Milwaukee, Wisconsin, correcting in part the above letter, as follows:

The statement * * * should read as follows, “ That the operation of the business in my Detroit, Michigan, office was different from the business in my other offices in that the business consisted of the purchase of an interest in earned salaries and wages together with an assignment of said salaries or wages.” These are the actual facts as stated in a conference with your agents and further supported by copies of the form of contract used, whieh are attached to this letter. • .
*******

On August 6,1931, petitioner wrote the Commissioner of Internal Revenue at Washington, D.C., in reference to such claimed loss, as stated in part as follows:

The business at my Detroit office was continued until June, 1927, showing book gains and losses for the months of this period but no part of the total capital investment of $15,000 was ever recovered by me.
During June 1927, all records located in this Detroit office were confiscated and destroyed by order of the District Attorney for the reason that I had not obtained a license to conduct a loan business.
Since all of my capital investment had been loaned and because of the confiscation and destruction of all records, it was impossible to recover on any of these loans. In fact, the debtors were advised from the office of the District Attorney that they were not liable.
Consequently, I closed this office in Detroit in June, 1927, and none of the assets were recovered by me except a small part of the office furniture not to exceed in value $300. In addition to the capital loss of $15,000.00, I had also advanced a total of $1925.00 which I considered a surplus or revolving fund to be returned to me. Since the item of $1500.00 attorneys fees under date of May 13, 1927 was not allowed as a deduction for tax purposes^ my loss was increased by the net balance of $425. which more than offset the small recovery on office furniture.
*******

No part of the $15,000 invested in the business of the Detroit office by the petitioner has been recovered by him, except that the furniture and fixtures were not confiscated. There is no other prospect of recovering any of the $15,000.

The petitioner contends that, under section 214 (a) (4) and (5) of the Bevenue Act of 1Q2Q, he is entitled to deduct from gross income the amount of $15,000 as a loss sustained in 1927 in his business in Detroit, Michigan. He contends that the business conducted by him in Washington, Missouri, Kentucky, Texas, Minnesota, and Tennessee is the same business that he conducted in Detroit, Michigan; that in the conduct of all of them, the rate of interest charged was far in excess of the allowable statutory rate; that the Detroit loss was not incurred from the confiscation of the records of petitioner, but from the impossibility of collecting accounts because of the absence of records and because of the statutes of Michigan, which make it impossible to collect; that, assuming the loan business of petitioner was illegal because usurious in the State of Michigan, as well as in every other state in which he operated, the Detroit loss nevertheless is deductible, as petitioner may offset the illegal loss sustained in Detroit against illegal income derived from usurious loan business in other states; and that he is subject to tax only on the net illegal income derived from such business in all of the states in which he operated.

The respondent contends that the loss, if sustained in 1927, is not allowable because the business of loaning money at usurious rates is illegal in the State of Michigan under its “ Small Loan Act ” and that the confiscation of petitioner’s records by state officials as a means of enforcing the law does not result in a loss allowable as a deduction.

Whether or not the petitioner engaged in the usurious loan business in all or any of the states in which he was engaged in the business of lending money and whether or not such business is legal or illegal in the various states is dependent upon the laws of the various states as construed by the courts thereof. As stated in Missouri, Kansas & Trust Co. v. Krumseig, 172 U.S. 351, 355:

Usury is, of course, merely a statutory offense, and Federal courts in dealing with such a question must look to the laws of the states where the transaction took place, and follow the construction put upon such laws by the state courts. DeWolf v. Johnson, 10 Wheat, 367; Soudder v. Union National Bank, 91 U.S. 406.

The general statutes of Michigan effective in 1927 provide that a usurious contract is not void, but the defendant shall not be compelled to pay any interest thereon. As stated in Newmam v. Adelsperger, 173 N.W. 351; 206 Mich. 683, usury does not make a contract unlawful, void, or even voidable, but penalizes the lender by denying him the right to collect any interest. However, beside the general law on usury, there has been enacted in Michigan a so-called “ Small Loan Act.” The Michigan “ Small Loan Act ” in force in 1927, being No. 317 of the Public Acts, Michigan, 1921, as amended by No. 181 of the Public Acts, Michigan, 1925, provides, among other things, that no person shall engage in the business of making loans of $300 or less and charge or contract for or receive a greater rate of interest than 7 percent except as authorized by the act and without first obtaining a license from the commissioner of the banking department; that any person licensed under the act may make loans not exceeding $300 and may charge, contract for, or receive interest thereon at a rate of not to exceed Sy2 percent per month; that contracts of loan in which a greater interest rate is provided for shall be void; and that any person who shall violate the above and certain other provisions of the act shall be guilty of a misdemeanor, and upon conviction thereof shall be punished by a fine of not more than $500 or by imprisonment of not more than six months, or by both fine and imprisonment in the discretion of the court.

With the exception of the letter of August 6, 1931, the record does not disclose the law or authority upon which the district attorney confiscated the records of the petitioner. It does appear, however, that, after the confiscation, the borrowers refused to pay the loans. Whether or not they would have voluntarily paid the loans after the confiscation had petitioner been able to recover his records is mere speculation. The rate of interest charged by petitioner was 10 percent a month and, therefore, such loan contracts were void and unenforceable under the Michigan “ Small Loan Act.” Michigan Loan Assn. of Jackson v. Cahill, 235 N.W. 182; 253 Mich. 358.

It has been repeatedly held that expenses, such as fines, costs, and attorney fees, arising out of the unlawful operation of business in contravention of state or Federal regulatory statutes, such as safety appliances acts, hours of service acts, antitrust laws and others, which subject those violating such statutes, upon conviction, to fine or imprisonment, or both, are not deductible as ordinary and necessary expenses upon the ground of public policy. Tunnel R.R. of St. Louis v. Commissioner, 61 Fed. (2d) 166; Chicago, Rock Island & Pacific Ry. Co., 13 B.T.A. 988; affirmed in Chicago, R. I. & P. Ry. Co. v. Commissioner, 47 Fed. (2d) 990; certiorari denied, 284 U.S. 618; Burroughs Building Material Co. v. Commissioner, 47 Fed. (2d) 178; affirming 18 B.T.A. 101; Great Northern Ry. Co. v. Commissioner, 40 Fed. (2d) 372; certiorari denied, 282 U.S. 855; affirming 8 B.T.A. 225; Kansas City Southern Ry. Co., 22 B.T.A. 949; Bonnie Bros., Inc., 15 B.T.A. 1231; Atlantic Terra Cotta Co., 13 B.T.A. 1289; Columbus Bread, Co., 4 B.T.A. 1126; and Sarah Bacher et al., Executors, 1 B.T.A. 214.

In Sarah Backer et al., Executors, supra, wherein attorney fees, and expenses paid by the decedent to defend himself against criminal prosecution for perjury were disallowed as a deduction, the: Board stated:

* * * We do not believe that it is in the interest of sound public policy that the commission of illegal acts should be so far protected or recognized; that their cost is regarded as a legitimate and proper deduction in the computation of net income under the revenue laws of the United States.

In Great Northern Ry. Co., supra, wherein the railroad company claimed to be entitled to deduct certain fines paid in violation of certain Federal regulatory statutes such as the Safety Appliance Act, Hours of Service Act, and others, the Circuit Court of Appeals stated:

* * * The character of these expenditures is such that they should not be regarded as coming within the statutory definition of deductible operating expenses. It is true that they [claimed deductions] arose in connection with the operation of the road, but it is also true that they arose entirely from unlawful operation, prohibited specifically by statutes or regulations. It cannot be that Congress intended the carrier should have any advantage, directly or indirectly, of these penalties.

In Burroughs Building Material Co. v. Commissioner, supra, which involved fines imposed by the Supreme Court of New York upon the company and its president for participation in a. price-fixing agreement and fees paid to a law firm employed to conduct their defense, the court stated that “ The.disallowance may properly rest upon a refusal to sanction expenditures of such a character as we have here on grounds of public policy.”

In our view it is immaterial whether the deduction is classified as an ordinary and necessary expense or as a loss.

Neither is deductible if incurred or sustained in the commission of acts forbidden by statute or in the omission of acts made mandatory by statute, subjecting those guilty of either to fine or imprisonment,, or both. In principle, in situations such as we have in the instant, proceeding, the same result follows when the deduction of a loss, is involved as when the deduction of an expense is involved. The reasoning which leads to such result as to an expense applies with equal force to a loss.

The petitioner engaged in a business prohibited by the “ Small Loans Act ” of Michigan. He made loans under contracts which he knew or should have known were void and unenforceable under such act. In our opinion the instant proceeding is governed by the principle enunciated in the above cited cases and is a loss arising from the operation of a business prohibited by state statutes, subjecting those violating them, upon conviction, to fine or imprisonment, or both, and is not deductible under section 214 (a) (4) and (5) of the Eevenue Act of 1926.

Furthermore the Board has held that losses sustained as a result of an illegal transaction are not deductible. M. Rea Gano, 19 B.T.A. 518; U. L. Heide, 2 B.T.A. 451; Mitchell M. Frey, Jr. et al., Executors, 1 B.T.A. 338. Cf. Louis D. Beaumont, 25 B.T.A. 474.

The cases cited by the petitioner, James P. McKenna, 1 B.T.A. 326; Steinberg v. United States, 14 Fed. (2d) 564; and Edgar B. Terrell, 7 B.T.A. 773, are distinguishable upon the facts and are not applicable here.

The determination of the respondent in disallowing the loss claimed by the petitioner in 1927 is approved.

Reviewed by the Board.

Decision will be entered for the respondent.

       Sec. 214 (a) In computing net income there shall be allowed as deductions:
      (4) Losses sustained during the taxable year and not compensated for by Insurance or otherwise, If incurred in trade or business;
      (5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *


source: Caselaw Access Project

author: Trammell:

license: Public Domain

text:
    Illinois Central Railroad Company and Yazoo & Mississippi Valley Railroad Company, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62023, 62991.
    Promulgated June 29, 1934.

      R. O. Beckett. Esq., for the petitioners.

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

Trammell:

Respondent determined deficiencies in income tax of $27,088.88 for 1926, $84,611.39 for 1927, $46,663.09 for 1928, and $29,463.82 for 1929. Petitioners allege that respondent’s determinations are erroneous in that as to each taxable year he did not deduct from the income of the Yazoo & Mississippi Valley Railroad Co. the cost of replacements of leased property. The respondent claims increased deficiencies for all of the taxable years, alleging that he erred in allowing deductions from the income of the Yazoo & Mississippi Valley Railroad Co. (1) of $142,248.26 for 1926, $148,603.57 for 1927, $158,959.70 for 1928, and $68,441.88 for 1929, representing the excess of cost of items of roadway and structures leased from the Alabama & Vicksburg Railway Co., which were replaced, over the value of the salvage recovered; (2) of $86,871.44 for 1926, $144,415.44 for 1927, $126,569.21 for 1928, and $163,660.52 for 1929, representing the excess of cost of items of roadway and structures leased from the Vicksburg, Shreveport & Pacific Railway Co., which were replaced, over the value of the salvage recovered; (3) of $17,938.74 for 1926, $19,999.74 for 1927, $16,513.90 for 1928, and $9,523.34 for 1929, representing the labor cost of removing replaced rail and other track material from, and the labor cost of laying new rail and other track material replacements on, the roadway leased from the Alabama & Vicksburg Railway Co.; (4) of $14,500.60 for 1926, $21,492.94 for 1927, $11,101.98 for 1928, and $13,461.22 for 1929, representing the labor cost of removing replaced rail and other track material from, and the labor cost of laying new rail and other track material replacements on, the roadway leased from the Vicksburg, Shreveport & Pacific Railway Co.; and (5) of $74,774.05 for 1929, for depreciation of railway equipment now alleged by the petitioner to have been transferred by the Yazoo & Mississippi Valley Railroad Co. to the Alabama & Vicksburg Railway Co. and the Vicksburg, Shreveport & Pacific Railway Co. in that year to replace equipment retired. The parties submitted a stipulation embodying substantially all of the material facts, which is incorporated herein by reference. The proceedings were consolidated for hearing and decision.

Petitioner Illinois Central Railroad Co. is an Illinois corporation, with its principal office at Chicago. It filed consolidated returns for the taxable years, for itself and its subsidiaries, which included the net income of petitioner Yazoo & Mississippi Valley Railroad Co. It is liable for any and all deficiencies, and is entitled to recover any overpayment for 1929 based upon the consolidated returns.

On March 31, 1925, the Yazoo & Mississippi Valley Railroad Co., hereinafter called the lessee, entered into separate agreements with the Alabama & Vicksburg Railway Co. and the Vicksburg, Shreveport & Pacific Railway Co., hereinafter called the lessors, by the terms of which it leased the properties of the two last mentioned companies until July 1, 2282, with options to renew the leases for an additional period of 999 years. The lessee agreed that it would keep up, maintain, repair, replace, and renew the leased properties during the terms of the leases so that such properties would at all times be in substantially as good repair, working order, and condition as of the effective date of the lease agreements; and it further agreed, that whenever during the terms of the leases any part of the leased properties, including rolling stock and equipment, should be damaged, destroyed, or otherwise become unfit for its appropriate use and purpose, to cause the same to be repaired, renewed, rebuilt, or replaced by property of equal value. These covenants were to be performed at the lessee’s sole cost and expense. The lease agreements also provided that the lessee should have the right to make such additions and extensions to, and betterments and improvements of, the leased properties as it deemed necessary, for which it was to be reimbursed by the lessors. The leases became effective on June 2, 1926, and the lessee took over the leased properties on the same day.

During the taxable years the lessee made substantial replacements of rail and other track materials on the leased roadways. In most, if not all, instances the rail and other track material replacements were heavier than the rail and material removed from the roadways, and to that extent were betterments or improvements of the leased properties. Substantial portions of the lessee’s expenditures for such replacements were charged to and borne by the lessors, as the costs of the betterments or improvements. The following statement shows for each taxable year the actual cost, exclusive of labor, of rail and other track material replacements made by the lessee, the part of such cost charged to and borne by the lessors, and the cost to replace the removed rail and other track material in kind, which was borne by the lessee:

The labor costs incurred and borne by the lessee in making the replacements were $32,439.38 for 1926, $41,492.71 for 1927, $27,-615.87 for 1928, and $22,984.56 for 1929. One half of these labor costs were incurred in taking up the removed rail and other track materials and one half in laying the replacements.

Also, during the taxable years the lessee replaced 57, more or less, bridges and trestles on the leased roadways. In most, if not all, instances the replacements were improvements over the removed structures. Substantial portions of the lessee’s expenditures for such replacements were charged to and borne by the lessors, as the costs of the betterments or improvements. The following statement shows for each taxable year the actual cost of such replacements made by the lessee, the part of such cost charged to and borne by the lessors, the part of such cost borne by the lessee, and what it would have cost to replace the structures in kind:

In each instance, the part of the cost borne by the lessee is equal to the cost to the lessors, of the removed structures.

Further, during the taxable years the lessee replaced other parts of roadways and roadway structures, extended and rearranged existing trackage, constructed new facilities, installed tie plates, and otherwise made changes on the leased properties. Most, if not all, of these changes were betterments or improvements of those properties. Substantial portions of the lessee’s expenditures for such changes were charged to and borne by the lessors as the costs of the betterments and improvements. The following statement shows for each taxable year the actual cost of the changes made by the lessee, the part of such cost charged to and borne by the lessors, the part of such cost borne by the lessee, and what it would have cost to replace all removed properties in kind:

The costs borne by the lessee, except for $283.80 in 1926, $36,174.22 in 1927, and $6,470.90 in 1928, are equal to the costs to the lessors, of items of roadway and roadway structures that were removed in making the changes. As to the excepted costs, they represent actual costs to replace the properties in kind.

In computing the lessee’s net income for the taxable years, the respondent allowed deductions of $229,119.70 for 1926, $293,019.01 for 1927, $286,528.91 for 1928, and $232,102.40 for 1929, representing in each instance the cost to the lessors, less salvage recovered, of the leased properties that were replaced during the taxable years; and, also, he allowed deductions of the amounts enumerated above as the labor costs incurred and borne by the lessee in making the rail and other track material replacements. He now asserts that he erred in allowing any and all of these deductions. Petitioners concede that the lessee is not entitled to the deductions allowed by the respondent in respect of the leased properties that were replaced, since the lessee was not the owner thereof and had no capital investment in those properties. We agree with that concession, because it is in line with the authorities on the question, Duffy v. Central R.R. Co., 268 U.S. 55; Weiss v. Wiener, 279 U.S. 333; Brevoort Hotel Co. v. Reinecke, 36 Fed. (2d) 51; Belt Ry. Co. of Chicago, 9 B.T.A. 304; aff'd., 36 Fed. (2d) 541; certiorari denied, 281 U.S. 742; and Michigan Central R.R. Co., 28 B.T.A. 437; and the respondent’s claim for increased deficiencies is allowed to that extent. Petitioners contend, however, that the lessee is entitled to deduct from the income of each taxable year an amount equivalent to what it would have cost to replace the properties in kind.

As to the expenditures for rail and other track material replacements on the leased properties, including the labor costs of making them, there can be no doubt that, to the extent they were actually borne by the lessee, they constitute ordinary and necessary expenses of its business and are deductible in computing taxable net income* The maintenance engineer of the petitioners testified that the replaced rail was from 12 to 18 years old and in poor condition; that the replacements were made in pursuance of the maintenance program adopted and followed by the Illinois Central, of which the lessee is a subsidiary line; and that such replacements were necessary to the proper upkeep and maintenance of the leased properties. There is nothing in the record to the contrary. The expenditures are ordinary in the business in which the lessee is engaged and they are necessary, because the lessee was required to make them in the performance of its covenants to keep up and maintain the properties. To the extent indicated, the expenditures did not contain anything of a capital nature; the cost of the additions, betterments, and improvements were charged to and borne by the lessors. Obviously, the deductions must be limited to the lessee’s burden of the expenditures; for the statute will not permit the deduction of amounts for which it was reimbursed, or to be reimbursed, by the lessors. New York, Chicago & St. Louis R.R. Co., 26 B.T.A. 1229, 1289, and cases therein cited.

As to the second group of expenditures, for replacement of bridges and trestles, and the third group, for so-called “ miscellaneous roadway replacements ”, the evidence is insufficient, in respect of all but three items, to enable us to determine whether or not they may be deducted from income, even to the extent that they were borne by the lessee. While expenditures for ordinary upkeep and maintenance, such as those for rail and other track material replacements referred to above, are proper deductions from income, the lessee may not deduct expenditures made primarily for adding to and improving the leased properties. Duffy v. Central R.R. Co., supra.

The witness, heretofore referred to, without stating his reasons therefor and apparently basing his opinion on the meager facts in the stipulation, expressed the opinion that all of the expenditures were necessary to the proper maintenance of the leased properties. If by that he meant that they were necessary in order to keep the properties in good repair and good running condition, and no more than that, the inaccuracy of his opinion is clearly disclosed by the stipulated facts. The depression and rearrangement of existing tracks, the construction of concrete subways where none existed before, the extension of yard leads, and the application of more than a hundred thousand additional tie plates to the roadways are clearly betterments or improvements and cannot categorically be ascribed to that kind of upkeep and maintenance that may be deducted from income. Further, it is to be noted that some of the bridges and trestles replaced in the taxable years were constructed or erected as late as 1917 and 1918, and, as to them, while we have been given no evidence as to the usual normal life of this type of structures, there obviously must be some doubt that their replacement was due to normal upkeep and maintenance rather than to bettering or improving the leased properties. As to all of the expenditures included in these two groups, the stipulated facts, except as to three items, contain only a very meager description of what was done, the cost, the respective parts of the cost that were borne by the lessors and lessee, cost of the replaced items of roadways and roadway structures, and the value of the salvaged materials; and none of the facts as to the reasons and necessities for what was done have been given to us. In this state of the record, we are unable to determine the extent to which these expenditures, other than the three excepted items, fall within the categories of deductible expenses and nondeductible capital expenditures.

The three excepted items are $283.80 expended in 1926 for replacing a wornout cypress shingle roof on a section house; $36,174,22 expended in 1927 for replacing 17 miles of main track that had been washed out by flood conditions; and the cost of replacing 36,292 tie plates in 1928. The cost of the latter item is not separately shown, but is included in the lessee’s cost of $6,470.90 for installing 156,193 tie plates, of which 119,901 were new installations and 36,292 were used for replacements. The cost of the replacements is determined to be 36292/156193 of the total cost, or $1,503.54. These three items are proper deductions in computing the lessee’s taxable net income. Deduction of the remaining expenditures in the second and third groups must be denied for lack of proof that they are ordinary and necessary expenses.

During the taxable years and 1930, the lessee retired units of leased equipment, such as locomotives and freight train cars, as follows: 81 in 1926, 757 in 1927, 389 in 1928, 164 in 1929, and 73 in 1930, a total of 1,464 units, having a depreciated book value as of June 2, 1926, as agreed upon by the lessee and lessors, of $1,157,752.92. As each equipment unit was retired, the lessee recorded its liability for replacement thereof on its books in an amount equal to its depreciated book value at June 2, 1926, by a credit to the account of the lessor owning the unit. These retired units were replaced by the lessee with equipment furnished by the petitioner, as guarantor under the lease agreements, as follows: 577 units in 1929, and 29 units in 1930, a total of 606 units; but title thereto was not conveyed to the lessors at the times of replacement. The value of these replacement units, on the petitioner’s books, which was cost less depreciation previously allowed, was $1,020,121.99; but for the purposes of the replacements, the lessee and lessors agreed upon values of $1,103,579.22 for the 1929 replacements, and $60,408.60 for the 1930 replacements, a total of $1,163,987.82. In August 1929 it was agreed that the lessee should convey to the lessors title to all such equipment replacements and to such other equipment as was necessary to replace all units of leased equipment that had been and would be retired up to December 31 of that year, in order that all such equipment replacements might be brought immediately within the liens of the lessor’s mortgages. By reason of the delay in agreeing upon the values and classes of replacement units that were to be conveyed by the lessee to the lessors. the conveyances of title were not formally made to the lessors until 1932. The accounting for the transfer of the replacement units was made on the books of the lessee and lessors in 1932.

Petitioners contend that the lessee is entitled to deduct from 1929 income the amount of its entire liability to the close of that year in respect of equipment replacements required to be made under the provisions of the lease agreements and lessors’ mortgages. The respondent says that if the deduction is to be made at all, it must be from the income of 1932, the year in which the lessee formally conveyed the replacement units to the lessors. We disagree with both positions. Under the lease agreements, the lessee was required immediately to replace all units of equipment retired from service. Therefore, as and when the lessee retired a unit of equipment, a liability in praesenti, to make replacement, was created. The amount of the lessee’s liability was measurable, under the terms of the lease agreements, by the value as of June 2, 1926, of the equipment units retired. Consequently, the lessee’s liability to replace was fixed and determined at the time each unit of equipment was retired and was definitely ascertainable in amount. The lessee’s books were kept on an accrual basis, and the accounting for its liability to the lessors was made at the time the equipment units were retired. Under the circumstances, the amount to be deducted from the lessee’s income of any taxable year on account of its replacements of equipment is the aggregate value, as of June 2, 1926, of the equipment units retired during that particular taxable year. Cf. Lucas v. American Code Co., 280 U.S. 445. While the number of equipment units retired in each taxable year is shown, there is no evidence upon which we can determine the amount of the lessee’s liability as to each such taxable year. Accordingly, the issue must be resolved against the petitioners.

The fifth ground assigned by the respondent as the basis for his claim to increased deficiencies, particularly, in this instance, as to 1929, is an alternative matter and is pressed only in the event that the Board should decide that the lessee is entitled to deduct from the income of that year the amount of its entire liability to the close of the year in respect of equipment replacements. While our decision on the latter question obviates the necessity for passing upon the respondent’s alternative claim, we would feel constrained to hold adversely to him if a decision were necessary, since the lessee was the actual owner of the replacement units until it formally conveyed them to the lessors in 1932, and, accordingly, it is entitled to the depreciation deduction, in respect of such units, which the respondent allowed for 1929.

Eeviewed by the Board.

Judgment will be entered under Buie 50.


text:
    William F. Cochran, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65537.
    Promulgated June 29, 1934.

      Emory H. Niles, Esq., and Eenry W. Sohultheis, Esq., for the petitioner.

      George D. Brdbson, Esq., for tbe respondent.
   OPINION.

Trammell:

The petitioner contends that the World League Against Alcoholism is an educational organization and that the contribution made thereto during the taxable year should be allowed as a deduction. The respondent denies this contention and asks that his action be sustained.

Section 23 of the Revenue Act of 1928 provides as follows:

In computing net income there shall be allowed as deductions:

*******
(n) Charitable unit other contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
* ***** *
(2) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual.
*******

The only controversy between the parties is whether the League was organized and operated exclusively for educational purposes within the meaning of the statute.

In James J. Forstall, 29 B.T.A. 428, we reviewed at length the decisions relating to the question of what constituted an organization organized and operated exclusively for educational purposes. We there held that where an organization was organized and operated for the purpose of cultivating and influencing public opinion for the purpose of bringing about legislation on a controversial matter, such organization was not organized and operated exclusively for educational purposes.

An object of the World League Against Alcoholism, as stated in its constitution prior to its amendment in 1932 or 1933, which waó subsequent to the year in controversy, was to obtain legislation on a highly controversial subject, alcoholism. While the constitution indicates that the League was pledged to a neutral attitude on questions of public policy generally, an exception was to be made in the case of the traffic in alcoholic beverages. The League is simply the tool or creature of its member organizations, who, so far as we are able to determine, are allied on one side or another of the controversial alcohol question or problem. Some, if not all, of these are actively engaged in the presentation or defense of the side of the question which they have espoused and are actively promoting or actually resisting efforts at legislation in conformity with their views. According to the record it is the business of the League to furnish them and the general public the information it has available on all phases of the problem. The petitioner therefore is engaged in and operated for the distribution and dissemination of data which are highly controversial in their nature. The petitioner appears to be nothing more than a clearing house or a distributor of matter and material prepared and disseminated for controversial purposes. It may be likened to an accessory or an agent engaged in the furtherance of the cause of the principal.

In discussing the term “education” the court, in Weyl v. Commissioner, 48 Fed. (2d) 811, said:

Congress did not include a definition of the term “ education ” as used in the act. In the absence of specific definition, the words are to be given their usual and accepted meaning. Matter of Will of Foot, 52 N.Y. 530, 11 Am. Rep. 751. “ Education ” has been defined by the encyclopedia and dictionaries as “ imparting or acquisition of Knowledge; mental and moral training; cultivation of the mind, feelings and manners.” The definition given by the Funk & Wagnalls’ New Standard Dictionary, vol. 1, may be referred to:
“Education as understood today, connotes all those processes cultivated by a given society as means for the realization in the individual of the ideals of the community as a whole. It has for its aim the development of the powers of a man (1) by exercising each along its particular line, (2) by properly coordinating and subordinating them (3) by taking advantage of the law of habit, and (4) by appealing to human interest and enthusiasm. It includes not only the narrow conception of instruction, to which it was formerly limited, but embraces all forms of human experience, owing to the recognition of the fact that every stimulus with its corresponding reaction has a definite effect on character. It may be either mainly esthetic, ethical, intellectual, physical or technical, but to be most satisfactory it must involve and develop all these sides of human capacity.”

Giving due consideration to the objects, functions, and activities of the League in connection with the foregoing, we are unable to find that the League is or was during 1929 an organization organized and operated exclusively for educational purposes. The action of the respondent in disallowing as a deduction the amount of the contribution made thereto by the petitioner is sustained.

The respondent concedes that all of the other contributions set out in our findings of fact, which were not taken by the petitioner in his return nor allowed by the respondent in his determination of the deficiency, constitute allowable deductions except the following: Rev. A. L. Byron Curtiss, $25; E. C. Miller, Treasurer, ‘Why Go to Church ’ Posters, Metropolitan Tower, New York City, $50; Yale Alumni Association of Maryland, $00; League for Industrial Democracy, $100; Church League for Industrial Democracy, $1,600.

In Weyl v. Commissioner, supra, reversing 18 B.T.A. 1092, the court held that the League for Industrial Democracy was an educational corporation in 1922 and 1923 and that contributions made thereto constituted allowable deductions in determining the net income of an individual for those years. We have no evidence before us, however, that for the taxable year 1929 this corporation was operated exclusively for educational purposes. The Commissioner has determined that the contribution to it was not allowable and there is no evidence to overcome the presumption of correctness of that determination. We, therefore, affirm the Commissioner’s determination. As to the remainder of tbe foregoing items, 1 lie petitioner submitted no evidence as to their deductibility except that as to some the respondent had not disallowed similar deductions in other years. The respondent’s action with respect to the allowance or disallowance of a similar deduction in another year is not a sufficient basis upon which to hold that a deduction for the year in controversy is allowable. For lack of evidence, all of the foregoing contributions objected to by the respondent are held to be not allowable.

Reviewed by the Board.

Judgment will be entered under Rióle 50.

Murdock, McMahoN, and Goodrich concur in the result.


author: Goodhicii :

text:
    J. T. Sneed, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45694.
    Promulgated June 29, 1934.

      Harry C. Weeks, Esq., Charles F. Kejfer, Esq., and Walter G. RmseTl, Esq., for the petitioner.

      Frank B. Sohlosser, Esq., and R. B. Gammon, Esq., for the respondent.
   OPINION.

Goodhicii :

It is admitted that under the Texas statutes the lands purchased by petitioner prior to his marriage, his interest in the partnership lands which he owned prior to marriage, and the lands representing his interest in his father’s estate were his separate property. It is clear also, and respondent inferentially admits it, that the lands purchased by petitioner subsequent to his marriage are community property. Since the record (Exhibits 1 and 2) discloses the source and date of acquisition of all the tracts under lease (and we are here concerned only with the leased lands), the classification of the lands, the income arising therefrom, and the allocation of the expenses are a simple matter, except for the property representing the interest purchased from J. B. Sneed. The time of that purchase is in controversy. Respondent determined and maintains that it was effected prior to petitioner’s marriage; petitioner contends it was effected thereafter.

We are of opinion that the interest was not purchased by petitioner until subsequent to his marriage and therefore that the lands were community property. True, ostensibly this interest was conveyed to petitioner by deed of June 7, 1913, which was a short time prior to his marriage (June 30, 1913) and was claimed by him in the partition proceedings as a part of his share of his father’s estate. If petitioner’s ownership in the property had its inception when the deed was executed, the lands conveyed became and thereafter remained his separate property, for the Texas rule is that the date of inception of ownership fixes the status of the property. Petitioner does not question that rule, but contends that under the facts in this case his ownership did not have its inception in the passing of the deed before his marriage, but in the payment of the money thereafter. With that we agree.

The testimony is uncontradicted and convincing that the transfer of the legal title to petitioner was for the accommodation of the transferor; that the purpose was to enable petitioner to raise money by a loan, secured by him upon these lands, with which to enable J. B. Sneed to discharge the indebtedness upon which petitioner and other relatives were secondarily liable. It was with that understanding between the brothers that petitioner claimed the interest in the partition suit. As we view it, this is not a case where a bona fide conveyance is made effecting a completed sale, with payment of the consideration deferred. Petitioner was not obligated to buy the land, nor was it to be his until he paid for it. He had no option to buy, for J. B. Sneed was free, until petitioner should pay him the agreed price, to sell to any purchaser he could find. As between the parties the conveyance was not final, but conditional, and petitioner held only as trustee for security and convenience. We doubt whether the conveyance under such circumstances could have withstood an attack by creditors or other interested parties, and it is well settled that property conveyed upon trust, in which neither husband nor wife has any beneficial interest, is not community property.

We conclude that no sale of the J. B. Sneed interest to petitioner was accomplished until after petitioner’s marriage, when he obtained a loan and paid for the interest o,f his brother in the father’s estate. The lands received by petitioner upon partition of that estate, totaling 55,847 acres, represented nine-fourteenths of the total acreage owned by the partnership; seven-fourteenths being petitioner’s interest as a partner, one-fourteenth being his interest as an heir, and one-fourteenth being the interest he purchased from his brother (although the deed recited the brother’s interest as one-seventh of the whole of the partnership lands).' The lands representing the purchased interest in the estate should be classified as community property.

We come, then, to a consideration of the controversy respecting the classification, for purposes of the tax, of the income arising from the property under the leases — the delay rentals and bonuses. Petitioner vigorously contends that these revenues are community income and should be so taxed, no matter whether the leases embraced separate or community lands. As to the bonuses, this contention heretofore has been resolved against him, for it has been determined that cash considerations paid for the execution of leases upon separate property are the separate income of the owner of the property. James R. Parkey, 16 B.T.A. 441; John, O’Neil, 16 B.T.A. 614; W. P. Ferguson,, 20 B.T.A. 130; affirmed as to this issue, 45 Fed. (2d) 573; Oscar Chesson, 22 B.T.A. 818 (petition for review denied, 57 Fed. (2d) 141); E. Michna, 24 B.T.A. 715. We are not persuaded to a deviation from this rule of decision by petitioner’s argument that the character of the bonus income was changed by reason of the fact that much of his time and attention was given to the negotiation of the leases (the majority of which were consummated through brokers). See No. 1 Oil Corp. v. Bass, 283 U.S. 279; Rose v. Houston, 11 Tex. 324; Arnold v. Leonard, 114 Tex. 535; Stephens v. Stephens, 292 S.W. 291. The bonuses received should be taxed as separate or community income in accordance with the classification of the properties under lease, covered by the various leases as shown by Exhibits 1 and 2, upon which the bonuses were paid. This allocation may be made upon settlement of the case. But it is held also that no distinction exists between delay rentals arising under leases and ordinary rentals of farm lands, and that the latter are income of the marital community, notwithstanding that the lands from which they arise may be the separate property of either spouse. G.C.M. 11197, C.B. X11-1, p. 238; John O’Neil, supra, citing ’Willcutt v. Willcutt, 278 S.W. 236; Caruthers v. Leonard, 254 S.W. 779. Therefore, the delay rentals received during 1925 and 1926 should be taxed as community income.

Petitioner’s claim for the deduction from income of an allowance for depletion of 27% percent of the income from the properties (delay rentals and bonuses) is also controlled by prior decision. In Lizzie H. Glide, 27 B.T.A. 1264 (on review C.C.A., 9th Cir.), we held that depletion is inseparably related to production; that unless there is production, no depletion of reserve is in fact sustained, and no allowance therefor may be made. Here there was no production from any of the leased properties during the years before us. There was a well upon one lease it is true, but it was shut in and no gas was removed. A closed well does not produce; it does not exhaust the reserve; its mere existence does not set up production inseparable from depletion, nor serve to exempt the case at bar from application of the effect of the Glide case.

But this case goes further on its facts. Without a detailed recital of the evidence, we have found as a fact that petitioner’s lands in 1925 were regarded as proven oil or gas territory. The testimony of a qualified geologist, familiar with petitioner’s lands and the field in which they are situate, the charts introduced showing existing wells in adjacent territory, and the fact that gas was found on petitioner’s lands convince us that future production from wells which might be drilled on those lands was practically assured in 1925. That finding brings the case squarely within one of the situations described by respondent in G.C.M. 11384, C.B. XII-1, p. 64, in which he would permit the deduction of an allowance for depletion from income received as bonuses on leases, his description being as follows: “(1) No oil being produced when the bonus was received, but future production practically assured because of near-by wells and geological indications.”

We decline to follow this view, and therefore disapprove the above quoted portion of respondent’s ruling.

If we are correct in holding that without production there is no depletion (which, in fact, cannot be denied) and that without actual depletion there may be no allowance therefor, the probability of production from a property in the future is immaterial. Unless that production is obtained within the same taxable period in which the bonus is received, the latter must be carried into income unreduced by an allowance for depletion. We are fully cognizant of the possibility, which petitioner on brief points out, that cash considerations received in connection with the granting of leases in one year perhaps may never be reduced by a depletion allowance because production was not obtained until a later taxable period. If that situation is to be corrected, the task is for the Congress, not for respondent, nor for this Board or the courts to attempt by a straining of the plain provisions of the statute. See Aubrey Umsted, 28 B.T.A. 176. We conclude that petitioner may not deduct any allow-anee for depletion in either 1925 or 1926. This result is amply supported by the decision of the Circuit Court of Appeals for the Fifth Circuit in Herring v. Commissioner, 70 Fed. (2d) 785, which affirmed our memorandum decisions in Dockets 47041 and 47042 (June 29, 1933), wherein we followed the Glide case, supra.

The remaining issue relates to the validity of the consent upon which respondent apparently relied in issuing his notice of the deficiency for 1925 after the time within which, without an extension by mutual consent in writing, the assessment thereof would be barred by statute. Petitioner contends that there is no consent; that the qualified consent which he submitted was rejected by respondent.

We agree with him. The rejection of petitioner’s modified consent by the revenue agent in charge, who represented and acted for respondent, was definite and unequivocal. There is no evidence before us to indicate that respondent, within the statutory period, disapproved of his agent’s refusal of the offered consent or took any action evidencing a reconsideration of the refusal and a consequent acceptance of and reliance upon the consent. Nor does the record show that petitioner asked for or received any benefits by reason of his offer to agree to a waiver of the statutory period. On the contrary, his refusal to comply with respondent’s demand to submit a second consent in form acceptable to respondent shows clearly that petitioner was willing that respondent proceed at once to a final determination of deficiency in the case, and to the assessment thereof unless stayed by petition to the Board, within the period allowed by law. Therefore, the consent form signed and offered by petitioner and rejected by respondent was of no effect, and prior to the expiration of the statutory period there was no agreement in writing between the parties for an extension of that period. See American Railways Co., 30 B.T.A. 939.

Moreover, even had respondent’s rejection of the offered consent been less definite, there would still be no agreement in form prescribed by statute, for respondent has failed to sign the consent in evidence of his agreement thereto. We understand the rule to be that a consent is ineffective unless signed by or on behalf of the Commissioner, Chadbourne & Moore, 16 B.T.A. 961; Melville W. Thompson, 18 B.T.A. 1192; Corn Products Refining Co., 22 B.T.A. 605; Atlantic Mills, etc. v. United States, 3 Fed. Supp. 699; U. S. Refractories Corp., 23 B.T.A. 872; aff'd., 64 Fed. (2d) 69; 290 U.S. 591; (contra, Commissioner v. Hind, 52 Fed. (2d) 1075; reversing 18 B.T.A. 96; Parker v. Commissioner, 49 Fed. (2d) 254)—unless the Commissioner’s written approval of the consent appears elsewhere or can be reasonably inferred. Stearns Co. v. United States, 291 U.S. 54.

Here, the consent is not signed by or for respondent, and his only writing which could possibly record his approval or from which his approval could possibly be inferred, is the deficiency notice issued on July 18,1929, after the statutory period had expired. Consequently, it cannot be said that before the period expired the parties had consented in writing to an extension of the time. Nor can it be said that both consented in writing after the time prescribed as permitted by section 278 (c), 1924 Act, for petitioner submitted no consent except that of January 5,1929. Respondent’s notice of a deficiency for the year 1925 came too late.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Arundell, dissenting: For the reasons so ably set forth by Judge Sibley in Herring v. Commissioner, 70 Fed. (2d) 785, I disagree with the majority opinion in this case in disallowing depletion to taxpayer. Under the practice of the Bureau of Internal Revenue and the decisions of the Board, depletion allowances are treated as more intimately connected with income from the property than with actual production. That is, it has not been thought necessary to have both production and income in the same year in order for depletion deductions to be allowable. See Clearfield Lumber Co., 3 B.T.A. 1282; R. M. Waggoner, 5 B.T.A. 1191; Inspiration Consolidated Copper Co., 11 B.T.A. 1425; A.R.M. 12, C.B. 2, p. 144. While the rule of those cases perhaps should not be extended to situations where there is no production within a reasonable time after payment of a bonus, the Commissioner has interpreted the statute to apply to cases where production is practically assured. G.C.M. 11384, C.B. XII-1, p. 64. This ruling, promulgated after Murphy Oil Co. v. Burnet, 287 U.S. 299, is designed to give the reasonable allowance required by the statute. The facts in this case show that production was practically assured, and it also appears in the record, though not found as a fact, that fifteen or twenty wells have since been drilled, all producing or capable of production. I think the Commissioner’s ruling to be sound, and as it concededly applies to this case it is error to deny deductions for depletion against the bonuses.

Leech agrees with this dissent.

       Texas Civil Statutes (1914), arts. 4621, 4622; Texas Civil Statutes (Revision 1925), arts. 4613, 4614, 4619.

         See Speer’s Law of Marital Rights in Texas, 3d ed., p. 1051; note from 17 L.R.A. U.S.) 154 appended to decision in Creamer v. Briscoe, 103 Tex. 490 (309 S.W. 911). See also for discussion of applicable principles, John M. King, 26 B.T.A. 1158; aff'd. 69 Fed. (2d) 639.

       See Speer, Law of Marital Rights in Texas, ¶ 357, p. 438; Crenshaw v. Harris, 41 S.W. 391.


author: Maeqtjette :

text:
    R. J. Richards, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52848.
    Promulgated June 20, 1934.

      G. E. McDowell, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   OPINION.

Maeqtjette :

The respondent has determined deficiencies in income tax for the years 1927 and 1928 in the respective amounts of $486.69 and $12,552.81. The only issue is whether certain real estate sold in the taxable years constituted capital assets within the meaning of section 208 (a) (8) of the Revenue Act of 1926, and section 101 (c) (8) of the Revenue Act of 1928.

This proceeding was submitted upon a stipulation of the parties to the effect that two affidavits of the petitioner, one dated October 20,1930, together with exhibits thereto attached, and the other dated September 15, 1933, might be received in evidence, and that the respondent agreed that if the petitioner was called as a witness he would testify as set forth in the affidavits. However, respondent did not agree that all of the facts and conclusions' stated in the affidavits were correct. The affidavits and exhibits are made a part of this report.

The material facts are that the petitioner and his wife made joint income tax returns for the years before us, and that the real property involved was acquired by them as joint tenants with the right of survivorship. Since prior to 1920 the petitioner, for himself or as a member of a partnership, has been engaged in the business of raising, packing, buying, and marketing farm products, particularly lettuce. About September 15, 1920, petitioner and his wife acquired title to approximately 47 acres of land in Los Angeles County, California. About April 30, 1921, they acquired another tract adjoining the above tract, containing about 4 acres. About March 11, 1922, they acquired title to a third piece of land adjacent to the foregoing tracts. These tracts of land at the time of acquisition lay in a very productive farming area and were used by the petitioner in the raising of lettuce and sometimes chicory and endive. They were surrounded by farm lands producing these same vegetables. The products of these adjacent lands, together with the products of the petitioner’s own lands, enabled him to make shipments in carload lots.

In 1921 the petitioner erected buildings and other structures on not over three and one half acres of these lands, which were thereafter used by him as a combined office and residence.

After the petitioner acquired these properties there was a great deal of real estate activity in the lands between his property and the boundary of the city of Los Angeles. The intervening property began to be subdivided and sold, with the result that the petitioner’s property rapidly increased in value until it arrived at a value in excess of $4,000 an acre without improvements. Taxes and assessments for local improvements also increased. The taxes on this property in 1920 were $657.84 and for 1924 were $5,903.22, in addition to which the petitioner was required to pay $4,479.95 in 1924 on account of special assessments. This rise in prices made the use of these lands and the adjacent lands for gardening purposes unprofitable, and in this way deprived the petitioner of a base from which to ship the vegetables in carload lots.

In 1925 petitioner determined to subdivide a part of the first parcel of land which he had purchased. In pursuance of this plan on July 15, 1925, he conveyed a portion of the property to the Security Trust & Savings Bank of Los Angeles (now Security Trust National Bank of Los Angeles) hereinafter referred to as the bank, which accepted it in trust to secure a note of $28,500 which petitioner and his wife owed the bank, and upon further trust to subdivide and sell the property conveyed. Under the deed of trust petitioner and his wife agreed to pay all taxes and assessments levied on the property, to pay principal and interest on all indebtedness secured by the trust, to pay all claims, liens and encumbrances and defend all suits affecting the property, to pay for all improvements ordered by him or his agent, and to file with the trustee a copy of each contract for improvements to be placed on the property. The property was to be subdivided and improved by the petitioner and his wife.

The deed contains provisions which permitted the trustee, upon default of petitioner and his wife in paying the above amounts, to pay them itself, and gave it recourse against the property. The trustee was authorized to rent, sell and convey the property or any pai't thereof to such persons and at such times as it deemed best, provided the sale prices of the lands should not be less than those indicated in the schedule to be filed with the deed. The proceeds received from the sales were to be used to pay commissions and to release liens, the balance to go in what was termed a general fund, out of which the cost and expenses of the trust and certain other expenses were to be paid, and what remained over was to be paid to the petitioner and his wife. The deed recites that at the request of the petitioner and his wife it appointed P. N. Snyder “ as their exclusive agent to subdivide and improve, and to solicit and obtain purchasers for such part of said property ” as was subdivided. He was paid a commission, out of which he was to pay for advertising and other selling expenses of himself and his subagents. Among the duties assumed by the agent was the general care and custody of the subdivided property, and of all improvements placed upon the property, which included the installation of gas, water and electricity. The trustee was not required to procure any insurance on any building upon the property, or to collect or disburse any rentals therefrom. These duties were to be performed by the petitioner and his wife.

Upon payment in full of the indebtedness secured by the deed and at the request in writing of petitioner and his wife, the trustee was given authority to close and terminate the trust, but was not required to do so as long as any of the covenants contained in any deed remained unperformed. The petitioner and his wife furnished the trustee a list of the minimum prices at which the lots were to be sold. The number of lots was 186. The minimum price was $1,250 and the maximum price was $40,000 per lot.

The sales of lots in the first subdivision having proved satisfactory, petitioner determined to subdivide other portions of the property above described. By deed of August 6, 1926, the bank accepted in trust property previously conveyed. The provisions of this trust deed resembled the one of July 15, 1925. Afterward, the petitioner and his wife determined to subdivide and sell the remaining portion of the property purchased as hereinabove set forth, and by deed of trust dated January 12, 1927, the bank accepted such property on practically the same trusts. as those provided in the deed of July 15, 1925.

The principal reason for the above conveyances was to have all deeds on lots promptly executed, especially in the absence of the petitioner from Los Angeles. The number of lots in the second subdivision above set forth was 82. The number of lots in the third subdivision was 152. In the third subdivision the minimum price for the lots was $1,200 and the maximum was $15,000. Under each of the deeds, Snyder was appointed by the bank as petitioner’s exclusive agent, at his request, for a term of eight months, with the right to serve eight months more upon achieving certain results, and upon the termination of his employment the trustee was to appoint as agent for the petitioner and his wife such person as they directed, all sales, however, to be subject ito the approval of the trustee of the bank. The petitioner’s business of producing, packing and selling lettuce and other vegetables increased from year to year, and he substituted, either by lease or purchase, farming properties for the properties which he subdivided. The petitioner, himself, has never taken part in the subdivision or the sale of the lots in the subdivisions, all of which was done by Snyder. Except as herein set forth, the petitioner has never engaged in the business of buying and selling real estate or dealt therein. He has not been licensed as a broker to buy or sell real estate.

The petitioner seeks to have the gain derived from the sale of the lots in his subdivisions taxed under the provisions of section 208 of the Revenue Act of 1926 and section 101 of the Revenue Act of 1928. The only issue is whether the lands from which the lots were carved constituted “ capital assets ” as that term is defined in the above sections. Section 208 (a) (8) of the Revenue Act of 1926 provides:

The term “ capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *

Section 101 (c) (8) of the Revenue Act of 1928 is not materially different. If we eliminate the intervention of the trustee, it is clear that petitioner and his wife at the dates of the various sales had held the lands for more than two years. We do not think the fact that when the sales were made the legal title was in the trustee, is material. The conveyances were made for two purposes — first, to secure the bank, which was also trustee, for its loan then made to petitioner and his wife and to secure it for the advances thereafter to be made, and, second, to facilitate the execution and delivery of deeds to purchasers of the lots in the absence of the petitioner. On them, as individuals, remained the duty of paying all taxes and liens and advancing the money with which the pay the cost of subdivision and improvements and of insurance on the improvements. After paying the debts secured by the deeds and the cost and expenses of the trust and of the sales, what was left, corpus and income, was to be paid to the petitioner and his wife. The petitioner and his wife possessed all the substantial rights of ownership. The lands were held by them within the meaning of the above provisions. Carrie E. Molter, 19 B.T.A. 911; aff'd., 60 Fed. (2d) 498; San Martinez Oil Co., 25 B.T.A. 218.

Real estate may not be included in inventory. Willard Pope, 28 B.T.A. 1255, and cases cited. The facts show, and counsel for the petitioner concedes, that the lots were held primarily for sale. There remains for solution the question whether they were so held by the petitioner “ in the course of his * * * business.”

The fact that the petitioner was in the business of producing and marketing vegetables did not preclude him from engaging in another distinct business. Counsel for the petitioner concedes this and such is the law. Ignaz Schwinn, 9 B.T.A. 1304; John D. Roney, 26 B.T.A. 1213; aff'd., 67 Fed. (2d) 165. Neither do we think it is material that these lands, which were the individual properties of the petitioner and his wife, were once used by them in the farming business. Such use was abandoned and the lands were devoted to a very different purpose. There is nothing in the sections involved which makes any reference to the purpose for which the assets were acquired. To illustrate, one may, as here, own land devoted to farming and, having discovered minerals below the surface, proceed to mine and dispose of the minerals. The fact that he once used the land in connection with farming does not detract from the fact that he thereafter used it in the business of mining.

We may here dispose of the issue raised by the petitioner that in disposing of the lots by sale he was liquidating his business of farming, or at least a part of it. He relies on Trustees for the Creditors and Stockholders of Gonzolus Creek Oil Co. (dissolved), 12 B.T.A. 310; Wilson Syndicate Trust, 14 B.T.A. 508; Dauphin Deposit Trust Co., Trustee, 21 B.T.A. 1214; G. F. Sloan, 24 B.T.A. 61; Blair v. Wilson Syndicate Trust, 36 Fed. (2d) 43; White v. Hornblower, 27 Fed. (2d) 277. We do not perceive the relevancy of these cases. Not only has the petitioner not liquidated his business of farming, but, as we read the record, he has enlarged it. What he has done is to take certain assets individually owned and devoted them to a new purpose.

Cleared of all obscurities, the issue is whether in doing this the petitioner engaged in a business. In attempting to define this term we said, in Willard Pope, supra:

In Flint v. Stone Tracy Co., 220 U.S. 107, the Court said:
“Business” is a very comprehensive term and embraces everything about which a person can be employed. Slack’s Law Diet. IBS, citing People ex rel. Hoyt v. Tax Comrs., 23 N.Y. 242, 244. “ That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit.” 1 Bouvier’s Law Diet. p. 273.
On the other hand, isolated transactions do not constitute the carrying on of a trade or business. Mente v. Eisner, 266 Fed. 161; Bedell v. Commissioner, 30 Fed. (2d) 622; Washburn v. Commissioner, 51 Fed. (2d) 949. It is often difficult to apply the general definitions, with the result that “the decision in each instance must depend upon the particular facts before the court.” Von Baumbach v. Sargent Land Co., 242 U.S. 503.

Here we have no isolated transactions. Two of the subdivisions were laid out in 1925 and one in, January 1927. The total number of lots in the three subdivisions was 420. Streets and alleys were laid out and, we assume, were improved. The trust deeds disclose elaborate provisions for improvements and places the cost of them on the petitioner and his wife. What these improvements were is not disclosed, except that they included the installation of gas, water and electricity. We are informed that rentals were to be collected by the petitioner and his wife, and that all insurance was to be procured and paid for by them. All this involved the expenditure of money and that money was to be raised and paid by these same individuals. If these provisions were not carried out, the burden rested on the petitioner to so show. This he has failed to do, and he must bear the consequences. A selling agent was employed and he was to have subagents. He was to have charge of advertising. Here we have continuity of effort. All this was done for gain, and it falls squarely within the concept of the term business.” Whose business was it? The plan was conceived by the petitioner who, with his wife, owned all the assets of the business. The fact that to a large extent he confided the management of this business, to his agent, Snyder, and to the trustee, does not make it any the less his business. As we said in Willard Pope, supra, “ it is axiomatic that one may confide the management of his business to another; but it still remains the business of the owner.”

We are of opinion that the lots were held by the petitioner primarily for sale in the course of his business. Willard Pope, supra. Cf. Sloan v. Commissioner, 63 Fed. (2d) 666; affirming 24 B.T.A. 61.

Judgment will be entered for the respondent.


author: Maequette :

text:
    Isidore B. Dockweiler and Thomas A. J. Dockweiler, as Executors of and Trustees under the Last Will and Testament of George S. Wilson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50828.
    Promulgated June 29, 1934.

      Isidore B. Doehweiler and Thomas A. J. Doehweiler, pro se.

      M. B. Leming, 'Eng., for the respondent.
   OPINION.

Maequette :

The respondent has determined a deficiency in estate tax of $2,677.69, all of which is in controversy, and which results from his action in reducing the deductions permitted by section 303 (a) (3) of the Revenue Act of 1926 from $279,698.47 to $92,035.06. The petitioners assert that this action is erroneous. Other errors as to deductions are alleged, but these have been settled by a stipulation of facts on which this proceeding is submitted, and which is made a part of this report.

The material facts of the stipulation are that George S. Wilson, hereinafter referred to as the testator, died testate on May 3, 1927, a resident of the County of Los Angeles, California. His will, which was executed April 23, 1926, was, by order of the Superior Court of the State of California in and for the County of Los An-geles, admitted to probate May 31, 1927. The petitioners are his qualified executors. The testator left surviving him no parent, child, or grandchild, but did leave surviving him, his wife, Katherine R. Wilson, whom he married on April 2, 1907. Since November 1912 the testator and his wife have lived separate and apart. On April 2, 1926, the testator, as party of the first part, and his wife, as party of the second part, entered into a written agreement, the provisions of which, after reciting that the parties were married, that they had lived separate and apart since November 26, 1912, that there was no issue of their marriage, that the second party had been contemplating the commencement of an action against the first party for separate maintenance, that “ each of the parties hereto is desirous of determining for both the present and future their respective property rights and their respective financial obligations toward one another,” that the second party was the owner of separate property of the estimated value of $50,000, that the first party was the owner of separate real and personal property described in the agreement, and that there was no community property, provided:

First : In full and complete satisfaction of all financial claims and monetary demands and property claims and property rights of every name, kind, nature and character whatsoever that the said Katherine R. Wilson, said second party hereto, as wife, or as widow, or otherwise, has had or now has or might hereafter have against the said George S. Wilson, said first party hereto, or against the estate of said George S. Wilson, in the event of his death hereafter, as heir-at-law or otherwise, and in consideration of all other covenants and agreements in this agreement contained and on the part of the said Katherine R. Wilson to be kept and performed, the said George S. Wilson does hereby promise, covenant and agree, on behalf of himself and his estate, and his heirs, devisees, legatees, executors, administrators and assigns, to pay to the said Katherine R. Wilson, for the support and maintenance of herself, and as her sole and separate property, the sum of Two Hundred and Fifty Dollars ($250.00) per month, in lawful money of the United States, commencing as of the date of October 1st, 1925, and to continue during the natural life of said Katherine R. Wilson, and whether they remain married or should hereafter for any cause be divorced, said payments to be made by said first party to said second party on the first day of each and every month hereafter by depositing to the credit of said Katherine R. Wilson the said sum of $250.00 per month on the first day of each and every month hereafter at Guaranty Office of the Security Trust & Savings Bank, 655 South Spring Street, Los Angeles, California, and to insure the payment of said monthly sum to said second party during the term of her natural life and beyond the period of the death of said first party, in the event he should die first, the said first party does hereby agree immediately to execute, in the manner provided by law, a will, under and by virtue of the terms of which said first party shall provide the payment to said second party of said $250.00 per month for and during her natural life, and which monthly payments shall taire precedence of any and all other bequests and devises in such will contained, and shall receive first attention in matter of payment. * * *
V ^ ^
Second: All of the property of the said Katherine R. Wilson, both real and personal, now held by her or which shall hereafter be acquired by her in any manner whatsoever, shall be and remain her sole and separate property, free from any and all rights or claims of the said George S. Wilson, with full power to her to sell, convey, transfer, assign, mortgage, pledge, lease or deal with the same as if she were single. And the said George S. Wilson will, from time to time, but only in such manner, as not to create any personal liability on his part, execute any and all such deeds, conveyance, mortgages, pledges, leases and papers as may be necessary or proper to enable her to so sell, convey, transfer, assign, mortgage, pledge, lease or deal with her said property as she chooses.
And said George S. Wilson does hereby waive and surrender any and all right, in the event of the death of said Katherine R. Wilson, to act as the administrator of her estate, or to inherit any of her property as husband, or otherwise, and said George S. Wilson does hereby agree to never hereafter make any claim upon or against said Katherine R. Wilson or upon or against any of the property of said Katherine R. Wilson, either as surviving husband or otherwise, or upon or against her estate, and said Katherine R. Wilsion shall have the uncontested right and privilege to dispose of any and all of her property by will, deed, or otherwise, as she sees fit, and on her death, in the lifetime of said George S. Wilson, all her separate estate, and all of her estate, whether real or personal, which she shall not have disposed of in her lifetime or by will, shall, subject to her debts and engagements, go and belong to the person or persons who would have become entitled thereto if the said George S. Wilson had died in the lifetime of said Katherine R. Wilson; and if the said Katherine R. Wilson shall die in the lifetime of the said George S. Wilson, he shall, without contest of any kind, permit her will to be proved, or administration upon her estate to be taken out by the person or persons who would have been entitled to do so had he, the said George S. Wilson, died in her lifetime.
Thied: All of the property of the said George S. Wilson, both real and personal, now held by him, or which shall hereafter be acquired by him in any manner whatsoever, shall be and remain his sole and separate property, free from any and all rights and claims, except only as herein provided, of the said Katherine R. Wilson, with full power to him to sell, convey, transfer, assign, mortgage, pledge, lease or deal with the same as if he were single. And the said Katherine R. Wilson will, from time to time (but only in such manner as not to create any personal liability on her part), execute any and all such deeds, conveyances, mortgages, pledges, leases and papers as may be necessary or proper to enable him to so sell, convey, transfer, assign, mortgage, pledge, lease or deal with his said property as he chooses. And the said Katherine it. Wilson, contemporaneously with the execution hereof, hereby agrees to properly execute and deliver to said George S. Wilson quitclaim deeds to all of said real property belonging to him and hereinbefore described.
And the said Katherine R. Wilson does hereby waive and surrender any and all right, in the event of the death of said George S. Wilson, to act as the administrator of his estate, or to inherit any of his property as wife or otherwise, and said Katherine R. Wilson does hereby agree to never hereafter make any claim for support or maintenance or alimony, counsel fees or costs in any action for divorce or separate maintenance or otherwise or at all, upon or against said George S. Wilson, or upon or against any of the property of said George S. Wilson, either as surviving wife or otherwise, or upon or against his estate, except as to and for said Two Hundred and Fifty Dollars ($260.00) monthly payment herein provided for her during her natural life, and said George S. Wilson shall have the uncontested right and privilege to dispose of any and all of his property except such as has been placed in trust as security hereunder by will, deed or otherwise, as he sees fit, except that in such will he shall provide for and secure to said Katherine R. Wilson the said monthly payment of $250.00 for each and every month during her natural life, and on his death, in the lifetime of said Katherine R. Wilson, all his separate estate, and all of his estate, whether real or personal, which he shall not have disposed of in his lifetime, or by will, shall, subject to his debts and engagements, and in particular to the payment of said $250.00 per month to said Katherine R. Wilson, go and belong to the person or persons wo would have become entitled thereto if the said Katherine R. Wilson had died in the lifetime of said George S. Wilson; and if the said George S. Wilson shall die in the lifetime of the said Katherine R. Wilson, she shall, without contest of any kind, permit his will to be proved, or administration upon his estate to be taken out by the person or persons designated in such will as the executors thereof, or by the person or persons who would have been entitled to do so had she, the said Katherine R. Wilson, died in his lifetime.
* * * * * * *

All the payments provided in the agreement were made by the testator in his lifetime, and after his death by the petitioners as his executors.

In his will the testator, after bequeathing to relatives sums amounting to $3,000 and to charities sums amounting to $13,500, devised and bequeathed the residue of his estate in trust to the same persons whom he nominated as his executors in trust, to manage and control and to pay to his widow, Katherine K. Wilson, $250 per month so long as she lived, and to pay to a cousin $100 a month during his lifetime, the remaining income to be divided among certain charities. At the death of the survivor of the two beneficiaries the trust is to cease and the corpus is to be divided among the same charities who received the income. In April 1928 the petitioners, as executors, filed their estate tax return in which they reported a gross estate of $387,014.82 and took deductions in the amount of $335,421.69 and claimed the specified exemption of $100,000, leaving no net estate tax. The deductions included charitable bequests and devises in the amount of $279,698.47. The respondent accepted the return, but reduced the charitable deductions to $92,035.06. He made no other changes. The respondent, on brief, states that all the institutions named in the will fall within section 303 (a) (3) of the Revenue Act of 1926.

Neither Katherine R. Wilson nor any other person has objected to the will or to the order of probate. On December 7, 1931, the petitioners filed in said Superior Court their second and final account and report as executors. On January 19, 1932, there was filed in the court report of the inheritance appraiser which was approved February 1, 1932, and which determined that the bequests and devises to charities were exempt from the inheritance tax of California. On February 27, 1932, the court entered its order of settlement and final distribution. No appeal from that order has been taken. The letters testamentary to the petitioners have not been revoked.

The respondent insists that under section 1313 of the Civil Code of California the devises and bequests to the charities are valid only to the extent of one third of the testator’s estate. The petitioners concede that this would be true but for the agreement between testator and his wife of April 2, 1926. They insist that by this agreement the testator’s wife, the only person alive who fell within the last proviso to the section, has waived the restriction contained therein. Whether the agreement operated as a waiver is the only question before us.

It is clear that if no parent, wife, child, or grandchild had survived the testator he could have devised and bequeathed any part or all of Ms estate to charities, provided his -will had been executed six months prior to his death. In re Bartlett's Estate, 122 Cal. Ap. 375; 10 Pac. (2d) 126. In California, as elsewhere, the policy of equity is to favor charities. In re McDole's Estate (Sup. Ct. of Cal.), 10 Pac. (2d) 75. Section 1313 does not disclose a different conception. Thus it was said in Dwyer's Estate, 159 Cal. 680; 115 Pac. 235:

Now, as to such legislative intent: There is no limitation under the laws of this state, except as prescribed by section 1313, upon the right of a person to dispose of his property in favor of charitable purposes. I-Ie may by gift in his lifetime devote all his property thereto. He has a legal right to do so. He may with equal legal right dispose by will of all his property in favor of charities provided he leaves no heirs at law. It is only when he leaves such heirs that his power of disposition by will is restricted. But this is not by reason of any public policy of this state against dispositions in favor of charity. In fact, the state has no such public policy. It is well settled here that dispositions to charity are looked upon with favor, and the courts will uphold all such gifts whether made by a donor in his lifetime or by a i estator, when it can be done consistently with the rules of law. The theory of section 1313 is not to prevent charities from receiving testamentary gifts of property. It is not a mortmain statute; not an expression of a policy of the si ate against the accumulation of vast properties or the centralization of wealth in mortu naanu. It was not designed to operate upon the capacity of corporations or institutions or individuals to take charitable testamentary gifts, but solely as a limitation on the power of a testator to make them when he had legal heirs. Tire purpose of the section was remedial; to prevent what was deemed a wrong and injustice to those who should naturally be the recipients of the bounty of a testator — his heirs at law. It was not enacted for the public good or as a matter of state polity, but for the benefit exclusively of those named in it — the heirs at law — and as a protection against hasty and improvident gifts to charity by a testator of his entire estate to the exclusion of those who in the judgment of the Legislature had a better claim to his bounty. * * *

To bring this home, it is only necessary to point out that here the only person who could have benefited by the restriction was the testator’s wife, who had the right to waive it. Did the agreement of April 2, 1926, accomplish this result?

"VVe think that this agreement was valid. No one contends otherwise. Sections 158, 159, and 160 of the Civil Code of California. Clover's Estate, 179 Cal. 813; 176 Pac. 472; Fitch v. Tyler, 105 Cal. App. 306; 288 Pac. 74.

The main purpose of the agreement was to settle for the present and for the future all the property rights and financial obligations of the parties to one another. To this end the testator confirmed to his wife all her property as her separate property, and she likewise confirmed to him his property. He agreed to pay her $250 a month during her lifetime. All this was done in full and complete satisfaction of all claims and demands which she, as wife, widow, or otherwise might then or thereafter have against him, or against his estate in the event of his death in her lifetime, as heir at law or otherwise. She agreed that, subject to his debts and the payments of the $250 a month to her, on his death in her lifetime his estate should go to the persons who would have been entitled thereto if she had died in his lifetime, and, further, that she would without contest permit his will to be proved. It thus appears that under the agreement the only right which his wife had against the testator was to the monthly payments of $250 during her life. With the exception of this right she was a stranger to his estate after the execution of the agreement.

It remains to apply the last proviso to section 1313, which was enacted in 1919, to these facts. No California case in point has been cited to us and we have been unable to find one. We must therefore decide this case as a new proposition. The question should be approached in the light of certain accepted rules of statutory construction. Thus, in Smythe v. Fiske, 23 Wall. 374, the court said:

A thing may be within the letter of a statute and not within its meaning, and within its meaning, though not within its letter. The intention of the lawmaker is the law. * * *

In United States v. Katz, 271 U.S. 354, the Court laid down the following rule:

All laws are to be given a sensible construction; and a literal application of a statute, which would lead to absurd consequences, should be avoided whenever a reasonable aixplication can be given to it, consistent with the legislative purpose. See Hawaii v. Mankichi, 190 U.S. 197, 212, and cases there cited. * * *

To the same effect see Gulf States Steel Co. v. United States, 287 U.S. 32.

The agreement of April 2, 1926, falls within the letter of the proviso in that it was executed over six months before the testator’s death and, in our opinion, it falls within its spirit in that it divested the testator’s wife of all interest in his estate except her annuity, and this in no way conflicted with the gifts to charity. Any further formal waiver would have been a futile gesture. She had nothing to waive. The law does not require the doing of that which is unnecessary. Such a construction would result in an absurdity.

In our opinion the agreement of April 2, 1926, was effective as a waiver of the restriction in the proviso to section 1313. Estate of Valentine Janson, 3 B.T.A. 296, relied upon by respondent, is not in point. There, at the time of the testator’s death the bequests were void. Here, we have held them to be valid.

Reviewed by the Board.

Judgment will Joe entered under Rule 50.

       § 1313. Restriction on Denise for Charitable Uses; Emceptlons. No estate, real or personal, shall be bequeathed or devised to any charitable or benevolent society or corporation, or to any person or persons in trust for charitable uses, except the same be done by will duly executed at least thirty days before the decease of the testator; and if so made at least thirty days prior to such death, such devise or legacy and each of them shall be valid; provided, that no such devise or bequest shall collectively exceed one-third of the estate of the testator, leaving legal heirs, and in such case a pro rata deduction from such devises or bequests shall be made so as to reduce the aggregate thereof, to one-third of such estate; and all dispositions of property made contrary hereto shall be void, and go to the residuary legatee (and) devisee, next of kin, or heirs, according to law; and provided, further, that bequests and devises to the state, (or to any municipality, county, or political subdivision within the state), or to any state institution, or for the use or benefit of the state or any state institution, or to any educational institution which is exempt from taxation under section one a of article thirteen of the constitution of the State of California, or for the use or benefit or any such educational institution, are excepted from the restrictions of this section; provided, however, that nothing in this section contained shall apply to bequests or devises made by will executed at least six months prior to the death of a testator who leaves no parent, husband, wife, child, or grandchild, or when all of such heirs shall have by writing, executed at least six months prior to his death, waived the restriction contained herein.