author: Arundell: Sterniiagen, Murdock,

text:
    Commercial Investment Trust Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43495, 50051.
    Promulgated May 23, 1933.

      Bernard Knollenberg, Esq., for the petitioner.

      Mason B. Leming, Esq., for the respondent.
   OPINION.

Arundell:

The decided cases are uniform in holding that costs incurred in corporate organization, sales of capital stock, and amendments to corporate charters are not ordinary and necessary business expenses deductible in the year paid or incurred. Emerson, Electric Mfg. Co., 3 B.T.A. 932; Simmons Co., 8 B.T.A. 631; affd., 33 Fed. (2d) 75; certiorari denied, 280 U.S. 577; William Cluff Co., 7 B.T.A. 662; Corning Glass Works, 9 B.T.A. 771; 37 Fed. (2d) 798; certiorari denied, 281 U.S. 742; Odorono Co., 26 B.T.A. 1355. Such items as are here sought to be deducted have consistently been treated as relating to capital and not to current operations. As said in Corning Glass Works, supra, the expense of selling preferred stock “ represents a capital expenditure, and should be charged against the proceeds of the stock, and not recouped out of operating earnings.”

The cases above cited likewise dispose of petitioner’s alternative claim that the costs incident to the preferred stock issues be spread over 33% years, during which period it was contemplated that the stock would be redeemed. An item that is not essentially an ordinary and necessary expense can not be placed in that category by spreading it rather than by taking it in full in the year paid or incurred. While costs of issuing stock are spoken of as capital expenditures, they may not result in the acquisition of a wasting capital asset as, for instance, a leasehold for a definite term. The fact that the stockholders hope to get their investment back within a certain period does not convert the cash paid in into an exhaustible asset. We accordingly hold that costs incurred in connection with the preferred stock issues may not be deducted under either the expense or exhaustion provisions of the statute.

This disposition of the claim for a deduction of the capital expenditures makes it unnecessary to pass upon the sufficiency of the proof directed toward establishing the amount attributable to the first issue of preferred stock separately from the other expenditures in connection with the organization of petitioner and the issuance of its common stock. It appears that the entire amount of $30,065.09 paid or incurred in 1925 may properly be ascribed to the issuance of the 6% percent preferred stock. For reasons above given, however, none of this amount may be deducted except the amount of $23.10 allowable as a tax-

At the hearing it was shown that $28,437.50 of the amount originally claimed as a deduction for expenses incurred in 1925 in the issuance of stock was for interest paid to Dillon, Head & Co. on $7,500,000 at 6yz percent per annum for the period of 21 days between the payment by Dillon, Read & Co. of the sale price of petitioner’s 6% percent preferred stock and the delivery of stock certificates. The amount is deductible in 1925 as interest paid within the year on indebtedness.

The item of $23.10 was incurred for revenue stamps incident to the issuance of preferred stock in 1925 and represents a tax, deductible from gross income of that year. United States Playing Card Co., 15 B.T.A. 975; Borg & Beck Co., 24 B.T.A. 995.

The petitioner has abandoned so much of the next issue as relates to the deductibility in 1926 of the difference between the sale price and market value of the stock held for delivery in 1928 and 1929.

The reasonableness of the remaining amount in controversy as compensation for services rendered to petitioner is not questioned. The arguments of the respondent on the question are directed to the deduction in 1926 of the excess of market value over the selling price of all the stock. The contentions made are that in 1926 employees did not have a vested right to receive the stock, and the petitioner was under no obligation to deliver it within the year. When applied to allotments B and C, as to which the claim has been withdrawn, the contentions have some force, but they are without merit as to allotment A.

The facts here are very much the same as in Haskell & Barker Car Co., 9 B.T.A. 1087, where the taxpayer contracted to sell its capital stock to employees at less than the market value. It appears that in that case only a part of the stock was paid for and taken up by the employees during the taxable year, but it was held that the difference between selling price and market value of all the stock covered by the contracts was allowable as a salary deduction for the current year. If there is any distinction between the two cases, the one before us is the more favorable to the taxpayer. Here it appears that on June 1, 1926, when the written contracts were executed, the petitioner had been paid for the stock allotted to the employees. This was accomplished by means of advances to the employees to pay the petitioner for the stock, the issuance of the stock to the employees, and its endorsement back as collateral security for the loans. The conditions precedent had been fulfilled within the year, that is, the allottees were employees on the designated dates in 1926, and the stock had been issued to them. The only contingency we see in the case is that in the event of failure to repay the loan to the company, the employees’ stock might be forfeited and used to satisfy the loan. This was a condition subsequent and would not change the character of the stock as issued and paid for within the year nor affect the status of the employees as stockholders in the year. We accordingly hold that petitioner is entitled to the deduction claimed in connection with allotment A, as salaries accrued within the year.

There remains for determination the basis for the deduction. We have heretofore held that where stock is delivered as compensation for services rendered, the taxable income to the recipient is the fair market value of the stock at the time received. Anthony Schneider, 3 B.T.A. 920; Fred J. Collins, 16 B.T.A. 1426. The same basis is used in the computation of gain realized on the sale of stock received under such circumstances. I. C. Bradbury, 23 B.T.A. 1352. In Haskell & Barker Car Co., supra, we allowed the deduction on the basis of the market value of the stock at the time the allotments were made.

. Here most of the stock was allotted on January 2, 1926, when it had a fair market value of $11.50 per share. Other allotments were made on April 12, 1926, and July 1, 1926, when the fair market value was $55 and $62.50 per share, respectively. The employees acquired the right to one half of allotment A when the stock was allotted, and to the other half for continuous service to and including July 1, 1926. At those times the employees became owners of the stock and petitioner was under a definite obligation to turn over all of it on January 2, 1927, provided only that the employees had discharged their obligations for the loan. These facts, in our opinion, were sufficient to warrant the accrual of the deduction on petitioner’s books. The deduction, measured by the difference between the fair market value of the stock and the selling price of $35 per share to the employees, for one half of allotment A earned by services performed prior to July 1, 1926, should be on the basis of a fair market value of $71.50 for the stock allotted on January 2, 1926, and $55 for the stock allotted on April 12, 1926. The allowance for the remaining half of the allotment and all of the shares allotted on July 1, 1926, should be on the basis of a fair market value of $62.50 per share.

The sum of $82,454, representing credits made in the accounts of the employees in 1926 for dividends declared on the stock allotted to them, is claimed to be deductible as additional compensation for services rendered. We have already held that petitioner may deduct the difference between the selling price and the fair market value of the stock included in allotment A, as compensation for services. The value of the stock on the date of allotment was based on the right to receive dividends thereon, and to permit the deduction of dividends as such and also the market value of the shares would be to allow a double deduction. The entire plan between petitioner and the employees contemplated their acceptance as stockholders from the date of allotment, with a right to receive dividends on the allotted stock, and with a charge for interest on the advances made the employees for the purchase of the stock. On the record we sustain the respondent’s disallowance of the amount as a deduction.

Reviewed by the Board .

Decision will be entered under Rule 50.

Sterniiagen,

dissenting: As to the deduction allowed as compensa-

tion for services of the value of a corporation taxpayer’s shares, I have already expressed my disagreement in Haskell & Barker Car Co., 9 B.T.A. 1087. The confusion disclosed by the issue raised in the present proceeding as to the time and amount of the accrual, as suggested by my brother Murdock, has its genesis in the fallacy of regarding the disposition by a corporation of its own shares as an expense. The corporation has spent or incurred nothing. The transaction was a sale or issuance of shares to a restricted class for a price. The earnings and profits remain, throughout these stock transactions, entirely in the corporation’s possession, subject to its use and disposition, and distributable, in its discretion, by way of dividends. What then serves to reduce its income ? Nothing, unless the redistribution of share interests can be said to do so. If a partnership were to give an employee an interest in the business, there would probably be no suggestion of deduction. The concept of capital stock in Eisner v. Macomber, 252 U.S. 189, leads to the same result. Since, as the prevailing opinion holds, the payment of cash dividends to the employees fails to reduce income, it is difficult to see why the issuance of the stock upon which the dividends are paid should do so. It may be added, lest there be doubt as to the importance of this question, that the facts in Rogers v. Guaranty Trust Co., 288 U.S. 123, give some idea of the possible extent of its effect. A close corporation could by this method earn profits year after year, and by distributing shares of an increasing value for services avoid all tax while distributing its earnings, which to the distributee are free from normal tax. And it certainly adds nothing to the argument for deductibility that instead of an outright issuance for service, there is a sale for less than value.

Mttedock agrees with this dissent.

Murdock,

dissenting: I see neither statutory nor factual authority for the deductions allowed in this case on account of the “A” allotment of stock. The prevailing opinion attempts to justify the accrual of definite amounts on the theory that certain employees on January 2 and on April 12, 1926, purchased certain stock. An accrual must be made as of the time when the facts determinative of the obligation and its amount become fixed. How could this corporation accrue any amount until there was an agreement, which not only bound it to deliver a definite number of shares to a certain employee, but bound some employee to accept and pay for those shares ? The findings do not show any such agreement prior to June 1, 1926. Therefore, accruals based on fair market value of stock on January 2 and April 12 are clearly improper. But aside from this, the deduction is wrong in principle. See the dissenting opinions in Haslcell & Barker Car Co., 9 B.T.A. 1087. Other stockholders of the parent are the only ones adversely affected by the issuance of additional stock for less than its fair market value. Thereafter they have to be content with a smaller share of corporate distributions. But the income of the issuing corporation certainly is not reduced. Its - assets are not reduced. The transaction is unique and is not covered by any provision of the statute allowing deductions to a corporation.

Sternhagen, McMai-ioN, and Goodrich agree with this dissent.


source: Caselaw Access Project

author: Sternhagen :

license: Public Domain

text:
    Estate of A. Murat Willis, Deceased, Richmond Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59154.
    Promulgated May 23, 1933.

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

Sternhagen :

The respondent determined a deficiency (the amount of which does not appear) in the decedent’s estate tax, by including in the gross estate the full value in excess of $40,000 of insurance policies upon which the insurance companies were to pay interest to the widow during her life and then to a child during her life, the remainder to another. The facts are all stipulated, and it is furthermore agreed in the stipulation that if under the policies and the statute the face amount of the policies is to be commuted, the amount properly thus commuted and to be included in the gross estate is $98,878.89, while if no commutation is proper the Commissioner has correctly included the amount of $120,525.24.

In all the policies, the decedent at the time of his death had the right to change the beneficiary and to determine under certain options set forth in the policy how the proceeds were upon his death to be disposed of. At the time of his death the option in force by virtue of instructions already given was that the insurance company was to retain the face amount of the policy, pay interest thereon at a prescribed minimum rate to the designated beneficiary for life and to his named successor for life, and then to pay the remainder to another. There is nothing of annuity in this. Cf. Burnet v. Whitehouse, 283 U.S. 148. It is a simple insurance fund upon which interest was paid, both the fund and the interest being subject to the disposition of the decedent until the moment of his death. Since the estate tax is measured not by what the beneficiary receives but by the economic changes which are brought about by the decedent’s death and treated by the statute as a transfer, Fannie E. Lang v. Commissioner, 289 U.S. 109, there is, in our opinion, no occasion for commutation of value, even if, as we seriously doubt, the evidence indicated that actual value was less than the face amount used by the respondent. Chase National Bank v. United States, 278 U.S. 237; Reinecke v. Northern Trust Co., 278 U.S. 339; Solly S. Levy et dl., Executors, 25 B.T.A. 1174.

Judgment will he entered under Rule 50.


text:
    Louisiana and Arkansas Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59585.
    Promulgated May 23, 1933.

      Ferdinand Tannenbaum, Esq., for the petitioner.

      Arthur Clark, Esq., for the respondent.
   OPINION.

Sternhagen :

The question presented at the outset is whether the Board has jurisdiction of this proceeding, since it involves no issue as to the deficiency of the transferor or the petitioner’s liability therefor, that deficiency having already been definitively determined and paid, but only an issue as to the petitioner’s liability for the interest on such deficiency. While the evidence, all of which is stipulated, does not show how the amount of interest was computed, it is nevertheless a fixed amount, and it seems to approximate simple interest at 6 percent for the period of more than eight years between the filing of the return in 1922 and the payment of the redetermined deficiency in 1930.

In considering whether the Board has jurisdiction to consider interest, it is important that the proceeding is by a transferee in respect of its liability as such and not by a primary taxpayer in respect of a deficiency in its own tax; for the jurisdiction of the Board in these different matters is governed by different statutory provisions. As to the Board’s function in respect of the original taxpayer and the deficiency, before assessment, it is clear that interest is treated separately from the deficiency, is imposed directly by the statute and is collected by the Commissioner as thus prescribed as a supplement to the deficiency after it is finally determined. The entire scheme of sections 218 and 214, Revenue Act of 1926, supports this view, more especially section 214 (j). While both the deficiency and the interest are collectible as parts of the tax, they are separate from each other and within the operation of different parts of the machinery of administration. Where the proceeding instituted in the Board by the taxpayer in respect of the Commissioner’s determination of deficiency involves an amount already erroneously refunded, it has been held that interest upon such erroneous refund is not part of the deficiency and not within the jurisdiction of the Board, Joseph, P. Levy, et. al., Executors, 18 B.T.A. 337, 341, and also that interest upon an overpayment found in lieu of a deficiency is beyond the Board’s jurisdiction, Capital Building & Loan Assn., 23 B.T.A. 848. But those decisions are only remotely significant in the present inquiry.

In the realm of jeopardy assessments dealt with in section 279, the language used in the statute seems to be susceptible of the interpretation that the Commissioner may assess interest with the deficiency and that the entire amount may be litigated before the Board and redetermined. This is important as indicating that even in setting up the jurisdiction of the Board as to the taxpayer himself and his deficiency, there is no clear and unmistakable purpose to exclude interest from its field of inquiry, but rather a purpose to vary the jurisdiction in different classes of cases.

When, therefore, it becomes necessary to consider the scope of the system of jurisprudence as to transferee liability, set up for the first time in the Revenue Act of 1926, section 280 et seq., Phillips v. Commissioner, 283 U.S. 589, there is no justification for confining such system within an assumed general purpose to keep interest out of the Board’s focus. Unhampered by such a restriction, it is clear that as to a transferee the Commissioner may determine a liability not only for a deficiency but also for “ interest, additional amounts, and additions to the tax provided by law,” and that such a determination is subject to the same process as the determination of a deficiency, that is, a proceeding in the Board for redetermination. Section 280 (a), Revenue Act of 1926, appears in the margin. The Board has, in several earlier decisions in transferee proceedings, included interest in its determination, Henry Cappellini, 16 B.T.A. 802; Wayne Body Corp., 24 B.T.A. 524; Louis Costanzo, 16 B.T.A. 1294; J. E. Duval, 21 B.T.A. 1357. A fresh consideration of the question confirms the propriety of those decisions.

The motion to dismiss for want of jurisdiction is therefore denied.

Upon the merits, it appears from the stipulated facts that the petitioner acquired all of the taxpayer’s assets, leaving it with nothing; that the value of the assets thus acquired was more than the amount of the liability now being enforced, and that it gave its own shares directly to the shareholders of the original taxpayer. Its liability for the full amount of interest determined by the respondent is therefore beyond question. Woodley Petroleum Co., 16 B.T.A. 253; Concrete Industries Co., 19 B.T.A. 655; Gideon-Anderson Co., 20 B.T.A. 106; Magnolia Window Glass Co., 23 B.T.A. 1242.

Judgment will be entered for the respondent.

       Sec. 280. (a) The amounts of the following ¡¡abilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in ease of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :

        (1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.
      (2) Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.


author: Steknhagen :

text:
    C. P. Ford & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59851.
    Promulgated May 23, 1933.

      Jacob Ark, Esq., for the petitioner.

      Warren F. Wattles, Esq., for the respondent.
   OPINION.

Steknhagen :

The petitioner complains because the respondent has determined that there is no reasonable ground for any addition to its reserve for bad debts and has therefore disallowed the entire deduction taken. It argues that the amount was determined by the method which was used to arrive at the deductions previously allowed, that the method is “ scientific,” and that since, in the opinion of its officers, it is a reasonable amount, its deduction may not be dissallowed.

The effective statute is section 23 (j), Eevenue Act of 1928, which allows the deduction of “Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts).” The effective regulation is Regulations 74, article 195, which appears in the margin.

The statute, in providing for reserves for bad debts, imposes the condition that it shall be in the discretion of the Commissioner, thus giving a sanction to his determination which, while still subject to review (cf. Blair v. Oesterlein Machine Co., 275 U.S. 220), is not to be lightly set aside. A taxpayer has an absolute right to choose to deduct his worthless debts when they are ascertained to be worthless and charged off, but if instead he chooses to deduct additions to a reserve, he subjects himself to the reasonable discretion of the Commissioner. Reserves of any sort are not ordinarily deductible, Spring Canyon Coal Co. v. Commissioner, 43 Fed. (2d) 78, and when Congress so far departs from the customary practice as to permit such a deduction as to a bad debt reserve, the condition is as important as the permission. Such a deduction presents substantial problems of administration, and it can not be assumed that Congress intended either that the taxpayer’s unrestrained judgment as to the propriety or wisdom of his method or that the Board’s judgment in a particular case when not supported by broad administrative considerations as well as the taxpayer’s individual premises should override .the Commissioner’s sound discretion. That the Board has jurisdiction to review his determination does not mean that its judgment is to be substituted for that of the Commissioner merely because both may be within the bounds of reason. This may mean nothing more than that the Commissioner’s determination is presumed to be correct, but Congress seems to have given the presumption greater emphasis by its express legislation than that of the general presumption which applies to all determinations of deficiencies.

The petitioner insists that the method already tacitly approved by the Commissioner through his allowance of the earlier additions to the reserve bespeaks the reasonableness and deductibility of the 1929 addition. This would mean that the Commissioner had discretion not as to the addition and its reasonableness, but only as to the initial approval of the method to be annually employed; that once the method is approved, the amount, however inordinately large or small in the light of experience, may not be disallowed or increased. Manifestly the discretion was not intended to be so restricted. A method which produces a reasonable result for one year or even a series of years may in a given year be entirely out of tune with the circumstances. If so, it should not deprive the taxpayer of a deduction sufficiently large to reflect such changed circumstances, Rhode Island Hospital Trust v. Commissioner, 29 Fed. (2d) 339, and should likewise not entitle him to a deduction in excess of the amount reasonably necessary to provide for his probable bad debts. Since the reserve is necessarily the embodiment of estimates, the estimate for any year must be measured by the necessities of the reserve as those necessities appear at the time the estimate is made. So long as the method adopted accomplishes its purpose, there is reason for its consistent and continued use; but beyond that, it loses its force.

Thus considered, the evidence in the present record not only falls short of proving that the Commissioner’s determination was erroneous but to the contrary proves that the addition claimed by the petitioner is unreasonable in that it would increase the reserve beyond the necessity disclosed by its experience or by its prospects for the future. The amount of its bad accounts in the past was never so large as to require as large a reserve as was set up. While we do not lay down a rule that the reserve may not be larger than the amount of actual or average bad accounts of the past, the reserve already available in the present case is so much larger than appears to be necessary that there is no right to expand it and clearly no warrant to require the Commissioner, contrary to his discretion, to approve such expansion.

We have considered the Commissioner’s determination on the one hand and the opinions of the petitioner’s officers on the other, together with the evidence of facts and circumstances as it affects both; and in our opinion, the respondent correctly disallowed the deduction.

Judgment will be entered for the respondent.

       Art. 195. Reserve for bad debts. — Taxpayers who have, prior to 1928, established the reserve method of treating bad debts and maintained proper reserve accounts for bad debts, or who, in accordance with article 191, or upon securing permission from the Commissioner, adopt the reserve method of treating bad debts, may deduct from gross income a reasonable addition to a reserve for bad debts in lieu of a deduction for specific bad debt items.
      What constitutes a reasonable addition to a reserve for bad debts must be determined in the light of the facts, and will vary as between classes of business and with conditions of business prosperity. A taxpayer using the reserve method should make a statement in his return showing the volume of his charge sales (or other business transactions) for the year and the percentage of the reserve to such amount, the total amount of notes and accounts receivable at the beginning and close of the taxable year, and the amount of the debts which have been ascertained to be wholly or partially worthless and charged against the reserve account during the taxable year.

       In the revenue agent's report appended to the petition appears the following tabulation:

      This indicates a ñve-year average of $11,190.97 bad accounts out of an average of $256,736.91 accounts receivable, which is less than 4K percent. If this percentage be applied to the accounts receivable of 1929 of $388,055.67, the resulting figure is $17,462.50, which may be compared with the $30,000 already in the reserve and the $28,163.49 proposed to be added.


author: Lansdon:

text:
    Carter Publications, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44838, 66891.
    Promulgated May 23, 1933.

      H. A. Mihills, C. P. A., for the petitioner.

      F. B. Schlosser, Fsq., for the respondent.
   OPINION.

Lansdon:

In this proceeding we are required to decide only a question of law. The petitioner contends that in the circumstances set out in our findings of fact it purchased certain of the physical assets of the Fort Worth Record Co. for $175,000 and, therefore, is entitled to compute gain or loss from the sale of such property and depreciation sustained in the use thereof on a cost basis of $175,000. The respondent has determined the transactions in question effected a reorganization as defined in section 203 (h) (1) of the Revenue Act of 1924 and therefore that the basis for computing gain or loss from sales or depreciation sustained in the use of assets so acquired is that to which the transferor was entitled under the provisions of section 204 (a) (7) of the same act.

The Fort Worth Record Co. distributed a part of its assets to its principal shareholder, thereafter sold the remainder to the petitioner and was at once dissolved. Instead of being a continuing reorganized corporation in any sense it ceased to exist, and from the date of its dissolution neither as a corporation nor through its stockholders did it have any continued interest in or control over the corporation that had purchased a portion of its assets for cash. Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; H. L. Neuman Co., 16 B.T.A. 533. It is equally difficult to see any reorganization of the petitioner, which merely bought some property and thereafter remained under and was operated for the same body of stockholders that controlled it prior to the transaction.

In the circumstances herein some of petitioner’s stockholders took legal title to the stock of the Fort Worth Record Co., but only for the purposes of carrying out the agreement with Hearst. In their ad interim holding thereof, Carter and his associates were no more than trustees charged with the duty of accomplishing the terms of such agreement. Since none of such stockholders owned a majority of the Fort Worth Record Co. at the inception of this transaction, the procedure followed is not within the definition of a reorganization as contended by the respondent. The whole series of acts, corporate and otherwise, constituted only a single transaction in which the petitioner purchased certain tangible assets for cash. On this issue the determination of the respondent is reversed. Weiss v. Stern, 265 U.S. 242; United States v. Phellis, 257 U.S. 156; Cooper v. Reynolds, 60 Fed. (2d) 650; E. G. Robertson, 19 B.T.A. 534; Robert A. Taft, 27 B.T.A. 808; Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed. (2d) 188. Cf. Mente & Co., 24 B.T.A. 401; Warner Co., 26 B.T.A. 1225.

The petitioner has abandoned its claim for a rate of depreciation higher than that allowed by the Commissioner. On this issue the determination of the respondent is affirmed.

Reviewed by the Board.

Decision will be entered under Rule 50.

Goodrich and Leech dissent.


author: Smith :

text:
    Waldemar R. Helmholz, Executor of the Estate of Irene C. Helmholz, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50485.
    Promulgated May 23, 1933.

      James Quarles, Esq., for the petitioner.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

Smith :

No jurisdictional question has been raised by either party to this proceeding, but because of the record made herein we deem it advisable to consider that question. Cf. Martha M. Hanify, 21 B.T.A. 379. The deficiency notice was addressed to “ Waldemar R. Helmholz, Executor, Estate of Irene C. Helmholz.” The petition, captioned “Waldemar R. Helmholz, as sole devisee and legatee under the will of Irene C. Helmholz, deceased,” was based upon that notice. In his petition the petitioner alleged, and the respondent admitted, that “ the Petitioner was and is the sole beneficiary under the will of said Irene C. Helmholz, and it is in that capacity he prosecutes this appeal.” It appears that the petitioner duly administered the estate, made final settlement of his accounts, and was discharged as administrator by the County Court of Milwaukee County in September 1928. It does not appear that the petitioner ever notified the Commissioner of such final settlement and discharge. The settlement of the estate and the final discharge of the administrator before the tax obligations were discharged neither extinguished the tax nor relieved the petitioner from his liability under the law to pay it. Petitioner has invoked the jurisdiction of this Board for a redetermination of the deficiency set forth in the notice addressed to him as executor of the decedent’s estate. No one has been misled as to the liability asserted. In these circumstances we accept jurisdiction of the proceeding. Charles Hallock Whitehead, Executor, 24 B.T.A. 1111; Jessie Smith, Executrix, 24 B.T.A. 807; Commissioner v. New York Trust Co., 54 Fed. (2d) 463; certiorari denied, 285 U.S. 556.

The primary issue is whether the 999 shares of stock, or any interest therein, which the decedent placed in the trust created by the decedent, her parents, brothers and sisters in 1918, should be included in her gross estate. The respondent contends “ that the value of the property in question was properly included in the gross estate under the provisions of Section 302 (c) and Section 302 (d) of the Revenue Act of 1926.” The petitioner insists that not even the life interest of the decedent’s appointee should be included in the gross estate. In so far as material hereto, section 302 of the Revenue Act of 1926 is as follows:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
*******
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth.

In construing the decedent’s will as a valid exercise by Irene C. Helmholz of the power of appointment reserved in the trust agreement, the Supreme Court of Wisconsin, in First Wisconsin Trust Co. v. Helmholz, 198 Wis. 573; 225 N.W. 181, 183, said:

* * * She had a most hazy conception of the change which the trust deed had wrought upon her rights in and title to the corporate stock conveyed by that deed. In drafting her will she used the language of the layman. So far as the terms of her will were concerned, her husband was constituted her sole beneficiary. We glean no purpose from the terms of the will to make any other person the beneficiary of her bounty. She probably was not conscious of the necessity of exercising her power of appointment by her last will and testament, and a specific intent to that end probably was not present in her mind, but it does most satisfactorily appear that she intended to make her husband the beneficiary of all and everything of value which she could confer upon him by her last will and testament. If this purpose on her part is to be given effect, the will must be construed as an exercise of the power of appointment. Not to do so would be recreant to the sacred trust with which the judiciary stands charged, inconsistent with established principles of law, and especially the uniform rulings of this court.

The Supreme Court of Wisconsin affirmed the trial court in holding that the decedent’s husband was “beneficiary of the dividends accruing from or paid upon the 999 shares of stock conveyed by her trust deed.”

By the provisions of the trust deed, the remainders after the life estate of the grantors and their appointees were vested in the issue of such grantors, and, failing issue, in a designated charitable.trust— such remainders taking effect upon the termination of the primary trust. If it were not for the provision for the termination of the trust and the power of appointment reserved by the decedent, we would have no hesitancy in holding that the corpus of this trust should not be included in the decedent’s gross estate under the ruling in May v. Heiner, 281 U.S. 238, which was followed per curiam in Burnet v. Northern Trust Co., 283 U.S. 782; Morsman v. Burnet,

288 U.S. 783; and McCormick v. Burnet, 283 U.S. 784. See also Elizabeth B. Wallace, Executrix, 27 B.T.A. 902.

In Charles H. W. Foster et al., Executors, 26 B.T.A. 708; affd.. C.C.A., 1st Cir., March 20, 1933, we said:

* * * Where, as here, gifts are made irrevocably to a trust and the donor reserves the income to himself for life and the right to designate the beneficiaries of the income after his death, which right is exercised in accord wiqth the trust agreement, it is doubtful whether any portion of the trust property should be included in the decedent’s gross estate in view of the decision in May v. Heiner, supra. Such doubts should be resolved in favor of the taxpayer (Gould v. Gould, 245 U.S. 151, 153), particularly in view of the fact that immediately following the per curiam decisions in Burnet v. Northern. Trust Co., supra; Morsman. v. Burnet, supra; McCormick v. Burnet, supra, Congress amended section 302 (c) of the Revenue Act of 1926 by joint resolution (Public 131), approved March 4, 1931, which specifically provides for the inclusion of property transferred in trust where the transferor “has retained for his Ufe * * * the income from the property or * * * the right to designate the persons who shall * * * enjoy * * * the income therefrom.” The amendment was not retroactive and has been applied only to transfers “ made after 10:30 P.M. * * * March 3, 1931.” Treasury Decision 4314. See United States v. Field, 255 U.S. 257.

The provision for the termination of the trust, “ upon delivery to the * * * trustee of a written instrument signed by all of the then beneficiaries, other than testamentary appointees, declaring said trust term at an end,” did not render the trust revocable. The grantors of the trust are generally referred to as the subscribers, but assuming that the term “ beneficiaries ” embraces the grantors, no one of them could have revoked the trust alone. As was said by the Circuit Court of Appeals for the First Circuit in White v. Erskine, 47 Fed. (2d) 1014, 1016:

* * * but where the decedent has no such power except by the consent of an adverse party as one of the beneficiaries, or as in this' instance of the trustee for the beneficiaries, the right of revocation is gone from the donor and also all beneficial interest for taxing purposes under section 801 of the act.

See also Reinecke v. Northern Trust Co., 278 U.S. 339, 346; Union Guardian Trust Co., 26 B.T.A. 1321, 1324.

In Porter v. Commissioner, 288 U.S. 436, the Supreme Court pointed out that:

* * * Congress has progressively expanded the bases for such taxation. Comparison of § 302 with corresponding provisions of earlier Acts warrants the conclusion that (d) is not a mere specification of something covered by (a) but that it covers something not included therein. Cf. Chase National Bank v. United States, 278 U.S. 327. Tyler v. United States, 281 U.S. 497. Gwinn v. Commissioner, 287 U.S.-. Burnet v. Guggenheim, 287 U.S.-.
* * * Subdivision (d) requires to be included in the calculation all property previously transferred by decedent, the enjoyment of which remains at the time of his death subject to any change by the exertion of a power by himself alone or in conjunction with another. * * * Here the donor retained until his death power enough to enable him to make a complete revision of all that he had done in respect of the creation of the trusts even to the extent of taking the property from the trustees and beneficiaries named and transferring it absolutely or in trust for the benefit of others. So far as concerns the tax here involved, there is no difference in principle between a transfer subject to such changes and one that is revocable. The transfers under consideration are undoubtedly covered by subdivision (d).
* * * the reservation here * * * while subject to the specified limitation Tthat there could be no change in favor of the grantor or his estate], * * * made the settlor dominant in respect of other dispositions of both corpus and income. His death terminated that control, ended the possibility of any change by him, and was, in respect of title to the property in question, the source of valuable assurance passing from the dead to the living. * * *

In the instant proceeding, Mrs. Helmholz had irrevocably disposed of the corpus of the trust, and that property went to the re-maindermen designated in the trust agreement, upon the termination of the trust. She had no power to alter, amend, or revoke the trust instrument that would effect such a disposition as was possible in the Porter case and bring the property within the purview of subdivision (d).

In White v. Erskine, supra, the Circuit Court of Appeals for the First Circuit, in construing subdivision (d) of the statute, said:

To hold that Congress under subdivision (d) intended under the guise of a tax on the transfer of property at death to impose a tax solely on a limited power of alteration of a trust, or a limited power of appointment under it, would be contrary, not only to the spirit of the act, but the express terms of section 301,, Leser, Executrix, v. Burnet, Oom., supra; Fidelity-Phila. Trust Co., v. McCaughn (C.C.A.) 34 F. (2d) 600, 604, and so doubtful a construction that the contrary intent should be resolved in favor of the taxpayer, Gould v. Gould, 245 U.S. 151, 38 S.Ct. 53, 62 L.Ed. 211.

Having found that the corpus of the trust here involved was not within the purview of subdivisions (e) and (d) of the statute, and by applying the cognate reasoning of the Porter case, it is reasonable to conclude that subdivision "(f) covers property not otherwise specified in section 302. See also United States v. Field, 255 U.S. 257. That being the case, is the property here involved to be included in the decedent’s gross estate by reason of her power of appointment?

We have had occasion to determine what “ property passing under a general power of appointment exercised by the decedent * * * by will ” was to be included in the gross estate of such decedent. Where the appointment has been general and unrestricted and upon the exercise thereof effectively disposed of the corpus, we have held that the appointed property was includable in the gross estate. See Emily Annette Agnus Leser, Executrix, 17 B.T.A. 266; Edward J. Hancy, Executor, 17 B.T.A. 464; Mary M. Lee, Executrix, 18 B.T.A. 251; affd., 57 Fed. (2d) 399; Cortlandt F. Bishop, Executor, 23 B.T.A. 920; Joseph Walher Wear et al., Executors, 26 B.T.A. 682. See also Stratton v. United States, 50 Fed. (2d) 48.

In John S. Montgomery et al., Executors, 17 B.T.A. 491, we held that the respondent correctly included the present worth of certain equitable life estates in the decedent’s gross estate under section 402 (e) of the Eevenue Act of 1921, which is similar to the applicable provision of the 1926 Act here involved. In that case it appeared that in 1898 Samuel M. Child created a trust for the benefit of designated beneficiaries, including the decedent (Harriette Hall Morris). The trust continued until the death of the last surviving beneficiary. Upon the death of each beneficiary he or she had a general power of appointment over his or her interest in the trust, that is, to dispose of the income during the continuance of the trust and to dispose of the corpus upon the termination of the trust. The decedent exercised her power of appointment, but with void limitations over. In holding that the present worth of the life estates appointed by the decedent’s will should be included in her gross estate, we ignored the remainders, which nevertheless passed to her descendents just as if she had failed to exercise her power of appointment. These facts distinguish the Montgomery case from the instant proceeding.

In Leser v. Burnet, 46 Fed. (2d) 756, the Circuit Court of Appeals for the Fourth Circuit in part reversed the Board’s decision (Emily Annette Agnus Leser, Executrix, supra) and held that only property subject to a general power of appointment was to be included m the gross estate of the donee of such power. The court said:

* * * The first question to be determined, therefore, is what is meant by a general power within the meaning of the act, and we think there can be no question that by a general power is meant one which may be exercised by the donee of the power in favor of any person whomsoever including the donee himself or his own creditors.
# # # * * * *
In this respect, the case of a general power of appointment is analogous to that of a policy of insurance where the insured has the right to change the beneficiary and thus secure for his estate or his creditors the proceeds of the policy. In such case it is held that the proceeds of the policy may properly be included in the estate of the insured for the purpose of the estate tax. See Chase Nat. Bank v. U.S., 278 U.S. 327, 335, 49 S.Ct. 126, 127, 73 L.Ed. 405, 63 A.L.R. 388, * * *
* * * * * * *
The inclusion for purposes of estate taxation of property transferred under a general power is analogous also to the inclusion of property transferred in trust with power of revocation reserved to the grantor. It is held that upon the grantor’s death such property should be included in valuing his gross estate, upon the principle that the passing from him of the power and control over the property is taxable as a transfer. Reinecke v. Trust Co., 278 U.S. 339, 345, 49 S.Ct. 123, 73 LEd. 410, 66 A.L.R. 397; Saltonstall v. Saltonstall, 276 U.S. 260, 271, 48 S.Ct. 225, 72 LEd. 565.
Except that the donee of a general power may exercise it in favor of his creditors and thus use the property which is the subject of the power for his
own use and benefit, there is no basis for including in his taxable estate property which is subject thereto; for this right is all that passes from his estate by reason of his death. In Y.M.C.A. v. Davis, 264 U.S. 47, 44 S.Ct. 291, 292, 68 L.Ed. 558, the Supreme Court said: What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of death.” By this language we understand the court to mean that the tax is imposed on what is transferred from decedent as a result of his death (New York Trust Co. v. Eisner, 256 U.S. 345, 41 S.Ct. 506, 65 L.Ed. 963, 16 A.L.R. 660; Knowlton v. Moore, 178 U.S. 41, 20 S.Ct. 747, 44 L.Ed. 969) ; and it logically follows that, where nothing is transferred, as where property passes under a limitation in remainder, there is no transfer to tax. Reinecke v. Trust Co., supra. Nothing passes or is transferred from the estate of the donee in the case of a naked or special power of appointment, and Congress has recognized this fact by not requiring that property passing under a special power be included in the estate. It is only property subject to a general power— property of which the donee might have obtained the benefit by subjecting it to the payment of his debts — which is required to be included.

The court then proceeded to determine “whether the power created by the conveyance * * * is a general power ” under the laws of Maryland, saying:

* * * Only by considering, not merely the language creating a power, but the effect and meaning which is given that language by the law of the state which governs the exercise of the power, can uniformity in the operation of the statute be attained.

Under the terms of the trust indenture involved in the instant proceeding, the only power of appointment reserved to the decedent was the power to appoint the beneficiary of her share of the income, and merely for the life of her appointee. Her power of appointment did not cover the corpus of the trust, which had irrevocably passed beyond her control and which went to her issue upon the termination of the trust. Her power to appoint a life beneficiary was restricted to a natural person and/or a charitable organization which, if appointed, could only receive the income during the remainder of the term of the trust.

General and special powers are defined in the Wisconsin Statutes (1927) as follows:

Sec. 232.05. General Power. A power is general wben it authorizes the alienation in fee, by means of a conveyance, will, or charge of the lands embraced in the power, to any alienee whatever.
Sec. 232.06. Special Power. A power is special:
(1) When the person or class of persons to whom the disposition of the lands under the power to be made are designated.
(2) When the power authorizes the alienation by means of a conveyance, will, or charge of a particular estate or interest less than a fee.

Special powers in trust are defined in section 232.22 as follows:

A special power is in trust:
(1) When the disposition which it authorizes is limited to be made to any particular persons other than the grantee of such power.
(2) When any person or class of persons, other than the grantee, is entitled to any benefit from the disposition or charge authorized by the power.

The term grantee as so used includes the person in whom the power of appointment is vested by reservation, as in the instant proceeding. See section 232.58. While these definitions are a part of the real property law of Wisconsin, they are applied as the personal property law. Cawker v. Dreutzer (Wis.), 221 N.W. 401, 413. The power of appointment reserved to the decedent embraced an interest less than a fee, the disposition within the exercise of the power was limited to persons other than the grantee, and the benefit thereunder was restricted to the life of a natural person or a charitable organization for the remainder of the term. The power of appointment reserved to the decedent was therefore a special power (cf. Cawker v. Dreutzer, supra), and since the revenue act covers only property passing under a general power, the interest conveyed by the decedent’s exercise of this special power of appointment, to wit, the life estate of this petitioner, should not be included in the gross estate. Leser v. Burnet, supra.

The secondary question is the fair market value of the one share of stock which the respondent has included in the gross estate at a value of $320, and which the petitioner contends had a fair market value of only $100. There were no sales of this stock, and when the petitioner sought to have it transferred to himself he was offered $100 for it. The restrictions upon the disposition of this stock were valid and enforceable under the law of Wisconsin. See In re Laun, 146 Wis. 252; 131 N.W. 366; Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517; 149 N.W. 754. Unlike the situation considered in Estate of Louise N. Sckulz, 14 B.T.A. 419, the directors of the Patrick Cudahy Family Co. tendered $100 to the petitioner in an effort to purchase this share; it does not appear whether or not the tender was accepted. The appraisers for the State of Wisconsin considered the restrictions upon the transfer of this stock in determining a valuation of $100. When these restrictions are considered in the light of the dividend record of the corporation, and the fact that it was a close family affair, we are unable to conceive of a concourse of buyers and sellers that would give this stock the fair market value determined by the respondent. In these circumstances we sustain the petitioner’s valuation of $100 for this share. Cf. Herbert W. Eldredge, 18 B.T.A. 194; Richard deZ. Pierce et al., Administrators, 22 B.T.A. 1070.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Sternhagen dissents.


author: Smith : Goodrich,

text:
    Stanley S. Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42053.
    Promulgated May 24, 1933.

      Joseph D. Peeler, Esq., Melvin D. Wilson, Esq.,, and E. P. Adams, C.P.A., for the petitioner.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Smith :

The only question to be determined in this proceeding is whether the income received by the petitioner and his wife from certain joint investments in 1924 and 1925 is taxable in its entirety to the petitioner as community income under the laws of the State of California, or whether one half of such income is taxable to the petitioner’s wife as her separate income.

Under the law of the State of California, as it existed prior to enactment of section 161 (a) of the California Civil Code (enacted April 28,1927), all property acquired after marriage by either spouse constitutes community property except that acquired by gift, bequest, devise, or descent. California Civil Code, secs. 161-164. Likewise, the income from such property constitutes community income for which the husband is liable in respect to the Federal income tax. United States v. Robbins, 269 U.S. 815; Blair v. Roth, 22 Fed. (2d) 982. Section 161 (a) of the California Civil Code, which gives to the wife “ present, existing and equal interests ” in community property during continuance of marriage relations, and renders her liable for the Federal income tax on her separate share of the community income, United States v. Malcolm, 282 U.S. 792, does not apply to property acquired prior to its enactment or affect the taxability of the income therefrom to the husband. Paul F. Hill et al., Executors, 24 B.T.A. 1144; F. J. Carman, 25 B.T.A. 162.

As the respondent concedes, however, the respective interests of the husband and wife in community property and likewise community income, with certain limitations as set forth in Lucas v. Earl, 281 U.S. 111, are subject to change by contract between the husband and wife. Kaltschmidt v. Weber, 145 Cal. 596; 179 Pac. 272; Wren v. Wren, 100 Cal. 276; 34 Pac. 775; Larson v. London, 15 Cal. Ap. 531; 15 Pac. 340; Smith v. Smith, 47 Cal. Ap. 650; 191 Pac. 60; Francis Krull, 10 B.T.A. 1096; W. A. Roth, 22 B.T.A. 587; Blair v. Roth, supra. If the wife has a vested interest in the community property separate from that of her husband, the income therefrom is taxable to her in her separate returns. Poe v. Seaborn, 282 U.S. 101.

Was there such a contract between the petitioner and his wife and did the wife in 1924 and 1925 have a separate vested one-half interest in the property from which the income in dispute was to arise ?

Much of the evidence adduced by the petitioner was directed towards proving that his wife contributed equally with him to their joint earnings after marriage, including the $10,000 fee for negotiating the real estate sale in 1916, the salary and profits from the operation of the hotel, and the income from all other sources. Assuming that to be true, however, these earnings and the property acquired therewith might nevertheless belong to the community, for, as we have said above, under the laws of the State of California, all the property acquired after marriage by either spouse prior to the enactment of section 161 (a) of the California Civil Code is presumed to be community property except that acquired by gift, bequest, devise, or descent. Of the $13,200 invested in the real estate lots in 1916, $3,200 was received by the petitioner’s wife as a gift from her father and was therefore not community income. The evidence is to the effect that the petitioner’s wife received approximately $20,000 from this source after her marriage to the petitioner. However, these funds were commingled with their other earnings and investments so that their identity was lost. See Pedder v. Commissioner, 60 Fed. (2d) 866; John H. Flach, 13 B.T.A. 383.

The petitioner and his wife both testified that there was an oral agreement between them that they should each own a separate one-half interest in all of their income and property. They testified that there was such an agreement with respect to the $10,000 fee received from the real estate sale in 1916, the salary and profits from the operation of the hotel during the years 1919 to 1923, inclusive, and all of their investments made with these and other funds. There is no written evidence of such an agreement with respect to any of their property prior to September 5, 1923, which is the date of the above letter from the petitioner to his wife regarding their investment in the Janss Investment Co. and Charles H. Christie real estate ventures. This letter does not purport to be, nor can it be construed as, a valid assignment by the petitioner to his wife of any interest in these investments. It contains the statement:

I [the petitioner] understand from you that you agree to these transactions and agree to payment of your proportion of the cash payments from any funds now held jointly by us, and that you assume liability for your proportion of future payments, such liability to attach to your separate funds as well as those held jointly by us.

It is not shown to which joint funds or separate funds of his wife the petitioner referred. The letter is not signed by the petitioner’s wife and was not executed as an agreement. We think that it has but little, if any, probative value.

The deeds to the five real estate lots purchased in 1916 were taken in petitioner’s name and so remained until May 1932, just prior to the hearing of this proceeding, which was on June 14, 1932, when they were changed to show the petitioner’s wife the owner of .a one-half interest in the property. Likewise, the investments in the real estate syndicates were recorded in the petitioner’s name. The formally executed agreement defining the separate interests of the petitioner and his wife in all of their property, which is set out in part above, was not executed until June 8,1932. This agreement, of course, has no retroactive effect and does not change the status of the income of the petitioner and his wife for the taxable years 1924 and 1925. W. A. Roth, 17 B.T.A. 1330.

The facts in this case are hardly distinguishable from those in Blair v. Roth, supra, in which the court held, reversing the Board, that notwithstanding an oral agreement between husband and wife that the earnings of both should be contributed to a common fund and that the surplus thereof, after payment of their personal and community expenses, should belong to them on an equal footing, the earnings of both spouses constituted “ community income ” taxable to the husband. In its opinion, the court said:

* * * There was no writing, and the testimony of appellee and his wife, much of which was elicitated by highly leading questions, was to the effect that, shortly after their marriage, they had an understanding, not that the earnings of each should constitute the separate property of the earner, but that the earnings of both should be contributed to a common fund, of which they were to be the owners, share and share alike. They referred to themselves as equal partners in all they had or should acquire, jointly or severally.
** + $##*
* * * As exemplified in actual practice, the agreement of the appellee and his wife amounted to substantially this: They would contribute their earnings to a common fund, out of which their personal and community expenses would be paid, and of the savings, if any, and the property in which such savings were invested, they were to be the owners upon an equal footing. By the appellant it is not contended that, under the California statutes (sections 159, 160, Civ. Code; Wren v. Wren, 100 Cal. 276, 34 P. 775, 38 Am. St. Rep. 287; Kaltschmidt v. Weber, 145 Cal. 596; 179 P. 272; Smith v. Smith, 47 Cal. App. 650, 191 P. 60; Perkins v. Sunset T. & T. Co., 155 Cal. 712, 103 P. 190), a husband and wife domiciled in that state may not make valid agreements relating to either their separate or their community property, or that it would be incompetent, by appropriate agreement between them, to constitute the earnings of the wife her separate estate. In essence his contention is that, at most, the agreement here was for an assignment by each of the parties of one-half of his or her earnings to the other; that, at the instant they were received, the salaries were, by the law, impressed with the status of community property, and were taxable with reference to that status; and that the obligation to pay the tax so computed could not be escaped by contributing such incomes to the so-called partnership between the two members of the community, any more effectually than by contributing it to a like enterprise as between one member of the community and a third person. In this view we concur.

The petitioner herein testified, upon interrogation by his counsel, as follows:

Q. Did you have an agreement in advance as to how the commission was to be split?
A. Yes, sir. When we got the commission we agreed to go fifty-fifty.
Q. She was to have half as her separate property?
A. Yes, sir.
# * * * * * *
Q. At the time you purchased those lots [the five vacant lots purchased in 1916] there was a definite agreement with Mrs. Anderson how the property interest was to be?
A. She had a one-half interest and I owned the other half.
Q. How were the deeds taken?
A. The deeds?
Q. To whom?
A. In my name.
Q. She knew that?
A. No, she didn’t know until three or four weeks ago.
* * * # * ❖ *
Q. You.had an arrangement with Mrs. Anderson as to how the' profits and salary [from the operation of the hotel] would be divided?
A. She made the arrangement with mother.
Q. Did you have an arrangement with your wife?
A. When I came home, yes.
Q. What arrangement did you make with your wife?
A. She was to work with me, I was to have half and she was to have half,
Q. As separate property?
A. As her own money.
❖ * * * * * *
Q. You bought other real estate?
A. Bought and sold.
Q. As I understand the situation, the title to the various lots were taken in your name?
A. Yes, sir.
Q. Did Mrs. Anderson know it?
A. She didn’t know until about two weeks ago.
* í¡s s¡« >¡! #
Q. So that every investment you made was a joint agreement?
A. Yes, sir.
Q. was there any agreement between you and Mrs. Anderson as to how the property was to be held, that is, whether she had any interest?
A. She understood she had a half interest.
Q. A half interest in each property?
A. Everything I had or we acquired between us.

In Pedder v. Commissioner, supra, the Circuit Court of Appeals for the Ninth Circuit held, affirming the Board, upon facts similar to those in the instant case and those in Blair v. Roth, supra, that the presumption of the law of the State of California in favor of community property was not overcome. See also W. A. Roth, 22 B.T.A. 581, in which the Board, also under similar facts, followed Blair v. Roth, supra.

Aside from the presumption of law which, as we have said, operates in favor of the respondent’s contention that the income in question was community income, the very nature of the question here calls for the strictest proof on the petitioner’s part. Where, as in the instant case, the written records and the acts of the husband and wife for a number of years indicate that, either ill-advisedly or without knowing the result upon their tax liability, they have submitted to the community property rule of their state, they should not be permitted to avoid the legal consequences of that rule merely upon their own testimony that they had previously entered into an oral agreement between themselves by which their property rights must be determined upon some other than the community property basis. We can not escape the conviction, that this is the tenor of the cases in which the courts have considered this question.

Upon the evidence before us, we are not convinced of the existence of any valid enforceable agreement between the petitioner and his wife, prior to the written agreement executed on June 8, 1932, that their income and property should be owned by them otherwise than “ on an equal footing ” as in Blair v. Roth, supra. We are therefore of the opinion that the petitioner has not overcome the presumption of the correctness of the respondent’s determination that the income in question for the years 1924 and 1925 was community income taxable to the petitioner.

Reviewed by the Board.

Judgment will be entered for the respondent.

Goodrich,

dissenting: I disagree with the majority opinion, for the evidence herein convinces me that a contract existed between petitioner and his wife under which each acquired and held, as tenants in common, a separate one-half interest in these properties, and, consequently, the income therefrom should be taxed, one half separately to each of them.

Lansdon and Black agree with this dissent.


author: Lansdon: Goodrich,

text:
    Aubrey Umsted, Petitioner, v. Commissioner of Internal Revenue, Respondent. Audrey Umsted Wilkins, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edna Umsted, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gressie Umsted Carnes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46471-46474.
    Promulgated May 24, 1933.

      Edward L. Wright, Esq., for the petitioners.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has asserted deficiencies against each petitioner as follows:

All of the issues raised by the pleadings have been settled by stipulation except the following: (1) Whether income from certain property, which was impounded by a court pending the outcome of litigation over title, is taxable when received by the court receiver or upon termination of the litigation; (2) whether amounts paid by a landowner to attorneys for services rendered in a suit against an adverse claimant are a deductible expense; (3) whether a certain written instrument is a lease or a contract of sale; and (4) whether a bonus received for the execution of an oil and gas lease is subject to depletion.

From the stipulated facts, which we adopt by reference as our findings of fact, it appears that Sid Umsted died intestate on November 8,1925, leaving a widow and three daughters, who are the petitioners here. " Prior to November 21, 1924, certain land to which he claimed title became involved in litigation and pending the outcome thereof the property was impounded by the court and placed in the hands of a receiver. On November 21, 1924, the receiver leased the property for oil and gas and collected a bonus of $80,000. On December 21, 1925, the Supreme Court of Arkansas held that Sid Umsted owned the property, including mineral rights, and that he was entitled to the bonus collected by the receiver. On January 7, 1926, the receiver paid $30,000 to Umsted’s attorneys, who, after deducting $10,000 for their services, paid the balance of $20,000 to his estate. Such payment was distributed to Umsted’s heirs, each receiving the pro rata part to which she was entitled under the laws of Arkansas.

In computing income of the estate for the period November 3, to December 31, 1925, the respondent has included the amount of $20,000. By amendment to his answer at the hearing he alleges that the total of $30,000 should be included as income and moves to increase the deficiency accordingly. The petitioners contend that no part of the $30,000 was income to the estate. In the alternative they contend that only $20,000 should be included as distributable income of the estate of Sid Umsted and that a proper allowance for depletion should be made if the Board includes any amount as income. Only the amount distributed to the petitioners as heirs of the estate should be included in their taxable income. Margaret B. Sparrow et al., Trustees, 18 B.T.A. 1; and Florence Grandin, 16 B.T.A. 515.

Since the petitioner has offered no evidence that there was any production of oil or gas on the property at the date the lease was executed or any reason for anticipating such production in the near future, there is no basis for allowing a depletion deduction in respect of the bonus received. Murphy Oil Co. v. Burnet, 287 U.S. 299.

On February 28,1926, the beneficiaries of the estate of Sid Umsted executed an instrument whereby they leased a certain oil-producing property to the Woodley Petroleum Co. in consideration of $50,000 in cash and one eighth of the oil produced and under the terms thereof received cash in the amount of $55,707.53 in the same year. The petitioners contend that such instrument evidenced a sale and that the price received is less than the basis for computing profit therefrom. The respondent has determined that there was a sale of property resulting in a taxable gain of $2,161.30. By amendment to his answer at the hearing he now alleges, however, that the property was leased by petitioners in consideration of a bonus of $50,000 and one eighth of the oil. He moves to increase the deficiencies accordingly.

The instrument in controversy, which is included in the record as an exhibit, is clearly a lease of land for oil and gas purposes in the usual form. The amount of bonus and royalties received in the taxable year should be included in income. Deductions for depletion should be allowed in respect of the bonus and royalties in the amounts stipulated by the parties. Murphy Oil Co. v. Burnet, supra.

Reviewed by the Board.

Decision will he entered under Rule 50.

Goodrich,

concurring: While I am in accord with the result reached in these proceedings, for the reasons more fully Lizzie Glide, 27 B.T.A. 1264, I disagree with the opinion in so far as it intimates that an allowance for depletion might have been deducted had evidence been presented showing that production in the near future was reasonably anticipated. The instant proceedings, like the Glide case, are controlled by the Revenue Act of 1926, which substitutes for the “ reasonable allowance for depletion ” to be determined under the Commissioner’s regulations, which was the subject of consideration by the Supreme Court in Murphy Oil Co. v. Burnet, 287 U.S. 299, a depletion allowance at the flat rate of 27% per centum of income from the property. It is no longer necessary to determine what, upon a unit basis, may be a reasonable allowance. The statute allows the flat rate, reasonable or not. If it be true, as we held in the Glide case, that depletion is inseparably related to production, that unless there is a well, there can be no allowance for depletion, then it is immaterial that at the time the bonuses were received subsequent production was anticipated. Unless production is obtained within the same taxable period in which the bonuses are received, they can not be offset by the deduction of an allowance for depletion. In my opinion, the plain wording of the statute can not be stretched to permit an allowance for depletion in the absence of an existing well, nor should a similar effort be made with respect to the language used by'the court in determining a case arising upon a different set of facts and under different statutory provisions. Doubtless, inequities may arise under this strict rule. It may be that in some cases bonuses may be received which must be treated as income and which can not be reduced by an allowance for depletion because no production was obtained within that year. The task of supplying a remedy for such harsh results lies with the Congress, not with this Board and the courts.


author: Trammell :

text:
    E. D. Knight, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56865.
    Promulgated May 24, 1933.

      J. C. Murphy, Esq., for the petitioner.

      Owen W. Swecker, Esq., for the respondent.
   OPINION.

Trammell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the amount of $33.99. The sole issue is the amount of profit realized by the petitioner upon the sale during the taxable year of five shares of stock of the Piedmont Laundry Co. acquired in 1919.

The petitioner, who is an individual residing in Atlanta, Georgia, sold the stock in the taxable year for a cash consideration of $19,-516.77. In his income tax return for the calendar year 1928 the petitioner reported a profit from the sale of the stock computed upon the basis of a cost of $500 at the date of acquisition in June 1919. At the time the stock was acquired by the petitioner in 1919 it had a fair market value of $1,600 per share, or a total fair market value for the five shares of $8,000. In determining the deficiency in controversy, the respondent computed the profit on the sale of the stock on the basis of a cost of $500. The petitioner contends that the correct basis for computing such profit is the fair market value of $8,000 at date of acquisition.

The Piedmont Laundry Co. was a close corporation, all of the stock of which, prior to May 3,1919, was owned by three individuals, one of whom was the father of the petitioner and another of whom was petitioner’s half brother. Each of these individuals owned 50 shares, or one third of the stock of said corporation. On May 3, 1919, the president of the company died, and the stock owned by him passed to his estate. On June 7, 1919, a stockholders’ meeting was held, at which all the issued and outstanding stock was represented in person or by proxy. At this meeting a resolution or motion, was adopted by the stockholders authorizing an increase in capital stock from 150 shares, of the par value of $100 per share, to 160 shares of the same par value, and said resolution further authorized the sale of five shares of said stock to one V. F. Todd and five shares to E. D. Knight, petitioner herein, at par. value. Pursuant to the resolution petitioner thereafter acquired five shares of the stock at par value or a cost to him of $500.

In his return for 1919, the petitioner did not include therein any amount with respect to the transaction whereby he acquired the stock, and the Piedmont Laundry Co. in its return for the year 1919 did not claim as a business expense or otherwise any deduction with respect to this transaction.

The issue here resolves itself into the question whether the transaction by which petitioner acquired the five shares of stock was a bona fide sale and purchase, or whether the difference between the nominal sale price of $100 per share and the stipulated fair market value of $1,600 per share constituted a gift by the corporation to the petitioner, or represented additional compensation for services.

The minutes of the stockholders’ meeting authorizing the “ sale ” recited that “A motion was made * * * and unanimously adopted, and it was mutually agreed among all the stockholders * * * that we should sell five shares of stock * * * to E. D. Knight, at par value.”

The stock was “ sold ” to an employee who had rendered valuable services in the past and whose future services it was especially desired to retain. The petitioner was the son of one of the three equal owners of the corporation and the half brother of another. Petitioner had acquired a knowledge of the business and was influential in building it up. The directors felt that by petitioner having this stock he would be more interested in the business. They wanted to do something for him and felt that he would appreciate being able to acquire the stock on the basis on which offered to him. The petitioner was given the right to buy the stock at the reduced price on account of these considerations. The $100 a share at which the stock was sold was not the real consideration therefor. It was known to be worth $1,600 a share.

From a consideration of all the evidence, it is our opinion that the difference between the amount paid by the petitioner and the fair market value of the stock represents either a gift or additional compensation for services. If it was compensation, clearly its value when received is the basis to be used in determining the profit on a subsequent sale. If it was a gift the same rule applies. G. Wildy Gibbs, 28 B.T.A. 18; Harry F. Robertson, 5 B.T.A. 148.

In Robinson v. Commissioner, 59 Fed. (2d) 1008, identically the same issue was raised as is presented here, and under circumstances substantially similar. There Robinson was permitted to purchase 200 shares of the common stock of the Libbey Glass Co. at a price less than its fair market value. In its opinion the court said:

Whether the actual money cost of $200 per share * * * or the market value of the stock at the time of acquisition is to control in fixing the capital base, presents the only question for our determination.
* * * In each such case we think that the obvious intent of the parties, and their relationship as affecting intent, are the controlling considerations. Here the relationship between the parties, the personal interest shown by Mr. Libbey in the business career of the petitioner, the evident purpose of Mr. Libbey to educate the petitioner in the business, to the end that he might not only qualify himself for a position of executive responsibility, but that, in doing so, he might also create an investment estate for himself in the very company to which he was, applying his talents, the conditions of the sale, and the admitted value of the stock in excess, perhaps largely in excess, of the agreed price, demonstrated, in our opinion that such excess value * * * was either intended as a gift by Mr. Libbey to the petitioner, induced by a genuine paternal interest in the petitioner’s welfare, or as in the nature of compensation for past or future services * * *. Whether regarded as a gift or as compensation, it is evident that the surplus value, over and above the actual price paid for the shares, must be taken into consideration in determining the capital base, and that such base is to be fixed at the true or market value at the time the stock was acquired.

As in the Robinson case, it is immaterial here whether the excess value of the stock be regarded as a gift or as compensation for services. In either event, the basis for computing the profit realized by the petitioner from the sale of the stock in the taxable year 1928 is the fair market value of $8,000 at the time of acquisition in 1919.

The deficiency will be redetermined accordingly.

Judgment will be entered under Rule 50.


author: Goodrich:

text:
    Moses Cohen, Petitioner, v. Commissioner of Internal Revenue, Respondent. Nathan Rosenbaum, Petitioner, v. Commissioner of Internal Revenue, Respondent. Nathan Cohen, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward Godfried, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54240-54243.
    Promulgated May 31, 1933.

      H, Kennedy McCook, Esq., for the petitioners.

      R. W. Wilson, Esq., and S. B. Anderson, Esq., for the respondent.
   OPINION.

Goodrich:

It is conceded that the amounts received by each of these petitioners from the corporation fall within the statutory definition of “ dividends ” — a distribution to the shareholders out of profits accumulated since February 28, 1913 — but there is dispute as to the time when the distribution was made and when the amounts, appearing on the books as accounts receivable, became dividends to be included in income. Respondent contends that the distribution was made and the amounts became dividends in 1928 when the accounts were charged off against the corporate surplus, and has included them in petitioners’ respective incomes for that year. On the other hand, petitioners contend that distributions were made in the years when the withdrawals were made; that the amounts were dividends forthwith and should be included in their incomes for those several years prior to 1928, relying upon Chattanooga Savings Bank v. Brewer, 17 Fed. (2d) 79; Christopher v. Burnet, 55 Fed. (2d) 527; and Leland v. Commissioner, 50 Fed. (2d) 523.

We are not impressed by petitioners’ argument. As pointed out in Fred T. Wood, 27 B.T.A. 162, the decisions relied on by petitioners do not lay the rule that every withdrawal of corporate funds is a dividend, or that every loan or advance made by the corporation to a shareholder is a distribution, as that term is used in the statutory definition of “ dividend.” In the cases there cited, and in the cases here cited by petitioner, the Commissioner had determined that amounts received by shareholders from corporations should be treated as income when received, and the complainants failed to convince the courts that the Commissioner’s action was erroneous. In 'the case at bar, respondent has made a determination to the opposite effect; he has treated the withdrawals as loans or advances to the shareholders at the time received. We are not convinced that his action is erroneous. Apparently petitioners themselves did not regard the withdrawals as dividends at the time they were made, since, so far as this record discloses, they did not include these amounts as income in their returns for those years. Apparently, also, the corporation did not regard the withdrawals as distributions at the time they were made, for on its books it carried these debit balances as amounts owing to it by the shareholders. Eespondent has based his determination upon the facts as presented to him by both the corporation and the shoreholders, and we see no reason to disturb his action.

There is no evidence of any distribution by the corporation prior to the adoption in 1928 of the resolution canceling the indebtedness of the stockholders and reducing the surplus. That action, which gave to the shareholders an undisputed right to the amounts previously advanced to them, did effect a distribution of the accumulated earnings of the company and constituted a dividend, properly to be included in income by the recipients at that time. Hugh H. Miller, 25 B.T.A. 418; Jacob Loewer, 13 B.T.A. 787; Henry D. Muller, 16 B.T.A. 1015; Virginia H. Holden, 9 B.T.A. 220.

Petitioners, on brief, call attention to certain of the statutes of Ohio respecting loans by a corporation to its officers, directors and shareholders and limiting the bringing of actions on behalf of the corporation for the collection of such advances to two years after the date they were made. They argue that the action of the corporation in 1928 did not serve to distribute to them any income because their indebtedness to the corporation for loans made to them prior to December 31, 1924, could not then be collected by suit. That has no bearing on the issue here, for those statutory provisions are for the benefit of a creditor or shareholder attacking an illegal dissipation of corporate funds. The validity of the loans made by the company is not here in question. However, these provisions, to an extent, tend to prove the character of the withdrawals, for they create a debt to the corporation, to the amount of the loan, due from the officers and directors permitting such loans to be made. Moreover, the statute of repose suspended only the remedy; it did not cancel the indebtedness. That was done only in 1928 by proper corporate action and the fact that the company itself may have been barred from bringing actions against the shareholders for collection of their indebtedness does not change the character of the advances at the time they were made nor the effect of the distribution from surplus in 1928.

We need not discuss petitioners’ suggestion that the cancellation of the indebtedness in 1928 amounted to a forgiveness of indebtedness by the company and a gift by it to its shareholders. There is no evidence here that the corporation had the power or made any attempt to distribute gratuitously its funds in violation of its duty to its stockholders. We will not assume that it did so. Cf. Ida L. Dowling, 13 B.T.A. 787; Lincoln National Bank, Executor, 23 B.T.A. 1304. Nor are we disturbed by petitioners’ claim that respondent has treated advances made by the corporation in 1925 and subsequent years, and charged against surplus as a dividend in accordance with the resolution of October 16, 1928, as dividends in the years when received. Perhaps he was right, perhaps he was wrong — we need not decide, for those years are not before us. What respondent may have done at some other time, perhaps in view of different facts, does not affect our task of determining the issue presented to us.

Judgment will l>e entered for the resfondent.

       See. 115 (a), Revenue Act of 1928; sec. 201 (a), Revenue Acts of 1924 and 1926'.


author: Matthews :

text:
    George Emlen Roosevelt, Trustee of the Estate of Theodore Roosevelt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48906.
    Promulgated May 31, 1933.

      Edmund B. Quiggle, Esq., for the petitioner.

      Frank Schlosser, Esq., for the respondent.
   OPINION.

Matthews :

The petitioner is the testamentary trustee of Theodore Eoosevelt, who died on January 6, 1919, domiciled in New York. The only question involved is the basis to be used in determining gain or loss on the sale by the trustee in 1926 of certain stock received by him on December 31, 1925, from the trustees of the testamentary trust created by Cornelius V. S. Eoosevelt, who died in 1887. Cornelius gave his widow a life estate with remainder over, such remainder interests being charged with the payments of certain annuities. Theodore Eoosevelt was one of the remaindermen. The widow died in 1900. The Supreme Court of New York decreed that the trust survived the life tenant’s death; that the corpus should be retained by the trustees with the same powers to sell and reinvest as they had had during the life tenant’s life; and that the trustees should pay the annuities out of the income of the trust and distribute the balance of the income to the remainderman. After the death of two of the annuitants the court, on December 30, 1925, authorized a part of the corpus to be distributed to the remainderman. It was Theodore Eoosevelt’s share of the amount distributed which the trustee of his residuary estate received on December 31, 1925.

Under section 204 (a) (5) of the Eevenue Act of 1926, the basis for determining gain or loss on the sale of property acquired by bequest, devise or inheritance is the fair market value of such property at the date of acquisition.

At the time of his death, Theodore Eoosevelt had a vested remainder interest in the trust res of the Cornelius Eoosevelt trust. At his death this interest became a part of his estate and passed to his testamentary trustees. The trustees were devisees of the residuary estate, which was distributed to them on May 31, 1922. Under the principle of Brewster v. Gage, 280 U.S. 327, “ the legal title [to the residuary estate] so given [by the decree of distribution] relates back to the date of death.” Security Trust Co. et al., Trustees, 25 B.T.A. 29. Therefore, the date of acquisition by petitioner of Theodore Roosevelt’s remainder interest in the Cornelius Roosevelt trust was the date of death of Theodore Roosevelt.

By virtue of having acquired Theodore Roosevelt’s remainder interest in the Cornelius Roosevelt trust, the petitioner received in 1925 from that trust certain shares of stock. These shares were sold in 1926. The question is, What was the date of acquisition by petitioner of the stock sold in 1926?

The petitioner contends that the date of acquisition was the date of distribution to him in 1925; the respondent contends that the time of acquisition was the date of Theodore’s death in 1919, and uses as a basis the value of the stocks on such date, except as to stocks bought by Cornelius’s trustees after Theodore Roosevelt’s death, where he would use cost to Cornelius’s trustees. Since the corpus of the Cornelius Roosevelt trust had changed in form from time to time by investment and reinvestment, the petitioner complains that respondent’s method will result in inequalities since Theodore, while living, and his trustees after his death, had no right to particular stock, but only to a fro rata share of the whole corpus. The applicability here of the general principle laid down by the Supreme Court in Brewster v. Gage, 280 U.S. 327, is also denied, since that case did not involve an intervening trust between decedent and legatee.

This Board in Rodman E. Griscom, 22 B. T. A. 979, and in William Huggett, 24 B. T. A. 669, and the Circuit Court of Appeals for the First Circuit in Chandler v. Field, 63 Fed. (2d) 13, considered the question as to the time of acquisition by the remainderman of property held in a testamentary trust. The same principle is involved in the instant case. In all three cases the principles of Brewster v. Gage, supra, were followed and it was held that the time of acquisition was the date of death of the testator from whom the right was acquired. In the Griseom and Huggett eases, the contention had been made that the time of acquisition was at the death of the life tenant and that the value of the property at the death of the life tenant was the basis for valuing the property received by the re-mainderman. In the Chandler case, it was contended that the date of distribution to the remainderman was the date of acquisition, and value on such date was the proper basis to be used.

In each case the testamentary trustees had the power to sell and reinvest, and it was argued that because of such power the remainder-man might not receive the same property as the decedent left. In each case it so happened' that the remainderman did receive the identical property left by the decedent.

In the Huggett case, the respondent had contended and we held that the value of the remainderman’s interest in the property as of the date of the death of the testator, and not the value of the property itself at that date, should be used as the basis. On appeal of the Huggett case to the Court of Appeals of the District of Columbia, our decision was modified to the extent of holding that it was error to reduce the value of the property at the basic date by the value of the interest of the life tenant. We have no such question here, inasmuch as the respondent has used as a basis the value of the property itself.

Under the principle of Brewster v. Gage, supra, and the application thereof by the Board in the Griscom and the Huggett cases, and by the court in Chandler v. Field, the general rule is that title to property received by a remainderman relates back to the date of death of the testator from whom such right was acquired.

Under this rule, the title to stocks received by petitioner in 1925 which had been held by the Cornelius Eoosevelt trust at the date of Theodore Eoosevelt’s death relates back to Theodore Eoosevelt’s death. Therefore, we affirm the action of the respondent in using the value of such stock on January 6, 1919, the date of Theodore Eoosevelt’s death, as the basis for determining the gain or loss on the sale of such stock.

In the instant case, the Cornelius V. S. Eoosevelt trustees had the power to sell and reinvest, and did sell and reinvest, a part of the corpus; and some of the stocks received by petitioner were acquired by the Cornelius Eoosevelt trust after Theodore Eoosevelt’s death. As to these stocks, the Commissioner used the cost to the Cornelius Eoosevelt trust as the basis to be used by petitioner. This means that the date of acquisition by the remainderman (petitioner) was the date of purchase by the Cornelius Eoosevelt trust. We think this is correct.

As said above, the title to property devised or bequeathed to a testamentary trustee relates back to the date of death of testator. If the trustee sells any of the trust property for a price in excess of value at date of acquisition, a taxable gain is realized. That is a closed transaction as to such property. Neither remainderman nor trustee has any further interest in it. If the proceeds are used in the purchase of other property, the date of acquisition of such property by the trustee is the date of purchase and the basis in the trustee’s hands is cost. The remainderman’s interest in the property is acquired at the same time as the trustee acquires legal title to the property. Therefore, when such property is distributed to the remain-derman his legal title relates back to the time he acquired his remainder interest in the property, namely the date of acquisition by the trustee.

The determination of respondent is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.