author: OPINION. Disnet:

text:
    MaüRice S. Avidan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87459.
    Promulgated October 20, 1938.

      Samuel I. Bendet, G. P. A., for the petitioner.

      J. B. Johnston, Esq., for the respondent.
   OPINION.

Disnet:

The question here to be decided is not complex: Is an employee of the Workmen’s Compensation Bureau or division of the Department of Labor of the State of New Jersey constitutionally exempt from income tax upon his salary as such employee? The question as to whether petitioner is employee, independent contractor, or officer does not enter here. Not only is there no showing that the petitioner took an oath of office as an officer, but the act creating the Workmen’s Compensation Bureau enumerates the officers and does not include therein the position held by petitioner, and it is not to be denied that he comes within the language providing for “other employees as may in the judgment of the Commissioner of Labor be necessary.” Without such general provision there would have been no authority for the employment and payment of the petitioner by the Workmen’s Compensation Bureau. We, therefore, proceed to consider petitioner as an employee.

In considering this question, it should be kept in mind that any decisions (such as Robert P. Bay, 28 B. T. A. 1169, relied upon by petitioner) based directly or indirectly upon the regulations of the Commissioner of Internal Revenue exempting state officers and employees from Federal income taxation are not applicable herein. A regulation attempting to create an exemption is void. Langstaf v. Lucas, 9 Fed. (2d) 691; affd., 18 Fed. (2d) 1022; certiorari denied, 273 U. S. 721. Claim of immunity herein must therefore be based squarely upon the Constitution of the United States and not upon the regulations promulgated by the Commissioner of Internal Revenue. Helvering v. Gerhardt, 304 U. S. 405, has made it clear that immunity from taxation under the Constitution under the claim of participation in an essentially governmental function must be based upon participation in a function so essentially governmental as to be indispensable and essential to the continued existence of the state government.

Though recognizing the validity of the statement by Daniel Webster, in arguing McCulloch v. Maryland, 17 U. S. 315, “An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation”, epitomized by Chief Justice Marshall as “the power to tax involves the power to destroy”, we nevertheless recognize that the power to prevent or be immune from taxation may also involve the power to destroy, when such a power is directed at a sovereign whose lifeblood is taxation. Such effect obviously follows to the same extent as there is broadening of immunity under claim of state governmental function beyond and outside of the vital sovereign powers, protected by the rationale of Collector v. Day, 11 Wall. 113, involving the salary of a state officer, a probate judge. In the interrelation of the two governments in the Federal-state system adopted by the Constitution there was necessarily in the minds of the framers thereof recognition of the necessity of coordinating the activities of the two governments with a minimum of friction between the two sets of governmental machinery, and reason dictates that there was no contemplation of allowance of immunity from taxation by each other beyond those administrative activities indispensably necessary to the operation of dual governments over a citizenry common to both.

By definition precisely to delimit “delegated powers” or “essential governmental duties” is not possible. Controversies involving these terms must be decided as they arise, upon consideration of all the relevant circumstances. Notwithstanding discordant views which have sometimes arisen because of varying emphasis given to one or another of such circumstances, it is now settled doctrine that the inferred exemption from federal taxation does not extend to every instrumentality which a State may see fit to employ. Exemption depends upon the nature of the undertaking; it is cabined by the reason which underlies the inference. [McLougliMn v. Commissioner, 303 U. S. 218.]

Workmen’s compensation statutes are in pursuance of a trend toward broadening the activities of the sovereign in a manner which is often referred to as paternalistic. We are not here concerned with the wisdom of such a statute, but look only to the question as to whether it is such an “indispensable function of the state” that a burden is laid upon state sovereignty by the taxation of those individuals engaged in administering it, within the reasoning of Hel-vering v. Gerhardt, sufra. Applying that decision, we think the function being performed by the petitioner is not one “essential to the preservation of state government”, and therefore come to the conclusion that the administration of the Workmen’s Compensation Law of New Jersey is not so essentially an indispensable governmental function as to call for immunity from taxation by the Federal Government of the salary paid to petitioner as an employee engaged therein. This conclusion renders it unnecessary for us to consider the further question suggested as to reality of burden of taxation passed on to the state.

We therefore hold that the respondent did not err in including in petitioner’s net income the salary received by him from the State of New Jersey as an employee of the Workmen’s Compensation Bureau.

Reviewed by the Board.

Decision will be entered wider Rule 50.

Opper concurs only in the result.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    Royal Insurance Company, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83632.
    Promulgated October 20, 1938.

      William H. Hotchkiss, Esq., and John S. Breckmridge, Esq., for the petitioner.

      P. M. Clark, Esq., and S. B. Pierson, Esq., for the respondent.
   OPINION.

Leech:

This proceeding seeks redetermination of a deficiency in income tax of $54,551.90 for the calendar year, 1931. The petitioner denies the existence of a deficiency and asserts an overassessment of taxes for that year in the amount of $11,150.79.

There are three issues of law presented. The facts are not in dispute. For convenience, the issues will be decided in order and the facts, pertaining to each, set out thereunder.

Issue No. 1.

The question in this issue is the deductibility of a loss of $630,-893.26, sustained by petitioner, in 1931, on the sale of certain investment securities. The petitioner is a British corporation, its home office is in England, and it is engaged in the business of writing various types of insurance throughout the world. It operates a branch office in the United States, through which it transacts here only a fire and marine insurance business. This branch office derives income from sources within the United States from premiums on insurance, usually termed underwriting income, from the proceeds of sales of securities, from interest on bank balances and from dividends on domestic securities.

During 1928 and 1929, this branch office transferred, on its books, to the home office, certain amounts consisting of earnings from the transaction of business in this country. The funds, represented by these book transactions, were not physically transferred to the home office but were deposited with J. P. Morgan & Co. in this country, subject to the control of one E. B. Kellam, general attorney for petitioner, who was in charge, for petitioner, of its United States branch. These funds, in the amount of $1,010,000, were used for the purchase of stock in the Allied Securities Corporation, am American company. The stock, thus purchased, was held in this country and the investment recorded on the books of the American branch as a home office item. Subsequently, the Allied Securities Corporation went into receivership and was liquidated. In 1931, the petitioner received a distribution, in full, of $319,106.74, and thus sustained a loss of $630,893.26, the amount of which is not disputed by respondent.

Petitioner contends that it is entitled to deduct the full amount of this loss from its income from sources within the United States, during the taxable year, in determining net income subject to tax by this country. Respondent argues that this loss is not directly connected with income from sources within or without the United States and, accordingly, is to be apportioned under article 680 of Regulations 74. He then urges that petitioner is entitled to deduct only such portion as is allocable to United States income upon the basis of the ratio of that income to the gross income of the company from all sources.

It is respondent’s position that, since the funds used in the purchase of these securities have been segregated from those used in the operation of the American branch and have been transferred by book entry to the home office of the company, the securities purchased with such funds constituted an investment by petitioner’s home office, not connected in any way with its business in this country and is, therefore, not “connected with income from sources within the United States” in the sense in which that term is nsed in section 232 of the Revenue Act of 1928.

Petitioner answers that the contested loss was definitely connected with income from sources within the United States because it was an investment in a United States corporation of funds derived from the operation of petitioner’s business in this country and that the investment was made with the purpose of deriving income from United States sources through anticipated dividends therefrom or profit upon resale of such stock. It points to the fact that it can not be denied that the investment was for profit and that any profit would be taxable since it arose from sources within the United States. Consequently, it is said, any loss sustained is connected with income from such sources.

Section 204 of the Revenue Act of 1928 defines gross income of an insurance company, other than life or mutual, as the amount earned during the taxable year from investment income, from underwriting income, and from the sale or other disposition of property. It provides for the computation of net income by the deduction of ordinary and necessary expenses, taxes, losses sustained during the taxable year in the sale or the disposition of property, dividends, as provided in section 23 (p), and interest exempt from taxation under section 22 (b) (4). By subsection (d) the deductions of foreign corporations of this character are allowed to the extent provided in Supplement I, section 232 of which is quoted in footnote.

If the loss sustained by this petitioner upon its investment in stock of the Allied Securities Corporation was connected with income from sources within the United States, it is, unquestionably, allowable as a deduction, in its full amount, from income from such source in determining net taxable income.

Obviously, this investment did not produce income outside the United States. A fortiori, the loss sustained was not connected with income from outside the United States. We think the loss must be considered as connected with income “from sources within the United States.”

The investment, from which the loss occurred, was made for the purpose of deriving income from United States sources. Any income resulting from this investment, whether in dividends or in profit from resale of the securities purchased, would constitute gross income from such source. Carding Gill Ltd., 38 B. T. A. 669.

Respondent’s theory appears to be that this petitioner must be considered as a dual character, one personality consisting of the home office and the other, the American branch; that only the activities specifically allocated to the latter, constituted business carried on in the United States; that deductions for losses were intended by Congress to be allowed only when connected with the business carried on by the American branch; that any investment transferred on the books as a home office item, irrespective of the fact that it is an investment in American securities, profits from which are taxable as arising from sources within the United States, is not to be considered as an investment in connection with income from such sources, and that a loss sustained upon such investment, is a “home office loss”, not connected with the business of the petitioner corporation in this country.

We do not agree with this theory. Cf. London & Lancashire Insurance Co., Ltd. (3d point), 34 B. T. A. 295; Texas Land & Mortgage Co., Ltd., 30 B. T. A. 861. The so-called American office of petitioner is a part of its general business. It is merely the agency through which it transacts its business of writing fire and marine insurance in this country. Such business, together with the investments made in American securities by the petitioner, constitute the aggregate of its American transactions carried out here with the purpose of deriving income from sources within this country.

The statutory restriction upon foreign corporations, limiting the deduction of losses to those in connection with income from sources within the United States, and the legislative history of such provision, do not seem to indicate an intent to restrict the deduction of petitioner’s losses, as respondent contends. The statutory provisions here involved have been included in the Revenue Acts from that of 1918 to and including the Revenue Act of 1928. The respondent calls attention to the statement on page 8 of the Report of the Senate Finance Committee filed in connection with the Revenue Act of 1918, reading as follows:

In tlie case of nonresident alien individuals and foreign corporations, expenses, losses, debts, depreciation, amortization, and depletion are, under tbe language of tbe House bill, allowed only to tbe extent that they are connected with a trade or business carried on within the United States, and tbe depreciation, amortization, and depletion deductions are allowed only with respect to property within tbe United States. In many eases, however, property outside of tbe United States is directly concerned in tbe production of income taxable in tbe United States. Accordingly, tbe limitation with respect to nonresident aliens and foreign corporations has been modified so that tbe specified deductions shall be allowed to the extent that they are connected with income arising from a source within tbe United States (sec. 214 (b) and sec. 234 (b)).

It is argued that this statement evidences a legislative intent that the modification is meant to apply only to depreciation, amortization, and depletion deductions -with respect to property, outside the United States, which is directly connected with the production of taxable income in the United States. A careful reading of the quoted statement convinces us that the intent there disclosed is quite the opposite. The House bill limited such deductions, including losses, to those “connected with a trade or business carried on within the United States.” The bill, as amended, changed the allowances, including losses, to those “connected with income arising from a source within the United States.” The argument that this language indicates an intent to restrict the modification merely to allowances for depreciation, amortization, and depletion is, we think, without merit.

The petitioner is sustained on this issue.

Issue No. #.

The facts are all stipulated. Petitioner paid its taxes imposed upon dividends distributed, under the British income tax law. It contends that such taxes were imposed upon it and not upon the shareholder, and were therefore deductible from its gross income.

This question was decided by the Board in London & Lancashire Insurance Co., Ltd., supra. We held there that since taxes of this character were imposed upon the corporation and not upon the stockholder, they were deductible by the corporation. Subsequently, in Biddle v. Commissioner, 302 U. S. 573, the Supreme Court denied a stockholder a credit for such a tax paid by the corporation under those conditions, because such tax was imposed upon the corporation and not the stockholder. This decision concludes respondent here.

Issue No. §.

In computing the amount of unallocable expenses and taxes of petitioner, to the deduction of which it is here entitled, the respondent used a ratio of gross income from sources within the United States, excluding therefrom tax-exempt interest and dividends from such sources, against gross income from all sources, including therein tax-exempt income and dividends from sources within the United States. Our only inquiry is whether this was the proper ratio.

The provisions of section 232 of the controlling revenue act appear in footnote No. 1, supra.

The pertinent part of section 119, referred to in that section, is:

* * * Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other ex-ponses, losses or other deductions which can not definitely be allocated to some item or class of gross income. * * *

Petitioner contends that tax-exempt interest and dividends should either be included in both the gross income of petitioner from all sources and its gross income from sources within the United States, used in this ratio, or should be excluded from both. Otherwise, it is argued, the resulting allocation of deductible unallocable expenses and taxes is distorted.

The identical question here was decided adversely to petitioner in London dé Lancashire Insurance Go., Ltd., supra, on the ground that any other conclusion would have violated section 204 (e), by permitting, in effect, a double deduction of tax-exempt interest and dividends. We sustain the respondent on this issue upon the authority of that case.

Decision will be entered under Rule 50.

       SEC. 232. DEDUCTIONS.
      In the ease of a foreign corporation the deductions shall be allowed only if and to the extent that they are connected with income from sources within the United States ; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 119, under rules and regulations prescribed by the Commissioper with the approval of the Secretary.

       Revenue Acts of 1918, 1921, 1924, and 1926, sec. 234 (b).

       SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.
      * ⅜ * * * ⅜ #
      (e) DouMó deductions. — Nothing in this section shall be construed to permit the same item to be twice deducted.


author: OPINION. Black: Smith, Sternhagen, Hill, TtiRNER,

text:
    Edward Mallinckrodt, Jr., and St. Louis Union Trust Company, a Missouri Corporation, Trustees under Indenture of Trust Made April 17, 1918, by Edward Mallinckrodt, Petitioners, v. Commissioner of Internal Revenue, Respondent. Jane Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 79138, 87240, 87339.
    Promulgated October 21, 1938.

      Harry W. Kroeger, Esq., and Dam&l N. Kirby, Esq., for the petitioners.

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

Black:

Although the respondent in his several dehciency notices has determined that, in connection with the transactions between the Mallinckrodt trust and the Jane Holding Corporation as set out in our findings, the trust received income in 1932 and 1933 in the amounts of $171,249.36 and $2,510,222.07, respectively, and that the Jane Holding Corporation also realized income in 1933 in the amount of $2,510,222.07, the respondent in his brief now contends primarily that the trust received income in 1933 in the amount determined; that, as a first alternative contention, the Jane Holding Corporation realized income in 1933 in the amount determined; and that, as a second alternative contention, the trust received income in 1932 in the amount of $171,249.36 as interest, either actually or constructively received. We shall first discuss respondent’s main contention and the one upon which he lays the most emphasis.

Did the Mallinckrodt trust, by virtue of the cancellation and forgiveness to the Jane Holding Corporation on December 30, 1933, of an open account in the amount of $2,890,349.83, receive in legal contemplation the accrued interest in the account in the amount of $2,-510,222.07, which accrued interest the corporation over a period of years had deducted from its gross income in determining its net income? The indebtedness was canceled in order that thereafter the corporation might distribute all its net income annually to the trustees, who in turn could distribute it to the beneficiaries of the trust. Under the terms of the trust indenture, the trustees were forbidden to distribute income to the beneficiaries as long as there was any outstanding indebtedness connected with the construction of the Arcade Building. In a statement attached to the deficiency notice in Docket Ho. 87339, the respondent said in part:

Your contention that no taxable income was realized by the Trust upon cancellation of indebtedness to Jane Holding Corporation in 1933 has been denied.
* * * * * ⅜ *
It is contended that the effect of the cancellation of the indebtedness was simply to convert what had been a debt owing to the trustees from the corporation into an additional contribution by the trustees to the surplus account of the corporation and that it had become paid-in surplus and, further, that it was “a mere bookkeeping transaction in the nature of a capital readjustment.”
It is held that the Trust received $2,510,222.07 in payment of the interest due to it from the Jane Holding Corporation in 1933 and that it represents taxable income in 1933. On December 31, 1933, in lieu of demanding or receiving cash in payment of the interest obligation the Trust elected to accept in payment something other than cash, that is, other property in the form of increased value of its stock in the Jane Holding Corporation. The effect is the same as though the corporation had paid the interest to the Trust in cash which was immediately returned to the corporation as paid-in surplus. The fact that instead of actual cash the payments were by-passed could not change the result as was stated by the Court in the case of Commissioner v. S. A. Woods Machine Company, 57 Fed. 2d. 635, certiorari denied 53 Supreme Court 15.
“The transaction involved in this case was equivalent to the payment of a debt in cash and the investment of the proceeds by the corporation in its own stock. If that had been done, clearly, the cash received would have been taxable income. The transaction was not changed in its essential character by the fact that, as the debtor happened also to own this stock, the money payment and the purchase of the stock were by-passed, and the stock was directly transferred in payment of the debt. The stock was the medium in which the debt was paid. The wide door to the evasion of taxes, opened by the decision of the Board, is an additional reason and quite a weighty one, against it.”

Counsel for respondent continues to press in his brief the above views and cites, as one of the principal authorities in support of his contention, Commissioner v. Woods Machine Co., 57 Fed. (2d) 635.

The petitioners, on the other hand, contend that the true nature of the transaction is to be defined by the word “relinquishment” and not by the words “payment” or “receipt”; that no artificialities or magic words such as “by-passing” can disguise the transaction as one of gain on the part of the trustees; that by canceling the debt, the trustees divested themselves of the right to enforce payment of $2,890,349.83 of their accumulated investment in the Jane Holding Corporation through the remedies of a creditor and allowed that investment to change from the category of debts to the category of net worth; that the constructive receipt doctrine is wholly inapplicable; that as a corollary from the doctrine of Commissioner v. AutoStrof Safety Razor Co., 74 Fed. (2d) 226, the cancellation in question was simply a capital transaction giving rise to no income to the sole stockholder; that the transaction in question has none of the attributes requisite to the creation of income within the meaning of the Sixteenth Amendment; and that the case of Commissioner v. Woods Machine Co., sufra, cited and urged by the Commissioner as an authority in point is here inapplicable.

The Mallinckrodt trust and the Jane Holding Corporation are separate and distinct taxable entities under sections 161 and 13, respectively, of the Revenue Act of 1932, and we do not understand it to be the contention of any of the parties here involved that these entities should be treated otherwise. Cf. Burnet v. Commonwealth Imfrovement Co., 287 U. S. 415. Of course, where the relationships between the taxable entities are as close as is the relationship here, namely, that of sole stockholder and corporation, the transactions between the two require close analysis in order that no injustice may be done either to the taxable entities or to the revenue provided for by Congress.

We have made this close analysis and we do not think that it can be held that the cancellation and forgiveness by the trust of its $2,890,349.83 indebtedness against the Jane Holding Corporation resulted in $2,510,222.07 taxable income to the trust by way of a collection of interest. It is undoubtedly true that, if the trust had received cash or other property in consideration for the cancellation of this indebtedness, the trust would have been taxable on the interest to the extent it was collected, either in cash or other property. No citation of authority is necessary to support that proposition. But the trust received no property in consideration of the cancellation of its indebtedness against the corporation. It is entirely too far fetched we think to treat the act of cancellation or relinquishment the same as if the corporation had actually paid in cash the entire amount of its indebtedness to the trust and then the trust as a separate and independent transaction had paid in the amount thus collected as paid-in surplus to the corporation. That is the way the Commissioner wants to treat the transaction, but that is not what happened. If that had happened, then of course the trust would have beeu taxable on the $2,510,222.07 interest thus collected and thereafter, when it paid the $2,510,222.07 into the corporation as paid-in surplus, that amount, though recently collected as interest, would have become capital paid in and would have been immediately added to the trust’s cost basis of its stock in the Jane Holding Corporation. But the trust in this particular transaction did not pay cash to the corporation. What it did was to cancel an account against the corporation which, although $2,890,349.83 in amount, had a cost basis to the trust of only $380,127.76 (the remaining amount of the unpaid principal of the account). One of the arguments which the Commissioner strongly urges in support of his view that we should hold the $2,510,222.07 as taxable income in 1933, is that if it is not taxed in that year, it will never be taxed. We do not agree with that view. It would be so, if the trust were entitled to add to* its basis of cost of stock which it owned in the corporation, the full amount of the canceled debt, but it is not entitled so to do. All the cost which the trust had in the debt against the corporation was the $380,127.76 unpaid principal. The balance of the account represented interest which had never gone into the trust’s income (aside from the $171,249.36 which we shall later discuss), and therefore represented unrealized appreciation of the account, and this unrealized appreciation petitioner trust can not add to its basis of cost of the stock of the corporation. Cf. King v. United States, 79 Fed. (2d) 453. In the latter case the Gramophone <& Securities Corporation of Virginia was organized to take over certain stocks of inventor Emile Berliner and the sole consideration of the transfer of the securities from Berliner to the corporation was the stock of the newly organized corporation. He was the sole stockholder except as to two qualifying shares. This was clearly a nontaxable transfer under section 203 (b) (4) of the Revenue Act of 1926, and this was not disputed by either party in the case. Later, however, Berliner transferred 1,200 shares of Victor Talking Machine Co. stock to the corporation without receiving any stock for it, and the corporation set up the stock on its books as paid-in surplus to the extent of the fair market value of the stock at the time it was transferred to the corporation. Some months thereafter the corporation sold the Victor Talking Machine Co. stock for $1,302,000 and sought to use, as a basis for determining gain or loss on the sale, $1,200,000, which was the fair market value of the stock when Berliner transferred it to the corporation. The court denied the use of the $1,200,000 basis and held that the correct basis for determining gain or loss upon the sale was $720,000, that being the March 1,1913, value in the hands of Berliner, which was greater than his cost.

The grounds of the court’s decision were that, because of section 203 (b) (4) of the Revenue Act of 1926, which has its counterpart in section 112 (b) (5) of the Revenue Act of 1932, no gain or loss was recognized to Berliner when he transferred the Victor Talking Machine Co. stock to the corporation, and, therefore, the cost basis to the corporation of the securities transferred was their cost to Berliner, and this was by reason of section 204 (a) (8) of the Revenue Act of 1926, which has its counterpart in section 113 (a) (8) of the Revenue Act of 1932.

A necessary corollary to the above holding of the court in King v. United States, supra, is that the cost basis to Berliner of the 19,998 shares of stock which he owned in the Gramophone & Securities Corporation was only increased by $720,000, the March 1, 1913, value of the Victor Talking Machine Co. stock, rather than by $1,200,000, its fair market value when it was transferred to the Gramophone <⅞ Securities Corporation as paid-in surplus. The reason for this is that the appreciation in value of the stock in Victor Talking Machine Co., which had taken place in Berliner’s hands prior to the transfer to the corporation, was not recognized for tax purposes because of section 203 (b) (5), and therefore Ms basis of cost was not increased by the difference between $720,000 and $1,200,000.

For the same reason, in principle, the trust’s cost basis of its stock holdings in the Jane Holding Corporation is not increased by the interest item of $2,510,222.07 (except as to the $171,249.36 interest for 1932, hereinafter discussed). The interest has not come in by the door of income. Therefore, it is not added to the trust’s basis of cost of its stock in the Jane Holding Corporation. When and if the trust disposes of its stock in the Jane Holding Corporation, presumably it will realize, by means of an increase in the sale price of the stock or an increase in the amount received from liquidation, the increase in net worth which has resulted from the cancellation of the indebtedness. The mere appreciation in the value of its stock in the Jane Holding Corporation which undoubtedly resulted from its cancellation of the indebtedness in question is no more taxable as income to the trust than a depreciation in the value of the stock of the Jane Holding Corporation would result in a deductible loss. It is with realized gains and realized losses that the income statutes deal. The only cost basis that the trust will be entitled to use in arriving at gain or loss on the subsequent sale or liquidation of its stock in the Jane Holding Corporation will be its original cost, plus $380,127.76 principal canceled, plus $171,249.36 interest for 1932, hereinafter discussed. In that manner, at some time in the future presumably, the trust will have taxable gain equal to the untaxed interest canceled, and therefore the interest will be eventually taxed, but in another form. Of course, it is perfectly true that the $2,510,222.07 assets in the Jane Holding Corporation which were released by the cancellation of the interest liability may be subsequently lost in the business and never be realized as income to the trust. As a matter of fact, its entire investment in the Jane Holding Corporation may some day become entirely worthless. But that is always a possibility to an investor when he leaves something at the risk of the business. But the mere fact that the canceled interest, in such a transaction as we have in the instant case, may ultimately be lost through a dissipation of the assets which the cancellation freed, would not be sufficient grounds to tax the canceled interest to the stockholder on a cash basis, who has never actually or constructively received it.

For reasons above stated, we reject the Commissioner’s contention that, by its act of cancellation and relinquishment in 1933 of the $2,510,222.07 interest included in the $2,890,349.83 debt canceled, the trust realized in that year income to the extent of $2,510,222.07. On this issue, the Commissioner is reversed.

The next issue which we must decide is whether the $2,510,222.07 interest canceled and relinquished by the trust in 1933 was income to the Jane Holding Corporation. The Commissioner has so determined and that is the only issue we have to decide in Docket Ho. 87240.

We think that issue must be decided against the Commissioner on the authority of AutoStrop Safety Razor Go., 28 B. T. A. 621; affd. (C. C. A., 2d Cir.), 74 Fed. (2d) 226.

It is our opinion that under the AutoStrop Safety Razor Go. decision the cancellation and forgiveness of the $2,510,222.07 of accrued interest liability must be held to amount to a contribution of capital to the corporation as well as the cancellation and forgiveness of the $380,127.76 of remaining principal, which respondent concedes was a capital contribution. The only difference between the two amounts, as we see it, is, as we have already endeavored to point out, that the trust is entitled to add to its basis of cost of its stock in the Jane Holding Corporation the $380,127.76 unpaid principal canceled, but is not entitled to add the $2,510,222.07 unpaid interest canceled. In the AutoStrop Safety Razor Co. case the Government had argued on appeal that the AutoStrop Safety Razor Co. was on an accrual basis and had deducted the amount of the debt, which consisted of unpaid royalties and interest and loans, in previous returns; that the AutoStrop Co. was on the cash basis and had reported only the income actually received; and that therefore the deficiency was correctly determined. The Circuit Court of Appeals disposed of this contention by saying :

Should we assume that the claimed facts were before us, viz., that Auto Strop Safety Razor Company was on an accrual basis and deducted from its income the indebtedness as it was accrued on its books and that the Auto Strop Company was on a cash basis and so reported only what income it actually received, we do not think that would change the result. In doing what they did these two companies complied with the law. So far as now appears, their returns were correct and their taxes assessed and paid accordingly. When the indebtedness was cancelled, whether or not it was a contribution to the capital of the debtor depends upon considerations entirely foreign to the question of the payment of income taxes in some previous year. Since the cancellation, under the circumstances shown, did not make it income to Auto Strop Safety Razor Company in the year the debt was cancelled, it can not be taxed as its income in that year.

Tbe effect of tlie cancellation of the debt in question by the corporation’s sole stockholder seems to clearly fall within the last sentence of article 64 of Treasury Begulations 77, which reads as follows:

Forgiveness of indebtedness. — The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter’s gross income. If a shareholder m a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation. [Emphasis supplied.]

The trust, the sole stockholder of the corporation, as we have already endeavored to point out, gratuitously canceled and relinquished its indebtedness against the corporation. There was no property passing from the corporation to the trust in consideration of the cancellation and forgiveness of the indebtedness. That being true, the transaction resulted in a capital contribution to the corporation under the provisions of the foregoing regulation and the doctrine of the Auto-Strop Safety Razor Co. case.

The cases which respondent cites in support of his contention, such as B. F. Avery & Sons, Inc., 26 B. T. A. 1393, and United States v. Kirby Lumber Go., 284 U. S. 1, are not in point. They did not deal with a contribution by a stockholder to the corporation, which, under the doctrine of King v. United States, supra, and AutoStrop Safety Razor Co., supra, is a capital transaction and is nontaxable. On this issue the Commissioner is reversed.

We shall next consider the question presented in Docket No. 79138, which the Commissioner designates in his brief as his second alternative contention. He freely conceded at the hearing and on brief that if the Board should hold that the $2,510,222.07 in question was income either to the trust or to the corporation in 1933, then the $171,249.36 which the corporation accrued on its books in 1932 as interest due the trust and credited to the account of the trust and deducted from its own income tax return in 1932, was not income to the trust in 1932. Since we have held against the Commissioner on his first two contentions we must now decide his third contention. The trust did not include the $171,249.36 in question as income in its income tax return for the year 1932.

The Commissioner in his determination of the deficiency against the trust added this $171,249.36 to the trust’s income, and in explanation of his action stated in the deficiency notice, among other things, as follows:

* * * In the year 1932 the corporation made an entry on its books charging profit and loss and crediting the account of Edward Mallinckrodt Trust with $171,249.36, representing the accrued interest.
This office holds that $171,249.36 was constructively received, representing taxable income to the trust even though not actually received.
Article 322, Regulations 77, states in part:
“Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, * *
It appears that the trustees could have withdrawn the interest without jeopardizing the credit or financial standing of the corporation inasmuch as the corporation had tangible assets and investments which were not needed in the operation of its business. It appears that the corporation was under the absolute control of the trustees and payment of the interest was entirely within their control. In this connection the decision of the United States Board of Tax Appeals in the case of John A. Brander, 3 B. T. A. 231 and in the case of Albert J. Sullivan, 16 B. T. A. 1347 are referred to.

We think respondent must be sustained in his contention that the failure of the trust to collect the $171,249.36 interest due it from the corporation in the taxable year 1932 was a matter of its own free choice and not due to any inability on the part of the corporation to pay the interest. The corporation had large and valuable assets and abundant resources with which it could have paid the interest. It had receipts from interest and rents during the taxable year of $209,044.83 and operating expenses, including taxes, of only $17,112.57. It owed comparatively no debts outside of the indebtedness which it owed to the trust, its sole stockholder. During the period of 1920 to 1932, inclusive, the corporation had paid the trust $3,362,003.89 which the trust applied to principal and nothing to interest. We have none of these years before us except 1932, but we do have that year before us, and for the trust to contend that it did not collect its interest because the corporation was not financially able to pay it, is altogether unreasonable. A much more reasonable conclusion, when all the facts are considered, is that the trust did not collect the $171,249.36 interest in question because as the sole stockholder of the corporation it deliberately chose not to do so. Therefore in such a situation the doctrine of constructive receipt applies and we affirm the Commissioner in adding to the trust’s income for the year 1932 the interest item of $171,249.36. Cf. John A. Brander, 3 B. T. A. 231; Albert J. Sullivan, 16 B. T. A. 1347; Security First National Bank of Los Angeles et al., Executors, 28 B. T. A. 289; Jacobus v. United States, 9 Fed. Supp. 41. It may be argued that we are inconsistent in applying the doctrine of constructive receipt to the annual interest due the trust in 1932, and not applying it to the full amount of $2,510,222.07 unpaid interest canceled in 1933, but we do not think so. We think the Commissioner, for the same reasons as we have applied to 1932, might well have applied the doctrine of constructive receipt for those prior years when the corporation accrued and deducted it from its gross income and credited to the account of the trust the amount of the current year’s interest and the trust did not return it as income, although collecting more than the amount of the interest and applying it to principal. But we think we would not be justified in applying the doctrine of constructive receipt to the entire $2,510,222.07 in 1933. It is a very different thing we think to hold that the trust could have readily and easily collected the $171,249.36 interest due it for the year 1932 and that its failure to do so was by choice rather than necessity, than to hold that the trust could have readily collected from the corporation $2,510,-222.07 in 1933 and that its failure to do so was by choice rather than necessity. This latter fact we are unable to find from the evidence in the case. In this connection we may add in further continuance of the discussion under issue 1, that this $171,249.36 having now, by our decision in the instant case, been taken into the trust’s taxable income, it will have a right to add it to the basis of its cost of its stock in the Jane Holding Corporation, along with the $380,127.76 unpaid principal which was canceled in 1933. The balance of the $2,510,222.07 interest canceled in 1933 would not, for reasons we have already stated, be added to the trust’s cost of the stock of the Jane Holding Corporation because it has never gone into the trust’s taxable income. If we had before us the question of the trust’s right to add this uncollected interest of prior years, aside from the $171,249.36 here in question, to its basis of cost of its stock in the Jane Holding Corporation, the trust would not, we think, be permitted to contend that although it did not actually receive the interest, it constructively received it and should have been taxed with it in prior years. Cf. Raleigh v. United States, 5 Fed. Supp. 622; Moran v. Commissioner, 67 Fed. (2d) 601.

While, as we have stated, we do not have before us the question of deciding how the basis of cost of the trust’s stock in the Jane Holding Corporation was affected by the cancellation and relinquishment of the indebtedness in 1933, including interest of $2,510,222.07, and anything we have said herein on that subject is dicta, nevertheless it seems necessary to give some discussion to that phase of the matter in order to make all the more plain our reasons for holding that the cancellation by the trust in 1932 of $2,510,222.07 interest due it by the corporation was not taxable income in that year to the trust.

Reviewed by the Board.

Decision will he entered under Rule 50.

Smith,

dissenting: I dissent from the Board’s holding in this case that the Mallinckrodt trust, Docket No. 79138, is liable to income tax upon $171,249.36 interest credited to it upon the books of the Jane Holding Corporation for 1932. The trust and the corporation are separate taxable entities. The trust made its returns upon a cash receipts and disbursements basis in accordance with its books of account. It clearly was authorized by the law and the regulations of the Treasury Department to make its returns upon such basis. The taxpayer on a cash receipts and disbursements basis is not required to account for income unless it has been “received.” Cf. Avery v. Commissioner, 292 U. S. 210. The only cash which it received from the Jane Holding Corporation in 1932 was $160,000 paid by the Jane Holding Corporation “on account.” The trust accounted for the payment as being a receipt of a part of the loan made by the trust to the corporation. I think it might be held that the trust erroneously so treated the receipt of $160,000. In its income tax return for 1932 the Jane Holding Corporation had credited the trust with an accrual of $171,249.36 interest. It claimed the deduction from gross income of an accrual of interest in the amount of $187,243, thereby showing a net loss for the year of $130,193.36. I think it might properly be held that the payment made by the Jane Holding Corporation in 1932 to the trust of $160,000 was in reality a payment of interest and that the trust is taxable upon the receipt of that interest, even though on its books of account it shows the receipt as being a return of principal. But I can not see any justification for taxing the trust on the receipt in 1932 of $171,249.36 interest received from the Jane Holding Corporation.

It is held in the majority opinion that the trust could have received the payment of $171,249.36 interest from the J ane Holding Corporation if it had desired to receive it. In my opinion there is no justification for such a statement. It is true that the J ane Holding Corporation had in its treasury at December 31, 1932, cash in the amount of $43,907.13. But there is no evidence of record that the trust could have received from the Jane Holding Corporation in 1932 a payment of interest in the amount of $171,249.36 if it had elected to receive it.

Sternhagen,

dissenting: I find myself unable to accept the decision in Docket No. 87240, to the effect that the Jane Holding Corporation realized no income through the cancellation in 1933 by its creditor, the trustee, of the accumulated interest of $2,510,222.07. The decision is rested entirely upon Commissioner v. AutoStrop Safety Razor Co., 74 Fed. (2d) 226, affirming 28 B. T. A. 621, and the last sentence of article 64 of Regulations 77. It is important to remember that the nature of so much of the canceled indebtedness as is now in issue was accumulated accrued interest and did not represent the principal of a loan of money which had been made by the trustee to the corporation. I think that this fact is of primary importance in considering’whether it can properly be said that the trustee shareholder made a contribution to the corporation’s capital, as he might have done when he made the original loan upon which the interest was computed. As I read the regulations and the AutoStrop case, they were intended to deal with such principal indebtedness and not with accrued interest. Certainly the three illustrations of the article of the regulations indicate that accrued interest was not in the draftsman’s mind. When the Board and the court came to decide the AutoStrop case the dominant indebtedness which was thought of was that described in the instrument of cancellation as “royalties or commissions or on account of moneys loaned or advanced or otherwise.” The word “interest”, which appears but once in the findings and nowhere in the opinion, was entirely lost sight of. I think, therefore, that both the Board’s opinion and the court’s opinion should be regarded as dealing entirely with the question whether the principal of an indebtedness owing by a corporation to its shareholder becomes a contribution to capital when it is canceled. That case held that it does, and that the corporation thereby realizes no taxable income.

In the present case there is nothing to support a finding that the creditor, being the sole shareholder, intended a contribution of capital. On the contrary, the cancellation was made in order that the trustee might distribute to one of its beneficiaries. The creditor corporation seems to me to have “made a clear gain” and “realized within the year an accession to income”, to use the Supreme Court’s language in United States v. Kirby Lumber Co., 284 U. S. 1. Any thought of hardship which might result from tins view is dispelled by the fact that the debtor corporation has for many years accrued interest on its books and deducted it on its returns, thus indicating that no contribution of capital was in contemplation. As I understand, there was a credit by the corporation to surplus and undivided profits, and thus the amount which had theretofore been definitely obligated to be paid as a d_ebt was now freed of that obligation and was distributable or not to the shareholders entirely in the discretion of the directors. The trustee’s position was changed from that of a creditor with a right against the corporation to that of a shareholder with no such right. As a debtor, the corporation had been firmly bound and the amount of the debt had been a true liability; with the forgiveness of the debt the liability ended, notwithstanding that the accounting item “surplus” may still appear on the liability side.

Hill,

dissenting: I disagree with the opinion of the majority of the Board in Docket No. 87240.

It is my opinion that Jane Holding Corporation is taxable in the year 1933 on the amount of accrued interest canceled in that year by the Mallinckrodt trust, to the extent of deductions of such accrued interest taken by the corporation in its income tax returns for previous taxable years. The principal upon which the interest obligations were accrued by the corporation represented loans to it by its sole shareholder for use in its business operations.

The only justifiable theory upon which a taxpayer may deduct interest or ordinary and necessary business expenses accrued but not paid is that, for the purposes of taxation, such accrual is treated as payment. Of course, in order to subject the payee of such accruals to income tax on the amounts thereof, where the payee is on a cash basis, the amount of such accruals must be actually or constructively paid to him, notwithstanding the fact that as to the payor the accruing of such obligations, for the purposes of taxation, is tantamount to their payment. Where I refer hereinafter to accruals as payments it is to be understood that such expression is employed in the sense and in the connection above indicated.

In the present proceeding the accruals of interest were, to the extent of their deductions in the several taxable years, payments out of gross income and were not capital investments or paid out of capital. Taxable net income was reduced by the amounts of such deductions on the theory that so much of gross income as was necessary to meet sucb accrued obligations for interest must be taken and set apart for that purpose. Therefore, to the extent of such deductions, the corporation did not receive taxable income in the years of such deductions. It received the amounts of such deductions as gross income but lost such amounts to taxable income through their appropriation to meet the accrual of interest obligations. The cancellation of the accrued interest obligations by the trust operated as a refundment in 1933 of such amounts lost to taxable income in the previous years and constituted income to the corporation in 1933. Such cancellation was a refundment of expenditures out of earnings and not out of capital of the corporation.

The fact that from the standpoint of the trust as sole shareholder of the Jane Holding Corporation such cancellation constituted a contribution to capital of the corporation does not alter the fact that from the standpoint of the corporation itself the cancellation constituted a restoration to it of taxable income to the extent of the amount of accruals which it deducted from its gross income in previous taxable years. The capital contribution by the trust was not of itself income to the corporation, but through such contribution by cancellation of interest obligations previously deducted by Jane Holding Corporation from its gross income an amount of income equal to the amount of such deductions was restored to the corporation’s taxable income. Such restoration occurred in 1933 and constituted taxable income of the corporation in the year here involved.

I think my views herein are in harmony with the principle of the Board’s decision in South Dakota Concrete Products Co., 26 B. T. A. 1429, which has been frequently cited with approval by the Board. I think, also, that my views are supported by the principle upon which the Supreme Court based its opinion in Burnet v. Sanford & Brooks Co., 282 U. S. 359. In that case the taxpayer, who was engaged in business for profit and in carrying out a dredging contract entered into with the United States, expended in the taxable years 1913, 1915, and 1916 as expenses more than was received in each of those years as compensation under its contract, and on its income tax return for those years reported net losses by reason of the deductions of such expenditures. As a result of a suit against the United States for the recovery of such excess expenditures the taxpayer recovered from the United States in 1920 the amount of such excesses but did not return the amount of such recovery in its income tax return for the year 1920. The Commissioner determined a deficiency against the taxpayer based upon the amount of such recovery. The taxpayer petitioned the Board for a redetermination, contending that such recovery did not constitute income but a return of capital and hence the deficiency based thereon was erroneous. The Supreme Court in its opinion said:

That the recovery made by respondent in 1920 was gross income for that year within the meaning of these sections cannot, we think, be doubted. The money received was derived from a contract entered into in the course of respondent’s business operations for profit. While it equalled, and in a loose sense was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses incurred in the prosecution of the work under the contract, for the XDurpose of earning profits. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income. See Doyle v. Mitchell Brothers Go., supra, page 185 of 247 U. S., 88 S. Ct. 467. [Emphasis added.]

I think, also, that my views are in harmony with the principle adopted and adhered to by the Board and the courts that, when a deduction for a bad debt is taken in a given taxable year and such debt is paid in a subsequent taxable year, the amount thereof becomes taxable income in the year received notwithstanding the fact that the amount received in payment of the debt is or may be a return of capital. In such case the taxpayer is not taxed on capital but upon restored net income lost in the taxable year when the deduction for the bad debt was, for tax purposes, allowed from gross income.

I am aware that in Commissioner v. AutoStrop Safety Razor Co., 74 Fed. (2d) 226, on facts similar to those here, the Circuit Court of Appeals for the Second Circuit held:

When the indebtedness was cancelled, whether or not it was a contribution to the capital of the debtor depends upon considerations entirely foreign to the question of the payment of income taxes in some previous year. Since the cancellation, under the circumstances shown, did not make it income to Auto Strop Safety Razor Company in the year the debt was cancelled, it cannot be taxed as its income in that year.

I find it difficult to distinguish the facts in the instant case from those in the AutoStrop Safety Razor Co. case, supra, but with due deference to the court rendering the opinion in that case, I am impelled to the belief that its opinion therein is out of harmony with the principle underlying the opinion of the Supreme Court in the Sanford & Brooks Co. case, supra.

For the reasons assigned it is my opinion that the Jane Holding Corporation is taxable in 1933 on an amount equal to the amount of the deductions taken by it from gross income in previous taxable years for accrued interest obligations canceled by the Mallinckrodt trust in 1933.

TtiRNER,

dissenting: In my opinion the conclusion reached in Docket No. 87339 can not be reconciled with that reached in Docket No. 87240. In the case first mentioned it is concluded that the accrued interest due and owing from the corporation to the trust, the payment of which was waived or canceled by the trust, did not constitute taxable income to the trust for the reason that the trust, being on the cash receipts basis, never received it actually or constructively; while at the same time it is concluded in the latter case that the interest so waived or canceled by the trust did not constitute income to the corporation because it was received by the corporation from the trust, its sole stockholder, as a payment or contribution to capital. I have been unable to think of any situation or arrangement whereby it might probably be said that the one entity can make a payment or contribution of any sum to another without first receiving, actually or constructively, the money so paid or contributed.

The situation here does not involve a normal and ordinary relationship between a stockholder and a corporation, and it is unlikely that the events which took place could have happened unless the interests of the sole stockholder and of the corporation were so nearly the same that it would make little if any difference, except for income tax purposes, whether the interest, so-called, was paid over to the stockholder or retained by the corporation. As I understand the facts, the Jane Holding Corporation was organized and maintained solely for the purpose of carrying on under corporate form certain enterprises of the trust, and particularly to erect a substantial office or business building, and the trust was to furnish such amounts as were needed for completion of the project. The income of the corporation was to be derived almost if not wholly from the rents to be obtained on the building. Assuming the separate entities of the trust and the corporation, the facts, as I understand them, are that as rents began to come in the Jane Holding Corporation from time to time made cash payments on the open account which it had set up to, cover the loans or advances from the trust, which account covered not only the sums which had been advanced but interest thereon as it accrued from year to year. In making these payments there was no designation by the Jane Holding Corporation that these payments constituted a payment of interest or capital, and they were entered on the corporate books merely as payments on account. Normally under such circumstances there would be no occasion to designate the application of such payment to interest or principal, because it seems to me fundamental that where, in the absence of prior agreement or understanding, payments are made in respect of advances or loans, the amount so paid is to be regarded as the payment of interest to the extent of the interest then due and then as to any balance as a payment on principal. The only fact which could in any way indicate that such was not the case here is the fact that upon receiving these sums the trust, for some reason which it has not seen fit to explain, made entries on its boohs designating the amounts received as payments of principal, leaving the interest to accumulate from year to year. In my opinion that fact alone should not be sufficient to justify either a conclusion of fact or a conclusion of law that the amounts dealt with in 1933 constituted interest and not principal. It seems to me therefore that the correct conclusion on the facts as I understand them would be that the interest accrued on the advances had been actually paid by the corporation over the period of years and actually received in cash by the trust to the extent of the cash payments, limited only to the amount of the interest which had accrued but remained unpaid at the time any particular payment was received. Under such circumstances, if that conclusion is correct, the only manner in which income tax may now be collected in respect of such interest payments would be through the adjustment of trust income for the years in which the prior payments were made, unless, by reason of the act of the trust in treating the payments as the return of principal and in failing to report in income as interest the payments made, some form of estoppel may be spelled out so as to justify the inclusion of a corresponding amount in income for 1933, when payment of the balance due on the account was waived.

According to my understanding of the report herein, however, all parties in interest, including the trust, the corporation, and the respondent, have either agreed, or have proceeded to the trial of the issues in the two cases on the assumption, that the amounts which were actually paid by the corporation to the trust during the preceding years were in truth and in fact the payments of principal and that in the year 1933 interest accrued on that principal actually remained unpaid in the amount of $2,510,222.01, and to that extent the payment waived by the trust was in fact interest. On the basis of such an understanding, assumption, or agreement of fact, I am of the view that the only reasonable and logical conclusion that may be reached is that the interest so accrued and unpaid was constructively received by the trust at the time payment was waived and by it paid into the corporation as a contribution to capital. In that view of the case the conclusion of the majority in Docket No. 87339 is in error and the conclusion reached in Docket No. 87240 is correct. There seems to be no question that if the amount waived had been admitted to be principal, cancellation of the indebtedness would have been accepted by all parties as a payment to capital.

While I do feel that the reasoning in Burnet v. Sanford & Brooks Co., 282 U. S. 359, and South Dakota Concrete Products Co., 26 B. T. A. 1429, referred to in the dissent of Mr. Hill, is persuasive, I am convinced that the situation in those cases, as in the case of the recovery of a bad debt, is quite different from that in the cases before us. In each of the cases mentioned and in the case of a bad debt recovery, the recovery of funds was an actual realization on rights which existed in the person or corporation sought to be taxed, while here the acquisition of or the freeing of the sum of $2,510,222.07 from liability to the trust was not a realization on any right existing in the Jane Holding Corporation but the result of a voluntary act or gratuity of its sole stockholder, and, being a sum received or retained at the will of the stockholder, for which the corporation gave nothing, it constituted paid in capital. I am unable to see any analogy between a transaction such as we have in the cases before us and a transaction between a corporation and a stranger, as distinguished from a stockholder, such as took place in United States v. Kirby Lumber Co., 284 U. S. 1.

For the reasons set forth, I respectfully express my dissent.

Oppee agrees with this dissent.


author: Van Fossan :

text:
    Richard Van Nest Gambrill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81544.
    Promulgated October 21, 1938.

      Ben R. Ciarle, Esq., and Allin H. Pierce, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Van Fossan :

The first of two major questions presented by the case at bar, is the date to be used for the purpose of fixing the basic valuation in determining the gain or loss to petitioner on the sale of securities which he received as remainderman of a testamentary trust after the death of the life beneficiary.

The second question is the date to be used in determining the period for which these same securities were held by petitioner prior to their sale, within the meaning of the capital gains provisions of the applicable revenue act.

The securities which petitioner received as remainderman, after the death of the life beneficiary, are capable of being divided into two categories, the first being those securities which had come to the trustees as part of the trust res, and the second being those securities which were purchased by the trustees with trust funds, subsequent to March 1, 1913, and held by them until delivery to petitioner in 1928.

The statutory provisions governing the basis for the determination of gain or loss are found in section 113 of the Revenue Act of 1928 and those here pertinent are as follows:

(a) Property acquired after February 28, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
* ⅝ ⅛ * * * *
(5) Pbopektt teansmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis- in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death;
⅜ * ⅝ # * * *
(b) Property acquired before March 1, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be:
(1) the cost of such property (or, in the case of such property as is described in subsection (a) (1), (4), (5), or (12) of this section, the basis as therein provided), or
(2) the fair market value of such property as of March 1, 1913,
whichever is greater. In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.

As to the first above indicated issue, respondent urges that petitioner’s interest under the testamentary trust was a vested interest under the controlling law of New York; (as to the securities which were a part of the original trust res) that where property is bequeathed in trust, distribution by the executor of the donee’s estate to the trustee constitutes the “distribution to the taxpayer” contemplated by the statute; (as to the securities which were acquired by the trustees with trust funds) that where trustees purchase property with trust funds, and later distribute the property so acquired to the taxpayer, such property is not “acquired by will or intestacy” within the meaning of the above quoted statute.

Even though petitioner’s interest under New York law may be a vested interest acquired at the date of testator’s death, which was prior to March 1,1913, and as such brings the matter within the purview of section 113 (b), that section, by its terms, makes section 113 (a) (5) controlling. The date of acquisition therefore is removed from the picture and the date for determining gain or loss is the date prescribed by section 113 (a) (5). Counsel are agreed that the applicable provision of the subsection is the provision covering “all other cases” and that the basis therefore is “the fair market value of the property at the time of the distribution to the taxpayer.”

Respondent concedes that Ralph W. Harbison, 26 B. T. A. 896, Mary Colgate, 27 B. T. A. 506, Margaret E. B. Fleming, 36 B. T. A. 773, are all contrary to the position he takes on the first issue. These cases, together with Van Nostrand v. United States, 18 Fed. Supp. 295, affd., 94 Fed. (2d) 510, hold that the phrase “the time of distribution to the taxpayer” as used in the statute, means the time when this property was actually delivered to or made available for the use of the taxpayer.

However, respondent cites Jenlcins v. Smith (U. S. Hist. Ct., Dist. Conn.), 21 Fed. Supp. 433, as squarely supporting his contentions, and urges that this Board reconsider the entire issue on the basis of the Jenkins case and the arguments presented in the brief in the case at bar.

After a careful consideration of respondent’s arguments and with due deference to the District Court for the District of Connecticut, we are constrained to adhere to our original position. Nothing is presented which would justify our recantation. We, therefore, hold that the basis to petitioner for the purpose of determining gain or loss on the sale of the securities in question is the fair market value of such securities on May 5, 1928, the date when the corpus of the trust was delivered to petitioner. This was the time of the “distribution to the taxpayer.” Cf. Robert A. Taft, Trustee, 34 B. T. A. 603; Bessie C. Williamson, 34 B. T. A. 924.

Respondent urges that the second issue, being concerned with the capital gains provisions of the statute, is not dependent upon the date used under section 113 for determining the basis for gain or loss and that the securities here involved have been held by petitioner, within the meaning of section 101 of the Revenue Act of 1928, since the respective dates on which they were acquired by the trust estate. In other words, that those securities which were a part of the original trust res were “held by the taxpayer” since the death of the testator, and those securities which were acquired by the trustee with trust funds were “held by the taxpayer” since the time of their purchase.

Respondent relies on McFeely v. Commissioner, 296 U. S. 102, which case directly severs any dependence of section 101 on section 113 for the determination of the holding period.

In addressing itself to the question presented in the McFeely case the Supreme Court, through Justice Eoberts, declared that “held” and “acquired” were in effect synonymous, and stated:

* * * In common understanding, to liold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then that from which to compute the duration of ownership or length of holding. Whether under local law title to personal property passes from a decedent to the legatee or next of kin at death subject to a withholding of possession for purposes of administration, or passes to the personal representative for the purposes of administration, — the title of the beneficiary, though derived through the executor, relating back to the date of death, — is for the present purposes immaterial. In either case, the date of acquisition, within the intent of the Revenue Act is the date of death. [Citing Brewster v. Gage, 280 U. S. 327.]

To determine the application of the McFeely case to the case at bar, it is necessary to consider the particular questions involved in the two cases. The McFeely case, which is really a consolidation of five cases, is concerned with the administration period between the date of death of the original holder and the date of actual acquisition by the respective taxpayers, and involves, respectively, residuary legatees, the donee of a widow who elected to take against her husband’s will, and one taking under intestate laws. The Court states the question “whether property acquired from a decedent through intestacy, or a general bequest, is, within the meaning of the clause [held by the taxpayer for more than two years] held by the taxpayer from the date of decedent’s death or from the date of distribution.” The case at bar is concerned with the date of acquisition of a re-mainderman’s interest in a trust estate after the death of the life beneficiary. This, we think, presents a distinctly different problem, one not ruled on in the cited case. For this reason we do not deem the McFeely case controlling here.

As above noted, respondent contends that the securities which were originally a part of the trust estate were “held by the taxpayer” from the date of the death of the original grantor (1897), and those purchased with trust funds were held from the date of such purchase. This contention w’as based on McFeely v. Commissioner, supra, which, as above indicated, we have rejected as controlling in the case at bar.

Petitioner urges that the controlling date is May 5, 1928, the date of delivery of the trust corpus to petitioner. Whether this date or that of March 23, 1928, the date of death of the life beneficiary, is j the determinative date it is not necessary in this case to decide. The result is the same whichever be taken. The findings of fact establish that certain securities were sold prior to March 23, 1930, and that others were sold after May 5, 1930. None were sold in the interval between the two dates.

We hold that those securities sold in February 1930 had not been held by the taxpayer for more than two years and were, therefore, not capital assets, while those sold on May 6 and in June 1930 had been held by taxpayer for more than two years and were, therefore, capital assets.

Decision will be entered wnder Rule 50.

       Sec. 101, Revenue Act of 1928.

       Reversed on another issue, 68 Fed. (2d) 1004; 293 U. S. 144.

       Reversed on another issue, mandate C. C. A., 2d Cir., on stipulation to abide by decision in Bliss v. Commissioner, 68 Fed. (2d) 890; 293 U. S. 144.


text:
    W. F. Parker and Ethel M. Parker, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89921.
    Promulgated October 21, 1938.

      H. H. Hoppe, Esq., and Ralph F. Mateer, G. P. A., for the petitioners.

      Henderson A. Melville, Esq., and George F. James, Esq., for the respondent.
   OPINION.

Leech:

The award to petitioner, secured by the insurance policy on his life, upon which the contested premium was paid by the pension trust fund, was patently made as compensation for his services to the corporation. The amount of this premium was thus taxable income to petitioners, when' paid, unless section 165 of the Revenue Act of 1934 postpones the tax incidence. N. Loring Danforth, 18 B. T. A. 1221; George Matthew Adams, 18 B. T. A. 381. Petitioners apparently concede this.

Thus, their position rests wholly upon the contention that the pension trust fund here is within section 165 of the Revenue Act of 1934. That section provides:

SEC. 165. EMPLOYEES’ TRUSTS.
A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by tlie trust in accordance with such plan, shall not be taxable under section 161, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in wihich so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of dividends and interest specified in section 25 (a).

This provision, in almost identical form, has appeared in every Revenue Act beginning with that of 1921. See Oscar A. Olstad, 82 B. T. A. 670. Its entirely proper purpose, complemented by section 23 (q), undoubtedly, is to encourage employers to share profits with their employees and to provide some measure of security for their employees by means of pensions, when the earning power of the employees has decreased or ended.

It may be said that this act should be liberally construed in accomplishing this laudable purpose. But the title of section 165 is “Employees’ Trust.” Section 23 (q). in complementing section 165, allows an additional deduction to:

An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees (if such trust is exempt from tax under section 165, relating to trusts created for the exclusive benefit of employees) * * *, [Emphasis supplied.]

Sharing profits, as applying to stockholders, would be meaningless since that is their right, alone, as stockholders. And, provisions for the security of stockholders of the corporation was, just as obviously, not intended. This is strikingly apparent from the wording of section 165. Thus, assuming the present pension trust fund was not only a juristic trust but, assuming also, the doubtful premise that it was a pension trust within the section, was it created “by an employer * * * for the exclusive benefit of some or all of his employees * * *”? We think not.

The term “exclusively” under comparatively similar circumstances has been strictly construed. Henriette T. Noyes, 31 B. T. A. 121, and cases cited therein. Its companion term “exclusive”, used in section 165, should be likewise interpreted.

The present pension trust fund is described in resolution of the board of directors of the Standard Transformer Co., authorizing its creation, as being “for the sole and exclusive benefit of such of the officers and employees of the company (sometimes hereinafter referred to as the Pensioners) who desire to take advantage thereof and who can qualify therefor under the rules and regulations hereinafter set forth.” The trust instrument referred to this resolution. The rules and regulations of the pension trust fund included the same statement. But that nomenclature can not and does not, alone, establish the crucial fact that the pension trust fund here was created for the exclusive benefit of some or all of its employees. Peugh v. Davis, 96 U. S. 332; Jackson v. Lawrence, 117 U. S. 679; Chicago, Milwaukee & St. Paul Railway Co. v. Des Moines Union Railway Co., 254 U. S. 196. That fact is determinable from the instrument creating the trust, the rules and regulations controlling its administration, the circumstances surrounding both, and what was actually done pursuant thereto. Heryford v. Davis, 102 U. S. 235; First National Bank in Wichita v. Commissioner, 57 Fed. (2d) 7, affirming 19 B. T. A. 744; certiorari denied, 287 U. S. 636; Bank of California National Association, 30 B. T. A. 556; Carson Estate Go., 31 B. T. A. 607; affd., 80 Fed. (2d) 1007; Elgin National Watch Co., 17 B. T. A. 339.

What does the record disclose? The petitioner, admittedly, was an employee. But he was a stockholder, as well. At the creation of the pension trust fund and throughout 1934, he owned 97, and his son 19, of the 120 issued shares of stock in the company. Beyond question, he dominated and controlled the actions of the Standard Transformer Co. That company, which was the employer, could amend the rules and regulations, at any time, and in any way, except to deprive a beneficiary of a benefit awarded. It could cause the liquidation of the trust and the distribution to the beneficiaries, including the petitioner, of the policies of insurance held by the trustee. The petitioner was the manager of the pension trust fund, with the absolute right to grant or refuse any application for benefits and to fix, increase or decrease, within certain limits, the amount of the benefits awarded. The original application for insurance on the life of the petitioner, signed by him as manager of the pension trust fund, shows that the original request was for a policy of $100,000, requiring a total annual premium payment of $9,747. A policy of $25,000 was issued on this application. But its cost to the pension trust fund was more than 81 percent of the total disbursement by the pension trust fund for all the benefits awarded.

The petitioner testified that the pension trust fund was created for the purpose of providing the salaried employees of the company, who, possessing nothing but such salaries and having no interest in the corporation and would thus not be benefited by its future growth or prosperity, something in the nature of a saving which would inure to them when they became too old to work or lost their employment after years of service. If this was the purpose of the organization of the pension trust fund, then the award of more than 81 percent of its benefits to the petitioner is clearly not within that purpose. The petitioner stands outside such class of employee for which the pension trust fund was purportedly formed, because he owned 97 of the 120 issued shares of stock of the corporation and thus stands in a position to enjoy, financially, any future prosperity of the company. During the four years of the existence of the pension trust fund, the only awards made were those to the petitioner and three others upon the organization of the trust.

The rules and regulations of the pension trust fund provided that “Any officer or employee who has been continuously employed by the company for six or more months, who has attained the age of twenty-one years and who is not over forty years of age, may apply to the Manager for participation in the Pension Fund. Such application shall be made on blanks to be furnished by the Manager.” There is no indication that any other of the 17 employees in question ever knew of the organization of the pension trust fund, although petitioner testified that, so far as he knew, all of the other employees were eligible for membership. Three of the four employees, including petitioner, beneficiaries of the pension trust fund, were ineligible for benefits under the rules and regulations, as then constituted, since they were all more than 40 years of age. In June 1937, the rules' and regulations of the pension trust fund were amended, nunc fro tuno, to change the limit from 40 to 55 years. The explanation for this was that the original age limit was in error.

The rules and regulations, adopted in an attempt to bring the pension trust fund within the statute, were not followed. They provided specifically that the payment of pensions awarded all employees should begin “on the first day of the month following the completion of fifteen years of continuous employment by the company from and after November 1, 1934”, and that for all officers should start “on the first day of the month following the completion of ten years of continuous service with the company from and after November 1, 1934.” These regulations were violated in every award made by the pension trust fund. Thus, it is indicated that Haig was under 50 years of age and his pension was awarded to begin at 65. Greenwalt at the time of the hearing was “30 or 35 years old” and must have been little over 30 years of age when awarded a pension of $50 per month to begin approximately 35 years hence when he reached the age of 65. Miss Sutton, an officer of the company, entitled under the rules to a pension beginning December 31, 1934, if her application was accepted, was awarded a pension of $50 per month, to begin 24 years in the future, on the 10th day of September 1958, should she then be living. This inconsistency is not explained by the provision in the regulations that “Annuity contracts and life insurance policies shall be payable according to their terms”, since the petitioner and the three other employees, to whom awards were made direct by the pension trust fund, were not the beneficiaries of the life insurance policies. The pension trust fund was the beneficiary of those policies and had merely invested its funds therein.

The conclusion is inescapable that, whatever be the proper designation for the pension trust fund, it was created by the Standard Transformer Co., primarily, for the purpose of benefiting petitioner, W. F. Parker, as the majority stockholder of that company. It follows that the pension trust fund here was not created for the exclusive benefit of any or all of its employees, as such.

The action of the respondent in including the contested premium payment in petitioners’ income, as additional compensation to petitioner, W. F. Parker, is affirmed.

Decision will be entered for the respondent.


author: Smith:

text:
    D. W. Blacksher and First National Bank of Mobile, Alabama, Executors of the Estate of James Uriah Blacksher, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88453.
    Promulgated October 25, 1938.

      George E. H. Goodner, Esq., for the petitioners.

      Frameis S. Gettle, Esq., for the respondent.
   OPINION.

Smith:

Section 302 (g) of the Revenue Act of 1926 provides in material part 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. * * *
*******
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

Article 27 of Regulations 70 (1929 Edition) provides in part:

Insurance receivable by other beneficiaries. — All insurance in excess of $40,000 receivable by beneficiaries other than the estate, regardless of when taken out, must be included in the gross estate where the decedent during his life retained legal incidents of ownership in the policies of insurance, as, for example, a power * * to surrender or cancel the policies, to assign them, to revoke an assignment of them, to pledge them for loans, or to dispose otherwise of them and their proceeds for his own benefit, etc.

The first question for our determination is whether the value at the time of decedent’s death of the three above described insurance policies on decedent’s life, policy No. 1,176,103 issued by the Mutual Life Insurance Co. of New York, and policies Nos. 328,782 and 328,783 issued by the Union Central Life Insurance Co., are includable in decedent’s gross estate. See allegations of error 4 (a), (c), and (d) above.

The respondent contends as to those policies that the decedent retained until his death certain incidents of ownership which rendered them includable in his gross estate under the above regulations and the rule laid down by the Supreme Court in Chase National Bank of City of New York v. United States, 278 U. S. 327. The holding in that case was that the proceeds of certain life insurance policies were includable in the decedent’s gross estate. The Court said:

A power in tbe decedent to surrender and cancel the policies, to pledge them as security for loans and the power to dispose of them and their proceeds for his own benefit during his life which subjects them to the control of a bankruptcy court for the benefit of his creditors, * * * and which may, under local law applicable to the parties here, subject them in part to the payment of his debts, * * is by no means the least substantial of the legal incidents of ownership, and its termination at his death so as to free the beneficiaries of the policy from the possibility of its exercise would seem to be no less a transfer within the reach of the taxing power than a transfer effected in other ways through death.

The respondent submits that under the laws of the State of Alabama, where the policy contracts were executed, the rights and interests of the decedent in the policies at the time of his death must be determined in accordance with the express provisions of the policies themselves as those provisions may have been construed by the courts of that state. Reference is made to sections 8371 and 8375 of the Alabama Code of 1928, Annotated, and to State Life Insurance Co. of Indianapolis v. Westcott, 166 Ala. 192; 52 So. 344.

We said in Thomas C. Boswell et al., Executors, 37 B. T. A. 970, that:

Whether or not the proceeds of these policies are to he included in the gross estate depends, regardless of the time or terms of their issuance, upon whether decedent had any interest in them at the time of his death. David A. Reed et al., Executors, 24 B. T. A. 166; Estate of John T. JS. Mitchell, 37 B. T. A. 1; Chase National Bank v. United States, 278 TJ. S. 327; * * *

The decedent did not reserve the right to change the beneficiary in any of the policies under consideration and no contention is made that they are includable in his gross estate for such reason. Policy No. 1,176,103, issued by the Mutual Life Insurance Co. of New York, contained these provisions:

Cash Surrender Value. — After three full years’ premiums have been paid, * * * this policy may be surrendered and the Company will pay therefor, * * * the amount stated in the table below * * *
Loans. — After this policy shall have been in force three full years, the Company, within sixty days after written application, and upon the assignment of this policy as security, will, in conformity with its rules then in force, loan amounts within the limits of the cash surrender value, with interest in advance, at the rate of five per cent, per annum, provided: (1) that premiums be fully paid to the end of the policy year in which the loan falls due; (2) that in any settlement of this policy all outstanding indebtedness must be paid.
Surplus. — The first distributive share of surplus shall be apportioned to this policy, if in force, at the expiration of twenty years from date, and may be drawn in cash or be applied to purchase an annuity. Subsequent distributions shall be made annually during the lifetime of the insured only.

These provisions of the policy do not specify to whom the cash surrender value or loans or surplus shall be paid. There is the provision that “no assignment or hypothecation” of any interest in the policy made by the beneficiary without the written consent of the insured shall be valid.

In Bingham v. United States, 296 U. S. 211, which involved the question whether the proceeds of certain life insurance policies, under facts similar to those in the instant proceeding, should be included in the gross estate, the Court said:

* * * The decedent bad no power, none being reserved, to change the beneficiaries, to pledge or assign the policies after the assignment to his wife, or revoke that assignment or surrender the policies without the consent of the beneficiaries. Central Bank of Washington v. Hume, 128 U. S. 195, 205, 9 S. Ot. 41, 32 L. Ed. 370; Miles v. Connecticut Life Ins. Co., 147 U. S. 177, 181, 182, 183, 13 S. Ct. 275, 37 L. Ed. 128, compare dissent 147 U. S. 188, 13 S. Ct. 279; Commonwealth v. Whipple, 181 Mass. 343, 63 N. E. 919; Pingrey v. National Life Insurance Co., 144 Mass. 374, 382, 11 N. E. 562.

Also, in Ballard v. Helburn, 9 Fed. Supp. 812; affd., 85 Fed. (2d) 618, it was said:

* * * The policies now under discussion did not expressly nor by implication reserve to the insured the right to claim the loan or surrender values without the consent of the beneficiary, and by the overwhelming weight of the authorities he could not surrender those policies for the cash surrender value, or secure a loan on them, without the consent of the beneficiary. No control of his over the proceeds and benefits of the policies was terminated by his death. His control had already been terminated by his voluntary act in irrevocably assigning two of them, and by irrevocably designating Mrs. Ballard as beneficiary in the others. Nor can it be said that any interest in the proceeds passed at his death from the insured to the beneficiary. Her interest in the proceeds had already vested by virtue of the assignment of two of the policies and by virtue of designation as beneficiary in the others. * * *

Tbe agreement in tbe policy contract was tbat tbe loans on tbe policy would be made by the issuing company “in conformity with its rules then in force.” An official of tbe issuing company testified in this proceeding tbat as to tbe policy under consideration tbe consent of the beneficiary would have been required either to change the beneficiary, to obtain a loan thereon, or to surrender tbe policy for its cash value. In Thomas O. Boswell et al., Executors, supra, we said that “absence of the power to change beneficiaries in itself deprives an insured of authority in bis own right to obtain the surrender value,” citing Levy's Estate v. Commissioner, 65 Fed. (2d) 412, and Walker v. United States, 83 Fed. (2d) 108.

It does not appear that the laws of the State of Alabama require any different conclusion as to the policies here in question. In Fourth National Bank of Montgomery v. Woolf oik, 220 Ala. 844; 125 So. 217, the court said:

* * * The written assent and concurrence of the named beneficiary in the policy not reserving the right of change of beneficiary is required to a valid and binding assignment of such policy as to affect the rights of the beneficiary. * * *

The Union Central Life Insurance Co. policies Nos. 328,782 and 328,783 contain substantially the same features as those of the Mutual Life Insurance Co. of New York described above, with the additional provision that the insured should have the benefit of annual dividends. This right to dividends, however, ceased upon decedent’s death and was not thereby transferred to any other person. The retention of a life interest in the income from property transferred does not require the inclusion of the property in the transferor’s estate for estate tax purposes. May v. Heiner, 281 U. S. 238; Tait v. Safe Deposit & Trust Co. of Baltimore, 74 Fed. (2d) 851; Dwight Whiting, 35 B. T. A. 100. The right to receive the dividends was not such an interest or “incidents of ownership” in the policies as the Court had reference to in Chase National Bank of City of New York v. United States, supra, and as is contemplated by article 27 of Regulations 70, supra.

We are of the opinion that the proceeds of the above described policies, Nos. 1,176,103, 328,782, and 328,783, are not includable in decedent’s gross estate.

Since we have determined that the proceeds of Mutual Life Insurance Co. of New York policy No. 1,176,103 are not includable in decedent’s gross estate, it is not necessary to determine its value.

The only other question for decision relates to the Avalúes of policy No. 1,603,359, issued by the Equitable Life Assurance Society, and policy No. 1,100,992, issued by the Prudential Insurance Co. of America. The respondent has determined that the values of these policies were $31,022.40 and $30,000, respectively, while the petitioners contend that the values determined in accordance with article 13 (10) of Regulations 70, which regulations were in force at the date of death of the decedent, were $22,215.96 and $21,786.90, respectively.

The basis of respondent’s determination of the values is not in evidence. The evidence of record does show, however, that the values were not determined by the respondent on the basis of a valuation of the life annuities payable to the beneficiaries by reference to mortality tables and in accordance with article 13 (10) of Regulations 70. This method of valuing such life insurance policies for estate tax purposes was given approval in Estate of Archibald M. Chisholm, 37 B. T. A. 167, where we said:

At the time of Ms death, the decedent had effectually elected to leave to the beneficiaries only the right to receive future periodical payments during their several lives. * * *
The valuation of such a right or expectancy is a commonplace problem, Simpson v. United States, 252 U. S. 547. There is no dispute as to the determination through the use of mortality tables of the period of payments to be adopted as to each beneficiary, and in article 20 of Regulations 70, in effect at the time of the decedent’s death, the factor of discount and the resulting commuted value is correctly set forth. There is no reason, therefore, why a correct computation can not be made in the conventional manner of the value at the date of death of the future payments to be received by each beneficiary.

In Ithaca Trust Co. v. United States, 279 U. S. 151, involving the question of determining the value of a gift to charity subject to a life estate, the Court said

* * * Tempting as it is to correct uncertain probabilities by the now certain fact, we are of opinion that it cannot be done, but that the value of the wife’s life interest must be estimated by the mortality tables. Our opinion is not changed by the necessary exceptions to the general rule specifically made by the act.

The values of the policies here under consideration will be determined under the method indicated above.

Judgment will be entered under Bule 50.