author: Black: Leech,

text:
    T. R. Miller Mill Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82625, 82879.
    Promulgated January 11, 1938.

      W. W. Spaldmg, Esq., for the petitioner.

      DeWitt M. Evans, Esq., and J. M. Morawshi, Esq., for the respondent.
   OPINION.

Black:

As has already been pointed out, there is only one issue in these proceedings and that is whether $30,000 paid by petitioner to trustees for the benefit of its stockholders in each of the taxable years represents interest paid on its indebtedness.

The facts have been set out fully above and need not be repeated in this opinion. Respondent contends that the payments were not interest, but constituted dividends under article 621 of Regulations 77, applicable to these proceedings.

If petitioner is entitled to the deductions claimed, it is by reason of section 23 (b) of the Revenue Act of 1932, which reads in part as follows:

In computing net income there shall be allowed as deductions:
* * * # * * *
(b) Interest. — All interest paid or accrued within the taxable year on indebtedness, * * *

Article 621 of Regulations 77, which respondent relies upon in his determination that the payments in question were dividends and not interest, reads in part as follows:

Art. 621. Dividends. — The term “dividends” for the purpose of Title I (except when used in sections 203 (a) (4) and 208 (c) (1)) comprises any distribution in the ordinary coursd of business, even though extraordinary in amount, made by a domestic or foreign corporation to its shareholders out of its earnings or profits accumulated since February 28, 1913.
‡ £ * * » # *
* * * A taxable distribution made by a corporation to its shareholders shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands.

It seems clear from the evidence in this case that at the time of the corporate resolution of May 26, 1927, the corporation did not, despite the language used in the resolution, intend to presently distribute, in money or other property, $500,000 of its surplus to its stockholders. The corporation was a closed one, all of its stock being owned and held by the members of a few families, and it had been agreed upon that instead of actually distributing $500,000 in money or other property to the stockholders, the corporation would execute its promissory note for that amount, payable to designated trustees for the benefit of stockholders, the note to be due one year from date and to draw interest from date at the rate of 6 percent per annum. Does this arrangement make the distribution provided for in the resolution any less a dividend ? We think not.

The declaration of a dividend creates the relationship of debtor and creditor between a corporation and its stockholders. Southport Mill, Ltd., 6 B. T. A. 1073; affd., 26 Fed. (2d) 17. Though a dividend is payable upon a day not yet appointed, or at such time as in the opinion of the directors the corporation’s finances justify such payment, nevertheless the debtor-creditor relation arises upon the date of declaration. Wallin v. Johnson City Lumber & Manufacturing Co., 136 Tenn. 124; 188 S. W. 577; and Northwestern Marble & Tile Co. v. Carlson, 116 Minn. 438; 133 N. W. 1014.

We are not concerned here with the question as to whether or not the dividend distribution was a taxable one. The resolution declared that the distribution was to be out of surplus accumulated prior to March 1, 1913. Whether or not that was done in such a manner as to make the dividend nontaxable to the stockholders we do not in any manner decide. What we do decide is that the resolution of May 26, 1927, called for a dividend distribution and its effect was not changed by payment in the form of a promissory note, payable to trustees selected by the stockholders, drawing interest from date, instead of payment being made in cash or other property.

We see no essential difference in this method of payment from that which obtains when a corporation declares and pays a scrip dividend. Dividends paid in scrip have been ruled to be equivalent to a payment in cash and an investment of the cash in the scrip. See Paul and Mertens, vol. 1, sec. 8.68. Scrip dividends were held taxable under the Act of June 30, 1864, Bailey v. New York Central & Hudson Railroad Co., 89 U. S. 604. The regulations of the Treasury Department applicable to the present proceedings provide for the taxation of scrip dividends. Article 627 of Eegulations 77 provides, among other things: “Scrip dividends are subject to tax in the year in which the warrants are issued.” What is a scrip dividend? Fletcher’s Cyclopedia Corporations, vol. II, sec. 5357, defines a scrip dividend as follows:

* * * Scrip is simply a writing or certificate issued to shareholders in lieu of a dividend, entitling them to money, stock, bonds, land, or other benefit at some future time — “an interim or provisional document or certificate, to be exchanged, when certain payments have been made or conditions complied with, for a more formal certificate, as of shares or bonds, or entitling the holder to the payment of interest, a dividend, or the like.” “A scrip dividend is resorted to where the company has profits not in cash.”
The issuing of a bond or scrip dividend by a corporation to represent an investment of bona fide profits is not prohibited by a statute requiring dividends to be made only from surplus profits of the corporation, and providing that it shall not be lawful for corporations to divide or pay to stockholders any part of the capital, or to reduce the capital stock. Nor is such a dividend contrary to public policy. The rights of the holder of scrip depend upon the terms of his contract as therein expressed. Such a dividend, when the obligation to pay is absolute, is a debt due absolutely to the stockholders, although payment is postponed to a future time.
To warrant the recovery of interest therein provided for, it must be shown that the dividend was legally declared.

Although the note for $500,000 payable to trustees which was executed in payment of the dividend declared pursuant to the resolution of May 26, 1927, was made payable one year from date, the evidence shows that it was not intended to pay the note on the date due. We do not think that fact however renders the note any the less a legal obligation of the corporation. The note on its face represents an unconditional promise to pay and the fact that the stockholders and the corporation were willing to agree upon a longer term of payment than the note itself provided, we do not think changes the character of the obligation and makes it any the less the legal indebtedness of the corporation.

Ed. Leigh McMillan, who was one of the witnesses for petitioner in these proceedings and was its secretary, was asked the following question by petitioner’s counsel: “Mr. McMillan, Mr. Neal has just been asked whether it was ever intended to pay this note or not. What is the fact on that question?” McMillan’s answer was: “The note was to be paid. The note was an obligation of the company as much as any obligation, and just how it was to be paid and when, I could not say that, but it was an obligation of the company and it was to be paid at some time.”

If we had the stockholders before us in these proceedings on the question as to whether the dividend distribution was taxable in 1927 (leaving aside the question that the distribution was made out of earnings accumulated prior to March 1, 1913), we do not think it would avail them anything as a defense to say that the note, although unconditional in its obligation to pay, was not to be paid on the date stated therein. The fact that the note bore interest from date and interest thereon was actually paid and extensions of time were apparently made by mutual consent between the corporation and its stockholders, would render unimportant, we think, the factor of time extensions in payment.

We think the facts of the instant proceedings serve to distinguish them from the holdings in United States v. Mellon, 281 Fed. 645, and United States v. Davidson, 9 Fed. (2d) 1022. In these cases the question at issue was whether a cash dividend had been declared and paid, as the Government contended, or whether the transactions as a whole showed the declaration and payment of stock dividends. The decision of the court was that, as to the taxpayers involved before it, the transactions amounted to the payment of a stock dividend and were not taxable.

We have in these proceedings no question of the declaration and payment of a stock dividend. Our question here is raised by the Commissioner’s contention that, under the circumstances related in our findings of fact, no dividend at all was declared and no distribution of surplus was made or intended to be made, and therefore the promissory note of $500,000 did not represent legal indebtedness of the corporation. On this issue we hold against the Commissioner. A contrary view was expressed by the presiding member at the conclusion of the hearing, but this view has been changed upon review by the full Board.

As we have already pointed out, we see no distinction in principle between the form of payment in the instant case and the ordinary scrip dividend, and the Treasury’s own regulations provide for the taxation of scrip dividends and for the allowance to the corporation of interest, paid thereon.

Reviewed by the Board.

Decision will be entered under Bule 50.

Leech,

dissenting: The necessary premise of the majority opinion is that petitioner paid dividends to its stockholders in the amount of the corporate note. The argument to sustain that position is that the note was similar to “scrip”, that a corporate debt was thus created and the contested interest paid thereon was therefore deductible.

The fallacy in that argument seems to me to be that such note was not similar to “scrip.” It was drawn to trustees. The petitioner, not the stockholders, was the real beneficiary of the trust. The only interest the stockholders received in the proceeds of the note was the right to a proportionate distribution of any such proceeds which were “not in the judgment of said trustees needed by the said T. R. Miller Mill Co., Inc.” (Emphasis supplied.) And such rights as the stockholders had in the notes could be wiped out at any time at the discretion of the trustees since they had the “right, power and authority to mortgage, transfer, assign and hypothecate, for the use and benefit of T. R. Miller Mill Co., Inc., the said distribution of Five Hundred Thousand Dollars ($500,000.00), or any part thereof; or to transfer, assign or hypothecate the note or notes securing or evidencing such distribution * * *.”

Even had this so-called distribution of $500,000 been made in cash to such a trust, could it be reasonably held that the petitioner thus actually paid or the stockholders really received anything?

In such circumstances, I think no dividend was paid, no corporate debt existed, and no interest thereon is therefore deductible.


source: Caselaw Access Project

author: MuRdock:

license: Public Domain

text:
    Royal W. Irwin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79044.
    Promulgated January 11, 1938.

      Peter L. Wentz, Esq., for the petitioner.

      Elmer L. Corbin, Esq., for the respondent.
   OPINION.

MuRdock:

The figures involved are not disputed. The Commissioner suggests that the loss may not have been from a business regularly carried on by the petitioner. Sec. 117 (a) (1), Revenue Act of 1932. The evidence shows, however, that the petitioner was regularly engaged in the mining business in connection with this particular property during all of the period from 1922 until the termination of the agreement in 1931. He gave the work a part of his personal attention, made frequent visits to the property, received regular reports from his mining engineer, wrote frequently to the latter instructing him in the conduct of the work, and was personally responsible for all decisions. He was also engaged in other business and he failed to develop this property commercially, but those facts did not prevent him from being regularly engaged in this mining business. John D. Roney, 26 B. T. A. 1213; affd., 67 Fed. (2d) 165; certiorari denied, 290 U. S. 705; R. J. Richards, 30 B. T. A. 1131; affd., 81 Fed. (2d) 369; T. I. Crane, 17 B. T. A. 720; Oscar K. Eysenbach, 10 B. T. A. 716.

Since the expenditures were all made in an effort to develop the property, they were not deductible in years prior to 1931. Art. 235, Regulations 77. Cf. Connellsville Central Cohe Co., 27 B. T. A. 771. The net receipts were from sales made from ore produced for experimental purposes. No deduction for depreciation or depletion was ever claimed or allowed. None was allowable to the petitioner. The capital net loss section has no application, since the expenditures did not result in the acquisition by the petitioner of any capital asset and since his loss did not result from a sale or exchange. Sec. 101 (c) (2) and (8); R. W. Hale, 32 B. T. A. 356; affd., 85 Fed. (2d) 819; Mont S. Echols, 24 B. T. A. 1127; affd., 61 Fed. (2d) 191.

Decision will be entered for the fetitioner.


author: Leech:

text:
    Interstate Reserve Life Insurance Company, an Illinois Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78638.
    Promulgated January 12, 1938.

      Raymond F. McNally, Jr., Esq., for the petitioner.

      E. L. Corbin, Esq., for the respondent.
   opinion.

Leech:

The respondent determined a deficiency in income tax against the petitioner in the amount of $411.68 for the calendar year 1932. This proceeding involves the correctness of that determination. The only issue now left as the subject of inquiry here is whether, in computing the net income of the petitioner for the calendar year 1932, the petitioner is entitled to the deduction . of 4 percent of the mean of the reserve of “advance premium payments” under the provisions of section 202 (b) of the Revenue Act of 1932.

No testimony was taken. The case was submitted on the pleadings and. certain stipulations of fact. We find the facts as thus evidenced.

The petitioner is an incorporated life insurance company. It was organized as the Merchants Reserve Life Insurance Co. under an act of the Legislature of the State of Illinois entitled “An Act to incorporate companies to do the business of life or accident insurance on the assessment plan, * * approved June 22, 1893, effective July 1, 1893.

The articles of incorporation of the petitioner have been amended several times. The amendments pertinent to our inquiry were those of September 1, 1921, July 18, 1923, and March 17, 1930. That of September 1, 1921, contained the following provision, inter alia:

Article X. Section 1. Policies of Insurance shall be written by tbis company with assessment rates based upon tbe American Experience Table of Mortality with four percent interest, and such policies shall be known as “Legal Reserve Policies”; the time when the company shall begin issuing such policies to be determined by vote of the Board of Directors; the issuance of such polices shall not affect the rates to be paid by policy holders under the policies heretofore authorized.

The amendment of July 18, 1923, provided for the establishment of an advance payment fund. Section 6 of those amended articles provides:

All deposits received from policy holders of Legal Reserve Policies in addition to the premiums required to continue the insurance in force shall be kept separate and apart from all premium payments and shall be placed in a Fund to be kept by the Company, known as the Advance Payment Fund.
All such deposits shall be improved by interest at the rate of four percent per annum and the interest credited at the end of each policy year.
Such interest payments shall be made from the Surplus Fund of the Company.
All or any part of the amount thus credited may be withdrawn in cash by the Insured after thirty days written notice by the Insured of his desire to withdraw all or such part of the amount thus credited, or may be applied by the Company towards the payment of premium if the policy should become in default in premium payment and the amount to the credit of the Insured is sufficient to pay at least one quarterly premium.

Tbe amendment of March 17, 1930, provided for the change in the name of the company from the Merchants Reserve Life Insurance Co. to the Interstate Reserve Life Insurance Co.

The policy under which these advance premiums were paid contained, among others, the following provisions:

Notice oe Payment, Reinstatement
Notice of each and every payment due or to become due hereon is given and accepted by the delivery and acceptance of this policy. All premiums are due and payable at the Company’s home office or its designated depositories. If any premium shall not be paid when due or within 30 days thereafter, this policy shall thereupon cease and determine unless maintained in force as provided under the heading “Privilege of Advance Premium Payments” on the Third page hereof. In case this policy is lapsed for non-payment of premium, it may be reinstated within two years thereafter upon evidence of insurability satisfactory to the officers of the Company, and upon payment of all the premiums then due and unpaid with interest at 6% per annum. No annual premium shall eaiceed in amount, in any one year, the annual premium stated, unless the mortality experience of the Company should exceed that of the American Experience Table of Mortality for such a period as to exhaust the mortuary and surplus funds and then only for an amount sufficient to pay the pro-rata share of the excess mortality. [Emphasis supplied.] The private property of the policyholders of this Company shall be exempt from corporate debts.
Pkemium Payments
The annual renewal premium on this policy will be_Dollars payable in advance, but upon written application of the Insured, the Company will accept payment in semi-annual or quarterly payments in advance as follows: _Dollars on the_day of_and-_; or:_Dollars on the_day of-_and_■_; provided that upon death of the Insured, any semiannual or quarterly payment necessary to complete premium payment for the then current policy year will be deducted from the amount otherwise payable under the policy.
Dividends
This policy shall participate annually beginning at the end of the first policy year in the surplus earnings of the Company as ascertained and apportioned by the Board of Directors provided all premiums required hereon have been duly paid. Such dividends shall be paid or applied according to one of the following options which the Insured may elect:
Option 1. Applied to reduce the premiums on the policy.
Option 2. Paid in Cash.
Option 3. Placed in the Advance Payment Fund to the credit of the Insured to be used in the manner prescribed for payments into said Fund as stated on the third page hereof.
Election of an option may be made when the policy takes effect or at any time thereafter and shall remain in effect until a new option is selected. If no option is selected, the dividends will be applied as in Option 1, and in the event of failure to pay the balance of the premium due, or in the event of payment of the full premium, will be paid into the Advance Payment Fund to be used in the manner prescribed for payments into said Fund as stated on the third page hereof.
Privilege op Advance Premium Payments
The Insured hereunder shall have the right, beginning with the second policy year, to deposit Annually in Advance with the Company the sum of-dollars, (hereinafter called deposit) each such annual deposit to be in addition to the annual renewal premium required for this insurance as stated on the second page hereof, making total payments of_dollars annually in advance.
In the event that the Insured does not exercise this privilege at the beginning of the second policy year, he or she shall have the privilege of beginning to make such deposits at the beginning of any subsequent poliey year, by the payment of all omitted payments with interest compounded at the rata of 4 per cent per annum; provided, however, that no deposits will be received in any such case unless all the premiums required on the policy have been duly paid.
All such deposits shall be kept separate and apart from all payments made to the Company for other purposes and shall be held to the credit of this policy in a fund to be known as the Advance Payment Fund kept by the Company, and paid on account of this policy under the following conditions:
(1) Interest compounded at the rate of four per cent per annum shall be allowed on all such deposits, such interest to be paid into the Advance Payment Fund and credited to this policy at the close of each policy year.
(2) Upon thirty days written notice, the entire amount credited to this policy in the Advance Payment Fund may be withdrawn by 'the Insured in cash and this policy may thereafter be continued in force at the option of the Insured by the payment of the premium as stated on the second page of the policy.
(3) Should the Insured fail to pay any renewal premium when due, then any amount to the credit of this policy in the Advance Payment Fund, unless the Insured directs the Company otherwise in writing before the date of default in premium payment, shall be applied automatically to the payment of such premium or premiums as long as the amount in the Advance Payment Fund to the credit of this policy will be sufficient to pay at least one full quarterly premium.
All amounts thus applied will be charged against the Insured’s account in the Advance Payment Fund when applied. While the policy is thus maintained in force, the Insured may resume the payment of premiums without medical examination.
If the amount in the Advance Payment Fund should become insufficient to pay at least one full quarterly premium, the Company will mail notice of this fact on or before the date of default in premium payment to the Insured at the last known address of the Insured, and thirty days after the mailing of such notice, provided the premium is still unpaid, will forward to the Insured in cash an amount equal to the amount to his credit in the Advance Payment Fund. Upon tender of such cash payment the insurance hereunder shall cease.
(4) Upon the death of the Insured, any amount to the credit of the Insured in the Advance Payment Fund shall be added to the face of this policy and paid to the beneficiary as herein provided.
(5) When the amount credited to this policy in the Advance Payment Fund at the beginning of the_year of the policy is equal to the amount stated in the Table of Accumulated Savings below at the beginning of the said_ year, the Insured will be so notified, and thereafter, unless directed in writing by the Insured, before the date of default in premium payment, the Company will apply- the interest earnings at four per cent per annum on such amount to the payment of the annual renewal premium necessary to continue this insurance in force, any balance remaining after such payment has been made being paid in cash to the Insured; provided, however, that if subsequent to such date the Insured should withdraw in cash such an amount that the remaining balance will not earn sufficient Interest at 4 per cent per annum to pay the renewal premiums when due, then premium payments will be continued thereafter only as stated in subdivision (3) hereof.
(6) An amount equal to the amount in the Advance Payment Fund shall be kept invested by the Company in securities among the kinds in which Life Insurance Companies in Illinois are required to invest their funds, ■
If the Insured should make all the additional annual deposits in advance as provided above and not withdraw any amount to his credit in the Advance Payment Fund, the accumulated amount to the credit of this policy after each annual deposit is made in advance will be as set forth in the following table:
Table of Accumulated Savings in the Advance Payment Fund After the Deposit for the Year Designated Has Been Made.
[Table follows.]

The advance premium payment fund for the year 1932 amounted to the followings

Beginning of that tax year_$22, 544.82
End of such year_ 20,865.62

The mean of that fund for such year is $21,705.22. In its income tax return for 1932, the petitioner deducted $868.20, 4 percent of that amount, to which deduction it claims it was entitled under the Revenue Act of 1932, section 202 (b).

The propriety of the respondent’s disallowance of this deduction presents the only issue.

The term “reserve funds required by law”, as used in the revenue acts applying to insurance, has a very definite meaning. Thus the Supreme Court said in Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686:

* * * As the Act does not permit corporations other than insurance companies to make deductions of the kind here under consideration, “reserve funds” may not reasonably be deemed to include values that do not directly pertain to insurance. In life insurance the reserve means the amount, accumulated by the company out of premium payments, which is attributable to and represents the value of the life insurance elements of the policy contracts.

The Court of Claims, in Continental Assurance Co. v. United, States, 8 Fed. Supp. 474, similarly defines and limits the expression:

* * * Properly interpreted we think these last-mentioned eases establish the principle that the term “reserve” has a special meaning in the law of insurance and means a sum of money variously computed or estimated which, with accretions from interest, is set aside, “reserved”, as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unacerued and contingent claims. Also, that reserved for matured accrued claims which are payable in cash or subject to certain options cannot be included in the “reserve required by law” within the meaning of the taxing act. In the case of life-insurance companies, the computation of the reserve, in connection with which the deduction is allowable, is to be made upon the basis of an experience table of mortality and an assumed rate of interest, the calculation of wliicli is an actuarial function, and the reserve intended by the taxing act as a deduction is the amount set aside from premiums and built up by interest accretions to meet existing unmatured insurance, whether fire, marine, or life insurance. This principle excludes, as reserves within the meaning of the Federal taxing act, amounts held on account of matured obligations * * *.

So, it was Reid in both the cited cases that reserve funds maintained by a life insurance company to meet its liability to holders of matured unpaid coupons attached to its policies were not “reserve funds required by law” within the meaning of the revenue acts.

The advance premium fund here had not been applied under the policyholders’ option, to the payment of premiums. It was held, therefore, only to guarantee the repayment of those advance premiums, with interest, to the stockholders, or the application of them, at the option of the stockholders, to the payment of premiums due. This obligation was matured and existing. It did not pertain to insurance. It was a mere solvency reserve similar to the reserves discussed in the cited cases. As such, therefore, this advance premium fund did not constitute “reserve funds required by law.”

But the petitioner argues that the insurance contracts from which the advance premium fund arose were “assessment insurance” and that the “advance premium fund” made up from those payments was “maintained * * * exclusively for the payment of claims * * *” and that it was therefore entitled to the deduction of 4 percent of the mean of those funds for the taxable year. Sec. 202 (b), sufra.

That section has appeared without change in every revenue act since and including that of 1921. See also Revenue Act of 1916, sec. 12 (c). No authority has been called to our attention, construing that legislative provision. The reason may be that the answer is so obvious.

It would be difficult, if not impossible, to conclude from section 202 (b), sufra, alone, that Congress intended “reserve funds required by law” in assessment insurance to include something, not only definitely excluded by the term in other insurance, but wholly repugnant to the purpose of the phrase in the revenue acts. The Court of Claims, in the Continental Assurance Co. case, sufra, stated tins purpose clearly and its application here thus:

* * * But in the income-tax statutes Congress was not legislating with reference to solvency matters or accrued and unpaid claims or refunds of insurance companies; instead it was dealing with the determination of taxable income and the deductions from income in determining the amount subject to the income tax. For this reason matured or accrued claims, so long as they remain payable upon demand, have no place in the reserve contemplated in the taxing acts.

We conclude that the expression “claims arising under certificates of membership * * *” used in section 202 (b), supra, means life insurance claims, only, and does not include the claims of policyholders in connection with the advance premium fund here. This interpretation is supported by the construction of the substantially similar expression “policy obligations” in Continental Assurance. Co. v. United States, supra.

We think section 202 (b), supra, does not change or broaden the scope of “reserve funds required by law” when used in connection with assessment insurance. In view of the fact that premium payments are the basic source of insurance reserves, excepting in assessment insurance (see Revenue Act of 1916, sec. 12, supra; Continental Assurance Co. v. United States, supra, and cases cited therein), it would seem that section 202 (b), supra, was meant merely to provide equality of treatment of assessment insurance by including within the meaning of “reserve funds required by law” funds raised by assessment as well as from premium payments.

Decision will l>e entered for the respondent.

       SEC. 202. GROSS INCOME OF LIFE INSURANCE COMPANIES.

      (b) The term “reserve funds required by law” includes, in the case of assessment insurance, sums actually deposited by any company or association with State or Territorial officers pursuant to law as guaranty or reserve funds, and any funds maintained under the charter or articles' of incorporation of the company or association exclusively for the payment of claims arising under certificates of membership or policies issued upon the assessment plan and not subject to any other use.

      Acts of 1921, 1924, and 1926, sec. 244 (b) ; Acts of 1928, 1932, and 1934, sea 202 (b).


author: Smith:

text:
    Policyholder’s National Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83875.
    Promulgated January 14, 1938.

      Holton Davenport for the petitioner.

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

Smith:

In section 203 of the Revenue Act of 1932 it is provided that in the case of a life insurance company the term “net income” means the gross income less certain items, among which is:

(8) Inteeest. — All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

The crucial question in this case is whether the $2,564.16 paid by the petitioner in 1933, representing 6 percent on the founder’s certificates, was paid as interest on the petitioner’s indebtedness. The petitioner points to the fact that the policy contract provided in each case that “the amount of said fund represented by this Certificate and all other Certificates of like nature will be carried by the Company as separate and distinct liability” and that the founder’s certificate provides that:

* * * The Board of Directors, however, are authorized to pay interest on said Founder’s Fund in an amount not to exceed 6% providing in their judgment the financial condition of the Company shall warrant such payment.

It is argued therefrom that the distribution made by the petitioner in 1933 to holders of its founder’s certificates was interest paid upon its indebtedness. If it was paid on its indebtedness it is deductible from gross income; if not, it is not deductible. In Proctor Shop, Inc., 30 B. T. A. 721; affd. (C. C. A., 9th Cir.), 82 Fed. (2d) 792, this Board stated at page 725:

This question has been presented a number of times to the Board and the courts under slightly varying facts. In some cases the so-called stock was to be retired at a fixed date, Arthur R. Jones Syndicate, 5 B. T. A. 853; reversed, 23 Fed. (2d) 833, and in others at the option of the corporation or the stockholder, Finance & Investment Corporation, 19 B. T. A. 643; affd., 57 Fed. (2d) 444. In some cases the interest or dividends were payable regardless of earnings, Wiggin Terminals, Inc. v. United States, 36 Fed. (2d) 893, and in others payments were to be made only out of surplus or profits, Kentucky River Coal Corp. v. Lucas, 51 Fed. (2d) 586, sustaining 3 B. T. A. 644; Badger Lumber Co., 23 B. T. A. 362; Elko Lamoille Power Co., 21 B. T. A. 291; affd., 50 Fed. (2d) 595. None of the decided cases lay down any comprehensive rule by which the question presented may be decided in all cases, and “the decision in each ease turns upon the facts of that case.” Howland Realty Co. v. Commissioner, 47 Fed. (2d) 1018; affirming 18 B. T. A. 405; Arthur R. Jones Syndicate, supra; Carden Homes Co. v. Commissioner, 64 Fed. (2d) 593, 598. In each case it must be determined whether the real transaction was that of an investment in the corporation or a loan to it. On this the designation of the instrument issued by the corporation, while not to be ignored, is not conclusive, I. Unterberg & Co., 2 B. T. A. 274. The real intention of the parties is to be sought and in order to establish it evidence aliunde the contract is admissible. Arthur R. Jones Syndicate, supra. If the evidence establishes “that dividends paid are, according to the intent of the parties, in fact interest, and the stock on which the dividends are paid is merely held by the creditor as security, it makes no difference what the reason was for paying in that form.” Wiggin Terminals, Inc. v. United States, supra.

The question here presented does not turn upon the fact of whether the petitioner considered its founder’s fund a liability or whether the distributions made to the holders of founder’s certificates were characterized as interest. The question is whether the petitioner borrowed money from its policyholders which it was obligated to pay back and whether the amounts designated as interest represent interest which was paid upon such borrowings. In Elko Lamoille Power Co., 21 B. T. A. 291; affd., 50 Fed. (2d) 595, the Board said:

* * * A corporate creditor is one who has loaned to the corporation money or its equivalent, usually for compensation or interest, at a fixed rate, to be repaid at a designated time or in a designated manner. The stockholder risks his money in the enterprise. The creditor assumes no such risk. * * *

The facts in this case clearly show that as a means of inducing persons to take out life insurance policies the petitioner afforded them an opportunity of eventually becoming a stockholder in the company. Each policyholder understood that by means of the coupon attached to his policy and made a part thereof, he could, upon the maturity of the coupon, receive a founder’s certificate in the amount of $15 for each $1,000 of insurance contracted for. The petitioner did not obligate itself to redeem the certificate for $15 or for any other amount. It did, however, obligate itself to issue to the holder of the certificate $15 of the capital stock of the company as soon as the founder’s fund should reach the amount of $100,000. The founder’s fund was always at the risk of the business. It was just as much at the risk of the business as the founder’s surplus or the free surplus of the company.

It is plain from the provisions of the policy coupon and the founder’s certificate that the petitioner was not obligated to pay interest upon the amount of the founder’s certificate. The board of directors were, however, authorized in their discretion to pay interest on those certificates in an amount not to exceed 6 percent “providing in their judgment- the financial condition of the Company shall warrant such payment.” The evidence shows that no interest w7as paid upon these founder’s certificates until 1929. In that year the board of directors, considering the financial condition of the company and believing that it was morally obligated to pay the interest; did pay it. But this did not constitute interest paid upon an obligation of the company. The holders of the founder’s certificates had a proprietary interest in the company. To all intents and purposes the distribution made constituted a division among the holders of the founder’s certificates of a part of the profits or assets of the business. We are of tire opinion that the respondent correctly held that the amount of $2,564.16 paid in 1933 did not represent a payment by the petitioner of interest upon its indebtedness, but a voluntary distribution to the holders of the founder’s certificates of a part of the profits or assets of the petitioner. The amount was not a legal deduction from gross income.

Judgment will be entered for the respondent,


author: Black:

text:
    Estate of Willard T. Carleton, Boston Safe Deposit and Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82787.
    Promulgated January 14, 1938.

      Charles M. Rogerson, Esq., for the petitioner.

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

Black:

The following provisions of the Revenue Act of 1926, as amended, are applicable to this proceeding:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death. * * *
(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.

The Treasury Department, in construing paragraph (g) above quoted, has promulgated article 26 of Regulations 80 (1934), which reads as follows:

Akt. 26. Insurance in favor of the estate. — The provision requiring the inclusion in the gross estate of all insurance receivable by the executor, without any exemption, applies to policies made payable to the decedent’s estate or his executor or administrator, and all insurance which is in fact receivable by, or for the benefit of, the estate. It includes insurance taken out to provide funds to meet the estate tax, and any other taxes or charges which are enforceable against the estate. The manner in which the policy is drawn is immaterial so long as there is an obligation, legally binding upon the beneficiary, to use the proceeds in payment of such taxes or charges. * * *

It should be kept in mind at the outset that decedent reserved such rights and control over the policies of insurance which were payable to the trustee as to make the proceeds of such policies includable as a part of decedent’s gross estate under section 302 (g), above quoted. What these reservations were is not shown in the record and that is unimportant because the parties are in agreement that the proceeds are includable under section 302 (g). The only controversy is whether the entire amount of the policies should be included without the application of the $40,000 exemption, as respondent contends, or whether the insurance policies payable to the trustee were payable to “other beneficiaries” within the meaning of paragraph (g) of section 302 of the Revenue Act of 1926 and decedent’s estate is entitled to the benefit of the full $40,000 exemption which the statute allows, as petitioner contends.

It is petitioner’s position that under the laws of Massachusetts the proceeds of these policies were payable to a trustee for individuals and were not for the benefit of the estate or for the exoneration of its assets, and therefore are not includable under the first sentence of paragraph (g) of section 302, but are includable under the second sentence where the $40,000 exemption applies. It is plain that the policies were not by. their terms payable to decedent’s executor. The policies were payable to the “Boston Safe Deposit and Trust Company, Trustee.” If a beneficiary had been named in the trust, other than decedent’s estate, there seems to be no doubt but that petitioner’s contention would be correct. For example, if the policies had been made payable to “Boston Safe Deposit and Trust Company, Trustee, for the benefit of my wife, Loretta N. Carleton”, it is plain that their inclusion as a part of decedent’s estate would be under the last sentence of section 302 (g) and the full $40,000 exemption would apply.

An examination of decedent’s will shows that the Boston Safe Deposit & Trust Co. was named both as executor and trustee under the will. This situation seems to be substantially the same as we had before us in Marmaduke B. Morton, Administrator, 23 B .T. A. 236. In that case the Bartlett Trust Co. was named as both executor and trustee under the will of John S. Logan, Jr. The policies of insurance involved were payable to the Bartlett Trust Co. as trustee under the will. The Commissioner included the full amount of the proceeds of the policies as a part of decedent’s gross estate and the administrator claimed that the $40,000 exemption should apply because the policies were payable to “other beneficiaries” than the estate. "We denied the administrator’s contention and held that the full amount of the proceeds of the policies should be included.

In our opinion, among other things, we said:

It is reasonable to assume that Congress enacted the corresponding section of the Revenue Act of 1924 for the same purpose that it enacted section 402 of the Revenue Act of 1918. It therefore seems clear to us that Congress, in enacting section 302 of the Revenue Act of 1924, intended that there should be included in the gross estate of a decedent the full amount of his life insurance which after his death is subject to the payment of charges against his estate and the expenses of its administration, and which is subject to distribution as part of his estate, and that it was not the intention of Congress, in enacting subdivision (g) of that section to exempt from taxation life insurance meeting such tests, although in terms payable to some one other than the executor. To otherwise interpret section 302 of the Revenue Act of 1924 would be to allow every testator the power of determining whether his life insurance, amounting to less than $40,000, shall be subject to the estate tax even though it is in fact, subject to charges against the estate, subject to expenses of administration of the estate, and subject to distribution as part of the estate.

Petitioner contends that the instant case is distinguishable from the Morton case because in that case under the laws of Missouri the money in the hands of the trustee from the insurance policies could be turned over to the executor to pay the debts of decedent, whereas in the instant case that could not be done under the laws of Massachusetts. We are not convinced that there is any such distinction when the facts of the two cases are laid side by side. If we could adopt petitioner’s premise that the fact that the policies in the instant case were payable to the Boston Safe Deposit & Trust Co., trustee, created an express trust in favor of his wife Loretta, when coupled with the provision of his will making her the beneficiary of the trust created to have charge of his residuary estate, then we would be ready to accept petitioner’s conclusion as to the result. Doubtless the situation would have been the same in the Morton case if we had accepted the premise now urged by petitioner. But we did not accept it. The rationale of that opinion is that no express trust was created in behalf of petitioner’s wife, Caroline Logan, because the policies were made payable to Bartlett Trust Co., trustee, under the will and the will designated her as one of the beneficiaries of the trust created by the will. The effect of our opinion in that case was to hold that no express trust was created by decedent’s making the policies of insurance payable to Bartlett Trust Co., trustee, under the will and that, because no express trust was thereby created, there was a resulting trust in favor of the estate and the estate was therefore the beneficiary of the policies and the $40,000 exemption did not apply. We think we must hold likewise in the instant case.

Petitioner contends that a contrary result should be reached because of the fact that, when petitioner made the insurance policies in question payable to the “Boston Safe Deposit and Trust Company, Trustee,” he plainly evidenced an intent to establish an express trust of the policies of insurance and that under the laws of the State of Massachusetts the beneficiary of an express trust may be identified by extrinsic evidence, and cites in support of this contention, Kendrick v. Ray, 173 Mass. 305; 53 N. E. 823. Petitioner also cites Union Trust Co. of Pittsburgh v. McCaughn, 24 Fed. (2d) 459, as holding that the recitals in a decedent’s will may be looked to as furnishing the name of the beneficiary in the express trust which decedent intended to create.

Undoubtedly both cases cited by petitioner support the legal proposition advanced by it, but we do not think they apply to the facts in the instant case. In Kendrick v. Ray the policies of insurance were payable to “E. A. Taft, Trustee.” To determine the beneficiary of the express trust the court considered a letter found among the effects of the deceased requesting Taft to pay any money collected by him as trustee on insurance policies to claimant Ray. It appeared that Taft did not know of the policies or of the letter during the lifetime of the deceased. The plaintiff was the administrator of the insured, who claimed the proceeds by way of the resulting trust. The court held that the claimant Ray was entitled to the money, the letter being sufficient extrinsic evidence to set up an express trust in his favor. In Union Trust Co. of Pittsburgh v. McCaughn, supra, there was an insurance policy which the decedent took out on his own life, payable to “Anna L. Park, wife of. Richard C. Park, in trust.” In his will Richard C. Park disposed of one-half of the proceeds of the policy to Anna by the following language: “To my dear wife, Anna L. Park, I bequeath one-half (%) the proceeds of the insurance on my life in the Equitable Life Insurance Society of the United States absolutely.” (Emphasis supplied.) The court held that the will declared the trust upon which Anna was to hold one-half the insurance as beneficiary thereof and that this one-half was therefore not a part of decedent’s estate. The other one-half, having no express trust, was held upon a resulting trust in favor of donor’s estate and it was therefore includable as a part of decedent’s estate.

There is an essential difference between the provisions in the decedent’s will in the instant case and those which were present in the Union Trust Co. case, supra. In the instant case the provisions of decedent’s will did not bequeath his wife, Loretta, by specific bequest any part of the insurance policies which he had taken out on his' own life and made payable to the trustee, as Park did to his wife in the Union Trust Co. case. What decedent did in the instant case was to specifically bequeath his wife, Loretta, all his clothing, jewelry, household furniture, and other personal effects and then made her the life beneficiary of a trust, the corpus of which was to be composed of his residuary estate.

A part of this residuary estate, to be sure, was the insurance policies in question, which belonged to the estate because of the resulting trust which existed in favor of the estate by reason of decedent’s failure to create an express trust in the insurance policies. If decedent in his will had specifically bequeathed to the Boston Safe Deposit & Trust Co. the insurance policies in question in trust to hold, manage, invest, and reinvest, for the benefit of his wife, Loretta, we would have much the same situation as was present in the Union Trust Co. case, supra, and Kendrick v. Ray, supra, and the designation of Loretta as the beneficiary of the insurance policies trust would have related back and would have made of the trust an express trust.

As to the insurance proceeds of such a trust, section 125 of chapter 175 of the General Laws of Massachusetts would apply and such proceeds would not have been a part of decedent’s estate subject to the payment of claims of creditors and subject to distribution as a part of decedent’s estate.

As has already been pointed out, decedent did not specifically bequeath the insurance policies or any part thereof to his wife, Loretta, nor to any trust in her favor, and there is therefore no evidence before us to identify her as the intended beneficiary of the trust created in these policies by decedent in his lifetime. There is therefore no express trust in respect to these policies of insurance and under the authorities there was a resulting trust in favor of decedent’s estate. The situation we think is substantially the same as we had before us in Marmaduke B. Morton, Administrator, supra, and on the strength of that decision we hold in favor of the respondent on the only issue presented to us to decide.

Decision will he entered for respondent.


author: Tyson:

text:
    Bellagie I. Newman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78580.
    Promulgated January 14, 1938.

      J. V. Wolff, Esq., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Tyson:

This proceeding is for the redetermination of a deficiency in income tax for the year 1932 in the amount of $320.06. It is claimed by the petitioner that not only is there no deficiency, but that she has made an overpayment of income tax for 1932 in the sum of $284.37, exclusive of interest.

The only question in controversy is whether the agreed amount of $4,096.20, being the income from November 30, 1932, to and including December 31, 1932, derived from personal property formerly owned by the petitioner and decedent in community, or any part thereof, constitutes taxable income to the petitioner.

The facts were stipulated and in brief are as follows:

The petitioner is the widow of Harold W. Newman, late of New Orleans, Louisiana, who died testate November 30, 1932, leaving him surviving the petitioner and three sons, Harold W. Newman, Jr., Robert J. Newman, and Morris W. Newman. The will of the decedent appointed the petitioner executrix, “with full seizin and without bond”, and provided further, in so far as pertinent here, as follows:

I bequeathe to my beloved wife, Bellagie I. Newman, in addition to her one-balf interest in our community of acquets and gains, the entire disposable portion of my estate, in full ownership, with the exception of Twenty-five Thousand Dollars which I bequeathe to my son, Morris W. Newman, as an extra portion. I bequeathe to my wife the unlimited and undivided usufruct of my entire estate and also on the above stipulated legacy to my son Morris W. Newman, during her entire life-time.

The will of the decedent was probated and his estate administered in probate proceedings in the Civil District Court for the Parish of Orleans, State of Louisiana, in a proceeding entitled “Succession of Harold W. Newman.” The only steps taken in such proceedings between the date of the death of the decedent and January 1, 1933, are as follows:

Petition for the probate of decedent’s will, for the qualification of petitioner as executrix, and the appointment of a notary to take an inventory,
Probate of the will,
The appointment of such notary,
The commencing of the taking of the inventory,
The qualification of the executrix, and
The obtaining of an order to withdraw from the bank box of the decedent various interest coupons which belonged to decedent’s mother, and in which the estate of the decedent had no interest but which were in his possession as his mother’s agent.

A petition was filed in the above probate proceedings on September 8, 1933, by the petitioner and the three sons, wherein they accepted, simply and unconditionally, the succession of the decedent, and prayed that they be put and sent into possession of all the property left by decedent; that the petitioner be recognized as the surviving spouse in community with decedent, entitled, as such, to the ownership of an undivided one-half of all the community property; that she be further recognized as the legatee of the disposable portion under the last will of decedent and entitled, as such, to the ownership of an undivided one-third of one-half of all the property left by the decedent, less $25,000 cash bequeathed to Morris W. Newman, and to the usufruct on such $25,000 and on the other undivided two-thirds of one-half, or two-sixths of such property; and that the three sons be recognized as the sole and only heirs of decedent, and entitled, as such, to the ownership of an undivided two-thirds of one-half, or one-ninth each, of all of the property left by the decedent, subject to the usufruct in favor of their mother, the petitioner herein.

The gross taxable income, for the period from November 30, 1932, the date of death of the decedent, to and including December 31, 1932, from the property formerly owned by the decedent and the petitioner in community is $4,096.20, and consists of the following items:

Interest on a promissory note paid December 28, 1932- $585. 00
Dividend by DeSoto Building, Ltd., paid December 31, 1932_ 321. 00
Various interest coupons on bonds maturing December 1, 1932- 3,190.20
Total_ 4, 090. 20

In addition to this taxable income, the property produced exempt income during such period represented by interest coupons due December 15, 1932, on state bonds. None of the above bond interest coupons were cashed by the executrix in 1932. The only cash which came into her possession in 1932 consisted of the above interest and dividend items of $585 and $321, respectively, together with the sum of $3,330.73, representing the decedent’s cash in bank at the date of his death, which was transferred to the executrix on December 30. These three cash items were deposited in the Hibernia Bank & Trust Co. of New Orleans in an account entitled “Bellagie I. Newman, Testamentary Executrix.” The petitioner did not withdraw any funds for any purpose from this account in 1932.

The respondent determined that the net income of the petitioner for the calendar year 1932 was $20,100.56, composed of the following items:

Net taxable income admitted by the petitioner-$15,701. 36
Loss on account of stock in Edgewater Gulf Oo. becoming worthless- 303.00
All of the net income from the property formerly owned by the decedent and the petitioner in community from November 30, 1932, the date of the death of decedent, to and including December
31, 1932_ 4,096. 20
Total_ 20,100.56

The petitioner included one-half of the above income of $4,096.20 or $2,048.10, in her original 1932 income tax return, but now claims that such amount does not constitute income to her.

The petitioner paid on August 3, 1934, as income tax for the calendar year 1932, the sum of $822.32, plus $66.46 as interest thereon, which payment was made within two years of the filing of the petition herein on February 20, 1935.

Nothing was paid or credited during the taxable period by the executrix to petitioner as a legatee of decedent or as usufructuary under the will.

The petitioner sustained a loss of $303 in the year 1932 on account of the stock of the Edgewater Gulf Co. becoming worthless.

The petitioner, under the will of her husband, was bequeathed in “full ownership” the entire disposable portion of his estate, less $25,000 bequeathed to one of their sons, and the unlimited and undivided usufruct of his entire estate, including the $25,000 bequest to the son, during her life. A “usufruct” is defined in article 533 of Dart’s Civil Code of Louisiana, 1932, as “The right of enjoying a thing, the property of which is vested in another, and to draw from the same all the profit, utility and advantages which it may produce, provided it be without altering the substance of the thing.” Under this definition, the usufruct in the personal property, the income from which is here involved, was, in effect, the equivalent of a life estate as known at common law.

There are two questions presented, the first of which is, Did the seizin and right of possession of decedent’s community interest in such personal property, the usufruct therein bequeathed to petitioner by the will of decedent, and the income therefrom received during the first month of the administration of the. succession, or estate, pass to and vest in the petitioner individually, as respondent claims it did, or did the seizin and right of possession of such property and usufruct and such income therefrom vest in her as the executrix named in the will, and qualified as such by the proceedings in the probate court, as is claimed by petitioner? This question is presented by the issue of whether or not the respondent erred in his determination of a deficiency based upon his finding that the tax due on such income, in the amount of $2,048.10, was due from petitioner individually.

The petitioner contends that section 162 (c) of the Kevenue Act of 1932 is applicable here, and that, since no part of such income was either “properly paid or credited” during the taxable period by herself as executrix to herself as an individual and legatee, such income is not taxable to her individually. The respondent, however, contends that such section is not applicable here as the income involved does not represent “income received by estates of deceased persons during tbe period of administration or settlement of tbe estate” (sec. 161 (a) (3), Revenue Act of 1932 ); that none of tbe interest of decedent in tbe community property passed to tbe executrix, but that such interest and tbe right to the income therefrom passed, under the laws of Louisiana and tbe provisions of the will, immediately upon the death of the husband, to the petitioner as the survivor of the community and as usufructuary; that, whether or not the income was.received and held by her as executrix, it belonged absolutely to her individually as soon as it was produced, and therefore is taxable to her.

The contention of respondent, that the property bequeathed petitioner vested in her immediately upon the death of her husband and that the income therefrom belonged to her individually as soon as it was produced rather than to her as executrix, is based upon the propositions, first, that articles 940, 941, and 942 of the Civil Code of Louisiana, in effect, so provide, and, second, that the administration of the estate was unnecessary, and consequently inoperative, because, he asserts, no debts against the estate are shown to have existed.

Both propositions are settled adversely to respondent’s contention and favorably to that of petitioner, by the opinion in the case of Succession of Serres, 66 So. 342, in which the widow, and an heir named as a beneficiary in the will of decedent, opposed the application of the testamentary executor to be confirmed as such on the grounds, inter alia), that the heir was entitled to enter into immediate possession of the property bequeathed her in the will, without the intervention of an administration, and, further, that an administration was unnecessary because there were no debts of the succession, or estate. The Supreme Court of Louisiana held that the heir opposing the confirmation of the testamentary executor was not entitled to receive direct, or to be put into possession of, the property bequeathed her in the will, and that the testamentary executor was entitled to be confirmed regardless of whether or not there were debts of the estate. The court, after citing and discussing various articles of the Civil Code and Code of Practice of Louisiana, as well as prior decisions of that court relating to executors and their status with regard to successions or estates, stated, inter alia, as follows:

The office and seizin oí the executor enable him therefore to dispose of the title and to control the possession of all the property of the succession and the title and seizin of the heirs are among the rights that may be thus disposed of and controlled. Those rights must yield to the paramount authority and rights of an executor; and the only way in which the heir can resist the executor is, not by relying on his own title and seizin, but by taking away from the executor the seizin which the testator and the law have conferred upon him, a privilege which the heir may exercise on complying with conditions imposed by Articles 1671 and 1012 of the Civil Code. * * * We conclude, therefore, that the dictum in the opinion in Succession of Dupuy, to the effect that “the seizin of the executor is a fiction of law which does not interfere with the legal possession of the heir,” is misleading and that the law is correctly interpreted in the opinion of Bird v. Succession of Jones in the statement that: “The actual seizin of an executor is something distinct from and paramount to the fictitious seizin which, it is said, is vested in the heir immediately upon the death of the ancestor.”

Articles 1671 and 1012 referred to in the above excerpt from the Serres opinion are set out by footnote.

With special reference to the question of the necessity of the existence of debts against the estate in order to justify the confirmation of a testamentary executor, the court discussed various probable reasons why a testator should desire to have an executor of his estate even though he owed no debts, nor would owe any at the time of his death, and concluded that the question of the necessity or propriety of appointing an executor was one to be decided solely by the testator as a right conferred upon him by law, stating, inter alia, as follows:

It is not true that the sole duty of an executor to whom the seizing of an estate has been given, is to pay the debts and deliver the legacies; but on the other hand those duties, so far as values are concerned, may be, and often are, of less importance than the duty of delivering the balance or universality of the estate to the heirs. * * * Whether or not, therefore, the debts of this succession were of such a character as to have required the appointment of an administrator, if there had been no will, we are of the opinion that the executor appointed by the testator was entitled to be confirmed by the court.

Cf. Succession of Serres, sufra, J. H. Tippett, Administrator, 25 B. T. A. 69, and authorities cited therein; Garrett J. Donnelly et al., Executors, 31 B. T. A. 577; Ida Stephenson, 38 B. T. A. 252.

The case of Schreiber v. Beer's Widow and Heirs, 91 So. 149, is a decision of the Supreme Court of Louisiana, chiefly relied on by respondent as supporting his contention that such property of decedent as was disposed of by bis will and the income therefrom passed directly to petitioner in her individual capacity, and not to her in her capacity as executrix. In that case suit was instituted against his succession, or estate, to revive a judgment obtained against deceased in his lifetime and against his widow, individually, as survivor in community, and his children, individually, as his heirs, for the debt represented by the judgment. The petition instituting the suit failed to allege that the individual defendants had respectively accepted the community and the succession, as provided by statute law of Louisiana. Because of this failure to allege such acceptance an exception, or demurrer, to the petition was sustained by the lower court, and on appeal to the Supreme Court of Louisiana this action of the lower court was sustained in so far as it held that the petition disclosed no cause of action for a personal judgment against the widow and heirs of the deceased judgment debtor, but in so far as it held that the petition disclosed no cause of action against the “succession”, the holding of the lower court was reversed. The Supreme Court of Louisiana, in reaching this conclusion after consideration of the identical articles of the Civil Code of Louisiana relied on by respondent, said, inter alia (p. 155):

Articles 940, 941, 942 and 1014 of the Civil Code declaring, substantially, that an heir, being invested with seizin or the right of possession of the estate by the mere operation of law immediately at the death of the ancestor, is considered the heir so long as he has not renounced the succession, must be read in connection with Article 946, declaring that, although the succession is acquired by the heir at the moment of the death of his ancestor, the heir’s rights nevertheless remain in suspense until he decides whether he would accept or renounce the succession.

The articles referred to in this quotation from the opinion of the court are as set out by footnote.

It is obvious that the Schreiber case not only affords no support for the respondent’s contention that the property and income here involved was that of the petitioner, individually, and passed to her directly in her individual capacity rather than in her capacity as executrix, but, on the contrary, constitutes a strong authority against such contention.

The other Louisiana decisions cited by respondent in support of his contention are not in point.

The foregoing authorities establish the principle that a decedent’s one-half interest in personal property owned by the community, from which character of property the income here involved is derived, passes to and is held by the executor, as such, and not to the heirs or legatees directly, and such principle also obviously applies to the usufruct in such property. Succession of Bollinger, 30 La. Ann. 193; Succession of Romero, 8 So. 632. Cf. Le Goaster v. Lafon Asylum, 99 So. 22.

From these authorities it clearly appears that the interest of petitioner as an individual and legatee, in contra-distinction to her interest as executrix, in that part of the disposable property owned by decedent at the time of his death which was bequeathed to her absolutely, as well as in that other part of decedent’s property in which she was bequeathed the usufruct, passed to her as executrix and was held by her in that capacity at the time she, as such executrix, received therefrom the income which is here involved. It necessarily follows that the income from such property during the taxable period was also received and held by her in her capacity as executrix and not in her individual capacity as legatee and usu-fructuary.

We have found as a fact that nothing was paid or credited, during the taxable period, by petitioner as executrix to herself as legatee or usufructuary under the will of decedent, and, furthermore, it may be noted that such payment or credit could not have been legally made under article 977 of Merrick’s Revised Civil Code of Louisiana, since the acceptance provided for in that article was not made by petitioner as legatee and usufructuary until September 28,1933, several months after the end of the taxable period.

The respondent erred in his determination of a deficiency against .the petitioner, such determination being based upon the income from that one-half of the community property owned by decedent at the time of his death.

Having disposed of the first question, there remains the second one to be answered, i. e., Did that one-half of the community property belonging to the surviving wife at the time of decedent’s death and the income therefrom during the one month of administration, as well as that one-half of the community property belonging to the deceased husband at the time of his death, pass to the executrix as contended by petitioner? This question is presented by the contention of petitioner to the effect that the one-half interest in the community property owned by her at the time of decedent’s death, as well as that one-half interest owned by decedent, passed into the administration of the estate and was held by her as executrix and not by her individually; that the income therefrom is, therefore, taxable to her as executrix and not to herself individually; and that in returning and paying tax as an individual on such one-half interest she made an overpayment in the amount of the tax so paid.

The case of Festivan v. Clement, 66 So. 304, was one in which the children and heirs of A. J. Festivan and his first wife, who predeceased him, sought to enjoin the sale of the whole of a certain tract of land which the executor of Festivan’s estate was advertising for sale under an order of the probate court for the purpose of paying Festivan’s debts. The petition alleged, inter alia, that the land had been owned in community by Festivan and his deceased wife, mother of plaintiffs; that plaintiffs as heirs of their deceased mother inherited a one-half interest in the land; and that the whole of the property could not be sold until their interest was ascertained by judicial investigation followed by partition. The defendants interposed several exceptions to the petition, among them one of “no cause of action.” The Supreme Court of Louisiana reversed the lower court by ordering that the exception of “no cause of action”, which was the only one considered in the opinion, be overruled and remanded the cause to the lower court for decision on the merits. The court said, inter alia:

According to the allegations of the petition, the plaintiffs and the succession of Festivan are the joint owners of the tract of land in controversy. The plaintiffs, as joint owners, are entitled to partition in kind of the property, if practicable, and if not, to a partition by lieitation, in which they would be entitled to one-half the net proceeds of the sale. All of these rights would be defeated by the proposed probate sale of the tract of land as the property of the succession. * * *
It is not disclosed by the petition that the first community owed debts either to the surviving husband, or to third persons. Hence, the petition discloses a perfect legal title in the plaintiffs to an undivided half interes.t in and to the tract of land in question. * * * Plaintiff’s father became their coproprietor with power to sell only his undivided half interest in the community property. * * *
When the father died years later his half interest and no more passed into his succession. The other half interest belonged to the plaintiffs and the Probate Court bad no jurisdiction to order its sale to pay the debts of the deceased. * * *
The petition alleges that the probate sale was ordered “for the purpose of paying off the debts of the deceased, A. J. Festivan.” As the first community was dissolved in 1874, its debts, if any, have long since been prescribed. There is no presumption that the first community owed debts. Hence, the cases holding that community property may be administered in the succession of the husband for the purpose of paying community debts have no application to the facts of the case before us.
As the suit was dismissed on the exception of no cause of action it is necessary to remand the case to the Court of Appeals for decision on the merits.
* * * It is now ordered that the exception of no cause of action be overruled and the cause be remanded.

See also Hewes v. Baxter, 16 So. 196; Verrier v. Lorio, 19 So. 677. These authorities clearly establish the principle that, except in cases where there are community debts, the interest in the community property of the surviving member does not pass to or under the control of the executor of the deceased member’s estate.

This record is entirely devoid of any showing that there were any debts of the community, and, applying the principle established by these authorities, we conclude that the one-half interest in the community property owned by the petitioner as the survivor in community was not transmitted to or held by her in her capacity as executrix of the estate of her deceased husband, that consequently the income therefrom was properly taxable to her in her individual capacity, and that in paying same she made no overpayment.

The petitioner cites only one case in support of her contention that the one-half interest in the community property owned by her as the surviving wife and member in community passed to and was held by her as executrix of her husband’s estate, that case being Bronson v. Balch, 19 La. Ann. 39, which announced the principle that “the administration of the succession of the deceased husband involves with it the administration of the community and the executor or administrator may rightfully cause the community property to be sold to pay the debts of the succession.” It is apparent that the pronouncement of the court in this case does not support this contention of petitioner for the reason that the principle announced by it is identical with that of which it is said in the much later Festivan case, supra, that “the cases holding that community property may be administered in the succession of the husband for the purpose of paying community debts have no application to the facts before us,” which facts, as in the instant case, failed to show the existence of community debts.

It was stipulated by the parties that the petitioner sustained a deductible loss in the amount of $303 in the year 1932. Effect will be given to this stipulation upon recomputation under Eule 50.

Decision will be entered under Buie 50.

       The !net income of tlie estate or trust shall he computed in the same manner and on the same basis as in the case of an individual, except that—
      ****** *
      (c) In the ease of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included In computing the net income of the legatee, heir, or beneficiary.

      (a) Application op Tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
      *******
      (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * * *

       Art. 1671 — The heirs can, at any time, take the seizin from the testamentary executor, on offering him a sum sufficient to pay the movable legacies and on complying with the requirements of Article 1012.
      Akt. 1012 — In obtaining possession of the effects of a succession, the heirs shall not be permitted, under any pretense whatsoever, to have an actual delivery of any property of such succession which may be in" suit or to receive any money of such succession when there shall be claims thereon pending in court, unless they previously give bond with good and sufficient security, if the plaintiffs in such suits require it; which security shall be one-fourth over and above the amount of the claims for money thus claimed, or of the appraised value of the property in suit, which estimation shall be made by two appraisers appointed by the judge.

       Art. 940 — A succession is acquired by the legal heir, who is called by law to the inheritance, immediately after the death of the deceased person to whom he succeeds.
      This rule applies also to testamentary heirs, to instituted heirs and universal legatees, but not to particular legatees.
      Art. 941 — The right mentioned in the preceding article is acquired by the heir by the operation of the law alone, before he has taken any step to put himself in possession, or has expressed any will to accept it.
      Thus children, idiots, those who are ignorant of the death of the deceased, are not the less considered as being seized of the succession, though they be merely seized of right and not in fact.
      Art. 942 — The heir being considered seized of the succession from the moment of its being opened, the right of possession, which the deceased had, continues in the person of the heir, as if there had been no interruption, and independent of the fact of possession.
      Art. 1014 — He who is called to the succession, being seized thereof in right, is considered the heir, as long as he does not manifest the will to divest himself of that right by renouncing the succession.
      Art. 946 — Though the succession be acquired by the heir from the moment of the death of the deceased, his right is in suspense, until he decide whether he accepts or rejects it.
      If the heir accept, he is considered as having succeeded to the deceased from the moment of his death; if he rejects it, he is considered as never having received it.

       Art. 977 — No one can be compelled to accept a succession, in whatever manner it may have fallen to him, whether by testament or the operation of law. He may therefore accept or renounce it.
      It shall not be necessary for minor heirs to make any formal acceptance of a succession that may fall to them, but such acceptance shall be considered as made for them with benefit of inventory by operation of law, and shall in .all respects have the force and effect of a formal acceptance.


author: Arundell: Murdock, TURNER,

text:
    Cornelia W. Roebling, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85381.
    Promulgated January 14, 1938.

      'William H. Wiegering, Esq., and Robert W. Burton, Esq., for the petitioner.

      F. R. Shearer, Esq., James G. Maddox, Esq., and E. M. Woolf, Esq., for the respondent.
   OPINION.

Arundell:

In the deficiency notice sent to the petitioner the respondent treated separately some of the items making up the total claimed deduction of $11,493.13. He disallowed “the item of $4,000 representing payment to an individual for auditing books, preparation of tax returns, and procuring refund of taxes. The remainder of the total deduction is listed in the deficiency notice as $5,951.63, whereas the correct remainder is $5,979.43, a difference of $27.80. This item is the same in amount as the amount of taxes paid on rental of safe deposit boxes, and apparently was allowed by the respondent. Of the remainder of $5,951.63 the respondent disallowed $4,469.67 as being “allocable to tax-exempt income.” The amount of $4,469.67 is 75.1 percent of $5,951.63.

In the petition filed herein the petitioner alleged the amount of $9,951.63 to be “ordinary business expenses” and alleged error on the part of the respondent in disallowing as ordinary business expenses (a) the amount paid for services of tax advisor and accountant and (b) the “75.1 percent of the • total amount of all other expenses * * These allegations were denied by the respondent in his answer. By amended answer subsequently filed the respondent avers that he committed error in allowing the deduction of any portion of the claimed $11,493.13 and (quoting from the amended answer), “alleges affirmatively: (a) That during the year 1933 petitioner was not engaged in a trade or business, (b) That the deduction claimed was not incurred in connection with the carrying on of a trade or business.”

Some of the items making up the total claimed by the petitioner are not affected by the respondent’s change of position and will be disposed of first. There is an item of $173.63 claimed as postage, etc., as to which counsel for the petitioner concedes there is no proof as to the amount of the expenditure. The disallowance of that item is sustained. The $27.80 stipulated to be “taxes on safe deposit boxes” is clearly allowable as “taxes paid” under section 23 (c) of the Revenue Act of 1932, whether or not the petitioner was engaged in carrying on a trade or business. The item of $1,513.70, being the loss sustained on bonds, is not separately discussed by either side. This amount was claimed by petitioner to be a loss on the redemption of bonds; the parties have stipulated it to be a loss sustained on the sale of bonds. In either event the matter of allowance of the deduction would not depend upon whether the petitioner was engaged in trade or business. ' Losses are not confined to those sustained in the operation of business enterprises but are allowable “if incurred in any transaction entered into for profit, though not connected with the trade or business.” Sec. 23 (e) (2), Revenue Act of 1932. Neither side suggests that the provisions of section 23 (r), placing certain limitations on losses, are applicable. The respondent has not determined, and we will not presume, that the petitioner’s acquisition of the bonds was inspired by a philanthropic or other nonprofit motive. The natural assumption is that an investor is actuated by a profit motive when he buys securities. As the respondent’s disallowance is not based on any ground that would indicate any other purpose, we hold that the loss shoxdd be allowed.

According to the notice of deficiency in this case the respondent’s disallowance of the $4,000 item is based on the ruling in Gliarles Henry Mattlage, 3 B. T. A. 242. In that case the Board, without opinion, sustained the disallowance of an amount paid to a firm of accountants for services rendered in connection with the preparation of the individual taxpayer’s income tax return. The decided cases in which this question has been discussed hold that fees paid in connection with tax matters are deductible as expenses where the taxes result from business in which the taxpayer is engaged. J. W. Forgeus, 6 B. T. A. 291; Caroline T. Kissel, 15 B. T. A. 1270. Fees paid in connection with taxes on transactions not amounting to a trade or business are considered personal expenditures and not deductible. See Malcolm G. Gibbs, 34 B. T. A. 1028, and cases there cited. As to this item there has been no change of position by the respondent, and the burden of proof is on the petitioner.

The $4,000 fee paid in this case was paid for services rendered in prior years. The only evidence in regard to this payment is the testimony of the individual to whom it was paid. He testified that it was paid for audits, preparation of returns, and services in connection with proposed additional income taxes for prior years. The proposed additional taxes, he stated, involved the same question “as is raised in this case.” We take this to mean that there was a controversy over whether or not the petitioner was engaged in carrying on a trade or business in the earlier years.

We have no evidence of the extent of the petitioner’s business activities for the years prior to 1933. We have not been informed as to the outcome of the controversy over additional taxes for prior years. We do not know whether the Commissioner, or whoever passed judgment on the matter, determined the petitioner to have been engaged in a trade or business. Thus, the petitioner has failed to establish that she was engaged in a trade or business in the years for which this fee was paid, and consequently we can not find that it was a business expense.

We have left for consideration the following items: $5,000 salary paid to Austin C. Cooley; $500 paid to Cooley’s secretary for services rendered in connection with petitioner’s affairs; and $278 paid for rental of safe deposit boxes. A portion of these items was disallowed as being “allocable to tax-exempt income”, and in support of such disallowance the deficiency notice cites I. T. 2751, C. B. XIII-1, p. 43. That ruling, after citing other rulings of the Commissioner’s office, decisions of this Board, and one court decision, concludes that “all the ordinary and necessary expenses paid or incurred during the taxable year with respect to the management, protection, and conservation of properties producing taxable income should be allowed as deductions in computing net income.” That ruling does not hold that expenses in producing exempt income are not deductible and the statute does not classify business expenses according to the character of the property handled or the income produced. John H. Watson, Jr., et al., Trustees, 35 B. T. A. 706. Where such classification is intended it is so provided in the statute as in the case of interest, deduction being disallowed for interest on money borrowed to purchase or carry exempt securities (sec. 23 (b), Revenue Act of 1932; Denman v. Slayton, 282 U. S. 514), and, beginning with the Kevenue Act of 1934, for amounts allocable to exempt income, other than exempt interest. See John E. Watson, Jr., et al., Trustees, supra, distinguishing Victor G. Marquissee, 11 B. T. A. 334. It follows that the respondent’s allowance of a part of the deduction must have been predicated upon a determination by him that the taxpayer’s activities amounted to carrying on a trade or business. The respondent having made that determination and now affirmatively alleging error in so doing, the burden is on him to establish error. Board’s Rule 30; Henderson Tire & Rubier Co., 12 B. T. A. 716; Drawoh, Inc., 28 B. T. A. 666, 686. The respondent has not met his burden of affirmatively proving that the petitioner was not engaged in carrying on a trade or business. The evidence on the respondent’s side is mostly negative. Thus, it appears that the petitioner did not regularly visit the office in which her affairs were handled; she paid no rent for office space; her sales in the taxable year were only three in number. These negative matters are not enough in our opinion to overcome the presumption that the Commissioner correctly determined that the petitioner was carrying on a trade or business when he allowed part of her expenditures.

But if our holding as to the burden of proof is questioned and if the burden is on the petitioner to establish a trade or business, our opinion is that that burden has been met. The petitioner’s evidence shows that she was engaged in the taxable year in managing securities of close to $9,000,000 in value in addition to her interest in the Roebling Co. Her management was an active one; she did not confine her interest to employing others to manager her property for her. When it came to buying, selling, or reinvesting she conferred with Cooley and with her brokers and, after such conferences and after consulting investment services, she made the final decision. She instructed Cooley accordingly and he ordered purchases or sales in accordance with her instructions. She paid for the purchases by drawing checks herself. Cooley testified that he saw only one or two of the checks. Petitioner’s interest in the Roebling Co. likewise engaged her active attention. She was a substantial stockholder in that company and frequently conferred with other stockholders as to the company’s business. At stockholders’ meetings she had Cooley vote her stock in accordance with instructions that she gave him. All of this evidence indicates activities on the part of this petitioner beyond those of a mere passive investor. Cf. Foss v. Commissioner, 75 Fed. (2d) 326; Austin D. Barney et al., Executors, 36 B. T. A. 446. This petitioner’s purchases and sales, amounting to more than a half million dollars, exceeded in amount those in the case of L. T. Alverson, 35 B. T. A. 482, in which we allowed the deduction of the cost of statistical services in connection with the purchase and sale of securities. Her dividends for 1933 were in excess of $169,000 and interest received was over $230,000, which on its face shows at least a businesslike management of the petitioner’s property. On authority of the cited cases, and in addition thereto considering the active interest of this petitioner in the management of her property, we are of the opinion and find as a fact that the petitioner’s activities amounted to carrying on a trade or business. Consequently, the amounts expended for Cooley’s services, the secretary’s services, and rental of safe deposit box are deductible as business expenses.

The cases chiefly relied on by the respondent are distinguishable on the facts from this case. In Helen W. Heilbroner, 34 B. T. A. 1200, the taxpayer inherited a substantial amount of securities. She had no business experience. She placed some of the securities with a trust company to collect the income for which she paid the trust company a commission, and she engaged an employee of her brother to look after her accounts and paid $1,200 as her share of the employee’s compensation and office rent. In that case it wras found from the evidence that the taxpayer “did not manage her estate or direct its management. She merely received income from investments, and this is not a trade or business.” In this case, as pointed out above, the evidence abundantly establishes active management by the petitioner. In Alice G. Kales, 34 B. T. A. 1046, the taxpayer was a woman of considerable means. A major part of her wealth was received from the estate of her father and included a block of automobile stock, Dividends on that stock and profit on its sale gave rise to tax controversies with the Government. The taxpayer instituted suits against the Government and in connection therewith she paid fees, court costs, and legal expenses in 1928 and 1930 and claimed deductions therefor as business expenses. In that case it appeared that the taxpayer’s principal activity with respect to her securities prior to the taxable years was that of shifting the bulk of her investments- from stocks to bonds. It was found as a fact that the taxpayer “knew nothing about bonds, but her approval was always asked and given before the purchase or sale of bonds.” In the case before us, it is shown that the petitioner informed herself as to the securities she bought and sold. She did not, as in the Kales case, merely give her assent to proposals formulated by others, but studied the recommendations and actually made her own decisions. In the Kales case, while the taxpayer’s transactions amounted to considerable sums over a period of years, there is no showing of the extent of the taxpayer’s activities in' stocks for one of the taxable years; as to the other year, 1930, her stock purchases amounted to but $55 and her sales were in the amount of $210. No analysis of this point is needed to show the distinction between the two cases. In neither the Heilbroner nor the Kales case were the taxpayers active in personally handling their affairs as was the petitioner in this case, and the cited cases are not controlling here.

Reviewed by the Board.

Decision will be entered under Rule 50.

Murdock,

concurring: I think this case is contrary to that of Victor G. Marquissee, 11 B. T. A. 334; affd., 47 Fed. (2d) 32. The effort to distinguish the latter case in the Watson case does not satisfy me. However, since the Commissioner has acquiesced in the Watson case, I concur in the result reached here.

Smith agrees with the above.

TURNER,

dissenting: The majority opinion undertakes to distinguish this case from the case of Alice G. Kales, 34 B. T. A. 1046. In my opinion, the two cases are- indistinguishable and for that reason I note my dissent.

Black, Mellott, Disney, Harron, and Kern agree with the above.


author: Murdoch:

text:
    Thorne Donnelley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79040.
    Promulgated January 14, 1938.

      Preston Boy den, Esq., and Theodore Eardeen, Jr., Esq., for the petitioner.

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

Murdoch:

The Commissioner determined a deficiency of $4,638.97 in the petitioner’s income tax for the calendar year 1932. The only issue in the case is whether or not the Commissioner erred in including in the petitioner’s income $11,532.75 of dividends and $3,916.50 of other income from a trust. The facts have been stipulated and no good purpose would be served in setting forth the stipulation here.

The petitioner and his then wife, Helen Pauling Donnelley, were divorced on April 13, 1931. Immediately prior to the divorce a property settlement was made between the petitioner and his wife. The petitioner, pursuant to that agreement, assigned to his wife his interest to the extent of $30,000 per annum in the income of a trust theretofore created for him by his deceased mother. The decree of divorce incorporated and sanctioned the provisions of the property settlement, including the assignment. Thereafter the trustee paid the trust income directly to the wife. There is no evidence that the divorced wife remarried. The Commissioner in determining the deficiency held that $15,449.25, being income earned by the trust and paid to the wife pursuant to the terms of the property settlement in 1932, was income taxable to the petitioner. This income consisted of dividends in the amount of $11,532.75 and ordinary income in the amount of $3,916.50.

The Commissioner in support of his determination relies upon the case of Douglas v. Willcuts, 296 U. S. 1, and other more recent cases following that decision, including Helvering v. Brooks, 82 Fed. (2d) 173, reversing 31 B. T. A. 70; Commissioner v. Hyde, 82 Fed. (2d) 174, reversing 31 B. T. A. 256; Albert C. Whitaker, 33 B. T. A. 865; Alsop v. Commissioner, 92 Fed. (2d) 148. The petitioner points out that in those cases the husband had established a trust in contemplation of the pending divorce, whereas here no trust was established by him; instead, this petitioner assigned a part of his interest in a trust theretofore created by his mother at a time when there was no thought of the divorce. He claims that this difference serves to distinguish this case from those relied upon by the Commissioner. He argues that he had a right to irrevocably assign a portion of the, income to which he was entitled under the trust established by his mother, and, having made an irrevocable assignment, he was relieved of any further duty to pay income taxes upon the trust income, citing Blair v. Commissioner, 300 U. S. 5; Commissioner v. Field, 42 Fed. (2d) 820, and other cases. The Commissioner concedes that the petitioner had a right to irrevocably assign the income from the trust, and makes no argument that under other circumstances the petitioner would have been liable for income tax on the income of the trust after the assignment. But he argues that the income of the trust under the circumstances of this case is taxable to the petitioner for reasons set forth in the cases first cited.

Although the trust created by the petitioner’s mother was not made in contemplation of the divorce, the assignment of the income from that trust by the petitioner was manifestly made in contemplation of the divorce. The court was not bound by the agreement, but had authority to make full allowance to the wife out of her husband’s property and to set up a trust to give effect to that allowance. Being satisfied with the provision made through the assignment, the court incorporated that provision in its decree and made the terms of the assignment its own. It was from this action of the court that the assignment derived its force. “Amounts paid to a divorced wife under a decree for alimony are not regarded as income of the wife but as paid in discharge of the general obligation to support, which is made specific by the decree. * * * Upon the preexisting duty of the husband the decree placed a particular and adequate sanction, and imposed upon petitioner the obligation to devote the income in question, through the medium of the trust, to the use of his divorced wife.” Douglas v. Willcuts, supra. The following is a further quotation from the same case:

In the present case, the net income of the trust fund, which was paid to the wife under the decree, stands substantially on the same footing as though he had received the income personally and had been required by the decree to make the payment directly.

Other statements of the Supreme Court in the Douglas v. Willcuts case and statements of the lower courts in the other cases cited by the respondent lead us to believe that the principle of the Douglas v. Willcuts decision is applicable here and that the difference in the facts pointed out by the petitioner does not serve to distinguish the cases.

The petitioner in his brief makes a statement of the facts, including a statement that the dower interest of the wife had an annual income value at the date of the decree of a certain amount. No argument is made on this point. Also, there is reference in the property settlement to rights and claims other than alimony. However, the evidence is insufficient to permit any segregation or allocation whereby less than the full amount of the trust income can be allocated to the provision for alimony.

Decision will he entered for the respondent.