author: Arundell : Harron

text:
    Security-First National Bank of Los Angeles, Executor, Estate of William M. Young, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81224.
    Promulgated October 8, 1937.

      O. H. Chmillon, Esq., for the petitioner.

      H. F. Noneman, Esq., for the respondent.
   OPINION.

Arundell :

The respondent included in Young’s gross estate the full value of the trust corpus at the date of death on the theory that the transfer in trust was one intended to take effect at or after death. By amended answer counsel for the respondent alleges as further reasons for the inclusion that (a) the transfer of October 29, 1924, was also made in contemplation of death and (b) that the enjoyment of the trust property was subject at the date of death to a change through the exercise of a power by the decedent to alter, amend, or revoke.

It should be noted at the outset that, while the parties speak of this case as involving “a transfer”, there were in fact fourteen transfers. The one to which the parties address themselves is that of October 29, 1924. Thereafter thirteen additional transfers were made, all subject to the trust agreement of October 29, 1924, the dates of which are set forth in the findings of fact. For reasons hereinafter given some of the subsequent transfers become of importance in the case.

The contemplation of death issue raised by amended answer is not difficult. Speaking now of the original transfer in 1924, the parties have stipulated that the transfer “was not made in any expectation or apprehension of imminent death.” They have also stipulated that at that time Young was, and for some time had been, in good health. The testimony of the trust company official who aided in preparing the agreement is to the effect that the primary consideration that prompted Young to create the trust was his desire to conserve his property and be relieved from the work and responsibility of managing it. This official further testified that he suggested that a trust would effect savings in administration costs on the death of Young. This is pointed to as establishing contemplation of death in the creation of the trust. But out of this circumstance we can spell out at the very most only “the general expectation of death which all entertain.” United States v. Wells, 288 U. S. 102. We are unable to find in this casual reference to administration costs that the thought of such costs, occasioned by death, was a controlling motive in the creation of the trust. The subsequent transfers are not shown to have been impelled by any other motive than that which prompted the original one. As to all of the transfers that were made prior to 1931, the burden is on the respondent to establish a contemplation of death motive as this fact issue was initiated by his answer. He has not met that burden. We have accordingly found as a fact that the transfers were not made in contemplation of death and hold that the value of the trust property is not includable in gross estate on that ground.

Section 302 (c) of the Revenue Act of 1926, which the respondent originally said was authority for inclusion of the trust property in the taxable estate, provides for the inclusion of transfers intended to take effect in possession or enjoyment at or after death. The cited section was amended by Joint Resolution of Congress, approved March 3, 1931, so as to include transfers under which the transferor reserved the income from the property or the right to designate who should possess or enjoy the property or the income therefrom. A further amendment was made by section 803 (a) of the Revenue Act of 1932, which for the purposes of this case may be considered a reenactment of the Joint Resolution.

Under section 302 (c) of the Revenue Act of 1926, as it read before amendment, the transfers would not be included in decedent’s gross estate. Counsel for the respondent concedes that the decisions are against him on this point. The transfers of corpus were complete at the time thereof and the retention of income was not enough under the 1926 Act to bring the transfers within the provisions of transfers intended to take effect at or after death. May v. Heiner, 281 U. S. 238; Commissioner v. Northern Trust Co., 41 Fed. (2d) 732; aff'd., 283 U. S. 782; Charles W. Foster et al., Executors, 26 B. T. A. 708; aff'd., C. C. A., 1st Cir., without opinion.

The provisions of the Joint Resolution of March 3, 1931, were designed to include, and do in so many words include, transfers such as we have here. However, those provisions are not to be applied retroactively, and do not reach transfers made prior to the date of the Resolution. Mildred Kienbusch et al., Executors, 34 B. T. A. 1248; Pearl W. Dahl, Executrix, 35 B. T. A. 282; Welch v. Hassett, 90 Fed. (2d) 833; Treasury Decision 4314. Under these holdings, the original transfer in trust, and the subsequent transfers subject to the same trust made prior to March 3, 1931, are not subject to inclusion in decedent’s estate for tax purposes. Three transfers were made after March 3, 1931, to wit, $4,703.25 on March 31, 1932, $22,535 on November 7, 1932, and $2,412.75 on December 7, 1932. These transfers, being subject to the provisions of the original instrument wdiich gave the decedent the right to the income for life, come within the provisions of the-Joint Resolution. See Pearl W. Dahl, Executrix, supra; E. Pennington Pearson, Executor, 36 B. T. A. 5. We are aware that the Circuit Court of Appeals for the Seventh Circuit, in Bullard v. Commissioner, 90 Fed. (2d) 144, intimates that the cited Joint Resolution and the amendment effected by section 803 (a) of the Revenue Act of 1932 are invalid as applied to a transfer in trust where the transferor retains only the income. This proceeding arises in another circuit, and, with all respect to the court in the seventh circuit, we feel that our position in the Bullard, Dahl, and Pearson cases is right and we should adhere to it until there is more authority to the contrary.

The final question under the main issue is whether the trust property is includable .in gross estate under section 302 (d) of the Revenue Act of 1926. This section of the statute includes property transferred by the decedent, the enjoyment of which “was subject at the date of his death to any change through the exercise of a power by the decedent alone * * * to alter, amend, or revoke * * The power reserved which gives rise to the question here was that contained in the twelfth article of the trust agreement which reserved to the decedent the right to withdraw from the said trust up to the sum of $10,000 per annum. This right was cumulative, that is, if only $5,000 were withdrawn the first year, he could withdraw $15,000 the second year. According to the American Experience Table of Mortality, Inheritance Taxation, Federal Estate and Gift Taxes, 4th Ed., Gleason & Otis, p. 536, decedent’s life expectancy at the time he created the trust was 5.11 years. He actually lived 8.46 years after October 29, 1924, or 3.35 years beyond his expectancy on that date. During this time he exercised his power to withdraw from the corpus $81,262.16 of the $84,600 that he had a right to withdraw. On the date of decedent’s death, and that is the date mentioned in section 302 (d), supra, the trust estate was only subject to change through the exercise of a power by the decedent to revoke to the extent of $3,331.24. Beyond that, the enjoyment of the beneficiaries was, on the date of decedent’s death, subject to no change whatever. Like the right to receive the income of the trust, the right to withdraw the amount of $3,337.24 ceased at death. We hold, therefore, that only $3,337.24 of the trust estate is includable in decedent’s gross estate under section 302 (d) of the Revenue Act of 1926. Cf. Daisy Christine Patterson, Executrix, 36 B. T. A. 407.

Regarding one of the collateral issues, namely, the credit for gift taxes, the petitioner concedes that if the trust property is- excluded from the gross estate, the credit for gift taxes should be disallowed. In our opinion above we have excluded from the decedent’s gross estate all of the trust property, except the value of the three transfers in 1932 and the $3,337.24 item to be included under section 302 (d) of the Revenue Act of 1926. The credit for gift taxes should be adjusted accordingly.

As to the other collateral issue, namely, the credit for state estate or inheritance taxes, counsel for respondent stated at the hearing that this would be adjusted in the computation to be submitted under Rule 50.

The deficiency should be recomputed in accordance with this opinion.

Reviewed by the Board.

Decision will be entered under Rule 50.

Harron

dissents on the holding that none of the transfers made

prior to March 3, 1931, are includable in gross estate under section 302 (c) of the Revenue Act of 1926.


source: Caselaw Access Project

author: Hill :

license: Public Domain

text:
    Philip J. Cogan, Petitioner, v. Commissioner of Internal Revenue, Respondent. Patrick H. Cogan, Petitioner, v. Commissioner of Internal Revenue, Respondent. John F. Cogan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77703, 77704, 77705.
    Promulgated October 12, 1937.

      Frederick L. Pearce, Esq., for the petitioners.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Hill :

These are consolidated proceedings for the redetermination of deficiencies in. income tax as follows:

The question for decision is whether the organization of the new corporation in 1931 by an old corporation of which petitioners were the sole stockholders, and certain transactions in connection therewith, constituted a “reorganization” within the meaning of that term as defined in section 112 (i) of the Revenue Act of 1928, reading in pertinent part as follows:

(1) The term “reorganization” means * * * (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred. * * *

The petitioners are three brothers, who have been engaged for many years in the contracting business in New York. In 1931 they comprised the board of directors, officers, and stockholders of the J. F. Cogan Co., a New York corporation. That company was organized in 1909 to carry on a general contracting business, constructing principally bridges, subways, and sewers. There were two other stockholders of the corporation originally, but they were bought out about 1916, and since that time through 1931 the outstanding capital stock has been owned one-third by each of the petitioners herein.

The principal contracts of the J. F. Cogan Co. prior to 1931 were on two subways in New York City, one on the Central Park West subway for a face amount of $4,500,000, started in the spring of 1925 and finished late in 1928 or early in 1929, and the second on the North Boulevard subway in Long Island City, Queens, for a face amount of $7,500,000, started in the latter part of 1928 and finished in 1931. Many claims and suits arising out of those contracts were filed against the Cogan Co., principally alleging damages due to settlement of buildings along the streets in the vicinity of the subways. The face amount of the claims pending in 1931 aggregated about $500,000, for which suits were filed. Such claims were more numerous and for larger amounts in 1930-1931 than in previous years.

The minutes of a special meeting of the board of directors of the J. F. Cogan Co., held on June 8, 1931, disclosed the following proceedings :

The chairman stated the purpose of the meeting, namely:
To discuss the advisability of a reorganization by the organization of another corporation, to which would be transferred such portion of the assets of this company as was deemed necessary for the operation of the new company.
On motion duly made and seconded, the following resolution was unanimously adopted:
Resolved, that in view of the risk of accidents while fulfilling contracts, and the liability of heavy damage suits, out of all proportion to the damages accruing, the Company proceed to reorganize by organizing a new corporation and transferring to this new corporation its holdings of New York City 4¼% bonds or corporate stock of a par value of $1,050,000 in exchange for the entire capital stock of the new corporation; and upon the receipt of said stock of the new corporation it be distributed to the stockholders of this corporation in proportion to their stock holdings, but without surrender by them of their stock in J. F. Cogan Company, contractors.

Thereafter, the new company was formed under the name of P. J. & P. Corporation, and its charter, which was filed with the Secretary of State of New York on July 16, 1931, included among others the power to purchase, sell, and otherwise deal in stocks, bonds, mortgages, notes, and other obligations and securities of corporations, either public or private, foreign or domestic, and to carry on a general engineering and construction business.

Pursuant to a written offer of the J. F. Cogan Co. dated August 18, 1931, the new company acquired on August 25, 1931, the bonds of the city of New York in the face amount of $1,050,000 and issued therefor all of its capital stock, consisting of 200 shares no par value, to the J. F. Cogan Co.

On August 27, 1931, the stock of the P. J. & P. Corporation was distributed by the J. F. Cogan Co. to its stockholders, each receiving one-third of such stock. Immediately after the distribution each of the petitioners herein owned one-third of the stock in the J. F. Cogan Co. and the P. J. & P. Corporation.

Under the terms of the subway contracts with the J. F. Cogan Co. the city of New York had the right to retain 15 percent of the company’s monthly earnings. However, its bonds could be deposited with the city in lieu of the 15 percent otherwise retained and the contractor would then be entitled to receive 100 percent of the amount due monthly. After the bonds above mentioned were transferred to the P. J. & P. Corporation, it put up some $200,000 of the bonds with the city to release monthly payments to the J. F. Cogan Co.

At a special meeting of the stockholders of the P. J. & P Corporation, consisting of the petitioners herein, held on October 14, 1931, a resolution was adopted reading as follows: '

Resolved, that the corporation be dissolved and the net assets of the company be distributed among the stockholders, and the officers of the corporation are hereby authorized and instructed to take any and all steps necessary to legally dissolve and liquidate the corporation.

On December 30, 1931, the board of directors of the P. J. & P. Corporation adopted a resolution authorizing the treasurer to transfer to the stockholders the bonds held by the corporation, and on the same date the corporation was liquidated.

In their returns for 1931 petitioners treated the transactions hereinabove referred to as a reorganization, and the distribution of the P. J. & P. Corporation stock as in pursuance of the plan of reorganization. They treated the P. J. & P. Corporation stock as representing a continuance of their interest in the assets of the J. F. Cogan Co. for the purpose of determining the holding period of two years as the basis of new stock for computing capital net gain. Accordingly, each petitioner reported in his return for 1931 a capital net gain of $288,483.89 upon the liquidation of the P. J. & P. Corporation, and did not report any amount as gain derived from the distribution of the stock of the latter corporation by the J. F. Cogan Co.

Respondent in the deficiency notice held that the transaction in 1931 in connection with the organization of P. J. & P. Corporation did not constitute a reorganization within the meaning of the statute and the distribution of its stock to the stockholders of the J. F. Cogan Co. was not, therefore, such a distribution as was contemplated by section 112 (g) of the Revenue Act of 1928. Respondent further held that no capital gain resulted to petitioners from the liquidation of the P. J. & P. Corporation, but that the distribution of its stock represented an ordinary dividend of the J. F. Cogan Co., taxable to each petitioner in the amount of $291,500.

Respondent concedes that the transaction by which the J. F. Cogan Co. transferred a part of its assets to the newly organized P. J. & P. Corporation, the transferor or its stockholders after such transfer being in control of the P. J. & P. Corporation, constituted a reorganization within the literal -wording of the statute, but respondent contends that there was in fact no reorganization of the business of the J. F. Cogan Co.; that what was done constituted a mere device to disguise what was in reality the payment of an ordinary dividend under the masquerade of a reorganization, citing in support of its contention Gregory v. Helvering, 293 U. S. 465.

The salient facts of the instant proceedings are strikingly similar to those of the Gregory case. There the petitioner was the sole stockholder of a corporation which owned 1,000 shares of the capital stock of another corporation. She caused a new corporation to be organized, to which three days later the 1,000 shares of stock referred to were transferred in exchange for its capital stock, which was issued to the petitioner. Shortly thereafter, without the transaction of any other business, the new corporation was dissolved and the 1,000 shares of stock distributed to petitioner, who sold them at a large profit, which she reported for taxation as capital net gain, effecting a material saving in tax.

Here, petitioners were the sole stockholders of a corporation which owned something more than $1,000,000 face value of New York City bonds. They caused a new corporation to be organized, to which the bonds were transferred in exchange for its capital stock. The stock was then distributed to petitioners, and shortly thereafter, without the transaction of any other business of substantial character, the new corporation was dissolved and the New York City bonds distributed to petitioners, who reported the profit derived upon the liquidation as capital net gain, thus effecting a material saving in tax.

In these proceedings, as in the Gregory case, the issue presented is resolved in its last analysis into the question whether the things done constituted a “reorganization” within the contemplation of the taxing statute. In the cited case the question was answered in the negative, the court in its opinion saying:

When subdivision (B) speaks of a transfer of assets by one corporation to another it means a transfer made “in pursuance of a plan of reorganization’»’ (Section 112 (g)) of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose—a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which, was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a pareel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.

But petitioners strongly argue here that their corporation was not organized merely for the purpose of effecting a transfer of the New York City bonds to them in such manner as to reduce their tax liability. They say the corporation was organized for a legitimate business purpose; that in order to avoid as far as possible the hazard of claims and suits for damages, which had greatly increased in 1930-1981, they desired to conduct their contracting business through the medium of two corporations, so that they would not have all their “eggs in one basket.”

We are not impressed by this argument in the face of the undisputed facts that the new corporation never performed any business function in connection with the contracting business formerly carried on by J. F. Cogan Co. Aside from the collection of interest on the New York City bonds during the period they were held by the new company, and the loan of about $200,000 of the bonds to the old company, it engaged in no business activities whatever so far as the record discloses. We are told that one of its intended primary functions was to engage in the construction business, yet during its existence the P. J. & P. Corporation submitted no bids and apparently made no effort to obtain construction contracts, although throughout the year 1931 the J. F. Cogan Co. continued to bid on new contracts.

The new corporation was organized on July 16, 1931, and on October 14 petitioners, acting as the sole stockholders, adopted a resolution of dissolution, pursuant to which the corporation was dissolved on the following December 30.

If the reason for the organization of the new corporation was to reduce the risk of losses on account of damage suits and claims, as indicated in the resolution of June 8, 1931, pursuant to which the P. J. & P. Corporation purportedly was organized, it is not shown that there had been any change in the situation in that respect either at the time the resolution to dissolve was adopted or at the date of dissolution.

No reason for such action was indicated in the resolution to dissolve the new corporation, but at the hearing petitioner John F. Cogan testified that this resolution and the subsequent dissolution resulted from his desire to obtain his share of the Now York City bonds, so that he could distribute them among his children prior to his death. Disregarding the fact that he could have achieved substantially the same result by distributing among his children the stock which he owned in the P. J. & P. Corporation, it does not appear from the testimony of this witness that he carried out such expressed intention after he obtained his share of the bonds upon liquidation of the corporation. Some six months thereafter he sold $25,000 of the bonds, and about October 1934 he “sold” $40,000 worth of them as they were called by the city. It is not shown that he ever distributed any of the bonds among his children.

In contradiction of the claimed intentions of the petitioners in connection with the organization of the P. J. & P. Corporation, the fact indisputably appears that it was never used to effect any substantial reorganization of the business of the J. F. Cogan Co.; indeed the only function of importance which it ever performed was to enable petitioners to acquire the New York City bonds in the form of a liquidating dividend, taxable as capital net gain, instead of as an ordinary dividend from the old company, subject to surtax.

Respondent has determined that the transactions in question did not constitute a “reorganization” within the purview of the taxing statute, and has computed the deficiencies on the basis that the stock of the P. J. & P. Corporation, when distributed to petitioners, constituted an ordinary dividend of J. F. Cogan Co. to the extent of the fair market value of the New York City bonds, namely, $874,500. The burden is upon the petitioners to show that respondent’s determinations are erroneous, and this, we think, they have failed to do. The deficiencies determined by respondent are approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

       (g) Distribution of stock on reorganization.—If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.


author: Smith :

text:
    Schroeder Employees Thrift Club, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80691.
    Promulgated October 12, 1937.

      Arthur M. Kracke, Esq., for the petitioner.

      Hartford Allen, Esq., and Williard S. Lines, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of deficiencies in income tax for the fiscal years ended October 31, 1923, to October 31, 1933, inclusive, in the aggregate amount of $23,802.46 plus a 25 percent penalty, amounting in the aggregate to $5,950.63, for failure to file returns for those years. The petitioner alleges that the respondent erred in his determination that it was an association taxable as a corporation in each of the taxable years.

The facts have been stipulated as follows:

(1) In 1921 a number of the employees of Chris. Schroeder & Son Company and related corporations agreed to pool certain of their assets for the purpose of acquiring various securities and from time to time additional monies were supplied during the operation of the pool which was designated as the “Schroeder Employees Thrift Club.” Most of the securities purchased were underwritten by Chris. Schroeder & Son Co., which company financed the issuance of securities which consisted mostly of second mortgages.
(2) Mr. Walter Schroeder was President of Chris. Schroeder & Son Co., and offered his services to assist in the undertaking.
(3) The participants in the “Club” numbered anywhere from thirty at its inception to approximately one hundred at its peak. The number of participants was reduced when participants withdrew their deposits and were increased when new participants joined by making new initial deposits. During the existence of the “Club”, Mr. Schroeder and several of his friends and two relatives, as well as friends of some of his employees, joined the said “Club.” Chris. Schroeder & Son Co. was also a participant in the “Club.” Participation in the “Club” was evidenced by a deposit book in which was recorded from time to time the amounts deposited by the participant, and as funds accumulated, additional stock or securities were acquired. No required amount of deposit was necessary at any time, and the amount paid in could be withdrawn upon reasonable notice at any time.
(4) From 1921 to 1931 the “Club’s” funds grew materially, and during all this period of time, at semiannual periods, on April 30th and- October 31st, each participant’s fund so deposited was credited with amounts designated as interest, and computed at the rate of 7% per annum. This practice began April 30, 1922 and continued to October 31, 1931, after which time no further credits were made. In the fiscal years ended October 31, 1923 and October 31, 1924, credits to participants designated as interest exceeded current earnings of such years by the amounts of $3,297.90 and $211.49, respectively.
(5) Practically all of the securities purchased were underwritten by Chris. Schroeder & Son Co., who sold them to the “Club” at cost, which cost was below the principal amount due, and below the selling price to the public.
(6) During the period of twelve and one-half years from its organization in 1921 the total overhead expenses amounted to $742.32. This did not include any credits to participants designated as interest. The “Club” paid no rent, light or incidental office charges, and paid no salaries of any kind to anyone. The overhead expenses were incurred in the form of transfer taxes, attorneys’ fees and incidental expenses. The attorneys’ fees were occasioned by the fact that counsel was necessary where securities held by the “Club” became involved in foreclosure proceedings, or in connection with the collection of funds in forced liquidations.
(7) Where it was necessary to bring an action for the recovery of monies in foreclosure proceedings, an assignment was made to the Globe Investment Company, and the latter company proceeded on the part of the “Club” to make the recovery.
(8) The “Club” had no articles, charter, seal, declaration, minutes, by-laws or articles of association of any kind. It had no directors, board of governors, executive committee or committees, of any kind. Mr. Walter Schroeder was the sole acting manager of the “Club,” the participants acquiescing in his management. The “Club” held no meetings and passed no resolutions and issued no stock certificates or membership certificates. The participants’ interests were evidenced by entries in a memorandum pass book.
(9) Mr. Schroeder, on behalf of the “Club,” used the funds deposited from time to time for the purpose of acquiring additional securities.
(10) The books of account and records were kept by employees of Chris. Schroeder & Son Co. without expense to the “Club.”
(11) No meetings were held by the participants, and no direction was given by the participants to Mr. Schroeder as to their opinions with regard to the use and disposition of the “Club’s” funds, this being left to Mr. Schroeder’s discretion.
(12) When stocks or mortgages were purchased, title was taken in the name of Walter Schroeder, and upon the receipt of a certificate of stock, it was immediately endorsed by Mm in blank and kept in the vault of Chris. Schroeder & Son Co. with the other securities and cash of the “Club.” Mortgages were assigned in blank, but the assignment was not recorded.
(13) The “Club” did not at any time sell to any party other than Chris. Schroeder & Son Co. any securities purchased by the “Club.” Losses did result in connection with some securities by reason of forced liquidations, and by reason of the fact that certain stock held by a bank as collateral was sold by bank at a loss. Profits in addition to the interest yield resulted when securities were called or redeemed at or above par. Income was received also in the form of dividends on stock.
(14) At times Chris. Schroeder & Son Co. obligated themselves to outsiders to provide an entire bond issue or all notes issued under a mortgage and if the “Club” had previously acquired a portion of such issue Chris. Schroeder & Son Co. called upon the “Club” to resell such bonds and notes to it. When this was done the “Club” received from Chris. Schroeder & Son Co. the price which the “Club” originally paid for the securities when purchased from Chris. Schroeder & Son Co., except in the following instances wherein the securities were resold at prices other than cost.
(15) Other securities purchased from Chris. Schroeder & Son Co. were at times redeemed at par or called at a price specified by the securities, the “Club” receiving the call price when it held any called securities or par when the security was redeemed.
(16) There is attached hereto and designated as Schedule A and made a part hereof a list showing all securities resold by the “Club” to Chris. Schroeder & Son Co. and also securities held by the “Club” which were redeemed by the obligor or maker. The schedule shows the date and name of the various securities when resold, redeemed, called or liquidated as well as the price received by the “Club” in each instance.
(17) The financial condition of the “Club” is shown by a statement attached hereto and made a part hereof and designated as Schedule B.
(18) The cash deposits of the “Club” were made with the First Wisconsin National Bank in the name of “Schroeder Employees Thrift Club.” Funds were withdrawn from this account by check. The drawer was indicated as “Schroeder Employees Thrift Club” signed and countersigned by any two out of three designated participants.
(19) The Schroeder Employees Thrift Club filed no income tax returns for fiscal years ended October 31, 1922 to October 31,1933, inclusive.
(20) The amounts stated in the deficiency notice as gross income, including interest, dividends and profits on sales and/or redemptions, are mathematically correct. The amounts stated in the deficiency notice as losses, expenses, interest and oilier deductions are mathematically correct, if the Board determines that the “Club” is an association taxable as a corporation. The amounts stated in the deficiency notice as interest expense include all interest paid to others than participants of the “Club,” but do not include any part of the amounts credited or paid semi-annually to participants and designated as interest.

The amounts so credited or paid to participants were as follows:

(21) It is further agreed that in the event that the Board should find that the petitioner is a trust, not taxable as an association, then there is undistributed net income taxable to the trust as an entity as follows:

The balance sheets of the organization at the close of the fiscal years ended in 1981,1932, and 1933 show as follows:

The respondent has determined that the petitioner in each of the taxable years involved was an association taxable as a corporation, and that, since the petitioner did not file income tax returns as required by law, it is subject to the delinquency penalty of 25 percent for each of such years.

What constitutes an “association” within the meaning of the applicable taxing acts has received full consideration by the Supreme Court in Morrissey v. Commissioner, 296 U. S. 344; Swanson v. Commissioner, 296 U. S. 362; Helvering v. Combs, 296 U. S. 365; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Lewis & Co. v. Commissioner, 301 U. S. 385. See also Brooklyn Trust Co. v. Commissioner, 80 Fed. (2d) 865; certiorari denied, 298 U. S. 659; Bert v. Helvering, 92 Fed. (2d) 491; affirming 34 B. T. A. 805. In Morrissey v. Commissioner, supra, and the three related cases cited therewith above, the Supreme Court laid down certain tests by which associations, as that term is used in the statutes, are to be identified. The organizations there under consideration were all held to be associations taxable as corporations. In the Morrissey case the Court said:

“Association” implies associates. It implies the entering into a joint enterprise, and, as the applicable regulation imports, an enterprise for the transaction of business. This is not the characteristic of an ordinary trust—whether created by will, deed or declaration—by which particular property is conveyed to a trustee or is to be held by the settlor, on specified trusts, for the benefit of named or described persons. * * * But the nature and purpose of the cooperative undertaking will differentiate it from an ordinary trust. In what are called “business trusts,” the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains.

The petitioner here was such a “business trust”, providing a medium for the conduct of an investment business and the sharing of its gains among the investors.

There can be no doubt that the petitioner, through its manager, Walter Schroeder, was conducting an investment business for profit. The manager here stood in substantially the same relationship to the investors as a trustee.

A distinction between associations, such as that involved in the Morrissey case, and ordinary trusts or principal and agent relationships was drawn in Lewis & Co. v. Commissioner, supra. The Supreme Court there said:

The question recently has received full consideration in Morrissey v. Commissioner, 296 U. S. 344 [56 S. Ct. 289, 80 L. Ed 263, 16 Am. Fed. Tax Rep. 1274], and three other cases which immediately follow in the same volume. [Swanson v. Commissioner, 296 U. S. 362; Helvering v. Combs, 296 U. S. 365; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369]. The trust reviewed in the Morrissey case was essentially unlike that now under consideration. There, the trust was a medium for the carrying on of a business enterprise by the trustees and participation in the profits by numerous beneficiaries whose interests were represented by transferable share certificates, thus permitting the introduction of new participants without affecting the continuity of the plan. The certificates represented both preferred and common shares. We pointed out that the corporate analogy was evidenced by centralized control, continuity and limited liability, as well as by the issue of transferable certificates; and we said (p. 356) that the word “association” implies associates. “It implies the entering into a joint enterprise, and, as the applicable [departmental] regulation imports, an enterprise for the transaction of business. This is not the characteristic of an ordinary trust—whether created by will, deed, or declaration—by which particular property is conveyed to a trustee or is to be held by the settlor, on specified trusts, for the benefit of named or described persons. Such beneficiaries do not ordinarily, and as mere cestuis que trustent, plan a common effort or enter into a combination for the conduct of a business enterprise.”

In Brooklyn Trust Co. v. Commissioner, supra, where an investment trust was held to be an association taxable as a corporation the court said:

In Ittleson v. Anderson (67 F. (2d)323) [13 Am. Fed. Tax Rep. 311] [C. C. A. 2], we held that the determination of the question of whether an enterprise nominally a trust was an association turned on the degree of the trustees’ activity in the conduct of a business, and not on the formal resemblance to a corporate set-up. We said that when the trustee of an estate consisting of securities engages in considerable business activity and is trading those securities and loans and invests the proceeds so that he is in reality conducting an investment business for profits, then the estate is in business and is taxable as an association. * * *

The facts in the instant case are quite similar to those in Bert v. Helvering, supra, where the court held, affirming the Board, that a syndicate or trust formed by a group of employees of a corporation to trade in securities as a business enterprise under the management of a single trustee was an association taxable as a corporation. The court there said:

Applying these tests here, we find from the facts stated a group of individuals organized to carry on a business enterprise for profit; continuity of existence; centralized management; title to the property in a single trustee who is charged with the conduct of the enterprise in the same manner as directors of a corporation; and provision for the transfer of beneficial interests and the introduction thereby of new parties. * * *

Here, also, was a business enterprise, conducted for profit; continuity of existence; centralized management; and title to the property taken in the name of a single trustee or manager. It is not clear whether the interests of the participants were transferable, but in any event the participants could withdraw their funds at any time and others could enter, accomplishing the same result.

We are of the opinion that the petitioner was an association taxable as a corporation in each of the taxable years under consideration.

The petitioner urges, in the event that the Board should determine that it is an association taxable as a corporation, that the amounts credited or paid to the participants as interest during the taxable years 1922 to 1931, inclusive, should be deducted from its gross income as interest payments. The respondent has determined that these amounts were distributions in the nature of dividends. The stipulated facts do not support the petitioner’s contentions. Beginning in April 1922 and continuing through October 1931, the fund of each of the participants was credited semiannually on April 30 and October 31 with an amount designated as interest computed at the rate of 1 percent on such fund. The credits so made exceeded current earnings in the years 1923 and 1924. No such credits were made after 1931.

The statutes authorize the deduction from gross income of all interest paid or accrued within the taxable year “on indebtedness.” (See section 23 (b), Revenue Act of 1932, and corresponding sections of prior acts .) There is nothing in the stipulated facts to show that the funds of the participants in the possession of the petitioner constituted an indebtedness of the petitioner. There was no relationship of debtor and creditor between the participants and the petitioner or its manager. The only reasonable inference to be drawn from the stipulated facts is that the credits or distributions made to the participants represented profits, or anticipated profits, of the business. It is not explained why, if these amounts constituted interest, no such credits were made after October 1931.

The action of the respondent in disallowing the deduction of the amounts in question from gross income is sustained.

The petitioner being required by law to file corporate income tax returns for the taxable years involved, and having failed to do so, the assessment of the 25 percent delinquency penalty, which is mandatory in such circumstances, is sustained. Edmonds v. Commissioner, 90 Fed. (2d) 14.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Murdock :

text:
    The First National Bank of Birmingham, et al., Executors Under the Will of Harold R. Sanson, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85192.
    Promulgated October 15, 1937.

      J. H. Cabaniss, Esq., for the petitioners.

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

Murdock :

The Commissioner determined a deficiency of $4,840.52 in estate tax. He included in the gross estate the corpus of a trust created on April 16, 1932. The only issue is whether or not the corpus of the trust was properly included under that part of section 302 (c) (1) of the Revenue Act of 1926, as amended by joint resolution approved on March 3, 1931, which provides that the gross estate shall include any interest in property of which the decedent has at any time made a transfer by trust under which the transferor has retained for his life or any period not ending before his death “the possession or enjoyment of, or the income from, the property.” The facts have been stipulated.

The decedent created a trust on April 16, 1932, and transferred to it certain property. The trust was irrevocable and was not subject to change. The property transferred consisted of life insurance policies on the decedents’ life and shares of stock. The insurance policies were completely and irrevocably assigned to the trust. The premiums on the insurance policies during the life of the donor were to be paid from the income of the trust or from corpus, if necessary. Excess income was to be paid to the donor’s wife during her life and thereafter to the donor’s children. The corpus was to go to the children or persons named by or descended from them. The agreement was in full force at the decedent’s death. The Commissioner included in the gross estate the value of the shares of stock in the trust on the ground that “the decedent indirectly retained for his lifetime the use of the income on the securities transferred.” The trust received dividends on the shares from April 16, 1932, until December 30, 1933, the date of the decedent’s death, in the amount of $3,469.44 and paid premiums during that period in the total amount of $2,195.49.

The decedent did not have possession of the securities in question after the transfer of April 16, 1932. Nor did he retain the enjoyment of those securities or the income from them, unless it be considered that he retained the enjoyment or the income through the requirement that the trust be used to pay the premiums on the insurance policies. The Commissioner has made no such contention. Indeed he has made no argument in support of his determination. The policies were also assigned to the trust and the proceeds were retained by the trust. The Commissioner did not include the policies or the proceeds in the gross estate. The decedent did not retain for himself the income from the stock belonging to the trust. The use of the income directly benefited the trust which owned the policies and the proceeds of them. Cf. Ernst R. Behrend, 23 B. T. A. 1037. Under such circumstances the enjoyment passed to others at the date of the transfer. Reinecke v. Northern Trust Co., 278 U. S. 339; Coolidge v. Long, 282 U. S. 582. Cf. May v. Heiner, 281 U. S. 238. If Congress intended that payment of premiums on life insurance policies on the life of the decedent but owned by a trust should subject the corpus of the trust to estate tax as a part of the decedent’s gross estate, it would have been more specific in the wording of the statute. Cf. sec. 219 (h), Revenue Act of 1924; sec. 167 (a) (3), Revenue Act of 1932; Gift Tax 1932. Gould v. Gould, 245 U. S. 151; Miller v. Nut Margarine Co., 284 U. S. 498.

Reviewed by the Board.

Decision will be entered for the petitioners.


author: Smith:

text:
    Myrtle M. Irvine, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74612.
    Promulgated October 15, 1937.

      John L. Connolly, Esq., for the petitioner.

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

Smith:

This proceeding involves a proposed assessment against the petitioner as transferee of assets of her deceased husband for income taxes of the decedent for the calendar year 1929 in the amount of $2,728.05, plus interest.

During 1929 the petitioner’s husband, C. G. Irvine, a resident of Minneapolis, Minnesota, hereinafter referred to as the decedent, purchased from H. S. Byllesby & Co. a number of shares of stock in various corporations and had the stock certificates issued to himself and petitioner herein as “joint tenants with right of. survivorship and not as tenants in common.” On September 11, 1929, the decedent opened a trading account with the brokerage firm of Paine, Webber & Co., of Minneapolis, Minnesota, and from September 11, 1929, to January 28, 1930, he purchased through said brokers a number of shares of stock of various corporations, some of which were deposited in the Paine, Webber & Co. account in the decedent’s own name and some in the names of the decedent and the petitioner as joint tenants with the right of survivorship. The decedent withdrew several thousand dollars in cash from the account during that period.

On January 29, 1930, pursuant to the decedent’s instructions, the account with Paine, Webber & Co. was changed to a joint account in the names of “C. G. Irvine & Mrs. Myrtle M. Irvine.”

On January 29, 1930, the decedent owned the following property:

On September 11,1930, the decedent had a checking account at the Metropolitan National Bank with a credit balance of $3,991.59, which account on that date he had changed to a joint account for himself and the petitioner.

In June 1930 the decedent went to California for his health, suffering from what is commonly known as high blood pressure. He died on May 14, 1932. At the date of his death substantially all of his estate, which consisted principally of shares of stock, stood in his name and that of his wife, the petitioner, as joint tenants with right of survivorship, and not as tenants in common. The value of such jointly owned property at the date of death was in excess of $30,000. Likewise, the value at date of death of the portion of the jointly owned property transferred after 1929 was greatly in excess of the deficiency determined against the decedent for 1929. The value of all property other than the jointly owned property of the decedent at the date of his death was only $183.53. The petitioner admits a liability as a transferee of the assets of her husband in the amount of $183.53.

No cash consideration was ever paid to the decedent by petitioner in connection with any of the jointly owned property.

The decedent was survived by the petitioner herein and one daughter, Mrs. Brown. No probate proceedings were ever had in the settlement of his estate.

The shares of stock which were held by the decedent and the petitioner as joint tenants with right of survivorship at date of decedent’s death were subsequently returned to the transfer agent and reissued in the petitioner’s name.

In this proceeding petitioner alleges errors in the respondent’s determination that she is liable for the deficiency in the decedent’s income tax for 1929, as follows:

(1) That the assessment of the proposed deficiency against the petitioner is barred by the statute of limitations;

(2) That the petitioner is not a transferee of the assets of her deceased husband within the meaning of section 311 of the Revenue Act of 1928;

(3) That the decedent was solvent at the date of his death and well able to pay the deficiency out of his interest in the jointly owned property and that she acquired his interest in the jointly owned property by right of survivorship, freed from any debts owed by the decedent.

There is no merit in the petitioner’s contention that the assessment of the proposed deficiency against her as transferee is barred by the statute of limitations. It may have been the intention of the petitioner to waive this allegation of error, although she has not expressly done so. She makes no reference to it in her brief and it is inconsistent with her admission that she is liable as a transferee to the extent of $183.53. In any event, the admitted facts do not support the contention. A deficiency notice was mailed to the estate of the decedent on August 1,1932, which was within the time covered by a waiver filed by the decedent on February 16, 1932. The estate had 60 days within which to file a petition with the Board of Tax Appeals. Section 277 of the Revenue Act of 1928 provides for a further- extension of. 60 days. Under section 311 the respondent had one year from the expiration of the time within which the tax could be assessed or collected from the estate to send a notice of deficiency to a transferee. Notice was sent on November 7, 1933. This was within the time prescribed by the statute.

The second contention of the petitioner is that she is not a transferee of the assets of her deceased husband within the meaning of section 311 of the Revenue Act of 1928. She contends that the property held by her and her husband as joint tenants passed to her not as a surviving spouse and heir-at-law, but as the surviving cotenant under the joint tenancy, and therefore free of any claims of creditors of the deceased tenant.

The respondent contends that no joint tenancy was created by the transfers made by the decedent to himself and wife as joint tenants with right of survivorship, although he concedes that joint tenancies in their common law form may be created under Minnesota law in personal property. Peterson v. Lake City Bank & Trust Co. (Minn., 1930), 231 N. W. 794. He contends that a fee owner of property can not create a joint tenancy therein by transferring the property to himself and another as joint tenants with right of survivorship; that in such a case a tenancy in common is created. He therefore contends that the petitioner, as the surviving tenant in common, is a transferee of her husband’s interest in the joint tenancy. Anent this contention Edmonds v. Commissioner (C. C. A., 9th Cir.), 90 Fed. (2d) 14.

It is not material in this proceeding, we think, whether the petitioner took the property in question as an heir, devisee, or beneficiary of the decedent, or whether she took it by right of survivorship under the joint tenancy. This proceeding is brought against the petitioner as transferee under section 311 of the Revenue Act of 1928, which provides in part as follows:

* * * amounts of the following liabilities shall * * * be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the ease of a deficiency in a tax imposed by this title * * *
(1) Transferees.-—The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title.

Subdivision (f) of the same section provides that: “* * * As used in this section, the term ‘transferee’ includes heir, legatee, devisee, and distributee.”

In a joint tenancy the tenants hold separate and severable interests in the joint estate and “each is seized of an undivided moiety of the whole.” Wilson v. Wilson, 43 Minn. 398; 45 N. W. 710. See also Kissam v. McElligott, 280 Fed. 212; United States v. Robertson, 183 Fed. 711.

Even if the petitioner had acquired, free of any tax liability of the decedent, a one-half interest in the joint property by virtue of the conveyance which the decedent made to her and himself as joint tenants prior to his death, which for reasons hereinafter stated we do not think was so, this was not true of the other one-half interest which the decedent continued to own up to the time of his death and which then passed to the petitioner. In United States v. Robertson, supra, the court said:

* * * Did the title of defendant to one-half of the share that James Law possessed in his lifetime vest on the execution of the contract or did it vest only after the death of James Law? Defendant’s insistence upon an affirmative answer to the first alternative comes, we believe, from a confusion of estates in entirety with estates in joint tenancy. Survivorship is a characteristic of both. In estates by the entirety the title of each is to the whole, and from this it inevitably follows that no adverse act of the one can destroy the right of survivorship in the other. When the one dies, the other takes nothing by a new title of survivorship; he merely ceases to divide the enjoyment of an estate of which he was completely seized by virtue of the creative instrument. 21 Cyc. 1198, 1199, title “Husband and Wife”; Freeman on Cotenancy (2d Ed.) §§ 63-76; Preston on Estates, p. 131. But in joint tenancy the title is to a share only. If, during the continuance of the joint tenancy, the one dies, the survivor comes into the whole. But since the creative instrument gave him title to his own share only, it follows that he acquires the other share by the new title of survivorship. * * * If survivorship occurs, the survivor by the death of the other for the first time acquires a title and right of enjoyment in the decedent’s share. * * *

The stipulated facts show that the value of the one-half interest of the joint estate which the decedent owned at the time of his death was several times greater than the tax liability which the respondent has determined against him for the year 1929, This interest, we, think, constituted “property of a taxpayer” within the meaning of section 311 in respect of which the transferee liability is imposed. One who takes by right of survivorship is as much a “transferee” as one who takes by inheritance.

The Supreme Court held in Griswold v. Helvering, 290 U. S. 56, that the interest of a deceased joint tenant in jointly owned property with right of survivorship is includable in the decedent’s gross estate for the purpose of the estate tax. See also Tyler v. United States, 281 U. S. 497. The estate tax in those cases was imposed upon the transfer of the net estate. See section 401 of the Revenue Act of 1921. The statutes of Minnesota (Mason’s Minnesota Statutes, 1927, vol. 3, ch. 11, sec. 2292) provide:

(6) Whenever any property, real or personal, is held in the joint names of two or more persons, or is deposited in banks or in other institutions or depositaries in the joint names of two or more persons and payable to either or the survivor, upon the death of one of such persons the right of the survivor or survivors, to the immediate ownership or possession and enjoyment of such property, shall he deemed a transfer and subject to the inheritance tax imposed hy this act, except such part thereof as may be shown to have originally belonged to the survivor or survivors and never to have been received or acquired by them from the decedent for less than an adequate and full consideration in money or money’s worth; in which ease there shall be excepted only such part as is proportionate to the consideration furnished by the survivor or survivors. * * *

It follows, we think, that, if the passing at death of the interest of a tenant in a joint tenancy is a transfer, then the surviving tenant who receives it is a transferee. Such transferee may or may not be liable for the unpaid taxes of the deceased cotenant according to his “liability, at law or in equity.”

There is no merit in the petitioner’s contention that she took the decedent’s interest in the joint tenancy free of any claim of the respondent for decedent’s unpaid taxes. It is elementary in the application of the transferee provisions of the statute that, with certain exceptions not here material, the property loft by a decedent is subject to the payment of his just debts, and that one who takes it without paying a money consideration therefor is liable in equity for the payment of the decedent’s debts to the extent of the net value of the property received. See Crocker v. Commissioner, 84 Fed. (2d) 64.

Our ruling in this case may seem at variance with the views expressed by the Board in Jessie Smith, Executrix, 24 B. T. A. 807, a case which the petitioner cites in .this proceeding, but in any event that case involved a tenancy by the entirety, not a joint tenancy, and the cases are distinguishable on the grounds pointed out by the court in United States v. Robertson, supra.

In support of her contention that she received the interest of her deceased husband in the joint tenancy free of any of his liabilities, the petitioner cites 7 Ruling Case Law, pp. 811, 812, wherein it is stated: “And it [joint tenancy] passes to the last survivor free, and exempt from all charges made by the deceased cotenant.” The courts held in the cases cited that title to the interest of a deceased tenant in a joint tenancy with survivorship passes directly to the surviving tenant and is not subject to administration as a part of the deceased tenant’s estate. For this reason such interest may not be disposed of by will of the deceased tenant or appropriated for payment of his debts by his administrators or executors.

The respondent here is not seeking to recover the taxes due from the deceased tenant from his estate but from his transferee, and it is not material whether the transferee received the property through the decedent’s estate or directly from him. It is admitted that she received substantially all of the property in which the decedent owned any interest at the time of his death.

The transferee liability here asserted is for a tax deficiency of the transferor for the calendar year 1929. At the close of the year 1929 all of the events had occurred which fixed the amount of the tax for that year and determined the taxpayer’s liability to pay it.’ United States v. Anderson, 269 U. S. 422. After December 81, 1929, the taxpayer transferred to the joint tenancy, without any money consideration from the other tenant, substantially all of his property, which at the time of his death had a value many times greater than his tax liability for that year. We think that this transfer rendered the cotenant, the petitioner, liable as transferee for the transferor’s 1929 taxes to the extent of the value of the interest which was thereby transferred to her. Cf. United States v. Anderson, supra; Margaret Wilson Baker, 30 B. T. A. 188. In the latter case, where we were considering the liability of a transferee for the taxes of a transferor for the years 1927 and 1928, we said:

* * * Such additional taxes were due and owing at the close of the years 3927 and 1928 prior to the time the transfers, except the one noted, were made. Such tax liabilities must be taken into consideration in determining transferee liability, even though unknown at the time the transfer of property is made,

[ Citing cases].

Since the value of the property transferred by the decedent to himself and the petitioner as joint tenants in 1930, after tax liability for 1929 had attached, was far-in excess of the tax deficiency, and since there are no assets in the decedent’s estate from which the tax deficiency can be collected, we hold that the petitioner is liable as transferee for the deficiency, together with interest as provided by law.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    Alcy Sivyer Hacker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66646.
    Promulgated October 15, 1937.

      Herbert G. Hirschboeeh, Esq., and Frederic Sammond, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1929 in the amount of $1,078.30. The question presented is whether the petitioner, who received the proceeds of an insurance policy upon the death of the insured, her father, is liable to income tax in respect of any portion of the proceeds received.

The petitioner is a resident of Milwaukee County, Wisconsin. On June 23, 1920, her father took out a life insurance policy in the New York Life Insurance Co. for $10,000, in which the beneficiary designated was the Northwestern Malleable Iron Co. On September 21, 1920, the beneficiary was changed by endorsement on the policy to Lillian. D. Sivyer, mother of the petitioner. The policy contained the following provisions:

Assignment.—Any assignment of this Policy must be made in duplicate and one copy filed with the Company at its Home Office. The Company assumes no responsibility for the validity of any assignment.
Change of Beneficiary.—The Insured may at any time, and from time to time, change the beneficiary, provided this Policy is not then assigned. * * *

The insured, on January 11, 1926, assigned the policy to his wife, Lillian D. Sivyer, for a valuable consideration amounting to $730, the cash surrender value of the policy at that time.

On February 4, 1927, Lillian D. Sivyer assigned the policy to her daughter, the petitioner herein, “For Natural Love and Affection”, which was the only consideration involved. In such assignment the assignor reserved the right to revoke the assignment at any time on written notice to the company.

The petitioner’s mother, Lillian D. Sivyer, did not return as a part of her gross income for Federal income tax purposes the profit which she would have received from the transaction had she not reassigned the policy to the petitioner prior to January 22, 1929, the date of the death of the insured. In addition to the consideration of $730 paid by Lillian D. Sivyer for the assigmnent to her of the policy, she subsequently paid premiums thereon in the aggregate amount of $935.10.

The insured, Frederick L. Sivyer, died January 22, 1929, and the policy then matured as a claim against the insurance company. The petitioner thereafter, during the year 1929, received post mortem dividends and unearned premiums of $291.45, together with the face amount of the policy of $10,000, making in all $10,291.45, in the settlement of the insurance.

In her income tax return for 1929 the petitioner did not report in her gross income or net income any portion of the proceeds received from the insurance policy. In the determination of the deficiency the respondent has added to the petitioner’s gross income and net income $8,626.35, representing the excess of the proceeds of the policy over the amount paid by the mother for the assignment of the policy to her, plus premiums paid.

The petitioner’s income tax return for 1929 was made under the provisions of the Revenue Act of 1928. Under section 22 of that act, gross income is defined as including “gains, profits, and income derived * * * from any source whatever.” Section 22 (b) of the act provides in part as follows:

(b) Exclusions from gross income.—The following items shall not be included in gross income and shall be exempt from taxation under this title:
(1) Lute insurance.—Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or in installments (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income) ;
(2) Annuities, etc.—Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life insurance, endowment, or annuity contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income. In the case of a transfer for a valuable consideration, by' assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) of this paragraph;
(S) Guts, bequests, and devises.—The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).

Section 113 of the act provides in part as follows:

SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired, after February 28, 1913.—The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
(2) Gift after December 31, 1920.—If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. * * *

The petitioner’s contention in this proceeding is that the proceeds of the insurance policy received by her in 1929 upon the death of her father, the insured, are exempt from income tax under section 22 (b) (1). The respondent’s contention is that title to the insurance vested in the petitioner by gift from her mother on February 4, 1927, and that the gain computed in accordance with section 113 (a) (2) of the taxing act was realized by, and was taxable to, the petitioner when the insurance proceeds were received by her.

Under all of the income tax acts from 1913 the proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured have been declared to be exempt from tax. The Revenue Act of 1926 made a further provision with respect to the proceeds of insurance policies. By section 213 (b) (2), which is the same as section 22 (b) (2) of the Revenue Act of 1928, quoted above, it provided that:

* * * In case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, * * * contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) of this paragraph.

The petitioner argues that the above quoted provision has no application in a case where a policy of insurance is transferred by the insured for a valuable consideration to a person who has a special claim upon his bounty. We are of the opinion, however, that such a construction of the statute is not permissible. It may be granted that ordinarily the transferee would not be a person who has a special claim upon the bounty of the insured. But the language of the statute is all inclusive. If the insured transfers the policy for a valuable consideration the transferee becomes an investor in the policy. Where such investor receives the proceeds of the policy, only the actual value of the consideration and the amount of the premiums and other sums subsequently paid by the transferee are exempt from income tax. We are of the opinion that if Lillian D. Sivyer had not assigned the policy to the petitioner, but had herself received the proceeds of the policy upon the death of the insured, she would have received taxable income in the amount of the excess of the proceeds over her investment in the policy.

We are also of the opinion that the petitioner, who received the proceeds of the policy, stands in no better position than Lillian D. Sivyer would have stood if she had not assigned the policy, but had herself received the proceeds. The petitioner makes much of the contention that her mother did not make a gift to her in 1927. This contention is undoubtedly correct under Burnet v. Guggenheim, 288 U. S. 280. We think it immaterial, however, that the assignment made in 1927 did not constitute a gift made in that year.

The petitioner received the proceeds of the policy. She received them by virtue of an assignment from her mother. The assignment constituted a gift of a valuable right in property. It is immaterial that the gift became effective upon the death of the insured. We are of the opinion that section 113 (a) (2) of the Revenue Act of 1928 applies and that the respondent used the correct basis in the determination of the taxable gain made by the petitioner from the receipt of the proceeds.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Murdock:

text:
    Nipoch Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75616, 79775.
    Promulgated October 15, 1937.

      Samuel B. Pack, Esq., and Benjamin M. Kaye, Esq., for the petitioner.

      DeWitt M. Evans, Esq., and Spaulding F. Glass, Esq., for the respondent.
   OPINION.

Murdock:

The pertinent statutory provisions are as follows:

SEC. 104. ACCUMULATION OF SURPLUS TO EVADE SURTAXES.
(a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section IS * * *.
(b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.

See section 104 of the Revenue Acts of 1928 and 1932. Substantially similar provisions are found in the earlier acts. See section 220 of the Revenue Acts of 1918, 1921,1924, and 1926.

Both parties argue separately the questions (1) whether the petitioner was formed, and (2) whether it was availed of, for the purpose described in the statute. The respondent contends that the taxes in controversy are due if the corporation was either formed or availed of for the purpose mentioned. The respondent finds support for his contention in the statute, which uses the word “or.” But the point need not be decided in this case.

The Commissioner has determined that section 104 applies. His determination is presumed to be correct until the contrary appears from the evidence. Thus the evidence must be examined to see whether or not it is sufficient for the petitioner’s purpose. After-paying no Federal income taxes for the years 1919, 1920, and 1921, Earle was required to pay $80,257.06 for the year 1922. Earle and his advisers began to make plans for the organization of the petitioner at or about the time that his return for the year 1922 was due. Three corporations were formed and to these Earle transferred practically all of his fortune. The petitioner received about 77 percent of Earle’s fortune in June 1923. Most of the income from the property transferred to the petitioner was in the form of dividends not ordinarily taxable to a corporation. Thus it must have been obvious to Earle and his advisers that the result' of the transfer of this property from Earle to the petitioner would be a substantial reduction in the taxes on the income from the property. Such was the result of the transfer.

Martens, who was familiar with the circumstances surrounding the formation of the petitioner, was the only one who gave direct testimony as to the purpose for which the petitioner was formed. He testified that he was familiar with Federal income tax statutes at that time but thought that the formation of the petitioner would not have any effect upon income taxes because the petitioner could follow the practice, resorted to by Earle in prior years, of selling-securities at a loss in order to wipe out income. Since most of the dividends to be received by the petitioner would form no part of its taxable income under normal circumstances, it is obvious that its dividend income would not have to be wiped out by losses. Furthermore, Earle had not been able to wipe out his income for 1922, and it is difficult to see how anyone could have reasonably anticipated in 1923 that the petitioner would sustain losses equal to its taxable income in subsequent years. Martens further testified that the petitioner and the other two corporations were incorporated for the purpose of simplifying the administration of Earle’s estate after his death. A finding has been made that that was one of the purposes in incorporating. But such a purpose is, of course, not inconsistent with another purpose to reduce income taxes by having the corporation accumulate its gains and profits rather than distribute them to Earle.

Earle did not testify. No officer of the petitioner testified. Purpose, being a state of mind, is always difficult to determine in a proceeding like this. Subsequent events may aid. The gains and profits of the petitioner, instead of being divided or distributed, were accumulated during the years following its incorporation in amounts far beyond the reasonable needs of its business. The result was that its shareholder was saved from the imposition of a large amount of surtax over a period of years. The record considered as a whole warrants the conclusion that this corporation was formed for the purpose of preventing the imposition of the surtax upon its shareholder through the medium of permitting its gains or profits to accumulate instead of being divided or distributed.

The Commissioner has been sustained in applying section 104 and its predecessors in a number of cases. But in each of those cases there has been a finding that the corporation was “availed of” within the taxable year for the purpose described in the statute. No case has come to our attention where the Commissioner has been sustained solely on the ground of the purpose for which a corporation was “formed.” However, in at least two cases there are statements to indicate that that purpose alone would be sufficient. Saenger, Inc. v. Commissioner, 84 Fed. (2d) 23, affirming 33 B. T. A. 135; Rands, Inc., 34 B. T. A. 1094.

Although it is quite obvious that for a number of years following its organization the petitioner was availed of for the purpose of preventing the imposition of the surtax upon its shareholder through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, the situation in this connection for the taxable years 1931 and 1932 is somewhat peculiar. The petitioner in every year of its existence had a substantial amount of income. The dividends which it paid effected a distribution of only a small part of its income. The result was that it accumulated a substantial surplus. The reasonable needs of the business neither required nor justified the accumulation of gains or profits in the amount shown on its books. Those books show that it had a surplus in excess of $3,500,000 during each of the years 1931 and 1932. The book surplus resulted from the fact that the petitioner carried its securities at cost. However, the market value of those securities had declined to such an extent that the actual value of its assets was substantially less than the amount of its liabilities, including the par value of its outstanding stock. The petitioner argues that under such circumstances a corporation could not possibly be availed of during the taxable year for the purpose of preventing the imposition of the surtax upon its shareholder through the medium of permitting its gains or profits to accumulate instead of being divided or distributed. The argument is that it would actually have no accumulation of gains or profits whatsoever and any distribution to its shareholders would be a distribution of capital. See Vogtman v. Merchants’ Mortgage & Credit Co., 178 Atl. 99; cf. Federal Mining Co. v. Wittenberg, 138 Atl. 347; Loren D. Sale, 35 B. T. A. 938; sec. 34, General Corporation Law of New Jersey, as amended in 1929. However, a similar situation existed in the case of Rands, Inc., and the Board held that the corporation was availed of within the year for the purpose described in the statute.

Reviewed by the Board.

Decision will be entered for the respondent.

      . In the acts prior to that of 1924, the words “or investment” did not appear in (b).