author: Goodeigh :

text:
    Virginia V. Gary, formerly Virginia V. Douglass, Executrix of the Estate of Howard W. Douglass, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40031.
    Promulgated June 29, 1934.

      Samuel Kaufman, Esq., 8. Leo Buslander, Esq., Frank Wilbur Maim,, Esq., and George B. Beneman, Esq., for the petitioner.

      Eugene Smith, Esq., for the respondent.
   opinion.

Goodeigh :

Respondent determined a deficiency in estate tax (after a credit on account of state inheritance tax paid) of $376.41. Petitioner assails this determination as erroneous and claims an overpayment of $145.45.

The sole issue concerns the amount to be deducted in determining the net estate of petitioner’s decedent, as the value of property (certain stock in which this decedent had a vested remainder interest) included in the taxable estate of a prior decedent who died less than five years previously. Or., stated more narrowly, the issue is whether there shall be deducted the value of the remainder interest at the death of this decedent, or its value at the death of the prior decedent; the difference here being $12,146.25. It appears that precisely this question has not before been considered.

The facts are not in dispute.

Petitioner is executrix of the estate of Howard W. Douglass, who died a resident of Pennsylvania, on August 30, 1925. Howard was a son of Elisha P. Douglass who died, also a resident of Pennsylvania, on March 10,1922. At the time of his death Elisha, the father, owned 6,000 shares of stock of the McKeesport Tin Plate Co., upon the full value of which his estate paid Federal estate tax. By his will, Elisha devised these shares upon trust, the income therefrom (or so much of it as she might desire) to be paid for life to Elvira P. Douglass (who is the widow of Elisha and the mother of Howard) and upon her death the corpus to be distributed equally to Howard and his brother, Earl. At both basic dates, March 10, 1922, and August 30, 1925, the stock was of the value of $125 a share. Under the laws of Pennsylvania, by Elisha’s testamentary trust Howard acquired a vested remainder interest in one half of the trust corpus, or 3,000 shares, and this interest passed to Howard’s legatees as a part of his residuary estate. When Howard died (and when this case was submitted) his mother, Elvira, was living.

A Federal estate tax return was filed July 9, 1926, on behalf of Howard’s estate and reported therein as part of the gross estate were 3,000 shares of the McKeesport stock at $125 a share, or $375,000. Also in the return this amount was deducted as the value of property previously taxed within five years. Respondent did not accept this item as returned, nor did he allow the deduction. By applying to the value of the 3,000 shares the mortality percentages reflecting the age of Elvira Douglass, owner of the life estate, respondent determined the value of Howard’s vested remainder at the time of his death to be $285,806.25, and includes this amount in the gross estate. By the same method respondent determined the value of the vested remainder at the time of Elisha’s death to have been $273,660, and this amount he allows as a deduction to Howard’s estate as the value of property previously taxed. The result of this action is to include in the taxable estate of petitioner’s decedent (and to increase it over the amount reported) the difference between these two computed values, $12,146.25, thus giving rise to the deficiency here in controversy.

We approve of respondent’s correction of the amount to be included in the gross estate of petitioner’s decedent. Section 302 (a), Revenue Act of 1924, provides that there shall be included in a decedent’s gross estate the value at the time of his death of all his property, to the extent of his interest therein. Howard had a vested remainder interest in 3,000 shares of stock, which was worth, the parties agree, $285,806.25. That amount should be included in his gross estate.

But we find no statutory authority for respondent’s action in reducing the deduction for the value of previously taxed property by $12,146.25, and thus increasing the net estate by that amount, which, respondent argues, is the increase in the value of the vested remainder between the time Howard received it under his father’s will and the time he relinquished it by his own death. The statute says nothing about an increase in value of transmitted property. It provides for the deduction from gross estate of:

(2) An amount equal to the value of any property (A) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, * * *. This deduction shall be allowed only where a gift tax or an estate tax under this or any prior act of Congress was paid by or on behalf of the donor or the estate of such prior decedent as the case may be, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gift or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate and not deducted under paragraph (1) or (3) of this subdivision. [Sec. 303 (a)(2), Revenue Act of 1924.]

The purpose in permitting such a deduction is to prevent the imposition of an estate tax upon the same, or substantially the same, property twice within a five-year period. Elmer E. Rodenbough, Executor, 1 B.T.A. 477; af'fd., 25 Fed. (2d) 13. Respondent has promulgated an explanatory statement of the statutory limitations upon the allowance of the deduction in article 41 of Regulations 68.

Under the facts here it is apparent that all but one of the conditions precedent to allowance of the deduction have been met beyond question — the property (assuming for the moment that it can be identified) was received by this decedent by bequest from a prior decedent who died within five years; it was included in the gross estate of the prior decedent, and a tax paid thereon.

The question concerns the identification as property included, taxed, and received from Elisha’s estate of the property to be included in Howard’s estate. Elisha’s estate included 6,000 shares of stock; Howard’s estate included an indefeasible vested remainder to 3,000 of those shares. But Howard’s interest was a part of the whole ownership in 3,000 shares of the previously taxed stock and we think that interest is identified as property received from the prior decedent. Had he outlived his mother, whose interest was likewise a part of the whole ownership, the shares would have been distributed to him and, of course, there would then be no question as to the identity of the property. Respondent does not contend that Howard’s interest is not the same property as was taxed in and received from Elisha’s estate; if he did he would necessarily argue that Howard’s interest had not been previously taxed and therefore no deduction whatever should be allowed.

The previously taxed property — the stock — did not increase in value during the period intervening between Elisha’s death and Howard’s. Consequently, the increase in value of Howard’s interest during that period is immaterial, for the statute requires only that the property be included in the estate of the second decedent at its then value, and that the deduction for previously taxed property be limited botR to the then, value and to the amount at which the property was included in the estate of the prior decedent. Here, the 8,000 shares were included in Elisha’s estate at $375,000, and Howard’s interest is to be included in his estate at $285,806.25; therefore, the latter amount should be deducted from Howard’s estate as the value of property included and taxed less than five years previously in the estate of the prior decedent.

Reviewed by the Board.

Judgment will he entered under Rule 50.

TURNER dissents.


source: Caselaw Access Project

author: Teammell:

license: Public Domain

text:
    J. S. Rippel & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59009.
    Promulgated June 29, 1934.

      John A. Gordin, O.P.A., for petitioner.

      Paul A. Sehasticm, Esq., for the respondent.
   OPINION.

Teammell:

The petitioner’s contention is that the exchange by the petitioner and other stockholders of the Southern California Gas Co., and the Midway Gas Co., both California corporations, of a majority of the voting capital stock of those corporations for cash and bonds of the Southern California Gas Corporation, a Delaware corporation, organized for that purpose, was a merger or consolidation, or something in the nature thereof, and as such constituted a reorganization within the provisions of section 203 (h) (1) of the Revenue Act of 1926; that as a result of such reorganization the value of the bonds received in connection with the transaction was not subject to tax, in accordance with the provisions of section 203 (d) (1) of the same act.

It is respondent’s contention that the acquisition by one corporation of a majority of the capital stock of another corporation under the circumstances here stated does not constitute a reorganization and hence both the cash and bonds which petitioner received for the stock it owned in the Gas Co. constitute taxable profit.

The pertinent provisions of the statute are as follows:

Section 203, Revenue Act of 1926:

Sec. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section' 202, shall be recognized, except as hereinafter provided in this section.
* * * * # *
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
* ifc S}C H* * * *
(d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists ’not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
* * * ❖ * Sfc *
(h) (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation or substantially all the properties of another corporation), * * *

There is no contention that the facts in this case constitute a reorganization unless they bring the transaction within the scope of subdivision (A) of section 203 (h) (1). That provision is quoted above. We have heretofore held that in order to come within the scope of this provision there must be a merger or a consolidation, or something analogous thereto. It is clear that there was no strict merger or consolidation. In the case of a merger one of the corporations loses its identity by merging into another which survives and absorbs the property and assets of the merged corporation. See John J. Watts, 28 B.T.A. 1056; Pinellas Ice & Cold Storage Co., 287 U.S. 462.

In the case of a consolidation of two or more corporations the old corporations are dissolved and their assets are taken over by a new corporation. The question then is, Are the facts and circumstances in this case of such a nature as to constitute a transaction analogous to or in the nature of a merger or consolidation? We see no facts which bring it within such scope. The old corporation was not dissolved, but continued operation of its business without change in. corporate structure, capitalization, or otherwise, and is still in existence.

What occurred in this case was in fact merely a change in the ownership of a majority of the voting capital stock of the Gas Co. A partial or even complete change of stock ownership does not constitute a statutory reorganization. There was no transfer of assets, followed by a continuity of interest under a new or modified corporate structure; nor was there a merger or consolidation, or anything in the nature thereof, which effected such continuity of interest through an exchange of stock for stock.

As we said in John J. Watts, supra, at page 1063:

A consolidation of two corporations involves the dissolution of both and the transfer of their corporate assets and franchises to a new corporation. In a merger, on the other hand, one of two merged corporations loses its identity in the other. One corporation goes out of existence; the other corporation survives and the latter absorbs the property and franchises of the merged corporation whose stock it has acquired. * * *
The petitioners contend that there was a merger of the two corporations arising out of the provisions of the agreement between Sloane and the Vanadium Go. In our opinion the evidence does not lead to this conclusion. Under the provisions of the agreement the Vanadium Go. did acquire all of the capital stock of Ferro Alloys. This acquisition, however, created merely a change in the stock ownership of the latter company. The agreement contains no provisions looking to the creation of a “ new or modified corporate structure.” Therefore, although the former stockholders of Ferro Alloys secured for their stock in that company an interest in Vanadium Go., the transaction was not within the provisions of section 203 (b) (2) for the reason that their interest was not continued under a new or modified corporate form.

In C. H. Mead Coal Co., 28 B.T.A. 599, we held that the transaction there involved constituted a reorganization. The reasoning which lead us to that conclusion, when applied to the facts of the instant proceeding, leads to a reversed result. In that case all the assets of the old company were purchased by the new company for cash at a foreclosure sale. The stockholders of the old company received stock in the new company. The facts found do not indicate whether the old company was formally dissolved, but certainly it was left without business or assets, only the old corporate shell remaining. In our opinion, we said:

It seems to us immaterial that there was a foreclosure sale of the old corporation’s assets. Foreclosure sales are the common concomitant of reorganizations * * *. What is essential, however, to constitute a reorganization is continuity of interest from the old corporation into the new, and it is this element which distinguishes a reorganization from a mere sale by the old corporation of its assets for cash and notes to be distributed to its stockholders in liquidation.

In the case at bar there was no continuity of stockholders’ interests from the old corporation into the new; there was no change in the form of corporate ownership through which the interests of the old stockholders were continued in the same property. The new corporation merely purchased for cash and bonds approximately 60 percent of the voting stock of the old corporation, which latter company “ continued its corporate existence and operations in exactly the same manner as prior thereto, unaffected and without modification in any way as a result of the change in the ownership of its common capital stock.”

If the old corporation had exchanged all of its assets for stock of the new corporation, and if the old corporation had thereupon distributed the stock so received among its stockholders in liquidation, the transaction would have amounted to a reorganization, within the meaning of the statute. Cf. Minnesota Tea Co., 28 B.T.A. 591, 596. But this was not done. A wholly different situation is presented, which in our opinion falls short of constituting a statutory reorganization.

It follows that the petitioner is taxable upon both the cash and the bonds in question.

Reviewed by the Board.

Judgment will be entered wider Bule 50.

Black and Aründell dissent.


author: Marquette :

text:
    Marbelite Corporation of America, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50644.
    Promulgated July 10, 1934.

      Frank MergentTialer, Esq., for the petitioner.

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

Marquette :

The respondent has determined a deficiency in income tax for the year 1926 in the amount of $856.87. The only error alleged is that the respondent has included in the taxable income of the petitioner for the year 1926 the sum of $6,347.18, on the ground that this amount constituted undistributed profits of certain trusts. This proceeding was submitted on the following stipulation of facts:

During the year 1925 petitioner purchased 55.4/1000ths of the beneficial interests in trusts Nos. S-6318 and S-6365, Title Insurance and Trust Company, Trustee. The cost of said interests to the petitioner was $27,700.00.
For the year 1926 the Commissioner found that the profits of the said trusts amounted to $114,570.25, of which sum he allocated $6,347.18 to the beneficial interests owned by the petitioner. The trusts have never made any distributions to the holders of the beneficial interests. The petitioner has never received any income or distribution of any nature from the said trusts.
Trust No. S-6318 was created by a declaration of trust executed by the Title Insurance and Trust Company, as Trustee, under date of January 30, 1924. A copy of the said Declaration of Trust, marked “ Exhibit A”, is attached hereto and made a part hereof.
Trust No. S-6365 was created by a declaration of trust executed by the Title Insurance and Trust Company, as Trustee, under date of February 4, 1924. This trust is of minor importance, and the declaration of trust is similar to the one creating Trust No. S-6318. If the two trusts had been treated separately only a small part, if any, of the net profit of $114,570.25 would apply to Trust S-6365.
The Trustee of Trusts S-6318 and S-6365 filed notices under Section 704 (b) of the Revenue Act of 1928 within the time required, electing to have income of both trusts taxed to the beneficiaries whether distributed or not.
The said trusts are typical California real estate subdivision trusts. The declarations of trust do not provide for the buying and selling of property, but their activities are limited to the subdivision and sale of the particular tracts of land described in the declaration of trust. The Trustee has no power to buy or exchange or acquire any other real estate. The trusts were created and operated for the sole purpose of liquidating real property as a single venture, distributing the proceeds therefrom in due course to or for the benefit of the beneficiaries, and discharging indebtedness secured by the trust property.
The Commissioner has included the said sum of $6,347.18 in the petitioner’s income for said year. The petitioner treated the said $6,347.18 as a reduction of its cost, and since it had not recovered all of its cost did not include any part of this amount in its income.

The parties to the stipulation reserved the right to introduce further evidence and under this provision the respondent showed from the markings on the income tax return of the petitioner for 1926 that it was filed with the collector of internal revenue for the sixth district of California. The following are the pertinent provisions of the declaration of trust filed with the stipulation as Exhibit A. The Title Insurance & Trust Co. acknowledged that it had received a deed dated December 15, 1923, from Alma C. Tad-lock, a widow, which conveyed to it certain real estate in Los Angeles County, California. The real estate was held by it subject to the second installment of county taxes for the fiscal year 1923-1924, and also subject to a deed of trust which secured five notes for $153,977 each, due January 1, 1926, 1927, 1928, 1929, and 1930, respectively, with interest payable quarterly at 6 percent. The deed recited that the beneficiary, O. Nicholas Gabriel, promised for himself, and his heirs and assigns, to pay all taxes and assessments against the property, and all other claims, liens, and encumbrances; to provide fire insurance, payable to the trustee as its interest might appear; to defend all actions' affecting the property and to repay within 30 days from the date of the advancements, with interest, all sums advanced or expended by the trustee. The trustee was given the right, upon the failure of the beneficiaries to pay such sums, to make said payments and reimburse itself out of the property. Provision was made for a resubdivision of the property, such resubdivision to be made by the beneficiary in such manner as might be agreed upon between him and the trastee. The beneficiary agreed to improve the resubdivision or such part as he might select in such manner as he and the trustee might agree upon, but in any event to include the installation of water, gas, electricity, sidewalks, curbs, and macadam paving of all street's. The trustee agreed to sell the lots in the resubdivision upon such terms and for such prices as it should deem advisable, but in no event to execute any deed or agreement of sale of any lot except for a sale price not less than those indicated in the schedule of prices attached to the deed. Section 2 of the deed provided:

To Distbxbute the proceeds (Principal and interest), received by said Trustee, arising from Each Sami hereinbefore mentioned of property covered hereby as follows:
1st: To the payment of the costs, fees, expenses, damages, and advances (if any) with interest, hereunder of said Trustee.
2nd: To the payment, to the agent or agents hereunder (hereinafter mentioned) entitled thereto, of a commission for said sale of twenty-two and one-lialf per cent (22%%) of the gross selling price of the land so sold.
3rd: At the sole discretion of said Trustee; to the accumulation for, and payment hereunder of, the following:
(1) Taxes and assessments levied and assessed against the property covered hereby:
(2) And interest maturing from time to time on the trust deed indebtedness hereinbefore described:
said Trustee, however, in no event to be required to make any such accumulation and/or payment in event said Trustee deems the same would infringe upon moneys arising, from said sale required for either or any of the following distributions “4th”, “5th”, and “7th”.
4th: Until such time as the trust deed indebtedness hereinbefore described shall have been fully paid; twenty-five per cent (25%) of the portion of each sum of principal (but not of interest) received by said Trustee from said sale and not required for foregoing distributions “ 1st ”, “ 2nd ”, and “ 3rd ” shall be accumulated hereunder toward the release price shown on the hereinbefore mentioned “ Exhibit B ” of each lot covered by said sale; and such accumulations shall be applied, in partial payments hereinbefore provided, on the principal of the aforesaid trust deed indebtedness.
5th: That portion, of the principal (but not of the interest) received by said Trustee from said sale and not required for foregoing distributions “1st” to “4th”, both inclusive, but in no event exceeding an amount equal to fifteen per cent (15%) of the actual gross sale price of the land hereunder covered by said sale, shall be placed by said Trustee into the Improvement Fund hereinafter mentioned; said Trustee, however, in no event to be required to make any such payment into said Fund, if, in the sole judgment of said Trustee, such payment would encroach on moneys required for the release price shown on said “Exhibit B ” of each lot covered by said sale.
6th: The surplus — both principal and interest — of the proceeds received by said Trustee from said sale in excess of the following:
(1) The “remainder” — mentioned in the following distribution “7th”— of the release price of each lot covered by said sale,
(2) Plus an amount equal to five per cent (5%) of the actual gross sale price hereunder of each lot covered by said sale, shall be paid to the Beneficiary under this Trust.
7th: Until such time as the trust deed indebtedness hereinbefore described shall have been fully paid; to the accumulation of the remainder — not covered by foregoing distribution “ 4th ” — of the release price shown on said “ Exhibit B ” of each lot covered by said sale; and such accumulations shall be paid and applied, in the partial payments hereinbefore provided, on the principal of the aforesaid trust deed indebtedness.
8th: And the surplus (if any) of the proceeds from said sale shall be paid to the Beneficiary under the Trust.
* m * * * # *

Section 10 of the deed provided:

It Is Distinctly Undekstoo» that the interest under this Trust of said Beneficiary, and of each assignee and of each successor in interest of said Beneficiary, hereunder is personal property and that no such Beneficiary has, or shall have, any right, title or interest in or to the property covered hereby, nor has any right or power to in any manner apply for or secure the dissolution or termination of this Trust or the partition or division of any of the trust property; the sole right and power of each Beneficiary hereunder being to enforce the performance of the terms of this Trust as expressly set forth in this Declaration.

The deed finally provided that the trust should not cease until all costs, expenses, and advances made by the trustee and all liabilities incurred or sustained by it should be fully paid.

Petitioner makes two contentions — first, that it could not be in receipt of taxable gain until it recouped its cost, and, second, since it received no distributions from the two trusts, there was no income taxable to it.

In support of the first contention the petitioner cites Anton M. Meyer, & B.T.A. 1329; D. M. Stevenson, 9 B.T.A. 552; Benjamin L. Allen, 19 B.T.A. 1005; aff'd., 49 Fed. (2d) 116. In each of the first two cases it appears that certain deferred payments on an installment sale had no readily realizable market value, and that the cash payments were not equal to cost. Nothing like this appears in this proceeding. In the Allen case the issue presented by the petitioner was not involved, and what was said as to the cost or March 1, 1913, value was only to the effect that, in the absence of proof as to cost or such value, the Commissioner should be sustained.

It is obvious that to apply the rule asserted by the petitioner to a sale or disposition of every asset purchased for a valuable consideration would be destructive of the scheme found in all of the revenue acts requiring the return of income on the basis of annual accountings. Burnet v. Sanford & Brooks Co., 282 U.S. 359. To sustain such a contention would be to hold that the Congress performed a futile act in enacting section 212 (d) of the Revenue Act of 1926 with respect to installment and casual sales. Of course, there are exceptional cases in which the return of profit may be postponed until cost has been recovered. Such a case is one where repayment is “ wholly contingent upon facts or circumstances not possible to foretell with anything like fair certainty.” Burnet v. Logan, 283 U.S. 404. Here nothing exceptional appears. We are given no facts as to values or as to the merits of the scheme or what was done. We do not know when the sales were first made, what was received on such sales, or what was done with the money received. We do not know why no distribution was made in 1926, the year before us, of the profit of $114,510.25, which the respondent has determined that the trusts earned in that year. This determination is unchallenged, and we accept it as true. We are not concerned as to the subsequent years, especially in the absence of all relevant facts. Cf. B. F. Avery & Sons, Inc., 26 B.T.A. 1393. We see nothing exceptional in the facts which would bring this proceeding within the rule laid down in the Logan case.

In support of the second contention the petitioner refers to Eisner v. Macomber, 252 U.S. 189. We do not think that case is in point. What was decided there was that a stock dividend did not constitute taxable income for the reason that by it nothing was severed from the capital of the corporation, and that the taxpayer’s interest in the corporation, while taking a different form, remained the same. Here, it is sought to tax to the petitioner his distributable share of the income of the trusts. It is obvious that this net income is taxable to someone. If these organizations are trusts, the income is taxable to them under section 219 of the Revenue Act of 1926. If they are associations, it is taxable to them as corporations. Here, section 704 (b) of the Revenue Act of 1928 intervenes and grants to the trustees of trusts like the ones here involved the option to have them considered as trusts, the income of -which is (whether distributed or not) taxable to the beneficiaries. This option the trustee has voluntarily exercised. There is nothing arbitrary about this. Cf. C. C. Albright, 28 B.T.A. 82. In fact the taxation of undistributed income is not new. Provisions for taxing such income are to be found in section 219 of the Revenue Acts of 1918, 1921, 1924, and 1926, and in section 162 of the Revenue Acts of 1928, 1932, and 1934. See also sections 218 (e) of-the Revenue Act of 1918 and 218 (d) of the Revenue Act of 1921, providing for the taxation of personal service corporations. To sustain the petitioner’s contention would be, in effect, to hold that section 704 and the above provisions relative to taxation of income of trusts and personal service corporations were invalid.

This long, continuous, and consistent policy of the Government in taxing such income is sufficient to raise a strong presumption that the provision assailed is valid, and this presumption is strengthened by the fact that these provisions have been enforced by the courts. In Field v. Clark, 143 U.S. 649, the Court, in sustaining the constitutionality of the third section of the Act of October 9, 1890, after referring to numerous acts of Congress and discussing the decision in The Brig Aurora, 7 Cranch, 382, 388, said:

If the decision in tlie case of The Brig Aurora, liad never been rendered, tlie practical construction of tlie Constitution, as given by so many acts of Congress, and embracing almost tbe entire period of our national existence, should not be overruled, unless upon a conviction that such legislation was clearly incompatible with the supreme law of the land. Stuart v. Laird, 1 Cranch, 299, 309; Martin v. Hunter, 1 Wheat. 304, 351; Cooley, v. Port Wardens, 12 How. 299, 315; Lithographic Co. v. Sarony, 111 U. S. 53, 57; The Laura, 114 U. S. 411, 416.

The presumption thus raised is resolved in favor of the validity of the statute. Adkins v. Children's Hospital, 261 U.S. 525.

Judgment will be entered for the respondent.

       Sec. 704. (b) For the purpose of the Revenue Act of 1026 and prior Revenue Acts, a trust shall, at the option of the trustee exercised -within one year after the enactment of this Act, be considered as a trust the income of which is taxable (whether distributed or not) to the beneficiaries, and not as an association, if such trust (1) had a single trustee, and (2) was created and operated for the sole purpose of liquidating real property as a single venture (with such powers of administration as are incidental thereto, including the acquisition, improvement, conservation, division, and sale of such property), distributing the proceeds therefrom in due oourse to or for the benefit of the beneficiaries and discharging indebtedness secured by the trust property, and (3) has not made a return for the taxable year as an association.


author: Goodbich :

text:
    Gertrude Hemler Tracy, Margaret M. Reichert, and Central Trust Company, Trustees Under the Will of David E. Tracy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54828, 62982.
    Promulgated July 10, 1934.

      Henry Gross, Esc[., and Wm. Glarhe Mason, Esq., for the petitioners.

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

Goodbich :

In these proceedings, which were consolidated for hearing, petitioners contest the following income tax deficiencies determined by respondent:

1927_$2, 618. 24
1928_ 10, 384. 08
1929_ 10, 525. 53

Petitioners allege generally that respondent erred in determining that they received income on which they, as trustees, are liable for income tax. More specifically, the issues to be decided are two, and relate to the computation of the taxable income of the trust. They are, first, whether there shall bo deducted amounts distributed pursuant to the terms of his will to decedent’s widow, she having elected to take thereunder in lieu of dower, and, second, whether there shall be deducted capital gains upon sales of securities added to the corpus of the trust, because permanently set aside for charities.

The facts are stipulated, and we adopt the stipulation as our findings of fact. For the purposes of this report the following statement will suffice: Petitioners are the trustees under the will of David E. Tracy, who at the time of his death, February 10, 1923, resided in Harrisburg, Pennsylvania. In his will, after making certain minor bequests, he established a trust for the residue of his estate. The entire income from the trust (to be paid over quarterly) was left to his widow for life. The will enjoined upon her the obligation to pay $100 a month to the testator’s two brothers and $200 a month to his sisters “ providing the income from my estate amounts to at least four (4) times the sum of these amounts. In the event it does not, the payments can be reduced accordingly.”

Upon the death of the widow, the trustees were to create and establish, from the original trust fund, various new trusts. The income from the corpus of $250,000 in one of these trusts was to be paid to the brothers and sisters of the testator during their lives, with remainder over to a charity. The income from a corpus of $100,000 in another of these trusts was to be paid to two grandchildren until the boy was 30 years of age, whereupon they were to receive the corpus. In event of the death of both of the grandchildren before attaining the specified age, the corpus went to charity.

The balance of the original trust fund went either directly or through the medium of trusts to charities. All of the charitable institutions mentioned in the will are organizations within the purview of sections 214 (a) (10) and 219 (b) (1) of the Revenue Act of 1926 and sections 23 (n) and 162 (a) of the Revenue Act of 1928.

The will further provided that, if on the death of the widow the original trust fund was insufficient to pay all bequests, the trustees should decrease, in proportion to their respective amounts, the bequests to charitable institutions, leaving intact and in the full specified amounts the two trusts created for the testator’s brothers and sisters, and for the two grandchildren.

Decedent’s widow elected to take under the will in lieu of dower. The aggregate payments made to her from the estate, up to and including the year 1929, did not exceed the amount to which she would have been entitled as dower under the laws of Pennsylvania.

The income of the estate, and the amounts paid by the trustees to the widow and the family annuitants during the taxable years here before us were as follows:

The capital net gains in 1927 and 1928 were not distributed but were added to the corpus of the estate.

The net market value of the corpus of the estate throughout these years was never less than $1,400,000.

Respondent determined the trustees to be liable for income tax on the amounts distributed to decedent’s widow, and also on the capital net gains.

Respondent has refused to allow as a deduction in determining the taxable income of the trust during the years 1927 to 1929, inclusive, either the amounts distributed to the widow, or the capital gains added to the corpus, and, consequently, has laid a tax on these items.

In so doing with respect to the trust income paid the widow, he was in error. It is now settled that where, as here, a widow elects to take under the will of her husband in lieu of dower, trust income currently distributed to her in accordance with the provisions of the will is deductible in computing net income subject to tax. Sec. 219 (b)(2), Revenue Act of 1926; sec. 162 (b), Revenue Act of 1928; Butterworth v. Commissioner, 290 U.S. 365.

But we sustain respondent’s denial of deductions of the capital gains. The statute (section 219 (b), Revenue Act of 1926) permits the deduction of such amounts of income which, pursuant to the instrument creating the trust, are paid or permanently set aside within the taxable year for charitable and other specified uses.

We have heretofore corrected respondent’s disallowance of that deduction where it appeared that income or gains accrued to one or more of the specified institutions, or were properly added to the trust corpus, and definitely set aside, either directly or as a part of an indefeasible residue, for ultimate delivery to such institutions.

But that is not the situation in the case at bar. Assuming that, despite the lack of directions in the will respecting accumulations, these gains were properly added to the trust corpus under the laws of Pennsylvania—see Anna M. Chambers et al., Trustees, 29 B.T.A. 971—still it does not appear that they were paid to or definitely set aside for charities.

This will established no definite fund for the charities instanter. It provided that upon the death of the life beneficiary certain trusts for designated members of the testator’s family should be established and then the residue should be put in trust as directed for the charities. The amount of the funds for the charities therefore was contingent upon the successful survival of the trust corpus during the widow’s life, with retention of funds sufficient to establish in full amount the directed trusts for the testator’s brothers and sisters, and his grandchildren. While, as petitioners point out, during the period of which this record gives us knowledge the trust suffered no diminution to jeopardize the ultimate establishment of the charitable trusts in the amounts directed, nevertheless, the possibility of frustration through economic reversal must be recognized.

We conclude that, under this will, no part of the trust estate was paid or permanently set aside, during the period before us, for any charitable institutions recognized by statute, and that respondent was right in disallowing as deductions from income the items of gain. Bank of America National Assn., as Trustee, 19 B.T.A. 1278; Charles W. Jaynes et al., Trustees, 29 B.T.A. 259; Boston Safe Deposit & Trust Co. et al., Executors, 26 B.T.A. 486; aff'd., 66 Fed. (2d) 179; certiorari denied, 290 U.S. 700; Fidelity-Philadelphia Trust Co., Trustee, 25 B.T.A. 1359; reversed as to first point considered in the case now at bar, 63 Fed. (2d) 949; 290 U.S. 365.

Judgment will be entered under Bule 50.

      See Herbert Jermain Slocum et al., Executors, 6 B.T.A. 36; E. Sohier Welch et al., Trustees, 9 B.T.A. 1370; Hu L. McClung et al., Executors, 13 B.T.A. 335, E. C. Johnson, Executor, 13 B.T.A. 850; Peoples Trust Co., Trustee, 10 B.T.A. 1385. See also Bowers v. Slocum, 20 Fed. (2d) 350.


author: Smith:

text:
    Illinois Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67201.
    Promulgated July 12, 1934.

      /Samuel B. Kraus, Esq., for the petitioner.

      L. W. Greas cm, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1929 of $1,115.25. The petitioner alleges that the respondent erred in disallowing the deduction from gross income of (1) a portion of the depreciation sustained by it upon its furniture and fixtures; (2) an amount claimed as depreciation upon certain medical information cards; and by an amended answer the respondent alleges that he erred (3) in not excluding from the company’s reserve funds the mean of a “ survivorship investment fund ” and that through his failure to do so the petitioner has erroneously been allowed a deduction of $183,755.71 in the computation of the deficiency; and (4) that the respondent erroneously failed to disallow the deduction from gross income of $1,241.91 representing discounts on premiums claimed in the return “ as interest on indebtedness.” The respondent has moved to increase the deficiency accordingly.

The petitioner is an Illinois corporation which, has its home and principal office in Chicago. During the calendar year 1929 and prior thereto it was engaged in the business of issuing and writing life insurance policies on the life of individuals.

Issue No. 1.

During the year 1929 the petitioner owned and used in its business certain furniture and fixtures which it had acquired between 1921 and 1929 and for which it had paid $69,753.19. Its purchases of such assets in 1929 amounted to $5,635.78. The useful life of these assets was approximately ten years. They were used by the petitioner in both its investment and underwriting business and their use in connection with the investment department of its business, producing the statutory income designated interest, dividends, and rents, amounted to 28 percent of their use for all purposes. The remaining 72 percent of use was in connection with the production of the petitioner’s non-statutory or underwriting income.

The petitioner included in deductions from gross income reported on its income tax return for the calendar year 1929 the amount of $6,975.31 as depreciation on furniture and fixtures, which amount represented 10 percent of the cost of all the furniture and fixtures owned. In determining the deficiency upon which this proceeding is based the respondent allowed only $1,953.09 of the amount so deducted by the petitioner, being 10 percent of the cost of that portion of the furniture and fixtures which was used in the production of statutory income, that is, income from interest, dividends, and rents. The petitioner claims the deduction of the full amount of $6,975.31.

This issue is decided in favor of the respondent upon the authority of Rockford Life Ins. Co. v. Commissioner, 292 U. S. 382. The depreciation deduction as to purchases in 1929 is subject to adjustment in accordance with the respondent’s regulations; they were not owned for a full year.

Issue No. 8.

During the calendar year 1929 petitioner owned certain so-called medical information cards which had been acquired at a cost of $51,164.27 during the years 1921 to 1929, inclusive. The amount expended in the year 1929 was $7,517.06. The medical information cards were individual cards. Each card contained a code report of the physical disabilities found upon examination of individuals applying for insurance to life insurance companies which purchased such cards from the Medical Inspection Bureau. Each life insurance company which purchased these cards made a report of the physical impairments found upon the examination of the applicants. The cards were replaced from time to time if and when later examinations of the same individuals were made. Such of the cards as were not otherwise replaced within a period of approximately ten years were removed from the files or destroyed.

The petitioner included in the deductions from gross income reported on its income tax return for 1929 the amount of $5,116.43 as depreciation or obsolescence of such medical information cards, being 10 percent of the total cost thereof. In determining the deficiency proposed in the 60-day deficiency notice upon which the computation herein is based the respondent disallowed the deduction of this amount of $5,116.43.

All of the medical information cards hereinabove referred to were used exclusively in the production of nonstatutory or underwriting income and no part of these cards was used in the production of petitioner’s statutory net income; that is, income from interest, dividends, and rents. We sustain the action of the respondent in disallowing the deduction of the $5,116.43 in question. Rockford Life Ins. Co. v. Commissioner, supra.

Issue No. S.

During and prior to the calendar year 1929 the petitioner issued certain so-called survivorship investment policies. A specimen copy of a “ 20-Payment Life Survivorship Investment Policy ” was introduced in evidence as Joint Exhibit A. The provisions of this policy relative to the survivorship investment feature are that upon such policies the petitioner sets aside a portion of each premium payment which is placed in the “ survivorship investment fund.” This fund is accumulated at the rate of 3y2 percent per annum compound interest from the dates of the respective payments of premiums. At the expiration of the 20-year life of the policy the insured has the option of continuing the policy as a fully paid-up policy without further premiums, and receiving in addition a cash payment of the survivor-ship investment apportioned to his policy or a fully paid nonparticipating life policy for such amount as will be purchased by the sur-vivorship investment at the applicable single premium rate, or the policyholder may surrender the policy and receive in cash the entire guaranteed cash surrender value plus the portion of the survivorship investment fund apportioned to his policy. For each calendar year there is a different survivorship class. The survivorship investment fund can not be used except for the payment of survivorship benefits and at the end of 20 years the entire fund in the class maturing in that year is to be distributed among all the members in good standing in the class in proportion to their respective contributions to the fund established for that class.

In determining net income, life insurance companies are authorized by section 203 (a) (2) of the Revenue Act of 1928 to deduct from gross income “An amount equal to the excess, if any, over the deduction specified in paragraph (1) of this subsection [tax-free interest], of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year.”

The survivorship investment funds at the beginning and end of the taxable year of the petitioner were as follows:

In its income tax return for 1929 the petitioner deducted from gross income $133,155.71 representing 4 percent of the mean of the “ survivorship investment funds ” at the beginning and end of the year 1929.

The sole question arising upon this issue is whether the reserve funds above described were “ reserve funds required by law.” The petitioner was organized and operated under the laws of the State of Illinois. In 1929 its operations were governed by an act approved May 20, 1907, in force January 1,1908, and officially printed in the Session Laws of 1907, page 367. This act is also contained in Cahill’s Illinois Revised Statutes (1929), chapter 73, commencing at paragraph 375. Section 1 of the act provides in part as follows:

Seo. 1. That from and after January 1, 1908, no policy of life insurance shall be issued or delivered in this State or be issued by a life insurance company organized under the laws of this State, unless the same shall provide the following:
*******
(5-c) The provisions of the preceding paragraphs numbered (5-a) and (5-b) of this section shall not apply to any form of paid-up insurance or temporary insurance or pure endowment insurance, issued or granted in exchange for lapsed or surrendered policies, or to nonparticipating policies: Provided, however, that if any company shall issue any nonparticipating policy under the terms of which any stipulated part of premiums received is to be placed in a separate fund for subsequent apportionment, such company shall furnish the Department of Trade and Commerce each year a statement showing the number and amount of all such policies in force at the beginning of the year for which the statement is made; of all such policies issued and revived or terminated during the said year with the mode of termination; and the number and amount of all of such policies in force at the end of said year. Also a statement showing any and all amounts provisionally set apart, ascertained or calculated or held awaiting apportionment upon such policies according to classes, at the beginning of 'said year, the additions made to the said fund during the year with the source from which such additions arose, the deductions made from the said fund (if permitted by the contract) during the year with the reasons therefor and the amount of said fund at the end of the year; which shall be carried as a distinct and separate reserve liability of the company for the benefit of the classes of policies from the premium payments on which the sum was accumulated. No part of said fund prior to the time of distribution stipulated in the contract, shall be considered in determining the loan and cash and other surrender values provided for by this Act. * * *

It is to be observed that paragraph (5-c) of section 1 of the above cited act applies to precisely the type of policy introduced as Joint Exhibit A and that the portions of the premiums allocated to the “ survivorship investment fund ” are expressly required to “ be carried as a distinct and separate reserve liability of the company for the benefit of the classes of policies from the premium payments on which the sum was accumulated.”

In Standard Life Ins. Co. of America, 13 B.T.A. 13; aff'd., 47 Fed. (2d) 218, we set forth at length what constitutes the reserve funds of a life insurance company. In short the reserve funds required by law of a life insurance company are those funds which the company must, pursuant to statute, maintain as a reserve upon the valuation of the policies. The outstanding policies are valued according to their terms as of a particular date and the sum total of such valuations constitutes the reserve funds. Such reserve funds are exclusive of certain liabilities which the company may have and which may be required to be shown in their annual statements. Massachusetts Mutual Life Ins. Co. v. United States, 56 Fed. (2d) 897; United States v. Boston Ins. Co., 269 U.S. 197.

There can be no question in the present case but that the “ surviv-orship investment fund ” maintained by the petitioner was a reserve fund required by law. Nor can there be any question but that such a fund constitutes a policy reserve. It constituted a part of the fund that the petitioner was required to have on hand to meet its policy obligations at the end of the 20-year premium payment period. We sustain the petitioner’s contention upon this issue. See Missouri State Life Ins. Co., 29 B.T.A. 401; Standard Life Ins. Co. of America, supra; Commissioner v. Western Union Life Ins. Co., 61 Fed. (2d) 207; Reserve Loan Life Ins. Co., 18 B.T.A. 359.

Issue No. A

The petitioner included as a deduction on its income tax return for 1929 as “ interest on indebtedness ” certain discounts on premiums in the amount of $1,241.91. In determining the deficiency proposed in the 60-day deficiency notice upon which the petition herein is based the respondent did not disallow said amount as a deduction. He now alleges that he erred in failing to make such disallowance.

In its brief the petitioner does not question the correctness of the respondent’s contention upon this issue.

The contention of the respondent is sustained. The evidence fails to show that the $1,241.91 was interest “ paid or accrued within the taxable year on its indebtedness ” within the meaning of section 203 (a) (8) of the Revenue Act of 1928.

Reviewed by the Board.

Judgment will T>e entered under Bule SO.

Tuammell concurs in the result.

Black, Marquette, Moeeis, and Leech dissent.


text:
    Sprague-Sells Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42006, 42434.
    Promulgated July 12, 1934.

      Harold W. Norman, Esq., and Franklin D. Trueblood, Esq., for the petitioner.

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

Smith:

In these proceedings the petitioner claims the right to bring forward and deduct from its gross incomes net losses sustained by the Sprague Canning Machinery Co. for the prior years. This claim is predicated upon the theory that the business conducted by the petitioner is the same as that which was conducted by the Sprague Canning Machinery Co. and that there was in effect a merger of the two corporations. The petitioner relies especially upon the decision of the court in Industrial Cotton Mills Co. v. Commissioner, 61 Fed. (2d) 291. Since the hearing of these proceedings, the Supreme Court has decided the very question involved herein in New Colonial Ice Co. v. Helvering, 292 U.S. 435. That decision is adverse to the petitioner’s contentions. Accordingly the claims of the petitioner upon that point are not sustained.

2. In the determination of the deficiencies for the fiscal period November 1, 1923, to September 30, 1924, the respondent allowed the deduction from gross income of the petitioner of $19,741.75 representing eleven twelfths of the operating loss of the Sprague Canning Machinery Co. for its fiscal year. The respondent now contends that inasmuch as the Sprague Canning Machinery Co. was inactive after November 14, 1923, its loss for the fiscal year ended September 30, 1924, was likewise its loss for the period October 1 to November 14, 1923, inclusive, and that since the loss of $21,536.45 was sustained during a period of 45 days of operation, the petitioner is entitled to deduct from its own gross income only fourteen forty-fifths of $21,536.45, or $6,700.23, since only 14 days of the period fell within the period of affiliation. The respondent therefore contends that he was in error in allowing the deduction of the difference between $6,700.23 and $19,741.75 and has moved to increase the deficiency for the period in question by adding back to net income the excess loss deduction in the amount of $13,041.52. The petitioner, on the other hand, contends that it is entitled to the deduction of the entire operating loss of $21,536.45.

We think it clear from the evidence that the petitioner was affiliated with the Sprague Canning Machinery Co. from November 1, 1923, to September 30, 1924. Even though the Sprague Canning Machinery Co. was not an operating company after November 14, 1923, it continued in existence, the petitioner owning 3,995 shares out of a total of 4,000 shares during such period. It was obligated to make a return for its entire fiscal year. It made such a return to-gather with the petitioner and such return showed a net loss for the period of $21,536.45. Only one consolidated return for the entire year was required to be filed. Automatic Fire Alarm Co. of New York, 13 B.T.A. 1195; Hutt Contracting Co., 17 B.T.A. 818; Margay Oil Corp., 26 B.T.A. 199; American Paper Exports, Inc. v. Bowers, 54 Fed. (2d) 508; Newblock Oil Co. of Texas, 26 B.T.A. 696; Houghton & Dutton Co., 26 B.T.A. 1420. Such consolidated return must of necessity comprehend the operations of both companies for the entire return period. The respondent’s motion for an increase in deficiency for the fiscal period November 1, 1923, to September 30, 1924, is denied. The petitioner’s contention that it is entitled to offset its net income by the operating loss of the Sprague Canning Machinery Co. in the amount of $21,536.45 is sustained.

3. The contention of the petitioner that it is entitled to deduct from the gross income for the period March 1 to September 30, 1926, the net loss of the Peerless Husker Co. for the period October 1, 1925, to February 28, 1926, is not sustained, upon the authority of New Colonial Ice Co. v. Helvering, supra.

4. In Docket No. 42434 the petitioner alleges that the respondent erred in disallowing the deduction from gross income for the period March 1 to September 30,1926, $300 “paid the Secretary of the State of Illinois for authority to sell 25,000 shares of Class A stock of Sprague-Sells Corporation under the Illinois Securities Act.” The petition alleges as a fact that “in computing the consolidated net income of Sprague-Sells Corporation and Peerless Husker Co., Inc., for the period begun March 1, 1926, and ended September 30, 1926, there was deducted $300 paid to the Secretary of State of Illinois for authority to sell 25,000 shares of Class A stock of Sprague-Sells Corporation under the Illinois Securities Act.” The allegation of error and the allegation of fact were both denied in the original answer and the amended answer filed by the respondent. At the hearing of this proceeding counsel for the respondent stated:

There is also a minor issue in one of these appeals, which is, can the taxpayer deduct from its net taxable income an amount paid to the Secretary of the State of Illinois in connection with what I might term an adjustment of its capitalization behind the issue of the capital stock.
For the purpose of simplifying this question, I have admitted, and do now admit of record, that they paid that sum to the Secretary of State, and that the sum was $300.00. Now, why they paid it, I do not admit, except that I do admit that they paid the $300.00 to the Secretary of State during the taxable period at issue in connection with the issuance of corporation stock.

The petitioner contends that the $300 is a legal deduction from gross income, upon the authority of Borg & Beck Co., 24 B.T.A. 995.

The amount was a legal deduction from gross income if it was paid as a tax, as was the case in Borg & Beck Co., supra. We can not determine, however, from the evidence of record upon this point, all of which is set out above, whether the $300 was paid as a tax or for what it was paid. For lack of proof the action of the respondent in disallowing the deduction of the $300 in question is sustained.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Smith :

text:
    Dolese & Shepherd Company, Syndicate No. 3, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41136.
    Promulgated July 13, 1934.

      Merritt G. Bragdon, Jr., Esq., for the petitioner.

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

Smith :

This proceeding is for the redetennination of a proposed deficiency in income tax for 1924 in the amount of $31,552.40. The petitioner alleges that the respondent has erroneously held that it was an association taxable as a corporation in 1924 and that it realized a taxable gain upon the sale of certain property in that year. The material facts have been stipulated and, for the purpose of this decision, are summarized as follows:

The Dolese & Shepherd Co. is an Illinois corporation which for many years has been engaged in the business of quarrying and selling crushed stone. Its principal quarry and place of business is at Hodgkins, Illinois, a small town near Chicago.

About 1904 the Dolese & Shepherd Co. caused to be organized the Chicago & Illinois Western Railroad, an Illinois corporation, for the purpose of constructing a short line railroad to serve its quarry. The railroad was about 12 miles long, extending from the quarry at Hodgkins to a connection with the Pennsylvania Railroad in Chicago. The original stockholders of the railroad were principally stockholders of the Dolese & Shepherd Co.

The railroad company was unprofitable from the beginning, but its operation resulted in a great benefit to the business of the Dolese & Shepherd Co. It became necessary for the Dolese & Shepherd Co. to make substantial advancements to the railroad company to continue it in operation.

By 1916 the Dolese & Shepherd Co. had acquired <3,844 of the outstanding 10,000 shares of the railroad company’s capital stock, $185,-000 par value out of a total of $965,000 par value of bonds outstanding, and $89,000 par value of the railroad company’s equipment trust notes. It also held promissory notes of the railroad company in the amount of approximately $350,000 on account of moneys advanced to it.

At the same time the Dolese & Shepherd Co. had borrowed more than $250,000 from banks for which it had pledged all of the railroad company’s bonds and part of the trust notes, together with other collateral. The banks at that time were pressing the Dolese & Shepherd Co. for liquidation of the loan. As a result of those conditions the Dolese & Shepherd Co., Syndicate No. 3, the petitioner herein, was organized principally for the purpose of enabling the Dolese & Shepherd Co. to liquidate its bank loans. A syndicate agreement was executed on or about June 1, 1916. All of the stockholders of the Dolese & Shepherd Co. were asked to subscribe to the syndicate and about 24 of them did subscribe for a total of 512 syndicate shares.

The purposes of the syndicate were stated in paragraph III of the syndicate agreement as follows:

Whereas, growing out of the investment of so large an amount of its capital in said railroad securities, the Dolese & Shepherd Company has been obliged to borrow from banks a considerable amount of money, for which it is still indebted, and which it has secured by depositing as collateral among other things the said $185,000 par value of railroad bonds, and $66,000 par value of said railroad equipment notes; and it is now desired by the parties hereto to provide a fund to be used in purchasing from said company its holdings of said railroad stock, and also so "much as is practicable of its said railroad securities, and also if it be found practicable to provide a means of restoring to its treasury the amount of its said advances to the railroad; and also to secure for the subscribers to- this syndicate the advantages and benefits hereinafter stated.

The syndicate was capitalized at $400,000, divided into 800 units or shares of $500 each. Additional shares as determined by the syndicate managers were to be issued to defray legal expenses in connection with the organization. Three individuals were designated as syndicate managers. In paragraph XIII of the syndicate agreement the syndicate managers were assigned powers and duties as follows: to collect and receive subscriptions to the syndicate and to issue certificates of interest; to purchase the bonds and equipment trust notes of the railroad company; to secure an assignment to the syndicate of the outstanding shares of stock of the railroad company; to maintain a general supervision over the affairs and management of the railroad company with an idea of enhancing its value; and to sell, lease, or otherwise dispose of the railroad company’s stock and securities or physical properties.

Provisions were made in paragraph XIY for the election of a board of reference composed of five members.

Pursuant to the syndicate agreement, 300 shares of proportionate interest in the syndicate were issued to the Dolese & Shepherd Co., which shares were limited in their right to participate in the management of the syndicate. Other individual subscribers, all of whom were stockholders of the Dolese & Shepherd Co., subscribed for 500 shares of the par value of $500 per share. Of such shares 497 were issued to the individuals who paid in 80 percent of their subscriptions or $400 per share. Fifteen additional shares were issued for legal services in connection with the syndicate organization.

The Dolese & Shepherd Co. transferred to the syndicate the 8,344 shares of capital stock of the railroad company and the promissory notes of that company aggregating approximately $350,000. The individual subscribers paid into the syndicate in six quarterly installments commencing October 1, 1916, approximately $198,800 in cash, of which $196,536.75 was paid to the Dolese & Shepherd Co. in exchange for $185,000 par value of the railroad company’s bonds at 75 percent of their par value, and $64,207.50 par value of the equipment trust notes of the railroad company at 90 percent of their par value. These moneys were used by the Dolese & Shepherd Co. to reduce its loans with the banks. Thereafter, pursuant to the syndicate agreement, the syndicate received the interest ,on the bonds and equipment trust notes of the railroad company and currently distributed it to the individual subscribers.

Also, pursuant to the syndicate agreement, the Dolese & Shepherd Co. later transferred other obligations of the railroad company to the syndicate for additional advances made to the railroad company in the amount of approximately $48,500. The railroad company continued to sustain operating losses which were paid by the Dolese & Shepherd Co. up to the year 1924. In 1922 the railroad company turned over to the Dolese & Shepherd Co. $291,000 par value of 7 percent noncumulative preferred stock in satisfaction of an indebtedness in that amount, which stock the Dolese & Shepherd Co. transferred to the syndicate. By February 1, 1924, the railroad company was further indebted to the Dolese & Shepherd Co. for moneys advanced in the amount of $126,104.51, which indebtedness the Dolese & Shepherd Co. likewise assigned to the syndicate.

From time to time during the period 1916 to 1924 the syndicate made efforts to sell the capital stock and securities of the railroad company, but was unable to find a purchaser until 1924. In that year the syndicate sold to the Commonwealth Edison Co. and the Peoples Gas Light & Coke Co. the following capital stock, securities, and indebtedness of the railroad company:

(a) 10,000 shares common stock (entire outstanding shares).
(b) $291,000 par value preferred stock (entire outstanding shares).
(c) $89,890 par value equipment trust notes.
(d) $398,500 face value promissory notes.
(e) $126,104.51 indebtedness in open account.

The above named assets were all of the assets owned by the syndicate except the $185,000 par value bonds of the railroad company and a small amount of cash. In exchange for such assets the syndicate received $520,500 in cash and $200,000 of promissory notes. The syndicate also acquired the balance of the outstanding stock of the railroad company and the equipment trust notes of the railroad company, which were held by the Dolese & Shepherd Co., and transferred the same to the purchasers. It also paid off certain other obligations of the railroad company as required in the sales agreement. Thereafter, and in 1924, the syndicate distributed to the Dolese & Shepherd Co. in full payment for its interest in the syndicate $279,213.37, including the aforesaid $200,000 of promissory notes. It sold $7,000 par value of the railroad company’s bonds at 75 percent of their par value and distributed to the individual subscribers pro rata the remaining $178,000 par value of bonds of the railroad company and $303,454.27 in cash. At that time the certificates representing the syndicate shares were surrendered by the subscribers and canceled. The only asset retained by the syndicate was cash in the amount of approximately $4,000, which it held for contingencies. The syndicate engaged in no other activities whatever until 1926 when, pursuant to the aforesaid sale agreement, it received an additional amount of $1,740.40 from the purchasers of the railroad company’s stock and securities. Upon its receipt this amount, together with the remaining cash on hand, amounting in all to $6,130.25, was distributed to the individual subscribers. The syndicate has since engaged in no activities whatever except to contest the Commissioner’s assessment for income taxes for the calendar year 1924.

The syndicate had three managers, as provided in the syndicate agreement. The managers held no formal meetings and kept no formal record of the syndicate proceedings. A board of reference was elected in 1921 for the purpose of selecting a successor to one of the syndicate managers. In 1924 another board of reference was elected to approve the sale of the railroad company’s stocks and securities. No meeting of the syndicate’s subscribers was ever held until 1928, when the subscribers met to consider the tax question raised in this proceeding.

The syndicate never engaged in any business activities except those described above. It had no office or place of business and incurred only nominal expenses. Prior to the sale in 1924 the syndicate never owned any property except cash and the stocks and securities of the railroad company which it acquired from the Dolese & Shepherd Co.

No income tax return was ever filed on behalf of the syndicate as an association or a corporation. All or nearly all of the syndicate subscribers reported their respective profits from the sale of the syndicate property in their individual income tax returns. The respondent has determined that the syndicate was an association taxable as a corporation in 1924 and that the aggregate profits of all the individual subscribers constituted the taxable profit of the syndicate.

As a result of the entire syndicate transaction the Dolese & Shepherd Co. sustained a net loss from its advances to the railroad company of $654,974.92, which was allowed by the respondent as a deduction in computing its income tax for 1924. This loss of the Dolese & Shepherd Co. was substantially greater than the aggregate profits of the individual subscribers to the syndicate. In the determination of the gain to the syndicate upon the sale in 1924 the respondent did not consider or determine the cost to the syndicate of the 10,000 shares of common stock, the $291,000 par value preferred stock, the $398,000 face value of promissory notes, or the $126,104.51 open account of the railroad company which had been transferred to the syndicate by the Dolese & Shepherd Co. It is agreed that there is no deficiency due from the petitioner for 1924 unless it is to be classified as an association taxable as a corporation.

It appears from the foregoing statement that the petitioner was created primarily for the purpose of rendering financial assistance to the Dolese & Shepherd Co. by liquidating that company’s holdings in the stocks and bonds and other indebtedness of the railroad company and paying off the obligations of the Dolese & Shepherd Co. against which these properties had been pledged, and that the petitioner never engaged in any other form of business. This the respondent concedes, but he contends that, since the purpose of the syndicate and of the individual syndicate members was' nevertheless to make a profit, which was to be distributed to the beneficial shareholders, and since a profit was actually made and distributed, the syndicate should be classified as an association taxable as a corporation.

With this contention we cannot agree. The courts and this Board have held in numerous cases that where a syndicate or trust was organized primarily for the purpose of liquidation rather than for the purpose of engaging in a business enterprise, and the usual corporate forms of organization and operation were not observed, the syndicate or trust was not an association subject to tax as a corporation. See C. H. Atherton et al., Trustees, 19 B.T.A. 1172; aff'd., 50 Fed. (2d) 740; White v. Hornblower, 27 Fed. (2d) 777; Blair v. Wilson Syndicate Trust, 39 Fed. (2d) 43; affirming 14 B.T.A. 508; Lucas v. Extension Oil Co., 47 Fed. (2d) 65; affirming 16 B.T.A. 1028; Lansdowne Realty Trust v. Commissioner, 50 Fed. (2d) 56; Tyson v. Commissioner, 54 Fed. (2d) 29; Dunbar v. Commissioner, 65 Fed. (2d) 447; Commissioner v. Morriss Realty Trust No. 2, 68 Fed. (2d) 648; affirming 23 B.T.A. 1073.

The instant case is distinguishable from those in which a group of individuals organize to carry on a continuing business such as prospecting and drilling for oil (Monrovia Oil Co., 28 B.T.A. 335; G. E. Jordan, Trustee, 28 B.T.A. 372), or purchasing and selling land contracts for profit in repeated transactions (Edward Leszczynski, Trustee, 29 B.T.A. 551), or buying and selling securities for profit in repeated transactions (Investment Trust of Mutual Investment Co., 27 B.T.A. 1322), or purchasing, developing, and selling real estate (Trust No. 5522 and Trust No. 5644, Bellehurst Syndicate, 27 B.T.A. 1250; G. F. Sloan, 24 B.T.A. 61; aff'd., 63 Fed. (2d) 666; Adelaide Park Land, 25 B.T.A. 211; Joseph E. Swanson et al., Trustees, 29 B.T.A. 1123). See also Cyclops Iron Works, 25 B.T.A. 603; Twin Bell Oil Syndicate, 26 B.T.A. 172; affirmed upon this point, Twin Bell Oil Syndicate v. Helvering, 70 Fed. (2d) 402.

The petitioner here was never engaged in carrying on any business. It was in purpose and in fact purely a liquidating venture. The evidence indicates that the syndicate members never expected to realize any profit from the syndicate’s operations and probably would not have done so but for the unexpected and fortuitous circumstances which resulted in the sale of the railroad’s securities in 1924.

As to the methods and forms of procedure followed by the petitioner, there were no officers corresponding to those which usually serve corporations, no meetings were held by the owners of beneficial interests, no office was maintained or formal records kept, only nominal expenses were incurred, and, in short, none of the usual forms of corporate procedure were followed. See Commissioner v. Brouillard, 70 Fed. (2d) 154; affirming Pryor & Lockhart Development Co., 26 B.T.A. 1054, and Shepherd Syndicate, 26 B.T.A. 1062.

Upon authority of the cases cited above we hold that the petitioner was not taxable as a corporation in 1924.

Reviewed by the Board.

Judgment will be entered for the petitioner.

Maequette dissents.


author: Trammell :

text:
    James McCutcheon & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49167.
    Promulgated July 13, 1934.

      Boss M. Bacon, Esq., for the petitioner.

      Harry Morton, Esq., for the respondent.
   OPINION.

Trammell :

This proceeding is for the redetermination of a deficiency in income tax of $713.28 for the fiscal year ended August 31, 1928. Matters presented for determination are (1) whether the difference between cost and selling price of certain shares of stock in the petitioner which were sold by petitioner’s subsidiary during the period of affiliation constituted taxable income and should be included as such in a consolidated return filed by the petitioner and its affiliates, and (2) in the event the foregoing issue is decided adversely to the petitioner, then whether the sale constituted an installment sale.

The petitioner is a New York corporation, with its principal office in New York City. In 1921 it organized the McCutcheon Securities Corporation, hereinafter referred to as the Securities Corporation, in order that that corporation might buy at book value pro rata from the stockholders of the petitioner a percentage of their stock in the petitioner and sell it at book value only to key employees of the petitioner as a means of increasing the interest of these men in the petitioner by making them part owners, and buy the stock back at book value at any time an employee left his position with the petitioner.

The certificate of incorporation of the Securities Corporation authorized it, among other things, to deal in stocks and bonds.

Since the incorporation of the Securities Corporation in 1921 the petitioner has owned all of its issued capital stock. The McCutcheon Realty Corporation, hereinafter referred to as the Realty Corporation, was organized in 1924 and since that time the Securities Corporation has owned all of its capital stock. For the fiscal year ended August 31, 1928, the petitioner and the foregoing corporations were entitled to and did file a consolidated income tax return.

On July 21, 1921, the Securities Corporation purchased pro rata from the stockholders of the petitioner 500 shares of common stock and 500 shares of the first preferred stock in the petitioner for $122,782.54. On the same date the Securities Corporation sold to employees of the petitioner at cost 850 shares of each class of the stock. On February 28, 1923, the corporation sold to employees of the petitioner at cost the remaining 150 shares of each class of stock. When their employment with the petitioner terminated the corporation repurchased from some of the above employees shares of stock as follows for the amounts indicated:

On February 29, 1928, the Securities Corporation sold to the following named employees of the petitioner shares of stock as follows for the amounts indicated:

The above described transactions constituted the only purchases and sales of stock in the petitioner made by the Securities Corporation from the time of its organization until the close of the fiscal year ended August 31,1928.

The foregoing transactions did not affect the affiliation existing between the petitioner and the Securities Corporation and that existing between the Securities Corporation and the Realty Corporation, since the petitioner still owned and continued to own during the entire fiscal year ended August 31, 1928, all of the outstanding capital stock of the Securities Corporation and the Securities Corporation owned during the entire fiscal year all of the outstanding capital stock of the Realty Corporation.

The contracts under which the Securities Corporation sold stock to the employees of the petitioner on February 29, 1928, provided in part as follows:

That the Designee shall pay to- the Corporation the stipulated price aforesaid, of which none has been paid, on or before October 21, 1932 with interest thereon at the rate of six (6) per centum per annum, and the certificates representing said shares, * * * issued in the name of and duly indorsed by the Designee, have been and hereby are deposited with the Corporation as collateral security for the payment in full of such sum of * * * and the interest thereon; that until the full payment of said sum and interest, the dividends paid on all of said shares shall be paid to and received by the corporation and by it applied in liquidation of said stipulated price.

Under date of February 29, 1928, the accounts on the books of the Securities Corporation of the purchasers of stock on that date were charged with the purchase price of the shares of stock purchased by them. Thereafter these accounts were charged with the amounts of interest due thereon and credited with amounts of dividends paid on the stock purchased by them. On August 1, 1932, the interest that had accrued on the purchase price was in excess of the dividends that had been paid on the stock and as a consequence all of the purchasers, except one who had made some cash payments in 1928 and in 1929, were indebted to the Securities Corporation in greater amounts than at the time they purchased the stock. The Securities Corporation still holds as security for the indebtedness of the purchasers the shares of stock it sold them.

The consolidated income tax return of the petitioner, the Securities Corporation, and the Realty Corporation filed for the fiscal year ended August 31, 1928, showed a taxable net income of $207,357.98, on which a tax of $25,919.75 has been paid.

In determining the deficiency here involved the respondent increased the taxable income shown on the consolidated return by the amount of $6,538.04 representing the difference between the cost of $37,782.66 to the Securities Corporation of the 145 shares of common stock in the petitioner and the 145 shares of first preferred stock in the petitioner and the price of $44,320.70 at which it sold such stock to the employees of the petitioner in February 1928.

The petitioner contends that the amount of $6,538.04 by which the respondent increased the consolidated income does not constitute taxable income, since the sales from which the amount resulted were of stock in a member of an affiliated group by another member of the group during the period of affiliation. The respondent contends that if a separate return had been filed by the Securities Corporation it would have had to include the profit from the sales in its taxable income, and, since the provisions of the law authorizing the filing of consolidated returns does not purport to modify or change the method of computing the income of the various corporations for which a consolidated return is filed, the amount in controversy constituted taxable income of the Securities Corporation and was properly included by him as a part of the consolidated income of the group.

In support of its position the petitioner relies on our decision in John Scowcroft & Sons Co., 18 B.T.A. 532, wherein we held, upon authority of our prior decisions, that where two corporations are affiliated the consolidated net income is to be computed as for one corporation and the sale by .one of such corporations of some of its stockholdings in the other, affiliation continuing, should be treated, for the purpose of the income tax, as a sale by the affiliated group of its capital stock and as a capital transaction, giving rise to neither a taxable gain nor a deductible loss. We reached that conclusion on the theory that affiliated corporations filing a consolidated return Avere, for the purpose of the tax, .one and the same taxpayer and that the sale Avas a capital transaction which could not give rise to taxable gain or deductible loss irrespective of whether the sale of the stock was to an outsider or not. In Van Camp Packing Co., 26 B.T.A. 256, we reached the same conclusion as in the Soowcroft case and upon the same basis. The decision in the Van Camp case was reversed, upon appeal, 61 Fed. (2d) 596, the court quoting from Woolford Realty Co. v. Rose, 286 U.S. 319, and Commissioner v. Ben Ginsburg Co., 54 Fed. (2d) 238. In the Woolford, Realty Co. case the Supreme Court said:

The fact is not to be ignored that each of tA\'o or more corporations joining (under §240) in a consolidated return is none the less a taxpayer. Commissioner v. Ginsburg Co., 54 F. (2d) 238, 239, By the express terms of the statute (§240b) the tax Avlien compiuted is to be assessed, in the absence of agreement to the contrary, upon the respective affiliated corporations “ on the basis of the net income properly assignable to each.” “ The term ‘ taxpayer’ means any person subject to a tax imposed by this Act.” Revenue Acc of 1922, §2a(9). A corporation does not cease to be such a person by affiliating with another.

In the Ginsburg case the court said:

Even though both corporations were affiliated in 1927, they each remained taxpayers, and their affiliation merely made them a tax computing unit, Swift & Co. v. United States (Ct. Cl.) 38 F. (2d) 365, 379; Sweets Co. v. Commissioner, 40 F. (2d) 436 (C.C.A. 2). * * * But a corporation of the affiliated group remains a taxpayer, and the deduction must be confined to tlie computation of the net income of the corporate entity. * * * And Ave said in Sweets Co. v. Commissioner, supra, that the statutory provisions for consolidated returns declared merely a method of computing the taxes of the corporation members of the group. It is section 240 (a) which authorized the net Income of the affiliated group to be made up while computing the net income and losses of the several corporations and then consolidating the results of the several computations, thereby adding net income to net income and net loss to net loss and arriving at the taxable income by subtracting the composite net loss from the total net income.

Inasmuch as under the more recent decisions, as indicated above, affiliated corporations filing a consolidated return are not to be treated as one and the same taxpayer, but as taxpayers retaining their separate identities, and as not all dealings by a corporation in its capital stock are to be considered purely as capital transactions resulting in neither taxable gain nor deductible loss, it appears that the basis upon which our decisions in the Scowcroft and Van Camp cases were reached can not be sustained. Accordingly, the Scowcroft case relied on by the petitioner can no longer be considered as authority for its contention.

Here the Securities Corporation, the subsidiary, purchased from stockholders and employees or former employees of the petitioner certain shares of stock in the petitioner which it subsequently sold for an amount greater than it had paid for such stock. In view of the fact that the two corporations were separate taxpayers, we are of the opinion that the gain from the transactions constituted taxable income of the Securities Corporation and properly is to be included as a part of the taxable consolidated income. The action of the respondent is therefore sustained.

The petitioner urges that, in the event we hold that the income from the sales is taxable, then it is to be reported on the installment basis instead of the full amount to be included in the income of the taxable year. Since we have held that the income from the sales is taxable, it becomes necessary to consider this contention of the petitioner.

The contracts under which the Securities Corporation sold the stock in 1928 provided for the payment for such stock “ on or before October 21, 1982 with interest thereon at the rate of six (6) per centum per annum.” They further provided that until the payment in full of the purchase price of the stock and the interest thereon “ the dividends paid on all of said shares shall be paid to and received by the Corporation and by it applied in liquidation ” of the purchase price. During the years 1928 and 1929 the amounts of the dividends paid on the shares of stock exceeded the amount of the interest accruing on the purchase price, but beginning in 1930 the situation was reversed. Dividends paid on the stock from the time of its sale in the early part of 1928 down to August 31 of that year, the close of the petitioner’s taxable year, amounted to $1,740, which the petitioner contends constituted the initial payments. The petitioner contends that of the profit on the sales, $6,538.04, only 1740/44,320.70, or $256.68, represented taxable income on the installment basis. The respondent denies that the petitioner is entitled to report the profit on the installment basis.

Under the contracts of sale the only fixed date of payment for the stock was October 21, 1932. While under the contracts dividends paid in the meantime on the stock were to be received by the Securities Corporation and applied by it against the purchase price, the provision was contingent upon the declaration and payment of dividends. The contracts contained no statement respecting either the amounts or dates of payment of dividends. If no dividends had been declared and paid by the petitioner no payments were required to be made to the Securities Corporation. The sole unconditional obligation contained in the contracts respecting payment of the purchase price was that it be paid on or before October 21,1932.

In Thomas F. Prendergast, Executor, 22 B.T.A. 1259, we considered the question as to the meaning of the word “ installment ” and reached the conclusion that where only one single payment was provided for in the sales agreement the transaction was not an installment sale. Here the payment of only one definite sum of money, the purchase price, and only one fixed date upon which it was to be paid were specifically and unconditionally provided for. All else was contingent. Under these circumstances we are not able to find that the sales constituted sales on the installment plan.

Reviewed by the Board.

Judgment will ~be entered for the respondent.


author: Steknhagen:

text:
    American Central Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 30133, 31998, 56024, 63436.
    Promulgated July 17, 1934.

      Robert A. Adorns, Esq., and Abbot P. Mills, Esq., for the petitioner.

      James 0. Maddox, Esq., and John I). Foley, Esq., for tbe respondent.
   OPINION.

Steknhagen:

1. In computing the deduction under section 245, Bevenue Act of 1926, and section 203, Bevenue Act of 1928, the Commissioner has excluded from the “ reserve funds required by law ” the stipulated amounts of the insured’s personal benefit fund. This fund, as is shown by the findings, consists of amounts of $6.23 each contributed by policyholders as provided in the policies called “ Whole Life Premium Seduction Payable at Death.” This fund is by the terms of the policy built up for a period of 19 years, when, with the accretion of the company’s fixed interest contributions, it is apportioned among the survivors of the persistent contributing policyholders of the class. Thereafter, at the end of 20 years, the amounts thus apportioned are, at the election of the policyholder, distributed either in cash or by being applied to further insurance or otherwise as expressly provided in the policy. The respondent’s disallowance treats the fund as something apart from insurance and hence outside the intendment of the statute.

There can be no doubt that this is a reserve, that it is contractually provided in the petitioner’s insurance policies, and that it is within the requirement of the Indiana State law as that law is interpreted and administered by the State Commissioner of Insurance. In practice, it is regarded and treated by the petitioner as among its insurance reserves. Unless, therefore, it is apparent from analysis that the fund is something else and is not within the plan of the statute, its inclusion within the statutory reserve follows. While nomenclature alone does not determine the nature of the fund, consideration must be given to the recognition and treatment of it in the field of insurance and of state supervision. The scope of the term “ reserve funds required by law ”, as used in the revenue acts, has often been considered in respect of various f unds set up by insurance companies under varying circumstances. These different funds vary widely and each requires consideration in respect of its source, function, and sanction as the basis for its classification within or without the statutory provision.

The reserve which has been most recently and perhaps most fully considered is that of a premium reduction coupon fund, and the decisions affecting such reserve guide us as to the present decision. Commissioner v. Standard Life Ins. Co., 47 Fed. (2d) 218 (C.C.A., 3d Cir.); Commissioner v. Western Union Life Ins. Co., 61 Fed. (2d) 207 (C.C.A., 9th Cir.); Commissioner v. Great American Life Ins. Co., 70 Fed. (2d) 133, rehearing denied April 30, 1934 (C.C.A., 10th Cir.). Like the coupon obligation in those cases, the obligation here to each interested policyholder is contingent upon his survival of the term and his election to persist in his participation and to select the method of application of his distributive share of the fund upon its maturity. While the company may Be required to pay cash, as in the case of matured coupons, it may also, as in that case, be required to apply the distributive share to further insurance.

The Commissioner urges that, although the obligations as to the benefit fund and its contributions are found in the insurance policy, they are inherently not insurance obligations but that the arrangement is merely a sort of investment pool. We may not, however, upon this record, treat this fund as if it were unrelated to the insurance policies. To some extent most modern insurance embodies something besides strict insurance. We do not understand that the reserves which the statute recognizes are only those which can be mathematically related to the insurance function in its strict and narrow sense. While clearly it excludes distinctly noninsurance funds, such as reserves for dividends, Midland Mutual Life Ins. Co., 19 B.TA. 765, and while it has recently been held to exclude a “ guaranteed dividend fund ”, Farmers Life Ins. Co., 27 B.T.A. 423, we think that this does not require the exclusion of such a fund as this, which is expressly provided for in an insurance policy as one of its inherent provisions. This fund would no doubt serve to measure the extent of reinsurance available to the petitioner, cf. Commissioner v. Great American Life Ins. Co., supra.

While it is not suggested by the respondent, the inquiry arises whether, if this fund were not among the reserve funds required by law but were among the petitioner’s noninsurance obligations, there would be a right under section 245 (a) (8) to deduct the interest which the petitioner was obligated to accrue.

In our opinion, the Commissioner erroneously excluded the insured’s personal benefit fund from the statutory reserve funds required by law. Since, however, the respondent did permit the inclusion at the end of 1926, no adjustment as to that date is required.

2.The stipulated amounts held by petitioner as a reserve to meet its coupon obligations under the premium reduction coupon policies are properly parts of the reserves to be used as the basis of the deductible percentage. Commissioner v. Standard Life Ins. Co., supra (C.C.A., 3d Cir.); Commissioners. Western Union Life Ins. Co., supra (C.C.A., 9th Cir.); Commissioner v. Great American Life Insurance Co., supra (C.C.A., 10th Cir.); Reserve Loan Life Ins. Co., supra (petition for review dismissed, C.C.A., 7th Cir.); Atlas Life Ins. Co., supra.

3. That the statute is valid in its requirement that the computed rental value of space occupied by petitioner in its own building must be included in gross income as a condition to the deduction of taxes and expenses is now settled by Commissioner v. Independent Life Ins. Co., 292 U.S. 371. Hence the respondent’s inclusion of the stipulated rental value for 1925, 1926, and 1928 is correct. For 1929, the petitioner’s failure to include any rental value for such space supports the respondent’s disallowance of any deduction for such taxes and expenses.

4. The petitioner in earlier years had loaned money on mortgages. In 1928 and 1929, interest, and probably principal, being in default, petitioner acquired the mortgaged properties, some by voluntary deed and some by bidding at foreclosure sales. In each instance respondent included in petitioner’s income of the year of such acquisition the amount of accrued interest. The petitioner contests this inclusion in toto, saying that such interest was not received either actually or constructively.

Since, under the special method of taxing life insurance companies, profit is not included in gross income and losses are not deductible, the only question is whether in these transactions petitioner derived income by way of interest.

a. As to the property acquired by voluntary deed, it appears only, as shown by our findings, that the properties acquired in 1928 had secured loans upon which interest of $6,708.55 was due and unpaid, and that $129.75 had been expended by petitioner as advances and transfer charges; and that as to those acquired in 1929, the unpaid interest was $5,393.17 and the advances and transfer charges were $1,013.10. From this scant evidence, it can not be said that petitioner did not receive the interest. If the properties were worth more than the loans, costs, and interest, (and the record on this is silent), it could not be said that petitioner did not receive its interest. The property received may properly, without resort to the doctrine of constructive receipt, be treated as cash to the extent of its value, and the interest which a taxpayer is required to include in income is not restricted to cash receipts bearing the label of interest. We may assume, as the Commissioner did, that the mortgagee’s debt for the interest was discharged by the transfer. As to the items of $6,708.55 for 1928 and $5,393.17 for 1929, the respondent’s determination is sustained. Missouri State Life Ins. Co., 29 B.T.A. 401.

b. As to the property acquired by bidding it in at foreclosure, different situations require different treatment. Where the amount of the bid was no more than the principal of the loan, the decisions in John Hancock Mutual Life Ins. Co., 10 B.T.A. 736, and Missouri State Life Ins. Co., supra, have laid down the rule that nothing is to be treated as interest received. Cf. Drier v. Helvering, 72 Fed. (2d) 76. This applies to 12 of the 17 foreclosures covered by the evidence.

In five cases specifically shown in the findings (Nos. 64, 62, 85, 74, and 88) the bid exceeded the principal. The excess should first be applied as reimbursement for expenses and delinquent taxes, and only the remainder included in income as accrued interest. It does not appear whether, in any instance, the entire indebtedness was discharged or whether there remained an undischarged liability to any extent. The Commissioner, however, erred in including the book interest between the date of foreclosure and the transfer entry in the real estate account. That amount was in no sense received, nor was it accrued at the date of foreclosure.

Judgment will be entered imder Rule 50.

         McCoach v. Insurance Co., 244 U.S. 585; United States v. Boston Ins. Co., 269 U.S. 197; New York Life Ins. Co. v. Edwards, 271 U.S. 109; Massachusetts Mutual Life Ins. Co. v. United States, 56 Fed. (2d) 897; Minnesota Mutual Life Ins. Co. v. United States, 66 Ct.Cls. 481; Commissioner v. Standard Life Ins. Co., 47 Fed. (2d) 218; Commissioner v. Western Union Life Ins. Co., 61 Fed. (2d) 207; Commissioner v. Great American Life Ins. Co., 70 Fed. (2d) 133; rehearing denied April 30, 1934; Old Line Ins. Co., 13 B.T.A. 758; Reserve Loan Life Ins. Co., 18 B.T.A. 359; Midland Mutual Life Ins. Co., 19 B.T.A. 765; Farmers Life Ins. Co., 27 B.T.A. 423; Atlas Life Ins. Co., 29 B.T.A 750; Missouri State Life Ins. Co., 29 B.T.A. 401; Illinois Life Ins. Co., 30 B.T.A. 1160.