author: Steknhagen : AeuNdell,

text:
    Mary Ryerson Frost, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88981.
    Promulgated December 16, 1938.

      Kenneth Howes, Esq., for tbe petitioner.

      James D. Head, Esq., and Bryce W. Royce, Esq., for the respondent.
   OPINION.

Steknhagen :

The Commissioner determined a deficiency of $4,159.49 in petitioner’s income tax for 19B4. He included in her income a portion of the income of a trust established by her in which the right to alter and amend was held jointly by herself and. her husband, who was the. trustee and a beneficiary. The facts are contained in a written stipulation.

Petitioner, a resident of Boston, Massachusetts, on December 31, 1931, transferred personal property in trust to her husband, Donald McKay Frost, as trustee. The trust directs the trustee to hold and manage the corpus, to collect the income, and, after paying expenses, to distribute income and principal as follows:

1. The- Trustee shall accumulate the net income received during each calendar year and on the last day of the year shall pay to Donald McKay Frost individually during his lifetime one-fifth (⅜) of such accumulated net income, but not less than the sum of Five Thousand (5,000) Dollars, and shall transfer and pay the balance of the net income, or the entire net income after the death of Donald McKay Frost, into the principal of the trust * * *.
2. The Trustee at any time or from time to time upon receipt of a request or requests in writing signed by Donald McKay Frost and Mrs. Mary Ryerson Frost while both are living and of sound mind, or, in case of the death or mental incapacity of either of them, by the survivor or other of them and by any one of their three (3) children hereinafter mentioned then living and of age and of sound mind, shall distribute and pay over the principal of the trust fund in whole or in part and in equal or unequal shares to or for the benefit of Donald McKay Frost, Mrs. Mary Ryerson Frost and their children Mary Ryerson Frost 2d, Donald McKay Frost, Jr., and Mary Jane McKay Frost, or any one or more of them, all as shall be specified in said written request or requests.

Paragraph 4 provides that if the trust is not sooner terminated by distributions it shall terminate upon the death of the last survivor of the husband and wife and their three children, and the property shall then be distributed in three equal shares to the children’s appointees by will or, in default of appointment, to their heirs at law.

5. This trust may be altered or amended at any time or from time to time by an instrument or instruments in writing delivered to the Trustee and signed by the following parties:
(a) During the joint lives of Donald McKay Frost and Mrs. Mary Ryerson Frost and so long as they shall both be of sound mind, by an instrument or instruments in writing signed by both of them.
(b) After the death or mental incapacity of either Donald McKay Frost or Mrs. Mary Ryerson Frost, by an instrument or instruments in writing signed by the survivor or either of them.

Donald McKay Frost, Jr., died in 1932. The two daughters are still living.

On July 12,1933, petitioner and her husband, by written instrument, changed the trust provisions relating to the appointment of a successor trustee. On November 28, 1934, as a memorial to their son, they directed the trustee in writing to pay the 1934 income and so much of the principal as might be necessary (but not exceeding $40,000) to St. Mark’s School for the construction and furnishing of certain rooms at the school, and to transfer $10,000 in cash or securities to the school as an endowment for the maintenance and repair of the rooms. St. Mark’s School is a college organized and operated exclusively for educational purposes, and no part of its net earnings inures to the benefit of any private shareholder or individual.

In 1934 the trust received income of $14,362.17, derived from “nontaxable obligations”, and other income of' $34,635.81, of which $2,277.53 was capital net gain. It was entitled to deductions of $2,296.89. During the year the trustee paid $8,910.21 to himself as trust beneficiary; transferred income of $8,780.10, exclusive of capital gain, to trust principal, and paid to the school for constructing, furnishing, and maintaining rooms, $34,260.75, of which $7,500 was from trust principal and the remainder from 1934 income. In his individual income tax return for 1934 Donald McKay Frost reported $6,031.78 received from the trust as one-fifth of the trust’s taxable net income for 1934, computed without any deduction for the contribution to the school or for a $100 contribution.

In determining the deficiency for 1934 the Commissioner included in petitioner’s individual income $21,064.10, being all of the taxable income of the trust for that year except $6,031.78 which went to Donald McKay Frost. He defends this determination under sections 166 and 167 of the Revenue Act of 1934, on the ground that it is only as to one-fifth of the trust income that petitioner as the grantor of the trust is without possibility of ownership and control. Although the theory of the Commissioner’s determination is not clearly stated, we are of opinion that the determination is within section 167 and that it is unnecessary, therefore, to consider whether section 166 is applicable. In purpose the two sections, one relating to revesting of corpus and the other of income, are to be construed by similar considerations, Kaplan v. Commissioner, 66 Fed. (2d) 401; Higgins v. White, 18 Fed. Supp. 986.

By the terms of paragraph 1 of the trust instrument, so much of the net income as remains after the distribution to Donald McKay Frost as an individual is to be transferred to trust principal; and by paragraph 2 it is provided that if the grantor survives her husband some or all of such net income as has become principal may at the direction of herself and one of her children be distributed to her. By paragraph 5, after the death of her husband before her own she alone could amend the terms. This is literally within section 167 and also harmonious with its intendment as interpreted by the First Circuit Court of Appeals in the Kaplan case. Furthermore, this is not a mere possibility of reversion, cf. William E. Boeing, 37 B. T. A. 178 (on review C. C. A., 9th Cir.); John Edward Rovensky, 37 B. T. A. 702, for the right to control the use of the remaining four-fifths principal does not lie inchoate pending the grantor’s survivorship of her husband, but is a power existing at all times in her, first in conjunction with her husband and then alone.

Finding the determination to be supported by the language of section 167, we need not consider the question argued, whether during the life of the husband he was a person not having a substantial adverse interest, see Jane B. Shiverich, 37 B. T. A. 454, or the question whether the minimum of $5,000 causes the husband’s individual interest to permeate beyond one-fifth of the income into the whole trust corpus.

The Commissioner now submits a further contention not suggested in his notice of deficiency. The contention is that the amount paid to St. Mark’s School as a memorial to the deceased son must be regarded as having been paid constructively to the petitioner and by her given gratuitously to the school. This view we think can not be accepted. The trust instrument was amended, as permitted by article 5, to make the school a beneficiary of the trust. The amount which it received was received in that capacity. While it is true that by the terms of the instrument the petitioner, with her husband, might have requested in writing that the trustee pay this amount out of principal to her in order to enable her in turn to make a gift to the school, this was not done, and we see no reason to attribute to the petitioner an amount which she did not receive, through the application of the artificial doctrine of constructive receipt. What was done and not what might have been done is the basis for tax. United States v. Phellis, 257 U. S. 156; Davidson v. Commissioner, 305 U. S. 44. The respondent was in error in attributing to the petitioner as part of her individual income any part of the amount paid by the trust to the school in the taxable year.

Eeviewed by the Board.

Decision will be entered under Bule SO.

Leech concurs only in the result.

AeuNdell,

dissenting: I disagree with that part of the majority opinion holding that the trust created by the petitioner comes within section 167 of the Eevenue Act of 1934. That section, as far as material here, provides for taxing to the grantor the trust income that “is * * ⅝ held or accumulated for future distribution to the grantor.” In this case, while four-fifths of the income “is :!: ⅝ * held or accumulated”, I do not see how it can be said that it is held or accumulated “for future disposition to the grantor” in view of the fact that she could not by her own act secure distribution to her unless she survived her husband-beneficiary. The possibility of her survival is a contingency over which she has no control. A similar contingent reversion in William E. Boeing, 37 B. T. A. 178, is described as a mere “possibility of reverter”, and we held that under such a bare possibility the trust income is not “held or accumulated for future distribution to the grantor.” Neither this trust nor the Boeing trust contains definite provision for future distribution to the grantor. While this trust has in it a provision for amendment by joint action of the grantor and the beneficiary, and the Boeing trust did not, this is not a distinction as the Boeing grantor and beneficiary, being the only parties in interest, could together have amended at any time. Helvering v. Helmholz, 296 U. S. 93. I am unable to see any ground for distinguishing the two cases, and under the principle of the Boeing case the trust income here is not reached by section 167.


source: Caselaw Access Project

author: Turner: Hill,

license: Public Domain

text:
    Gordon M. Evans, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88261.
    Promulgated December 16, 1938.

      J. Lee Boothe., O. P. A., for tbe petitioner.

      Btomley B. Anderson, Esq., for the respondent.
   OPINION.

Turner:

Respondent contends that the option agreement between the petitioner and his employer, the Kelvinator Corporation, constituted an agreement for the payment of additional compensation and that the difference between the price paid for the shares of stock and their fair market value on the date of delivery was taxable income for the year 1934, in which the shares of stock were actually acquired. The petitioner contends that there was a bona fide purchase of the stock and that there was no realization of gain unless and until the shares of stock were disposed of at a profit. For the purpose of determining percentage of gain recognized as the result of the sale of 1,000 shares of the said stock on December 1, 1934, the parties are also in dispute as to the period the stock was held by the petitioner.

In 1929 the petitioner was serving as an executive of the Kelvinator Corporation. On September 13 of that year he was advised that the corporation had authorized a stock participation plan for a selected list of its executives and that under that plan he would be entitled to purchase 3,000 shares of Kelvinator Corporation stock at $10 per share, which at that time was less than its fair market value. He was advised that this offer was being made because it was recognized that the success of the company was assured only through the “tireless and united efforts of its executive personnel, continuously applied”, and as additional and separate consideration for his continued best efforts in the service of the company. It was also stated, however, that the acceptance or rejection of the offer was a matter of personal decision on the part of the employee and that the offer was not made in lieu of salary and its acceptance was to be considered as a separate and additional agreement which in no way conflicted with the existing relations.

Up to August 1, 1931, the petitioner had not acquired any of the shares of stock under the plan and on that date he received a further communication from the corporation advising that the plan had been renewed or extended for a period of three years to December 1, 1934. The difference between the original offer of September 13, 1929, and the extended offer of August 1, 1931, was to be found in the proposal under the extended plan to make credits to employees on December 1 of each year of a proportionate part of the corporate earnings. These earnings were to be credited to tlie account of the employee and were to be applied in his behalf in payment on the purchase price of the stock. An employee had the right to receive on demand the number of shares which could be purchased by the total earning credits which had up to that time been actually “applied” to his account, but in that event would have no further right to purchase stock or receive earning credits. The price the employee was required to pay still remained at $10 per share, and on August 28, 1931, when petitioner noted his acceptance of the extended plan, the fair market value of Kelvinator Corporation stock was $10.62½ per share. It is also to be noted that on March 29,1933, when the purchase price of the stock was reduced to $8 per share, the fair market value of the stock was $4.50.

We recently had occasion in Delbert B. Geeseman, 38 B. T. A. 258, to consider a transaction substantially similar to the transaction here and held that it was what its form indicated, a purchase of stock by the employee, and not the payment of compensation by the employer corporation. Here, as in the Geeseman case, the acceptance of the offer by the petitioner did not change his contract of employment and his continued employment was not dependent upon the agreement to purchase the stock. It is true that the extended plan outlined in the letter of August 1,1931, was to some extent different from the original plan and there was some statement that it was designed “to compensate those who continue to give the company their best efforts until December 1, 1934.” As we pointed out in the Geeseman case, however, the hope and desire that the acquisition of stock by a selected group of employees would stimulate the interest and efforts of those employees in the business of the company were not alone sufficient to stamp a sale of stock to such employees as the payment of compensation merely because the selling price of the stock was fixed at an amount less than its fair market value. It is to be noted here that the extended plan made no change in the price to be paid for the stock, and further, that at the time the offer was accepted by the petitioner on August 28, 1931, the fair market value of the stock was substantially the same as the price to be paid. The fair market value later dropped to an amount less than half of the purchase price originally provided, resulting in a reduction by the corporation of the purchase price from $10 to $8 per share. The only substantial point of difference between the original plan and the extended plan was that the corporation would, through the crediting of a proportion of earnings, provide additional compensation for those executives who had the right to participate in the plan. The petitioner not only makes no contention that the credits made to his account out of earnings of the corporation did not constitute income, but to the contrary has reported those amounts as income for the years in which the credits were made. The injection into the extended plan of an arrangement whereby additional compensation was so paid to employees does not in any way affect or change the purchase of Kelvinator Corporation stock by petitioner into the payment of compensation by the corporation.

The petitioner relies principally upon a decision of the Circuit Court of Appeals for the Eighth Circuit in Omaha National Bank v. Commissioner, 75 Fed. (2d) 434, which involved facts substantially similar to those of the present case. In the notice of deficiency herein the respondent stated that he was not following that case-and on brief counsel attempted to distinguish the two cases. We do not think the distinction pointed out, however, is of such nature that it requires or indicates the conclusion sought, and on authority of that case and Delbert B. Geeseman, supra, we decide this issue for the petitioner.

Upon receipt of the 3,000 shares of Kelvinator Corporation stock on December 1, 1934, petitioner sold 1,000 shares for $16,304.67, and the remaining question for determination is what percentage of the gain realized upon that sale is recognizable under the provisions of section 117 of the Revenue Act of 1934. Under the statute the percentage of gain recognized is fixed by the length of time the petitioner “held” the stock so sold.

The petitioner makes three alternative contentions — one being that one-fourth of the 3,000 shares of Kelvinator stock acquired by the petitioner was acquired on December 1 of each of the years 1931 to 1934, inclusive; another, that the entire 3,000 shares of stock were held by petitioner from August 28, 1931, the date the extended option agreement was accepted by the petitioner; and the other, that so much of the stock was purchased at the time of the application of each earning credit as the said credit would pay for. The petitioner relies principally on the first alternative stated above, namely, that he purchased 25 percent of the entire 3,000 shares on December 1 of each year from 1931 to 1934, inclusive. It is the respondent’s contention, on the other hand, that none of the stock was acquired or held by the petitioner prior to the date of delivery on December 1, 1934.

The option agreement as amended provided that the shares should “be deliverable to participants on December 1, 1934” on payment of $8 per share, less the amount of the earning credits, as set forth in our findings of fact. It also provided that in the event a participant left the employ of the corporation prior to December 1, 1934, he would be entitled to receive the amount of shares which the total earning credits theretofore actually applied would pay for at $8 per share, and, in addition, would have the right to purchase such number of shares of the total number allotted to him as had actually become purchasable upon the date he left the employ of the corporation. There was the further provision that any participant remaining in the employ of the corporation had the right at any time to demand and receive shares upon the same basis as a participant who had left the employ of the corporation, but upon the withdrawal of such shares, such participant would have no further right to purchase stock or receive future earning credits.

In McFeely v. Commissioner, 296 U. S. 102, in considering the definition of “capital assets” under section 101 of the Kevenue Act of 1928 and referring particularly to the period during which property is “held”, the Supreme Court stated in part:

In common understanding to liold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then, that from which to compute the duration of ownership or the length of holding.

Originally there may have been some basis for the thought that the term “holding” contemplated possession as well as ownership. See Ogle v. Helvering, 77 Fed. (2d) 338. But, as we read MoFeely v. Commissioner, supra, and the dissent thereto, any such restrictive interpretation of the statute has been rejected. See also Helvering v. New York Trust Co., 292 U. S. 455. In the instant case certainly no participant in the stock purchase plan could acquire possession of any of the stock prior to December 1, 1934, if he was to continue as a participant to the extent of the total number of shares allotted to him. The extended agreement specifically provided, as we have noted, that the shares were to “be deliverable to participants on December 1,1934.” On that date a participant was to receive the total number of shares allotted to him upon the payment of a total purchase price of $8 per share, less the amount of earning credits actually entered to his credit. In the light of the language quoted from McFeely v. Commissioner, supra, our question is narrowed to whether or not the petitioner owned any of the shares of Kelvinator Corporation stock prior to December 1, 1934.

The first two of the alternative contentions made by the petitioner seem to us to be clearly without merit. At the time petitioner accepted the extended plan on August 28, 1981, he was the holder of an option to purchase 3,000 shares of Kelvinator Corporation stock, but we find no basis for concluding that he owned any shares prior to the date of payment or the application of earning credits. • Helvering v. San Joaquin Fruit & Investment Co., 297 U. S. 496. The same conclusion follows as to the second alternative to the extent that the allotments which became purchasable on December 1 of each year from 1931 to 1934, inclusive, were not paid for by the earning credits which had on those dates actually been applied on the petitioner’s account or otherwise actually paid for. As to the third contention, however, we find merit in the petitioner’s position. When earning credits were made by the Kelvinator Corporation to the accounts of its participating employees those employees certainly received valuable rights which to them and to the Kelvinator Corporation existed only in the form of Kelvinator stock. There was no alternative with either the employee or the Kelvinator Corporation. The employee had no right to take money or any property other than Kelvinator stock and the Kelvinator Corporation was obligated to deliver Kelvinator shares on demand. At the time of the entry of each earning credit the participating employee became entitled to the number of Kelvinator Corporation shares that the amount of earning credits so entered and applied would pay for at the rate fixed by the option agreement, even though delivery of the said shares was not to be made until December 1, 1934. Such a participating employee had the absolute right to demand delivery of the shares so paid for at any time. The respondent argues, however, that petitioner was not the owner of the shares at that time, inasmuch as possession of the shares so paid for could not be acquired except through sacrifice by the employee of all rights to thereafter participate in the plan and to acquire earning credits in the future or the right to purchase the remaining shares in his allotment which had not accrued on the date of taking down the shares already paid for. While it is true, as the respondent points out, that the employee would by demanding delivery of the shares already paid for lose his right to purchase the remaining shares and his right to subsequent earning credits, there is no way in which and no provision whereby such employee was ever to lose his right to the shares which had been paid for by the earning credits already applied to his account. In our opinion the petitioner’s right was something more than a right to complete a purchase on- December 1, 1934, of the 3,000 shares of Kelvinator Corporation stock and petitioner actually owned the shares purchasable by the earning credits actually applied from the date of the credit, even though delivery of the certificates might be postponed to some subsequent date. Cf. Harvey S. Strassburger, 37 B. T. A. 881. We are also of the opinion that the petitioner became the unqualified owner of additional shares of Kelvinator Corporation stock on March 23, 1933, through the reduction of price from $10 to $8 per share to the extent that the amount of the earning credits previously applied actually purchased additional shares of Kelvinator stock. The period during which petitioner held the 1,000 shares sold should be computed in accordance with the conclusions stated.

Reviewed by the Board.

Decision will be entered under Bule 50.

Hill,

dissenting: I do not agree with that part of the opinion of the majority of the Board relating to the time of acquisition of the stock involved herein and the length of time it was “held” by him, in contemplation of section 117 (a) and (b) of the Revenue Act of 1934. It is my opinion that no part of the stock in question was held for more than one year and that 100 per centum of the gain realized upon the sale of 1,000 shares of the stock is recognizable for tax purposes.

I think the petitioner had no right to demand stock to the extent of the earnings credited to the purchase price of 3,000 shares and at the same time exercise his right to complete the purchase of 3,000 shares in accordance with the terms of the accepted option. He had the right to elect either to demand so much stock at the option price as the earnings credits would pay for and thereby forfeit his right to purchase under the option the remainder of the 3,000 shares, or to have the earnings credits applied to the purchase price of the' full 3,000 shares — and not to a less number of shares. He could not do both. Petitioner elected the latter course and, having so elected, he must abide by the terms of the option for the purchase of the full 3,000 shares. Briefly stated, then, petitioner accepted an offer to purchase 3,000 shares of Kelvinator Corporation stock at $8 (originally $10) per share, or a total of $24,000, on condition that payment therefor was to be made as follows and not otherwise:

By crediting the proportionate annual earnings of such stock to the purchase price on the first day of December, 1931, 1932, 1933, and 1934, respectively, and the payment in cash on December 1, 1934, in the amount" of the difference between the total of such earnings credits and $24,000, the total purchase price.

The payment was so made. The stock was deliverable only upon the completion of such payment on, or as of, December 1, 1934, and was accordingly delivered. I think, therefore, that petitioner acquired the stock in the full amount of 3,000 shares on December 1, 1934, and that he neither acquired nor held any part of it prior thereto.

For the reasons assigned I respectfully dissent.

Smith and Mellott agree with this dissent.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) General Rule. — In the ease of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall he taken into account in computing net income:
      100 per centum if the capital asset has been held for not more than 1 year;
      80 per centum if the capital asset has been held for more than 1 year but not for more than 2 years;
      60 per centum if the capital asset has been held for more than 2 years but not for more than 5 years;
      40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years ;
      30 per centum if the capital asset has been held for more than 10 years.
      (b) Definition of Capital Assets. — Eor the purposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.


author: Van Fossan:

text:
    Joseph Kahn, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harry Kahn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82860, 82861.
    Promulgated December 16, 1938.

      Llewellyn A. Luce, Esq., for the petitioners.

      Frank B. Seklosser, Esq., for the respondent.
   OPINION.

Van Fossan:

The first issue involves the familiar problem of deductions for worthless debts. There is no controversy as to their actual charge-off or as to the fact that a determination was made by the petitioners that the debts were worthless.

The facts, however, present an unusual situation. There is no proof or suggestion that the debtors were insolvent, that they were unwilling to pay their obligation or that they were in financial difficulty. The unusual factor is the undisputed fact that circumstances wholly beyond the debtors’ control delayed the payment of the accounts beyond the end of the taxable year.

The statute allows a deduction of debts ascertained to be worthless and charged off in the taxable year. But such an ascertainment and charge-off does not close the matter to review. When the question arises before the Board the taxpayer must prove the fact of worthlessness. The evidence must be such as reasonably to convince the Board that the accounts were in fact worthless. Worthlessness is not established by a showing that payment has been delayed a few months and may suffer further postponement. It matters not that the delay is due to conditions beyond the control of the debtor. Nor is it established generally without proof, direct or implied, of a distressed financial status on the part of the debtor. Here the proof establishes nothing as to the financial condition of the debtors. For aught that appears, they were ready and willing to pay. Likewise, there appears no reason why payment could not have been made to petitioner’s agents in the several countries. The difficulty was solely one of transmission of currency out of the countries. In this situation we can not hold that the debts were worthless. Their collection was delayed by the embargoes but the accounts were not worthless. See Richards & Hirschfeld, Inc., 24 B. T. A. 1289. Corroboration of this conclusion is seen in the fact that soon after the embargoes were lifted the accounts were paid. The Commissioner’s action is approved.

Under the second issue, the petitioners claim additional deductions for entertainment expenses. We note that the respondent has allowed one-half of the amounts claimed by each petitioner, thus recognizing the basis of the deduction but not approving the amount. There appears to be no question as to the fact that the amounts were actually spent. The amounts claimed do not seem unreasonable when compared with gross sales of over $1,300,000.

The only factor in the situation that would possibly prevent the allowance is the failure of the petitioners to keep an accurate account of the money so spent. Both petitioners and respondent rely on Cohan v. Commissioner, 39 Fed. (2d) 540 (C. C. A., 2d Cir.). In that case the court said:

In the production of his plays Cohan was obliged to be free-handed in entertaining actors, employees, and, as he naively adds, dramatic critics. He had also to travel much, at times with his attorney. These expenses amounted to substantial sums, but he kept no account and probably could not have done so. At the trial before the Board he estimated that he had spent eleven thousand dollars in this fashion during the first six months of 1921, twenty-two thousand dollars, between July first, 1921, and June thirtieth, 1922, and as much for his following fiscal year, fifty-five thousand dollars in all. The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence of any items or details. The question is how far this refusal is justified, in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent. True, we do not know how many trips Cohan made, nor how large his entertainments were; yet there was obviously some basis for computation, if necessary by drawing upon the Board’s personal estimates of the minimum of such expenses. The amount may be trivial and unsatisfactory, but there was basis for some allowance, and it was wrong to refuse any, even though it were the traveling expenses of a single trip. It is not fatal that the result will inevitably be speculative; many important decisions must be such. We think that the Board was in error as to this and must reconsider the evidence.

We have adopted the above principles and have applied them in many cases. A. F. Rees, 21 B. T. A. 698; R. P. Shea, 24 B. T. A. 798; Julia Dahl et al., Executors, 24 B. T. A. 1167; Mitten Management, Inc., 29 B. T. A. 569. The record convinces ns that the amounts claimed were actually spent for the purpose stated. Under the authority of the foregoing cases the deductions are allowed.

Pursuant to the stipulation, petitioner Joseph Kahn is allowed an additional capital loss of $2,774.75.

Decisions wül be entered under Rule 50.


author: Black:

text:
    John K. Broderick, Executor of the Estate of Emilie C. Broderick, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89759.
    Promulgated December 23, 1938.

      G. A. Stamm, Esq., and Phil Morelock, Esq., for the petitioner.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Black:

The parties are in accord as to the principal facts, but disagree as to the legal implications arising from them. The law presumes, however, that the respondent correctly construed the facts in the first instance when he determined the deficiency and the burden is upon the petitioner to overcome that presumption.

The petitioner contends that the facts established in the record negative “contemplation of death” as an impelling motive in causing the decedent to transfer her property to the trustee under the indentures dated July 19, 1919, and October 21, 1930. We think petitioner has met his burden of proof in that respect.

'At the outset of this opinion we take note of the situation in the affairs of the Broderick family with respect to its interests in the Broderick & Bascom Rope Co. in June 1919, following the death of John J. Broderick, and the economic necessity which compelled action to protect them. The family stock in that corporation, through John J. Broderick’s will, had already been transferred to a trustee to hold in trust until 10 years after death of the mother (decedent herein). The parties have stipulated that since June 7, 1919, and prior thereto the members of the Broderick family have had in mind holding together intact their said stock in order to assure to them official positions with and equal voice in the management of the corporation; also, that reasons for decedent’s having transferred the disputed assets to the trustee of the existing trust were to (a) provide for a fund Avhich might be used should that become necessary in protecting the interests of the Broderick family in the corporation, (b) to assure to the transferor, Emilie C. Broderick, the income from the trust corpus during the remainder of her life, and (c) to relieve herself from the care and worries of managing the properties transferred. The parties also agree that the transfer at issue was not prompted by any condition of body or mind of the decedent that would have led her to believe that death was imminent or near at hand or that her death was likely to occur within a reasonably distant future.

These concessions of fact on the part of respondent would seem to foreclose the issue against him unless a construction of the trust instruments and the circumstances under which they were executed would justify a conclusion that they were testamentary in character and used primarily to effect a distribution of decedent’s property at or after her death. The respondent contends that the trust instruments call for such a construction. In his brief the respondent asks us to find, in addition to the proposals of fact made by the petitioner to which he “subscribes”, that one of the motives for the transfers was to make provisions for disposition of the trust corpus to and among decedent’s grandchildren to take effect in enjoyment after her death. He also asks us to find “that it never became necessary, during the decedent’s lifetime to use any part of the trust corpus to protect the interests of the decedent’s family” in the Broderick & Bascom Hope Co. The last request need not be considered. Obviously the finding asked for would be material to no issue here, inasmuch as the protection intended by the trust was not limited to decedent’s lifetime; neither could the transferor’s motive be affected by the happening or nonhappening of the contingency it was intended to protect against.

As to the respondent’s contention that one of the motives for transfer in question was disposition of the trust corpus to and among decedent’s grandchildren, effective at her death, we think such inference naturally follows from the trust instruments. Such finding, however, does not dispose of the case in the Commissioner’s favor, since as between that and the several other admitted motives we think the motive to dispose of the corpus of her property after death toi her grandchildren was secondary to the other impelling motives. Cf. Thomas C. Boswell et al., Executors, 37 B. T. A. 970. Naturally, when one executes a trust instrument directing how the income shall be paid during his lifetime and what disposition shall be made of the corpus after his death, the latter provision contemplates his death at some future time. That is the very purpose of disposal of the remainder at or after death. But such a provision does not necessarily mean that the transfer is made “in contemplation of death” within the meaning of the applicable statute. It may do so sometimes, depending altogether on the facts and circumstances of the particular case. In the Boswell case, by the trust instrument decedent provided for distribution of the income from the trust property during his life and for its further disposition, as well as that of the corpus, after his death.

The Commissioner argued there, as he has argued here, that notwithstanding that the settlor of the trust was in excellent physical health when he executed the trust and had no expectation of death from any existing bodily infirmity, yet, because the trust instrument made disposition of the remainder interest after his death, it -was executed “in contemplation of death” within the meaning of the applicable statute. We denied that contention and held that the transfer to the trust was not made in contemplation of death nor was it intended to take effect in possession or enjoyment at or after death. It must be admitted that respondent’s contention in this respect finds some support in the decision of the Tenth Circuit in Commissioner v. Colorado National Bank of Denver, 95 Fed. (2d) 160. Respondent in his brief cites that case, among others, and urges it as authority to support his views. That case, however, was recently reversed by the Supreme Court of the United States, and the Board’s finding that the transfers in question were not made in contemplation of death was upheld. See Colorado National Bank of Denver v. Commissioner, 305 U. S. 23. The Supreme Court in that case pointed out that the learned Circuit Court in reversing the Board had erroneously interpreted the meaning of the term: “In contemplation of death.” On this point, the Supreme Court said:

The Court’s opinion seems to rest upon an erroneous interpretation of the term “in contemplation of death.” The meaning of this was much discussed in United States v. Wells, supra. We adhere to what was there said. The mere purpose to make provision for children after a donor’s death is not enough conclusively to establish that action to that end was “in contemplation of death.” Broadly speaking, thoughtful men habitually act with regard to ultimate death but something more than this is required in order to show that a conveyance comes within the ambit of the statute.

With the aid of the facts before us, we think it clear that the “particular concern” which dominated the mind of the decedent on July 19, 1919, and October 21, 1930, when the transfers herein were executed, was decedent’s solicitude for and desire to protect her family’s interests in the Broderick & Bascom Rope Co. Important also was decedent’s desire to assure to herself her life income from her private estate through placing its management in the hands of the trustee and relieve herself of business responsibilities to which she was unaccustomed. These purposes as inducements for the transfer are conceded by the respondent and in the circumstances shown we find them to have been paramount to all others in decedent’s mind and of her first and particular concern when she executed the transfers. In view of these findings, we hold that the petitioner has successfully sustained the burden put upon him of showing that the transfers in issue were not made in contemplation of death.

The respondent argues that the provision in the trust instrument giving decedent a life estate in the trust income and directing distribution of the corpus among her grandchildren after her death makes the trust corpus a part of the decedent’s gross estate under section 302 (c) of the Revenue Act of 1926 as transferred interests “intended to take effect in possession or enjoyment at or after” death. On this claim as applied to the present transfer, we find that the authorities are against respondent’s contentions. Here decedent reserved no power to revoke or change any of the provisions of the trust deeds, but conveyed title to and delivered possession of the assets to the trustee without condition. Her economic interests, therefore, in possession and enjoyment passed out of her hands and vested in the trustee when the trust was made. Reinecke v. Northern Trust Co., 278 U. S. 339; May v. Heiner, 281 U. S. 238; H. Seldom Taylor, Jr., et al., Executors, 27 B. T. A. 220; Thomas C. Boswell et al., Executors, supra.

If the transfers in question had been executed after the effective date of the joint resolution of March 3, 1931, or of section 803 of the Revenue Act of 1932, amending section 302 (c) of the Revenue Act of 1926, admittedly the value of the property in question would be included as a part of decedent’s gross estate for estate tax purposes because decedent reserved to herself for life the income from the property, but both trust indentures were executed prior to the effective dates of such provisions of the law, and under the recent decisions of the Supreme Court of the United States in Hassett v. Welch, supra, and Helvering v. Marshall, supra, these provisions have no retroactive effect.

For reasons above stated, we bold that tbe respondent erred in including tbe trust assets valued at $274,139.93 in the decedent’s estate.

Tbe parties having stipulated that the value of the estate disposed of by decedent under her last will and testament and concededly includable in decedent’s gross estate amounted to $62,320.84, the estate tax herein will be recomputed upon that value.

Decision will be entered under Rule 50.


text:
    Pan-American Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84638.
    Promulgated December 23, 1938.

      Eugene J. McGimey, Esq., Solomon S. Goldman, Esq., and Edwin J. Prinz, Esq., for tbe petitioner.

      Allen T. Akin, Esq., for tbe respondent.
   OPINION.

Black:

The first question for decision is whether petitioner is entitled to deduct from its gross income an amount equal to 3¾ per centum of the mean of its reserve for incurred disability benefits held at the beginning and end of the taxable year. The applicable statute is the Kevenue Act of 1932, the material provisions of which are set out in the margin.

Petitioner is a “life insurance company” as that term is defined in section 201 (a). The policies with respect to which the reserve in question was held were “contracts of combined life, health, and accident insurance.” Under all of these policies the insured agreed to pay a certain annual premium in consideration for petitioner agreeing to pay the insured’s beneficiary a sum certain upon receipt of due proofs of death of the insured. In some of the policies the insured agreed to pay a small additional premium in consideration for petitioner agreeing to waive the future payment of premiums in case the insured became totally and permanently disabled as the result of bodily injury or disease; and in some of the policies the insured agreed to pay a larger additional premium in consideration for petitioner agreeing not only to waive the future payment of premiums as they became due, but also to pay the insured a stated monthly income in case the insured became totally and permanently disabled as the result of bodily injury or disease. To meet its future unac-crued and contingent obligations under these combined life, health, and accident policies, petitioner set up and held at the beginning and end of the taxable year several reserve funds. Its largest reserve was a reserve to meet the purely death claims as and when they matured. This reserve is a part of the reserve for outstanding policies and annuities, reported on line 1, schedule A, of petitioner’s income tax return. Another reserve was a reserve to meet its future unaccrued and contingent obligation to waive premiums or to waive premiums and to pay a monthly income, depending upon the type of policy, in cases of total and permanent disability where the insured had not yet become disabled. This reserve is a part of the reserve for disability and accidental death benefits, reported on line 2 of schedule A of petitioner’s return. The statutory per centum of the mean of the two last mentioned reserves was deducted by petitioner and allowed by respondent as “reserve funds required by law”, and those reserves are not involved in this proceeding. They constitute the larger part of petitioner’s reserves “required by law.” Another reserve reported by petitioner on line 3 of schedule A of petitioner’s return was for supplementary contracts. This reserve petitioner concedes is a solvency reserve and that petitioner is entitled to no deduction by reason thereof. The fourth reserve, which is the pne here involved, was set up by petitioner and held to meet its future unaccrued and contingent obligation to waive premiums or to waive premiums and to pay a monthly income, depending upon the type of policy, in cases of total and permanent disability where the insured had already become disabled. This reserve is the reserve for incurred disability benefits, reported by petitioner on line 4 of schedule A in the amounts of $311,250.91 and $378,915.36, respectively, and is subdivided according to the benefits reserved for, as follows:

This reserve for incurred disability benefits did not include any amount for benefits which had already accrued in favor of the disabled insured. Such latter amounts would represent pure liabilities of petitioner and the reserve set up therefor would be in the nature of a solvency reserve and not a reserve “required by law” as that term is used in section 203 (a) (2) of the Revenue Act of 1932. Cf. Maryland Casualty Co. v. United States, 251 U. S. 342, as modified by United States v. Boston Insurance Co., 269 U. S. 197. It included only amounts held for the payment of benefits which would become due in the future, providing the insured survived and remained disabled.

At the time petitioner filed its income tax return for the year 1933 the respondent’s regulations (art. 971, Regulations 77) held that the type of reserve here involved was a reserve required by law. The pertinent provisions of these regulations are set out in the margin. Substantially the same provisions were contained in all of the regulations issued under all of the revenue acts beginning with the Eevenue Act of 1921. See article 681 of Eegulations 62,65, and 69, and article 971 of Eegulations 74. “Items 7-11 of the liability page of the annual statement” referred to in the regulations are also set out in the margin. These items correspond with lines 1 to 5, respectively, of “Schedule A — Eeserve Funds” contained in the blank income tax return for life insurance companies, form 1120 L. Item 10 of the liability page of the annual statement is the item petitioner relied upon at the time it filed its return as authority for deducting 3¾ per centum of the mean of the reserve for incurred disability benefits held at the beginning and end of the taxable year.

Shortly after the Court of Claims handed down its decision in Continental Assurance Co. v. United States, 8 Fed. Supp. 474, the respondent issued Eegulations 86 under the Eevenue Act of 1934. Although section 203 (a) (2) of the Eevenue Act of 1934, so far as material here, was the same as similar provisions in all the prior revenue acts beginning with the Eevenue Act of 1921, the respondent in article 203 (a) (2)-l of Eegulations 86 omitted all reference to items 7-11 of the liability page of the annual statement for life insurance companies and held, among other things, that the reserve funds required by law did not include “estimated value of future premiums which have been waived on policies after proof of total and permanent disability.” Thereafter, the Supreme Court handed down its decision in Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686, in which it cited with approval Continental Assurance Co. v. United States, supra. The respondent then issued Treasury Decision 4615. (Cumulative Internal Revenue Bulletin XIV — 2, p. 310), in which he amended article 681 of Regulations 62, 65, and 69, and article 971 of Regulations 74 and 77, to read the same, so far as material here, as article 203 (a) (2)-l of Regulations 86, supra. Since then the Supreme Court has decided Helvering v. Illinois Life Insurance Co., 299 U. S. 88.

The respondent, in support of his contention that the term “reserve funds required by law” in section 203 (a) (2), supra, does not include the reserve for incurred disability benefits here in question, relies upon his regulations as amended by T. D. 4615, supra, and the decisions of New York Life Insurance Co. v. Edwards, 271 U. S. 109 (point 3), Helvering v. Inter-Mountain Life Insurance Co., supra, and Helvering v. Illinois Life Insurance Co., supra.

Although not a conclusive test, it is, nevertheless, a prerequisite to the allowance of any deduction under section 203 (a) (2), supra, that the reserve in question be required, as expressed by the respondent in his regulations, either by “express statutory provisions or by the rules and regulations of the State insurance departments when promulgated in the exercise of a power conferred by statute.” Cf. McCoach v. Insurance Co. of North America, 244 U. S. 585; Maryland Casualty Co. v. United States, supra; United States v. Boston Insurance Co., supra; New York Life Insurance Co. v. Edwards, supra; Helvering v. Inter-Mountain Life Insurance Co., supra; and Helvering v. Illinois Life Insurance Co., supra. And the respondent concedes in his regulations that a company is permitted to make use of the highest aggregate reserve called for by any state in which it transacts business. Petitioner transacted business in Louisiana, Oklahoma, Indiana, and Illinois. As stated in our findings of fact, the reserve in question was required by the laws of Oklahoma, cf. In re Oklahoma National Life Insurance Co., 68 Okla. 219; 173 Pac. 376, and until July 1, 1937, by the laws of Illinois.

The petitioner having met successfully the prerequisite stated in the preceding paragraph, the question at issue, at least as far as premium waiver benefits are concerned, is identically the same as the issue relating to the reserve for incurred disability benefits in the recent case of Monarch Life Insurance Co., 38 B. T. A. 716. In that case we held that the reserve for incurred disability benefits (apparently involving premium waiver benefits only) was a reserve fund required by law and that the petitioner there was entitled to deduct from its gross income an amount equal to 3¾ per centum of the mean of such a reserve fund held at the beginning and end of the taxable year. It follows that, at least as far as premium waiver benefits are concerned, the instant proceeding is controlled by our holding in Monarch Life Insurance Co., supra. Cf. Equitable Life Assurance Society of the United States (reserve for unpaid and unresisted accident and health claims), 33 B. T. A. 108, Ill.

Regarding that portion of the reserve for incurred disability benefits involving monthly income benefits, we know of no reason why it should be treated any differently from that portion of the reserve involving premium waiver benefits. The policies involving both kinds of benefits are substantially the same, except that in those involving both premium waiver and monthly income benefits the insured agrees to pay a larger additional premium than the insured pays in those policies involving premium waiver benefits only. We hold that both portions of the reserve for incurred disability benefits involved herein should be treated alike and that petitioner is entitled to deduct from its gross income the amount of $12,940.62 set out in our findings as representing 3¾ per centum of the mean of the reserve for incurred disability benefits held at the beginning and end of the taxable year.

Before passing this question, however, we wish to say that we have carefully considered the respondent’s contentions and find ourselves unable to concur in the belief that the effect of the holdings in the New York Life case, the Inter-Mowntain Life case and the Illinois Life case is to exclude the present reserve from the classification of “reserve funds required by law” as that phrase is used in section 203 (a) (2) of the Revenue Act of 1932.

In the New York Life case, supra, the Supreme Court was not satisfied from the evidence that the reserve there involved in point (3) was required by the laws of New York. Neither was there anything to show how the value of the contractual benefits under the policies was arrived at. Under those circumstances the Court said: “The company has not shown enough to establish its right to the exemption.” The proof lacking in the New York Life case has been supplied in the instant proceeding.

The reserve funds involved in the other two cases were in the nature of solvency reserves and were essentially different from the one which we are now considering. For instance, the reserve in the Inter-Mountain case, supra, was against matured, unsurrendered, unpaid coupons, and was not essentially an insurance reserve. Inter-Mountain’s liability thereon depended upon no contingency. The insured there at any time could have withdrawn the matured coupons in cash. Likewise, in the Illinois Life case, supra, the reserve for survivorship investment funds was not a reserve set aside to mature or liquidate any future unaccrued and contingent claims. Illinois Life was bound at the end of 20 years to discharge a definite liability consisting of the total contributions to the fund plus the interest it had agreed to pay. The reserve set up to meet this definite liability was in substance nothing more than a solvency reserve.

Neither do we think the Supreme Court in the Inter-Moimtain and Illinois Life cases intended to construe the phrase “reserve funds required by law” to mean only the reserve funds relating to life insurance. It seems to us that the structure of the act requires a recognition of other reserves. Sec. 201 (a), supra, defines the term “life insurance company” as one “engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.” In this definition there can be no doubt but that Congress intended the term “reserve funds” to apply to “contracts of combined life, health, and accident insurance” as well as to “life insurance and annuity contracts.” Therefore, it would seem to follow that the term “reserve funds” in section 203 (a) (2) would also apply to “contracts of combined life, health, and accident insurance,” which is the type of policies involved in the instant proceeding. Any other construction of the act would be inconsistent with the respondent’s allowance of the statutory per centum of the mean of the reserve for disability and accidental death benefits reported on line 2 of schedule A of the return and briefly referred to at the beginning of this opinion. The only difference between that reserve and the one for incurred disability benefits is that in the latter the disability has already taken place. But the insured must survive and remain disabled on each and every anniversary date of the policy before any actual liability accrues against petitioner.

Interest question. — As we have already stated, respondent in his brief concedes that petitioner is entitled to deduct the interest items covered by paragraphs (b), (d), and (e) of the stipulation. He contests the deduction of those included in paragraphs (a) and (c) of the stipulation. These latter have been described in our findings of fact.

The second question, therefore, for decision falls into two subdivisions — (1) whether petitioner is entitled to deduct $9,282.31 as interest in connection with two types of its ordinary life policies, and (2) whether petitioner is entitled to deduct $257.88 as interest in connection with the type of trust agreements referred to in our findings of fact. The applicable statute is the Revenue Act of 1932, the material provisions of which are set out in the margin. We shall first consider the deductibility of the so-called interest in connection with the two types of petitioner’s ordinary life policies.

The first type of policy provides for a lump sum payment at death and for ⅛ series of 240 monthly installments. A copy of one of these policies is attached to the stipulation. It provides for a lump sum payment of $500 at death and for a series of 240 monthly installments of $50 each, aggregating in all $12,500. The commuted value of this policy is $9,200. The policy contains a provision that at any time before his death the insured may elect to have the commuted value paid at his death in one sum rather than a first payment of $500 followed by a series of 240 monthly installments of $50 each. But if no such election is made by the insured, the beneficiary can neither assign nor commute the installments therein provided for.

The second type of policy simply provides for one lump sum payment at death unless the insured during his life time shall elect to have the insurance paid to the beneficiary in any one of the equal annual installments from five to twenty-five years provided for in that paragraph of the policy headed “Installment Benefits — Installment Settlements.” A copy of one of these policies is also attached to the stipulation. It provides for a lump sum payment at death of $5,000, or for either 5, 10, 15, 20, or 25 equal annual installments, providing the insured so elected during his lifetime. In all of the policies of the second type that are here involved the insured had so elected. Assuming that in the case of the sample policy of this type referred to above the insured had elected to have the insurance paid in 20 equal annual installments, the beneficiary of this policy would receive 20 equal annual installments of $389.90 (5 times $67.98) aggregating in all $6,798, instead of the lump sum of $5,000 payable at death which wa's originally provided for. As in the first type of policy, if the insured in the second type of policy died after electing to have the insurance paid in equal annual installments, the beneficiary could not thereafter either assign or commute the installments therein provided for.

Petitioner contends that in the first type of policy the difference between the commuted value of $9,200 and the aggregate payments of $12,500, or $3,300, and in the second type of policy the difference between the commuted value of $5,000 and the aggregate payments of $6,798 or $1,798, represents interest on its indebtedness which it is entitled to deduct as and when it is paid to the beneficiary. As soon as a policy of either type becomes a death claim, petitioner deposits the commuted value of that policy in a separate fund, which fund on a gradually declining basis is improved with interest at the rate of 3 ½ per centum per annum so that the commuted value plus the interest will exactly equal the aggregate installments paid to the beneficiary. At the beginning of the taxable year petitioner had on deposit $270,164.83 in connection with about 43 policies embracing both types here under discussion. During the year the fund was increased by $6,575.56, due to the death of one of petitioner’s policyholders of the first type. Also during the year the fund deposited in connection with the 44 policies was improved with interest in the amount of $9,282.31 and during the year there was paid to beneficiaries a total amount of $27,353.31. It is the $9,282.31 which petitioner contends it is entitled to deduct as interest paid on its indebtedness. It bases this contention partly upon the ground that the only reserve fund for which it has received a deduction under section 203 (a) (2) (see footnote No. 1, supra) is a reserve fund (included in the reserve for outstanding policies and annuities) set up to meet only the commuted value of the policies in question upon the death of the insured. At the time petitioner filed its return it also claimed a deduction under section 203 (a) (2) for the statutory percentage of the mean of a reserve for supplementary contracts, reported on line 3 of schedule A of petitioner’s return. Included in this reserve were amounts set up to meet the difference between the commuted value and the aggregate payments to be made under the two types of ordinary life policies now under discussion. This deduction was disallowed by the respondent upon the ground that the reserve for supplementary contracts did not come within the term “reserve funds required by law” as that term is used in section 203 (a) (2). This action on the part of the respondent was originally assigned as error by the petitioner, with an assignment of error in the alternative “that if it is not entitled to a deduction of 3¾ percent of the mean of reserve funds on Supplementary Contracts * * * it should be allowed to deduct all interest paid, credited or accrued on the said reserve funds under Sec. 203 (a) (8) of the Revenue Act of 1932.” At the hearing petitioner withdrew and abandoned its main assignment of error as to the reserve funds on supplementary contracts and relied solely on its alternative assignment of error that it was entitled to a deduction for alleged interest in the above amount of $9,282.31, upon the authority of Great Southern Life Insurance Co., 33 B. T. A. 512, issue (b) (1); affirmed upon other issues, 8& Fed. (2d) 54; certiorari denied, 302 U. S. 698. The question here under consideration, we think, is not the same as that we decided in Great Southern Life Insurance Co., supra. The issue referred to by petitioner is issue (b) (1) in the latter case, wherein the taxpayer claimed a deduction from its gross income of the amount disbursed by it as interest on coupons which were theretofore left to accumulate with the company at interest and were surrendered during the taxable year and principal and interest were paid thereon. We held that under such circumstances the interest was deductible. We cited a regulation of the Commissioner which specifically covered the subject and allowed the deduction of interest paid under such circumstances. But we have not that issue in the instant case. One that would be somewhat comparable to it is where the insured dies and the beneficiary voluntarily leaves the proceeds of the policy on deposit with the insurance company and it agrees to pay interest thereon. We held in Penn Mutual Life Insurance Co., 32 B. T. A. 839, that in such a case the insurance company is entitled to deduct the guaranteed rate of interest which is paid to the beneficiaries. That sort of interest the Commissioner concedes is deductible. The exact issue now before us was decided unfavorably to the instant petitioner’s contentions in Penn Mutual Life Insurance Co., supra (assignment of error No. (1), syllabus No. 2). Our decision in Penn Mutual was affirmed as to all contracts made or options exercised for installment settlements prior to the death of the insured, but was remanded as to all options for installment settlements exercised by the beneficiary after the death of the insured. Penn Mutual Life Insurance Co. v. Commissioner, 92 Fed. (2d) 962, 967, 968. All the contracts or options for installment settlements involved in the two types of ordinary life policies now under consideration were all made or exercised by the insured prior to the death of the insured, and are, therefore, ruled by that part of the Third Circuit’s decision wherein it concluded, p. 968:

We hold, therefore, that the portion of the respective sums of $211,254.60 and $238,640.01, which in fact represents the 3 per cent, annual interest included in the installment settlements paid to beneficiaries by the petitioner under the Trust Certificate policy or under an option of the Ordinary Life policy exercised prior to the death of the insured, is not interest on indebtedness within the terms of the statute and cannot be deducted by the petitioner from its gross income. We sustain the ruling of the Board in so far as it relates to such payments.

Counsel for petitioner in his briefs recognizes that the decision in Penn Mutual is contrary to the petitioner’s contention in the instant proceeding, but contends that the Board and the Circuit Court misapprehended the facts in that case and that the issue there should be distinguished from the issue here. We have considered this contention of petitioner, bnt think we should abide by our previous decision as affirmed by the Third Circuit.

We hold, therefore, that petitioner .is not entitled under section 203 (a) (8) of the Revenue Act of 1932 to deduct from its gross income as “interest paid or accrued within the taxable year on its indebtedness” the amount of $9,282.31 which it added during the taxable year to its deposits held under both types of ordinary life policies here involved. Penn Mutual Life Insurance Co. v. Commissioner, supra. Cf. Penn Mutual Life Insurance Co., 32 B. T. A. 876 (part I).

Regarding the deductibility of $257.88 as interest in connection with the type of trust agreement attached to the stipulation as exhibit “J”, the respondent contends that under Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269, no more interest may be allowed as a deduction to a life insurance company than that actually paid during the taxable year; and that in any event no amount is allowable as interest for the reason that petitioner has failed to show that no part of the amount of $257.88 is actually and in fact dividends under that part of the specimen trust agreement reading:

* * * and alter the first interest year there shall also he added as additional interest thereon each year thereafter, such amount as may be determined by the Directors of the Pan-American Life Insurance Company and apportioned annually from the surplus earnings of the said Company for the preceding year.

The respondent, however, in effect concedes that if it were not for the above quoted provision of the trust agreement, any interest actually paid under the trust agreements of this type would be deductible under our decision in Great Southern Life Insurance Co., supra.

In making the contention relative to the above quoted provision of the trust agreement, we think the respondent has overlooked that part of the trust agreement immediately preceding the above quoted provision which provides that: “The said net proceeds shall bear interest at the rate of 3½% per annum on funds remaining in the Company’s possession at the end of each year” and also that part of the stipulation which provides that the amount of $257.88 was computed at 3½ per centum. Whatever effect, if any, the above quoted provision relied upon by the respondent might have in another taxable year, we are satisfied from the record before us that it has no effect whatever in the present taxable year. Since the entire amount of $257.88 in question was computed at 3½ per centum it is clear that this amount did not contain any so-called “additional interest” to be determined by petitioner’s directors and to be apportioned from petitioner’s surplus earnings for the preceding year. It is, therefore, our opinion that petitioner is entitled to deduct as interest that part of the $257.88 that was actually paid out during the taxable year. The stipulation says that the amount paid out was $202.90. Massachusetts Mutual Life Insurance Co. v. United States, supra; Great Southern Life Insurance Co., supra.

We, therefore, hold that in connection with the type of trust agreement attached to the stipulation as exhibit “J” petitioner is entitled under section 203 (a) (8) of the Revenue Act of 1982 to deduct $202.90 as interest paid during the taxable year on its indebtedness. Cf. Edith M. Kinnear, 20 B. T. A. 718.

The deficiency should be redetermined in accordance with this report.

Decision will be entered under Rule 50.

       SEC. 201. TAX ON LIFE INSURANCE COMPANIES.
      (a) Definition. — When used In this title the term “life insurance company” means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.
      * * * * * * *
      SBC. 203. NET INCOME OE LIFE INSURANCE COMPANIES.
      (a) General Rule. — In the case of a life insurance company the term “net income” means the gross income less—
      *******
      (2) Reserve Funds. — An amount equal to 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, except that in the case of any such reserve fund which is computed at a lower interest assumption rate, the rate of 3¾ per centum shall be substituted for 4 per centum. * * *

       Abt. 971. Tax-exempt interest and reserve -funds. — TJnder paragraphs (1) and (2) of section 203 (a), life insurance companies are entitled to deduct from gross income: *******
      (2) Four per cent of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, except that in the case of any such reserve fund which is computed at a lower interest assumption rate, the rate of 3¾ per cent shall be substituted for 4 per cent. The reserve deduction is based upon the reserves required by express statutory provisions or by the rules and regulations of the State insurance departments when promulgated in the exercise of a power conferred by statute; but such reserves do not include assets required to be held for the ordinary running expenses of the business nor do they include the reserve or net value of risks reinsured in other solvent companies to the extent of the reinsurance.
      * * * * * * *
      * * * A company is permitted to make use of the highest aggregate reserve called for by any State in which it transacts business, but the reserve must have been actually held as shown by the annual statement. Generally speaking, the following will be considered reserves as contemplated by the law: Items 7-11 of the liability page of the annual statement for life insurance companies * * *.

       7. Net Reserve (i. e. the net present value of all the outstanding policies in force on the 31st day of December, 19_, as computed by the _ on the following tables of mortality and rates of interest)_$ — '■-
      8.Extra reserve for total and permanent disability benefits, $__ ⅞ and for additional accidental death benefits, $__ included in life policies_$--
      9.Present value of amounts not yet due on supplementary contracts not involving life contingencies computed by the_$-
      10. Present value of amounts incurred but not yet due for total and permanent disability benefits_:_$-
      11. Liability on policies canceled and not included in “net reserve” upon which a surrender value may be demanded_$-

       SEC. 203. NET INCOME OE LIFE INSURANCE COMPANIES.
      (a) General Rule. — In the case of a life insurance company the term “net income” means the gross income less—
      *******
      (8) Interest. — All interest paid or accrued within the taxable year on its indebtedness * * *.


text:
    The Springfield Industrial Building Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87300.
    Promulgated December 28, 1938.

      S. A. Bowman,.Esq., for the petitioner.

      Joe D. Hughes, Esq., and L. G. Mitchell, Esq., for the respondent.
   OPINION.

Van Fossan:

The matter at issue in this case is the taxability of the petitioner’s alleged gain of $16,000 arising from its discharge of an obligation of $50,000 by the payment of $10,000 in cash and the transfer of capital stock of its creditor, having a face value of $40,000 but purchased by the petitioner for $24,000.

If the petitioner had been solvent at the time of the transaction the gain would be taxable. In L. D. Coddon & Bros. Inc., 37 B. T. A. 393, we said:

* * * the present state of authority seems to be that where a solvent debtor is under direct obligation to make payments for physical property purchased by him or by his assignor, which is still held by him, and satisfies this obligation by paying less than the amounts called for by the obligation, the property continuing to be of a value sufficient to pay the indebtedness, the transaction will result in taxable income to the debtor in the amount by which the face value of the obligation exceeds the amount paid by him for its satisfaction.

Conversely, no taxable gain would result from such a transaction provided that, both immediately before and immediately after the transaction, the debtor was insolvent. In Madison Railways Co., 36 B. T. A. 1106, we said:

* * * It seems clear that where an insolvent debtor turns over all of his property to his creditors in full or partial satisfaction of his debts the debtor realizes no taxable gain. Cf. Bowers v. Kerbaugh-Empire Co., 271 U. S. 170; Meyer Jewelry Co., 3 B. T. A. 1319; Burnet v. John F. Campbell Co., 50 Ned. (2d) 487; Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95; Porte F. Quinn, 31 B. T. A. 142. It is equally clear, we think, that where an insolvent debtor satisfies a portion of his debts without thereby becoming solvent he has likewise realized no taxable income. He has not by such satisfaction of his debt realized “something of exchangeable value,” something “for his separate use, benefit and disposal.” * * *
The petitioner’s purchase and retirement of its own bonds during the taxable years simply reduced its outstanding liabilities. A reduction in outstanding liabilities which does not make a taxpayer solvent does not result in taxable gain. Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95.

See Porte F. Quinn, 31 B. T. A. 142; cf. Lakeland Grocery Co., 36 B. T. A. 289.

The only question for us to decide therefore is the fact of the petitioner’s insolvency. We have found as a fact that the petitioner was insolvent, immediately before and immediately after September 29, 1933. The record reveals that the petitioner owed $90,575.69 just before the settlement with the Loan Association and $74,501.12 immediately thereafter. In addition, the petitioner had a-liability of $50,500 in outstanding capital stock, and, despite a generous rental paid by the Bank, its books at the end of 1983 showed an operating loss of $2,648.36 (which did not include a depreciation allowance of $2,792.12).

Its only asset was the Kelly Building, whose fair market value we have found to be $70,000. At the end of 1933 it had an additional asset of $352.87 in prepaid insurance, minus the liability of an overdraft of $4.41. Thus, it is obvious that the petitioner could not pay its debts on September 29, 1933, or immediately theretofore or thereafter.

It is unnecessary to discuss at length the factors which combined to produce the September 29, 1933, valuation of the Kelly Building. However, it is pertinent to say that the Kelly Building was about 40 years old, of primarily a factory type of construction, with the Bank and cafeteria quarters on the lower floor and some office rooms finished off on the upper floors of the front part of the building. The ground floor was not level with the pavement. The building was not in good condition except the remodeled banking rooms and the cafeteria. Its location was not in the best business location of Springfield, a “one-street” city. Bents in this vicinity were very low in 1933 and there were many vacant rooms and buildings.

We had the benefit of the testimony of expert witnesses who were well acquainted with real estate values and were familiar with the general business and economic situation in Springfield. On the facts as presented, we feel that $70,000 is a liberal valuation of the Kelly Building on September 29, 1933.

Thus, due to its insolvent condition, the petitioner realized no taxable gain in 1933 and, consequently, is chargeable with neither the tax nor the penalty set forth in the respondent’s notice of deficiency.

Decision will be entered for the petitioner.


author: ARNOLD:

text:
    Estate of Sidney S. Gorham, Sidney S. Gorham and Willett N. Gorham, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83214.
    Promulgated December 28, 1938.

      Robert W. Wales, Esq., for the petitioners.

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

ARNOLD:

This proceeding involves a deficiency of $5,013.66 in income tax for the year 1932. The issue presented is whether respondent erred in increasing the decedent’s gross income for 1932 by including therein $18,000 which is alleged to have been income of the Sidney S. Gorham trust. The decedent died subsequent to the receipt of the deficiency letter and this proceeding is brought by the executors of his estate. The facts were stipulated.

In 1906 the decedent formed a law partnership with Henry W. Wales. From 1911 to some time during the taxable year the partnership operated as Miller, Gorham & Wales. During 1932 the firm name was changed to Miller, Gorham, Wales & Adams. On January 3,1932, there were six partners in the law partnership of Miller, Gorham & Wales. The partners had no written articles of copart-nership.

By an instrument dated January 4, 1932, entitled “Declaration of Trust”, the decedent, after reciting that he was a full partner in the aforesaid law firm and that he desired “to make equal provision for his wife, Myrtle W. Gorham, and his two sons, Sidney S. Gorham, Jr. and Willett N. Gorham”, declared “himself to be Trustee of his entire interest in the firm of Miller, Gorham & Wales, in trust for the uses and purposes” therein specified. It was then provided that the trustee should pay to decedent’s wife and two sons $6,000 each from “the income of this trust” and that the balance of the income of the trust should be paid to the decedent personally. Upon the death of any of the beneficiaries entitled to $6,000 per year his or her share was to be divided equally between the survivors, and upon the death of any two of said beneficiaries, the survivor should receive the full sum of $18,000 a year from the trust. The trust was to continue during the life of the decedent unless sooner terminated. It was provided that the trust “may be terminated with the written consent of any one of the three (3) beneficiaries, Myrtle W. Gorham, Sidney S. Gorham, Jr., and Willett N. Gorham, by the donor hereof at the end of any calendar year by giving written notice on or before December 1 of the preceding year to each of the said three (3) beneficiaries, * * * or the survivor of them.” It was provided that no part of the income of the trust should be liable for any debts or obligations of any of the beneficiaries and that the beneficiaries should have no power to anticipate or assign the latter or any portion of the income of said trust estate, but the income shall be paid to the beneficiaries. free of all claims of any kind or nature whatsoever.

Each of the decedent’s partners knew of the execution of the instrument of January 4, 1932, and none of them made objection thereto.

At January 4, 1932, the partnership had accounts receivable of $41,647.23 representing sums owing to the partnership by reason of services theretofore rendered. The partnership had furniture, fixtures, and a library, with an aggregate fair market value of approximately $8,000. The partnership had cash on deposit in banks on January 4, 1932, in the sum of $44,168.06 and its accounts payable on that date amounted to $2,568.22. The partnership was indebted in no further amounts except in so far as the partners had an interest in the partnership property.

During the year 1932 the partnership had gross income on a cash basis of $236,682.02. Included in this sum was $21,787.38 representing collections on accounts receivable of $44,168.06, due the partnership on January 4, 1932. Also included in the partnership’s gross income for 1932 was the further sum of not less than $25,000 received by the partnership which was fairly applicable to services rendered prior to the calendar year 1932. During the calendar year 1932 the partnership occupied an entire floor of a modern office building at 1 North LaSalle Street, Chicago. It never had less than 21 employees, of whom 8 were practicing lawyers. At December 31, 1932, there were 24 employees. The aggregate pay roll of the partnership for the year 1932 was $50,650.45. By reason of the supervision of older and experienced lawyers, the partnership received more for the services of its lawyer employees than it was required to pay under the contracts of employment with such lawyer employees.

Under the partnership agreement each partner received such share of the net partnership income as should be mutually agreed upon. For years prior to 1932 the decedent never received less than one-quarter of the net partnership income. One of the criteria used by the partners in determining what share of the net partnership income should be received by each partner was the amount of the fees paid into the partnership by clients who had originally employed the firm through the particular partner in question. The fees paid into the partnership during 1932 included gross fees in the amount of approximately $109,000 paid by clients considered by the partners as having employed the firm through Sidney S. Gorham, who was the senior partner in charge of their matters. More than half the services for which said fees were paid were rendered by partners and employees of the firm other than the decedent. Sidney S. Gorham devoted almost his entire time to the affairs of these clients.

No change of any kind was made in the partnership name upon the execution of the declaration of trust dated January 4, 1932. No “trustee” designation was added to decedent’s name in the firm or in his or the firm’s dealings with clients or the public. No new certificate to practice law was ever obtained by Sidney S. Gorham as trustee, nor was an application made for such certificate. To his and the firm’s clients, Sidney S. Gorham, the individual, remained the partner. None of the beneficiaries mentioned in the instrument of January 4, 1932, except the decedent and Sidney S. Gorham, Jr., was licensed to practice law at the time the document was executed or in 1932. Sidney S. Gorham, Jr., was a practicing lawyer employed by, but not a member of, the partnership in 1932. He was admitted to the bar in October 1930, had been employed in general office work of the partnership, and was so employed in 1932. He received a salary which was paid him as full compensation for his services.

The partnership return for 1932 reported net income of $148,730.04, which was allocated to the various partners in accordance with their respective interests. The return allocated $52,174.02, constituting 35.55 percent of the net income to “Sidney S. Gorham, Trustee.” For 1932 Sidney S. Gorham filed a fiduciary return of income for the Sidney S. Gorham trust, wherein he reported the income of the trust as $52,174.02 which he allocated to the beneficiaries in the amount of $6,000 each to Myrtle W. Gorham, Sidney S. Gorham, Jr., and Willett N. Gorham, and $34,174.02 to Sidney S. Gorham.

In determining the deficiency the respondent held that the instrument of January 4,1932, was merely an assignment of future income, and increased the decedent’s income by the $18,000 paid to his wife and two sons. At the same time respondent increased the amount of the decedent’s income from the partnership in the amount of $862.68, which adjustment is not here in controversy.

Upon the foregoing facts the petitioners deny that the decedent is liable for tax upon the $18,000 of trust income distributed to the members of his immediate family. They contend that the right of a partner may be held in trust, that where a partner’s rights are held in trust the income of the trust is taxable in the same manner as the income of any other valid trust, and, finally, that, even if the partner individually performs services for the partnership, the distributive share which he receives as trustee is not taxable to him but is taxable as trust income. The respondent contends that the trust instrument did not make the beneficiaries thereof partners in the firm of Miller, Gorham & Wales, nor did it give them an interest in the assets of the firm. He further contends that Miller, Gorham & Wales was a personal service partnership and the trust instrument constituted nothing more than an assignment of future income.

In the trust agreement the decedent “declares himself to be trustee of his entire interest” in the partnership and directs the trustee to pay out of the trust income $6,000 per annum each to his wife and two sons. The critical words appear to be the “entire interest” which the decedent conveyed in trust. Questions which naturally arise are: What was the nature of the decedent’s “entire interest”? What effect did the declaration of trust have, and was it the equivalent of an assignment of decedent’s future earnings, as contended by the respondent, or was it the transfer of a property right, the income from which is taxable to the owner of the property? These questions must be examined in the light of the Illinois law relating to partnerships in order to ascertain what rights a partner has in the partnership and in the partnership assets.

The common law rules covering partnerships are in force in Illinois except where said rules have been incorporated into or changed by state statutes. Ch. 28, Cahill Illinois Revised Statutes (1929). In 1917 Illinois enacted the Uniform Partnership Act, which act appears as chapter 106a of the 1929 edition of Cahill Illinois Revised Statutes. Part V thereof, which relates to the property rights of a partner, is set forth in the margin.

In Illinois, therefore, a partner has no individual property right in specific partnership property, separate and apart from the partners, that is assignable, ch. 106a, part V, ¶ 25 (b), Illinois Revised Statutes, supra, and if he attempts to assign his interest in the partnership, the assignment relates only to his share of the profits and surplus. Id. ¶ 26; Morrison v. Austin State Bank, 213 Ill. 472; 72 N. E. 1109, 1111. The effect of the declaration of trust was to convey decedent’s entire interest in his distributive share of the profits and surplus, present and prospective. Bank v. Carrollton Railroad, 78 U. S. 624, 628. It did not reach partnership property, as such, but only a proportionate part of the- profits, as the partnership continued its existence as a going concern without change. The conveyance operated in the same manner as, and is equivalent for tax purposes to, the assignment of future income. Lucas v. Earl, 281 U. S. 111; Burnet v. Leininger, 285 U. S. 136.

We have carefully examined the authorities cited by petitioners in support of their contention, together with cases discovered in our own research. None of the cases cited by petitioners are exactly in point. Each is" distinguishable as to facts involved or as to the question presented. In Rose v. Commissioner (C. C. A., 6th Cir.), 65 Fed. (2d) 616, which petitioners contend must control our decision herein, Nose declared himself trustee for his wife of a one-ninth interest and of a one-ninth interest for each of his two daughters in the partnership business and properties, which properties were specifically named. There was a reorganization of the partnership and a readjustment of assets. In the case before us the decedent simply declared himself trustee of his entire interest in a partnership in which capital was not an income producing factor.

In Kell v. Commissioner (C. C. A., 5th Cir.), 88 Fed. (2d) 453, cited by petitioners, the source of income was mineral lands and leases, and the court held that the taxpayer had divested himself of his one-fourth interest in the property so that the income therefrom belonged to his transferees. In the Kell and Rose cases the source of the income was the partnership property, while in the case before us the source of the income of the partnership was the knowledge, skill, and ability of the partners in the practice of law. The knowledge and skill which the decedent possessed was not property that could be transferred in trust or otherwise. American Law Institute, Restatement of the Law, Trusts, sec. 74, vol. 1, p. 222.

In Walter W. Moyer, 35 B. T. A. 1155, the Board held that the husband made his wife a coowner in his individual business by an irrevocable gift of an interest in the business. The Board held that the wife became a partner. Thereafter, she placed her interest in trust, which was an assertion of her rights of ownership. In' this proceeding no transfer was made to a third party. The decedent continued to act as a partner, individually, in the same manner as- he had prior to his declaration of trust. There was no assertion of any right of ownership over property by a transferee as a result of the declaration of trust.

The situation here appears to be one which the Supreme Court might have had in mind in Lucas v. Earl, supra, when it stated that “There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skilfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.” It is our opinion that the arrangement made by the decedent was anticipatory of the tax saving which he hoped would result, but that the things done were legally insufficient to accomplish the result desired. Sam H. Harris, 11 B. T. A. 871, affirming Harris v. Commissioner (C. C. A., 2d Cir.), 39 Fed. (2d) 546; Bishop v. Commissioner (C. C. A., 7th Cir.), 54 Fed. (2d) 298; Balkwill v. Commissioner (C. C. A., 6th Cir.), 77 Fed. (2d) 569; certiorari denied, 296 U. S. 609.

In Luce v. Burnet (D. C. App.), 55 Fed. (2d) 751, an attorney attempted to place one-half of his earnings from a law firm in trust for his wife. The court held that the fees earned by the taxpayer in the practice of his profession represented compensation for personal services and were taxable to him, no matter what arrangement existed between husband and wife. See also Emery v. Commissioner (C. C. A., 1st Cir.), 78 Fed. (2d) 437; Daugherty v. Commissioner (C. C. A., 9th Cir.), 63 Fed. (2d) 77.

Paraphrasing the Supreme Court’s decision in the Leminger case, supra, the thing which produced the income was not decedent’s entire interest in Miller, Gorham & Wales, but it was the firm enterprise itself, that is, the capital, labor, and skill of its members employed in combination through the partnership relation in the conduct of the partnership business. There was no transfer of the corpus of the partnership property to a new firm, with a consequent readjustment of rights in that property and management. The decedent continued to be a member of the firm, active in its behalf, and earned fees by rendering personal services to his clients. These earnings are taxable to him individually, as they represent compensation impersonal services, and the tax thereon can not be shifted by a declaration of trust equivalent to an assignment of future income. Carroll E. Donner et al., Guardians, 32 B. T. A. 364; Rossmoore v. Commissioner (C. C. A., 2d Cir.), 76 Fed. (2d) 520.

We have decided this proceeding upon the theory most favorable to petitioners’ contention, which is premised upon the validity of the trust. In view of the recent decision of the Seventh Circuit in Brainard v. Commissioner, 91 Fed. (2d) 880, affirming 32 B. T. A. 1036, which held that a declaration of trust concerning expected profits from future trading in securities created no valid trust, it might be questioned whether the decedent created a valid trust, but we need not discuss this point in view of our decision that in any event the declaration of trust operated as an assignment of future income.

Decision will he entered for the respondent.

       ¶24. What are property rights of partners. ] § 24. The property rights of a partner are (1) Ms rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management.
      ¶25. Partner as co-owner of partnership property■ — Incidents of tenancy. ] § 25. (1) A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership.
      (2) The incidents of this tenancy are such that:

        (а) A partner, subject to the provisions of this Act and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners.
      (б) A partner’s right in specific partnership property is not assignable except in connection with the assignment of the rights of all the partners in the same property.
      (c) A partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When partnership property is attached ■ for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws.
      <(Z) On the death of a partner his right in specific partnership property vests in the surviving partner or partners, except where the deceased was the last surviving partner, when his right in such property vests in his legal representative. Such surviving partner or partners, or the legal representative of the last surviving partner, has no right to possess the partnership property for any but a partnership purpose.
      (e) A partner’s right in specific partnership property is not subject to dower, curtesy, or allowances to widows, heirs, or next of kin.
      ¶26. Interest of partner — Personal property.] §26. A partner’s interest in the partnership is his share of the profits and surplus, and the same is personal property.
      ¶27. Bffeot of conveyance of partner’s interest.] §27. (1) A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books ; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled.
      (2) In case of a dissolution, of the partnership, the assignee is entitled to receive the assignor’s interest and may require an account frixn the date only of the last account agreed to by all the partners.