author: Black:

text:
    Winston Paul, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104028.
    Promulgated April 10, 1942.

      Wright Matthews, Esq., for the petitioner.

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

Black:

The Commissioner has determined a deficiency of $1,200 in petitioner’s gift tax for the year 1937. In his deficiency notice the Commissioner stated:

It is held that the trust is the donee in this instance and that only one exclusion of $5,000.00 is allowable for purposes of computing the gift tax due.

The petitioner, in filing his gift tax return, had taken four $5,000 exclusions. Following the Supreme Court’s decision in United States v. Pelzer, 312 U. S. 399, the Commissioner was given leave to file an amended answer in which he alleged that the gifts in question were of future interests in property and that he had erred in allowing any $5,000 exclusion and asked that the deficiency be increased to $1,650 instead of the $1,200 determined in the deficiency notice. The petitioner filed a reply to the Commissioner’s amended answer, in which he denied that the gifts were of future interests and alleged that the gifts were of present interests and were nine in number and that he is entitled to nine exclusions of $5,000 each; that there is no deficiency, but that on the contrary there was an overpayment of $900 in gift tax for the taxable year, and asks judgment of refund for that amount. A rehearing was held on these amended pleadings.

The facts have been stipulated and we adopt the facts as stipulated as our findings of fact. From them we state the following facts:

Petitioner is an individual who resides at Houston, Texas. Petitioner filed a timely gift tax return for the year 1937 with the collector of internal revenue for the first district of Texas at Austin, Texas.

By a trust indenture dated January 20,1937, petitioner irrevocably conveyed to Dallas S. Townsend, trustee, 10,000 shares of the common stock of the Paulwin Petroleum Co. for the benefit of the individuals and institutions named in said trust indenture. The fair market value of the 10,000 shares of common stock of the Paulwin Petroleum Co. was $100,000 at the time of the gifts.

The trustee was to pay over and deliver the principal and income of the trust as follows:

A. During the life of the settlor (petitioner) the net income of the trust was to be paid to the following named beneficiaries “in such proportion as the trustee may in his absolute discretion determine”:

* * * The Settlor’s wife, Ursula. M. Paul, the Settlor’s children, Ruth U. Paul and Miriam U. Paul, the children of the said Ursula M. Paul, Nigel G. Bois and Michael D. Bois, G. P. White, or the survivor or survivors of them, Young Men’s Christian Association oe the City oe New York, Citizens Union oe the City oe New York, National Civil Service Reform League.

B. Upon the death of the settlor (petitioner) the net income was thereafter to be paid to the settlor’s • wife, Ursula M. Paul, during her life.

C. Upon the death of the survivor of the settlor and his wife, Ursula M. Paul, the trust terminates and the trustee shall pay over the then trust fund, with any accumulated or unpaid income thereon, in equal parts, share and share alike, to the settlor’s children, Ruth U. Paul and Miriam U. Paul, and the children of the said Ursula M. Paul, Nigel G. Bois, and Michael D. Bois, or the survivor or survivors of them, and the issue collectively of any deceased child, provided, however, that there should be no distribution of principal to any of the above mentioned children until he or she reached the age of 25 years.

Since the property conveyed to the trust consisted only of 10,000 shares of the common stock of the Paulwin Petroleum Co., the amount and rate of annual income to be earned by the trust upon the property conveyed to it was not determinable at January 20, 1937, the date of the gifts.

The birth date of the settlor of the trust, Winston Paul, was October 31,1887, and he was 49 years of age at the date of the creation of the trust. The birth dates of the individual beneficiaries of the net income of the trust as granted by paragraph A of the trust indenture were as follows:

Ursula M. Paul_ Dee. 2,1900
Rutli U. Paul_Mar. 29,1917
Miriam U. Paul_Mar. 29,1917
Nigel G. Bois_Jan. 10,1921
Michael D. Bois_Dec. 29,1926
G. P. White_Dec. 16,1891

Petitioner in his brief concedes that the disposition of the corpus of the trust provided for in paragraph C of the trust indenture constituted gifts of future interests and thus that with respect to the corpus of the trust no $5,000 exclusions are allowable. Petitioner contends, however, that the gifts of the income from the property conveyed in trust were of present interests in property and that each gift was of a value of $5,669.85 and that as to each such income gift, petitioner is entitled to an exclusion of $5,000. Petitioner concedes that, inasmuch as the property which was given was common stock of a corporation, it was impossible to determine at the date of the gifts the amount of income which would be received by the respective beneficiaries during the life of the trust. Petitioner contends, however, that it is possible to arrive at the value of the gifts of the income from the property in the following manner:

Art. 19 (7), Regulations 79, provides for the valuation of annuities, life interests, etc., by reference to Table A made a part of said Article, and that “if the rate of annual income is not determinable, or if the donor is entitled merely to the use of nonincome-producing property, a hypothetical annuity at the rate of 4 per cent of the value of the property should be made the basis of the calculation.” Since the rate of income of the Trust here involved was not determinable, and since the value of the property donated was $100,000.00, use of the 4% rate provided by Art. 19 (7), Regulations 79, results in a hypothetical annuity of $4,000.00 from the entire Trust property.
The nine beneficiaries named in paragraph A of the Trust Indenture were entitled to the income of the Trust during the life of the Settlor, who was 49 years of age at the date of the gift: Reference to Table A under Art. 19, Regulations 79, shows that the present value of $1, due at the end of each year during the life of a person 49 years of age is $12.75716.
The present value of the $4,000.00 hypothetical annuity at the date of the gift then was $51,028.64; or $5,669.85 of value for each of the nine beneficiaries of the income of the Trust.

There has been no stipulation of the value of the income interests which were given to each of the nine beneficiaries of the trust. The only stipulation as to value is that the 10,000 shares of the Paulwin Petroleum Co. which was the subject of the gift was $100,000 at the date of the gift.

When we consider the language of the trust indenture empowering and directing the trustee as to the distribution of income, we must hold that the gifts of income from the property were of future interests and that, notwithstanding the formula which petitioner urges in his brief, it would have been impossible to have valued, at the time of the gifts, the income interest of any particular beneficiary of the trust. In this respect the gifts were very similar to those in Helvering v. Blair (C. C. A., 2d Cir.), 121 Fed. (2d) 945. The following provisions taken from the first trust involved in the Blair case and from the trust indenture involved in the instant case will demonstrate the striking similarity between the provisions of the two trusts.

Blair Trust Winston Paul Trust
The trustees were to apply the income of the trust “to the use of any one or more of the following who may be living [his wife and his seven children] and to the lawful issue of any of my said children in such proportions as shall * * * seem proper to the Trustees in their absolute discretion.”
The trustee was directed in the trust indenture “To pay the net income thereon during the life of the settlor to the following named beneficiaries, in such proportion as the trustee may in his absolute discretion determine”: [Here follows the names of the nine beneficiaries of the trust.]

In the Blair case, after stating the arguments of the taxpayer to the effect that the gifts of income were of present interests, the court said:

The difficulty with this reasoning is that it ignores the continued power of the trustees to change the original division, during the wife’s life in the case of the first trust; and during the trusteeship of Montgomery and William D. in the case of the second. It was the prime purpose of the trusts that the trustees should have this power, and presumably that they should exercise it. How then is it possible to compute the value of any beneficiary’s share at the time of the original division? The allocation might be changed the next day, and the interest which succeeded the interest first awarded would be a “future interest” within §504 (b). In order to calculate the value of an interest subject to such a condition, we should have to have some actuarial basis for the probability that trustees who had once made such a division would not disturb it. Obviously nothing of the kind is available or would in all likelihood be a sound basis for inference if it was compiled. [Citing authorities.]

Petitioner contends that the Blair case is disinguishable from the instant case in that in the Blair case the trustees were given the discretion to pay all the income of the trust to any one beneficiary, whereas in the instant case, the trustee had no such power. However, the trust indenture in the instant case empowered the trustee in his absolute discretion to give as much of the income of the trust to any one beneficiary as he chose and as little to the other beneficiary as he chose. In other words, each year he could shift the proportions of the income among the respective beneficiaries in any proportions that he chose. “How then” as the court pointed out in the Blair case, “is it possible to compute the value of any beneficiary’s share at the time of the original division?” As we view the matter, it can not be done. In Paul’s Federal Estate and Gift Taxation, vol. 2, par. 15.11, after discussing Welch v. Paine, 120 Fed. (2d) 141, where the court held that the gifts were of future interests, the author says:

* * * A fortiori the same conclusion should follow where the trustee may allocate..the. income, .among the various .beneficiaries in such proportions as he deems proper instead of accumulating the income. The Second Circuit, in holding that a right to income which is dependent upon the favorable exercise of such power is a future interest, has emphasized the actuarial impossibility of measuring the value of such a right. This is particularly true where the trustees are to enjoy their discretionary power until they cease to act as trustees. [Citing Helvering v. Blair, supra.]

Following the foregoing authorities we hold that petitioner is not entitled to any $5,000 exclusion in the determination of his gift tax for the year 1937.

In the alternative, petitioner contends that if it should be held that he is not entitled to nine exclusions of $5,000 each because of the discretionary power of the trustee as to apportionment of income between the beneficiaries, at all events he is entitled to a minimum of one exclusion of $5,000, for the trustee was granted no power to accumulate the income — he must distribute it — and, regardless of how he might apportion the income, at least one of the beneficiaries would receive income of a value substantially in excess of $5,000. We think this argument is without merit. It is, of course, true that several of the income beneficiaries of the trust may receive in excess of $5,000 over the life of the trust, but which ones? Ho one could tell at the time of the gift and, as the court pointed out in the Blair case, supra, it is this very uncertainty which makes the gifts impossible of valuation at the time of the gifts and therefore of future interests rather than of present interests. And it may be remarked that the value of the gift to any one of the nine beneficiaries is just as uncertain as the others. Therefore, the gifts to all nine of the beneficiaries are of “future interests.” Where the gifts are of future interests, even though it may turn out that the recipients may receive in excess of $5,000, there can be no $5,000 exclusions. See section 504 (b), Revenue Act of 1932.

Decision will be entered that there is a deficiency of $1,650 in fetitioner’s gift tax for 1937.


source: Caselaw Access Project

author: Tyson:

license: Public Domain

text:
    Edmund I. Kaufmann, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 97157, 97158, 97159, 97160, 97161, 97162.
    Promulgated April 10, 1942.

      Howe P. Cochran, Esq., and Margaret F. Luers, for the petitioners.

      L. W. Creason, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Marcus S. Golduamer; Jeanette Levi; Helen Goldnamer: Saul Kaufmann; and Lillian S. Kaufmann.

   OPINION.

Tyson:

The transaction here under consideration was apparently devised with the intention of bringing it within the scope of section 112 (g) of the Revenue Act of 1932, so that the stockholders of the Rosenthal Co. could receive all of the shares of stock of the new corporation, Associates, without the recognition of any gain to them. The Rosenthal Co. assigned the stocks of the retail jewelry corporations and the notes receivable to Associates, on August 3, 1933, in consideration for the issuance to it of the entire 1,500 shares of Associates and $19,892.29 in cash, and on August 10, 1933, the Rosen-thal Co. by corporate resolution authorized the distribution on August 15,1933, of the 1,500 shares of Associates to its stockholders. However, no entries of the transaction were made on the books of account and no certificates for the stock of Associates were issued or delivered, either to the Rosenthal Co. or to its stockholders, until the year 1934. The Revenue Act of 1934 was approved on May 10, 1934. By that act, Congress, for taxable years beginning after December 31, 1933, abolished the privilege of receiving, tax free, distributions of the kind described in section 112 (g), supra. The Commissioner, in Regulations 86, prescribed by him under the Revenue Act of 1934. incorporated a provision reading as follows:

Art. 112 (g)-5. Receipt of stock or securities m reorganization without surrender of stock by shareholder. — Any distribution, though in pursuance of a plan of reorganization, to shareholders without the surrender of their stock, in any taxable year beginning after December 31, 1933, by or on behalf of a corporation a party to a reorganization, * * * of stock or securities of another corporation a party to the reorganization, shall be taxed to such shareholders as a dividend, within the meaning of section 115, to the extent that the fair market value of such stock or securities at the date of the distribution is not in excess of the earnings or profits of the corporation accumulated after February 28, 1913. * * *

The Commissioner determined that the petitioners had received the stock of Associates in March 1934 as a dividend distribution by the Rosenthal Co. and that such distribution represented income in the year 1934 taxable under article 112 (g)-5, supra. He accordingly increased the dividend income of each petitioner to the extent of $415.83 for each share of stock received by him.

The deficiencies are for the year 1934, and no claim is here made that, if the distributions of stock here involved were made in that year, they would be tax free. The questions for decision are (1) whether the petitioners derived taxable income from the transaction here involved in the year 1934, and (2) if they did, whether the Commissioner erred in determining the fair market value of the stock of Associates and the amount of the earnings of the Rosen-thal Co. accumulated after February 28, 1913, for the purpose of computing the amount to be included in the income of the petitioners under article 112 (g)-5, supra.

The first question requires consideration of the effect of the resolution declaring the dividend in August 1933, and of the issuance and delivery of the certificates for the shares of stock of Associates in payment of that dividend in March 1934.

The Commissioner contends that the mere declaration of the dividend in stock of Associates did not constitute “either a dividend or a distribution” and that, since the certificates representing such stock were actually issued and delivered in March 1934 and the distribution was not recorded as having been made on the books of the Rosenthal Co. until March 1934, the stock was “paid to” and received by the petitioners in March 1934.

The petitioners contend that the resolution had the effect of vesting ownership of the stock in them on August 15, 1933, the date on which the dividend was made payable, and that the tardy issuance and delivery of the certificates had no bearing upon the time of passage of title to the stock, since stock certificates are nothing more than evidence of ownership and do not represent the stock itself. They further contend that they acquired the actual ownership of the stock in 1933 by virtue of a distribution made and completed in that year in pursuance of a plan of reorganization; that the principles of constructive receipt are inapplicable; and that even if the distribution should be regarded as an ordinary corporate dividend, taxable as income when it became unqualifiedly subject to the demand of the distributees, the stock was set aside for them and they became the owners thereof on August 15, 1933, and, hence, they could then have had the certificates on their demand.

We think it is obvious from our findings that the distributions of the Associates stock here involved were made in pursuance of a plan of reorganization, such reorganization being defined in section 112 (i) and the plan being covered by section 112 (g) of the Revenue Act of 1932.

Notwithstanding that the distribution of the stock here involved was made in pursuance of such a plan of reorganization as is provided for in section 112 (g), supra, yet, nevertheless, it is here taxable as a dividend if it was, in fact, made in 1934, to the extent that the value of the stock represented earnings and profits accumulated after February 28, 1913; and this because section 112 (g), which would render such distribution nontaxable, was not in force and effect in 1934. Therefore, the time when the distribution became income for tax purposes must be tested under the rules applicable to income received in the form of corporate dividends.

In those cases where income is accounted for on the accrual basis the rule is that dividend income accrues to the shareholder when a corporate debt on account of the dividend is created and the liability becomes fixed, and if, by the law of the domicile of the declaring corporation, the debt is created when the dividend is declared, the income accrues at that time; but if, by that law, the debt is created at a future date when the dividend is made payable, the income accrues at that future date. Estate of Henry W. Putnam, 45 B. T. A. 517; Falmouth Co., 45 B. T. A. 1033, and authorities cited. In those cases where, as here, income is accounted for on the cash basis, the rule is, as stated in a regulation which, with unimportant change in phraseology, has been in effect- since 1921, that the dividend constitutes income of the stockholder when the cash or other property is unqualifiedly made subject to his demand. This latter rule, which requires complete dominion over the property in question, goes far beyond the mere accrual of the right to such property. Cf. Falmouth Co., supra; Cox Motor Sales Co., 42 B. T. A. 192.

The uncontradicted evidence here is to the effect that the Rosen-thal Co. not only decided and intended in 1933 to distribute to its stockholders all of the stock of Associates, but also that it voted at the meeting of August 10, 1933, to make such distribution on August 15, 1933. The Rosenthal Co. thus became obligated to pay the dividend on August 15,1933, and the subject matter of the dividend, i. e., the 1,500 shares of Associates stock, was earmarked and segregated from other corporate assets by specific description thereof in the resolution by which the dividend was voted. The stock was thereafter held by the Rosenthal Co. as trustee for its stockholders and it was powerless to rescind its action as to such distribution. Commissioner v. Scatena, 85 Fed. (2d) 729. It follows, therefore, that the petitioners, on August 15, 1933, had an absolute and fixed right to receive the stock of Associates. Estate of Henry W. Putnam, supra; Falmouth Co., supra.

Shares of stock are the interest or right which the owner thereof has in the management, profits, and assets of the corporation, while stock certificates are mere symbols or paper evidences of the ownership of the shares and are not the stock itself. One may be a shareholder in a corporation without ever receiving a certificate of stock therein; and a shareholder may sell his interest in and pass title to the stock prior to delivery of certificates thereof if such was the intention of the parties. Pacific National Bank v. Eaton, 141 U. S. 227; Jellenik v. Huron Copper Mining Co., 177 U. S. 1; Richardson v. Shaw, 209 U. S. 365, 378; Hoffman v. Commissioner, 71 Fed. (2d) 929; Snyder v. Commissioner, 73 Fed. (2d) 5; Commissioner v. Scatena, supra, affirming 32 B. T. A. 675; Minal E. Young, Executor, 6 B. T. A. 472; Federal Grain Corporation, 18 B. T. A. 242; Anita Owens Hoffer, 24 B. T. A. 22; Lammerding v. Helvering, 121 Fed. (2d) 80, affirming 40 B. T. A. 589; Mascot Stove Co. v. Commissioner, 120 Fed. (2d) 153, affirming 40 B. T. A. 1057; Kansas, O. & G. Ry. Co. v. Helvering, 124 Fed. (2d) 460, affirming 42 B. T. A. 1128.

Upon due consideration of all of the evidence presented, it is our opinion that the petitioners not only acquired (1) a fixed right to receive the stock of Associates on August 15, 1933, but also that they acquired at the same time (2) the ownership of and the unqualified dominion and unlimited control over the said stock. Neither the transfer of ownership of stock nor the conferring of dominion and control over stock is established by the mere issuance and delivery of stock certificates. Minal E. Young, Executor, supra; Commissioner v. Scatena, supra. The transfer of the stock here involved was effected and completed by the corporate resolution of August 10, 1933, adopted in connection with a plan of reorganization, and before the delivery of the stock certificate. The plan was agreed upon by Goldnamer, Kaufmann, Rosenthal, and the other stockholders of the Rosenthal Co., and a written agreement was made by the Rosenthal Co., duly approved by its stockholders, to transfer a substantial part of its assets to Associates for the entire stock of the latter company. Pursuant to that agreement a bill of sale was executed by the Rosenthal Co. to Associates, and this was followed by a resolution of the Rosenthal Co., also a part of the plan, that the stock of Associates be distributed pro rata to its stockholders as a dividend on August 15, 1933. Although the Rosenthal Co. had not, at that time, received a certificate for the 1,500 shares of Associates and no certificates whatever had then been issued, there is no contention here that the Rosenthal Co. did not become the owner of the stock of Associates on August 15, 1933, and the respondent, on brief, concedes that the Rosenthal Co. was such owner in 1933. There was no express or implied condition, in the resolution or otherwise, which prevented the passage of all of the rights of ownership to the stockholders, including dominion and control.

The corporate intention to effect an immediate and unqualified distribution of the stock of Associates on August 15, 1933, and the understanding of the stockholders that this would be done are clearly established by the plan of reorganization, the terms of the resolution of August 10, 1933, and the testimony of Goldnamer, the accountant, and the attorney, who were active participants in the formulation and execution of the plan of reorganization.

In support of his contention that the distributions of Associates stock here involved were not made on August 15, 1933, by the adoption of the resolution of August 10,1933, providing for such distributions, respondent cites the cases of Mason v. Routzahn, 275 U. S. 175 and Avery v. Commissioner, 292 U. S. 210. The former case is distinguished on its facts in the vital particular that in that case the resolution declaring the dividend involved therein is not shown to have specified a definite time for the payment of the dividend, as was done by the resolution in the instant case. The case of Avery v. Commissioner, supra, is also distinguished on its facts in that there the holding that dividends declared in November of one year and payable on or before December 31 of that year were actually received by the stockholders in January of the following year, was based upon an invariable practice of the corporation, the deliberate design of which was to prevent the actual receipt by the stockholders of payment of the dividends until January of the following year; a design which was known to, and acquiesced in, by the stockholders. No such facts appear in the instant case.

In addition to the fact that the certificates were not actually issued until March 1934, some of the other evidence tends to reflect distribution of the stock here involved in that month. This evidence consists of entries made on the journal and ledger accounts of the Rosenthal Co., the former dated March 31, 1934, and the latter dated March 1, 1934, charging the amount of the distributions to surplus and crediting it to investments. The Commissioner relies upon these latter entries, in addition to the fact that no stock certificates of Associates were issued until 1934. The writing off of the distribution on the books is, of course, some evidence of the time the stock was placed within the dominion of the stockholders. But the fact that charges against surplus and credits to investments were made on the books in March 1934 purporting to reflect a distribution of the stock at that time does not warrant the conclusion that the stock was made unqualifiedly subject to the demand of the petitioners for the first time, in the year 1934. Book entries have some evidentiary value, but on an issue of whether income is to be taxed in one year or another the books are neither indispensable nor conclusive and the decision must rest on the actual facts. Helvering v. Midland, Mutual Life Insurance Co., 300 U. S. 216; Doyle v. Mitchell Brothers, 247 U. S. 179; Wessel v. United States, 49 Fed. (2d) 137; J. M. Loftis et al., Administrators, 6 B. T. A. 725; Luther Elkins, 12 B. T. A. 1058; Marian Otis Chandler, 16 B. T. A. 1248; Ohio Brass Co., 17 B. T. A. 1199; and Edgar Stanton et al., Executors, 34 B. T. A. 451. As we said in the Loftis case, supra, “While book entries may afford some evidence to support a fact, it is well established that they can not of themselves prove a fact otherwise authoritatively denied.” The evidence afforded by the book entries in the instant proceedings must yield to the otherwise proven and established fact that ownership and unrestricted command over the stock passed to the petitioners on August 15, 1933, under the resolution of August 10, 1933, authorizing the distribution of the stock on August 15, 1933. We, therefore, reject the Commissioner’s contention that the stock of Associates was paid to, and was received by, petitioners in March 1934, and hold that it was acquired and became unqualifiedly subject to their demands on August 15,1933, and is not taxable to them as income of the year 1934.

In view of our conclusion on the primary question, it is unnecessary to determine the fair market value of the stock of Associates, as of March 31, 1934, or the amount of the earnings and profits, as of that date, which the Rosenthal Co. had accumulated after February 28, 1913.

Decision will ~be entered under Rule 50.

       SEC. 112. RECOGNITION OP GAIN OR LOSS.
      (a) Generad Rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      * * * # * * #
      (g) Distribution of Stock on Reorganization. — If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

       See section 112 of tlie Revenue Act of 1934, omitting section 112 (g) of the Revenue ict of 1932 ; and section 1, Revenue Act of 1934. See also H, Rept. 704, 73(1 Cong., 2d sess., p. 14; S. Rept. 558, 73d Cong., 2d sess., pp. 16, 32.

         Art. 115-1. [Regulations 86.] A taxable distribution made by a corporation to its shareholders shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands.
      Art. 42-3. [Regulations 86.] Dividends on corporate stock are subject to tax when unqualifiedly made subject to the demand of the shareholder.
      See also arts. 641 and 333, Regulations 77, under the Revenue Act of 1932.


author: TuuneR:

text:
    John B. Downie, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101502.
    Promulgated April 10, 1942.

      T. G. Thompson, Esq., for the petitioner.

      Thomas F. Q(Mahan, Esq., for the respondent.
   OPINION.

TuuneR:

The respondent determined deficiencies in income tax for the years 1936 and 1937 in the respective amounts of $363.06 and $2,901.65. The question presented is whether the income from a trust created by petitioner is taxable to him under sections 166, 167, or 22 (a) of the Revenue Act of 1936. The case was submitted upon a written stipulation of facts, together with several exhibits attached thereto, and we adopt the facts as stipulated as our findings of fact herein.

Petitioner is an individual residing in Cleveland, Ohio. He filed his income tax returns for 1936 and 1937 with the collector of internal revenue for the eighteenth district of Ohio.

On August 30, 1935, petitioner and the National City Bank of Cleveland executed a trust agreement which provides in part as follows:

Trust Agreement
I.
Preliminary Recitals
1. This agreement is entered into at Cleveland, Ohio, this 30th day of August, 1935 by and between John B. Downie, of Lakewood, Ohio, the creator of the trust, who is hereinafter referred to in the first person, and The National City Bank of Cleveland, a national banking association, hereinafter referred to as the trustee.
2. Concurrently herewith I have assigned, delivered, transferred and conveyed to the trustee certain property described in Exhibit A attached hereto and made a part hereof.
3. The trustee acknowledges receipt of the aforesaid property and that it holds same in trust, and that it will hold all other property that may be added thereto in trust for the purposes and on the terms hereinafter set forth.
II.
Rights Reserved by the Creator of the Trust
1. I reserve the right with the consent of the trustee to bring additional property under the terms of this agreement. I further reserve the right at any time to revoke this agreement, to withdraw from the operation of this agreement any part or all of the trust property, to change the beneficiaries hereunder, their shares and the plan of distribution to each, and with the trustee’s consent to modify this agreement in any other manner. Provided, however, that so long as either my brother, James H. Downie, or my sister, May A. Downie, shall be living and in the reasonable judgment of the trustee physically and mentally capable of giving consent and approval to the exercise of the rights reserved to me in the next preceding sentence, such rights shall be exercised by me only with the consent and approval of one or the other of them.
2. I reserve the right at any time, upon giving reasonable notice to the trustee, to require it to transfer the entire trust estate to any other fiduciary I may designate as successor trustee, provided such successor trustee shall first execute its formal written acceptance of the duties and obligations of the trustee hereunder and file an executed copy of such acceptance with the trustee herein named. When this is done and when all sums then due from the trust estate to the trustee herein named have been paid it shall transfer the trust property then in its hands to the successor trustee, and shall thereupon and thereby be discharged of all duties and obligations under or arising out of its trusteeship. In like manner I may require transfer from any successor trustee to a subsequent successor trustee.
III.
Powers and Duties of the Trustee
1. During the term of this agreement and until the trust created hereunder shall have been discharged, the trustee shall have title to and possession of all property coming within the terms hereof, with full power and authority, except as expressly limited in this agreement, to manage, control, sell, convey, lease for any term of years irrespective of the period of the trust, invest, and reinvest the same and any part thereof as it deems advisable and to deal therewith in all respects as though the absolute owner thereof, all limitations now or hereafter imposed by law or rule of court on investments by trust companies or fiduciaries generally being hereby expressly waived.
The trustee shall make any sale, lease, investment or reinvestment of the trust estate or any part thereof which I may at any time in writing direct, or, during any period during which, in the reasonable judgment of the trustee, I am physically or mentally incapable of giving such direction, then any sale, lease, investment or reinvestment which my brother, James H. Downie, if living and capable of acting, may in writing direct, and the trustee shall have no responsibility with respect to any such sale, lease, investment or reinvestment so directed to be made except to comply with the written directions given. The trustee shall make no sale, lease, investment or reinvestment on account of the trust estate while I or my said brother shall be exercising such right of direction except upon our direction as aforesaid. The trustee may retain as part of the trust estate without liability for depreciation in value any securities or other property deposited hereunder by me, or the purchase of which shall have been directed by me or my said brother, and during any period in which I or my said brother shall be exercising the right of direction as aforesaid, the trustee shall not be obliged nor required nor shall it have any duty or responsibility to consider or recommend the advisability of selling or continuing to hold as a part of the trust estate any securities or other property held thereunder.
2. The trustee is empowered to determine whether money and property coming into its hands hereunder shall be treated as principal or income, and it may apportion .expenses to principal or income as it may deem just.
* * * * * * *
IV.
Distkibihion of Pbincipal and Income
1. During my lifetime, but subject to the rights reserved under Article II hereof, the trustee shall accumulate the net income derived from the trust estate and add the same, as and when received, to the principal of the trust estate. In the event I shall become disabled so that in the reasonable judgment of the trustee I am unable to exercise the right of withdrawal or principal herein reserved to me, the trustee shall have power and authority to pay over to my brother, James H. Downie, or my sister, May A. Downie, or to expend for my use and benefit, such portion of the income or principal of the trust estate as my said brother or sister, or if both of them shall be .deceased or in the reasonable judgment of the trustee incapable of advising the trustee in such respect, then as the trustee shall deem necessary or proper in order to provide for my care, support and comfort, taking into consideration my income from other sources.
2. After my death, the trustee shall first pay and discharge any and all taxes that may be found to be due by reason of or with respect to any gift hereby made, whether the same shall be assessed against the trust estate as such or against my general estate or against any beneficiary hereunder, to the extent of the trust funds then in its hands.
3. If both my said sister and my said brother shall survive me, then, upon my death, the trustee shall distribute the residue of the trust estate, both income and principal, to them in equal shares, or if only one of them shall survive me, the trustee shall distribute all of the residue to such one. If neither my said sister nor my said brother shall survive me, then upon my death and if I shall not have revoked this agreement under the right reserved to me by the provision of Article II hereof, the trustee shall distribute all of the residue of the trust estate, both income and principal, to the heirs-at-law of my said brother determined, however, in accordance with the laws of the State of' Ohio at that time in force respecting the distribution of personal property of an intestate, but for the purpose of determining such heirs, his death shall be considered as having occurred at the instant when such distribution shall be due.

On the date the above agreement was executed petitioner transferred and assigned certain property to the bank to hold in trust and from time to time and ultimately to dispose of the income and principal as provided for therein. On or about October 6,1936, petitioner transferred and assigned certain additional property to the bank to hold in trust and dispose of with the property which then comprised the trust estate.

The parties have stipulated the following additional facts:

Since said August 30, 1935, all net income and all net profits of trust estate have been accumulated by the Trustee and added to the principal of the trust estate. Since said date no part of the income received by the Trustee has been applied to the payment of any premium upon any policy of insurance upon the life of the Petitioner. Since said date no income or profits of the trust estate and no principal thereof has been paid over to Petitioner, or expended for his use or benefit, or paid over to May A. Downie or to James H. Downie, sister and brother respectively of Petitioner, as beneficiaries, or to any beneficiary under said trust agreement. The trust agreement was not revoked nor was it in any respect modified during either the year 1936 or the year 1937. No property at any time transferred to and made a part of the trust estate either in its original or in a converted or reinvested form has later been withdrawn therefrom.
May A. Downie, sister of Petitioner, and one of the beneficiaries of the trust, was born May 21, 1883. James H. Downie, the other beneficiary, was born September 23, 1897. Petitioner was bom April 15, 1887.
Since the trust was created the Petitioner has not been physically or mentally disabled or at any time unable to exercise any right reserved to him -under the trust agreement. Since the trust was created both of the beneficiaries, May A. Downie and James H. Downie, have at all times been physically and mentally capable of giving such advice, consent and approval as might have been required of them or either of them concerning revocation or modification of the trust agreement, change of the beneficiaries thereunder, their shares and the plan of distribution to each, or withdrawal of assets deposited under the trust agreement or distributions of the income or principal of the trust under the provisions of the trust agreement. In each year since the date of the trust agreement and throughout the year 1936 and the year 1937, the Petitioner has received from sources other than the trust, much more than the amount of income necessary to provide for his care, support and comfort.
A large part of the deficiency tax in controversy for the year 1937 is computed with respect to capital gains realized upon sales of securities which the trustee made during said year 1937.
The Petitioner filed gift tax returns with the Collector of Internal Revenue for the years 1935 and 1936 and reported on said returns as gifts the property which he transferred to the trustee during each of said years to be held under the trust agreement. The property so transferred during said years had an aggregate value of less than the amount of the exemption allowable by law to Petitioner and he therefore paid no gift tax for either of said years.
Since the trust was created both May A. Downie and James H. Downie, sister and brother respectively of Petitioner, have maintained living establishments entirely apart and separate from those maintained by Petitioner, who, during each of the years 1936 and 1937 was married and living with his wife. During the year 1936 and the year 1937 Petitioner was not in any way liable for the support of either his said sister or his said brother.

Subject to the terms of the trust instrument petitioner on August 30, 1935, and October 6, 1937, transferred certain of his property to the National City Bank of Cleveland, as trustee, and to the extent therefore that the trust instrument did not provide for the passage of his ownership or interest in the property to the trustee it was retained by and remained in the petitioner. Klein v. United States, 283 U. S. 231, and Helvering v. Hallock, 309 U. S. 106. See Everett D. Graff, 40 B. T. A. 920. Prior to the transfer the petitioner’s ownership in the property was absolute and included the right to the income therefrom. Under the trust agreement the trustee was to hold the property for the duration of the trust and was to accumulate and add the net income to principal. In transferring the property to the bank, as trustee, the petitioner specifically reserved the right to revoke the trust agreement or to withdraw any part or all of the trust property at any time. So long, however, as his brother or sister should live such power was to be exercised only with the consent and approval of one or the other of them, but after their deaths the power could be exercised by the petitioner acting alone. In Rollins v. Helvering, 92 Fed. (2d) 390, the Circuit Court of Appeals for the Eighth Circuit said: “Section 167 is not concerned with what is done under a trust agreement but with what might be done thereunder.” In Kaplan v. Commissioner, 66 Fed. (2d) 401, the Circuit Court of Appeals for the First Circuit said: “We think the statute means that if under any circumstances or contingencies any part of the accumulated income might inure to the benefit of the grantor such portion of the income is taxable to him.” While in Kent v. Rothensies, 120 Fed. (2d) 476, the Circuit Court of Appeals for the Third Circuit held that it was not necessary that the income be “unconditionally” held or accumulated for future distribution to the grantor as a prerequisite to the application of section 167. Through the exercise of the reserved power, first in conjunction with his brother or sister, and after their deaths, alone, the petitioner in the instant case could withdraw part or all of the trust property, including the accumulated income.

In Mary Ryerson Frost, 38 B. T. A. 1402, on facts substantially similar to those stated above, we held that the trust income was taxable to the grantor under section 167. The same conclusion follows in this case. Mary Ryerson Frost, supra; Altmaier v. Commissioner; 116 Fed. (2d) 162; Ella U. Seipp, 44 B. T. A. 720; William Lea Taylor, 37 B. T. A. 875; and David M. Heyman, 44 B. T. A. 1009. This is not a case where the income is payable to or vests in persons other than petitioner so that it passes beyond the reach of his retained power of withdrawal, and it is only through his death without withdrawal of the trust funds or revocation of the trust instrument that he is fully divested of his rights in and to the trust income.

That the income of the trust is taxable to the petitioner as grantor of the trust is also supported by other facts not apparent in some or. all of the cases cited above. Here the petitioner reserved the right to direct and control the sale, lease, investment, or reinvestment of the trust property or any part thereof and prohibited any of these activities by the trustee except upon written directions from him. It thus appears that as the trust was originally constituted the petitioner was not the trustee, as in Helvering v. Clifford, 309 U. S. 331, but not only did he reserve the above described powers unto himself, but just as specifically he relieved the trustee of any and all responsibility and liability in respect of the transactions involving the trust property. Furthermore, he reserved the right to require the transfer of the entire trust estate, which included accumulated income, to any successor trustee he might designate. Under this power he could have become trustee at any time. Cf. Suhr v. Commissioner, 126 Fed. (2d) 283; Commissioner v. Goulder, 123 Fed. (2d) 686; and Commissioner v. Buck, 120 Fed. (2d) 775.

It is also to be noted that at the death of petitioner, if the trust agreement had not been previously revoked or the trust property not wholly withdrawn prior to that time, the trustee was required to the extent of the funds remaining in its hands, first, to pay and discharge all taxes due by reason of or with respect to any gift made by or under the trust instrument, whether assessed against the trust estate as such, against the estate of the petitioner, or against any beneficiary under the trust. It thus appears that the trust property, including the accumulated income, was charged with any tax liability of the petitioner with respect to the transfer of property to the trust or its transmission to others under the terms of the trust instrument at or prior to his death. These facts, in our opinion, leave no doubt that the accumulated income was intended to and did inure to the benefit of the grantor and that section 167, supra, is therefore applicable. We think it also apparent that the trust property and the accumulated income was at all times under the dominion and control of petitioner so as to bring it under the rule laid down by Helvering v. Clifford, supra.

As tending to the same conclusion, the respondent stresses the provision whereby the petitioner reserved the right, in the event of his disability, to have withdrawn or expended for his use and benefit such portions of income and principal as his brother or his sister, or in the case of their deaths or inability to act, as the trustee might deem necessary or proper for his care, support, and comfort. While we do not consider it essential to the disposition of this case to dispose of that contention, attention is called to the recent decision of the United States Circuit Court of Appeals for the Third Circuit in Helvering v. Evans, 126 Fed. (2d) 270.

In reaching the above stated conclusion, we have not overlooked the recent decision in Commissioner v. Betts, 123 Fed. (2d) 534, where the facts are similar in many respects to the facts in the instant case and on first impression might indicate a conclusion contrary to that reached here. In determining the applicability in that case of section 167, supra, the court considered among the decided cases only those dealing with the possibility of reverter, a factor not here involved, as was pointed out in Mary Byerson Frost, supra. Cf. William E. Boeing, 37 B. T. A. 178; Paul W. Litchfield, 39 B. T. A. 1017; Marrs McLean, 41 B. T. A. 565; Christopher L. Ward, 40 B. T. A. 225; Genevieve F. Moore, 39 B. T. A. 808. The court in the Betts case did consider Altmaier v. Commissioner, supra, but only with respect to the applicability of section 166 of the statute. We do not consider therefore that a change in the conclusion here reached contrary to the line of cases followed is indicated or required by the Betts case.

Decision will be entered under Rule 50.


author: Turnee:

text:
    Estate of Charles H. Robinson, Northwestern National Bank and Trust Company of Minneapolis, Jessie P. Robinson and Charles J. Robinson, Co-executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. Bessie P. Douglas, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Adeline R. Morse, Deceased, John S. Dalrymple, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bernice B. Dalrymple, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102869, 102870, 102871, 106705.
    Promulgated April 14, 1942.

      Kimball B. DeVoy, Esq., for the petitioners.

      S. Ü. Eileen, Esq., for the respondent.
   OPINION.

Turnee:

The Commissioner determined deficiencies in income tax as follows:

The Commissioner also determined a deficiency of $5,412.47 in the income tax of Irene B. Robinson Cirkler for the period January 1 to October 20, 1937, the date of her death, and proposed to assess said amount plus interest against Bernice B. Dalrymple, petitioner in Docket No. 106705, as a transferee of assets of the estate of Irene B. Robinson Cirkler, deceased.

The issues presented by the pleadings are (1) whether the owners of an iron ore property are entitled to a deduction for depletion in 1937 with respect to minimum royalties received in that year, the lease under which the royalties were paid having been terminated in that year without any ore having been removed from the property during the life of the lease, (2) whether in determining taxable income for 1937 there is to be included the amounts of the depletion deductions taken by said owners in prior years in respect to the above lease, and, if said amounts of depletion are to be included in taxable income for 1937, whether they are first to be reduced by the portions thereof as to which no tax benefit was obtained in the years in which deducted, and (3) in the case of the estate of Adeline R. Morse, deceased, whether there is to be allowed a deduction for depletion taken in 1938 with respect to royalties received in that year from the above mentioned lease. The petitioners have conceded the correctness of respondent’s disallowance of the deductions involved in issues (1) and (3), thus leaving for determination only the issue presented in (2).

... With the exception of the facts relating to the liability of Bernice B. Dalrymple as transferee, all of which were alleged and admitted

in the pleadings, the proceedings were submitted on stipulation of facts, which we adopt herein as part of our findings of fact. Such of the stipulated facts and of those shown by the pleadings as we deem necessary for a discussion of the issue here involved are set out below.

The income tax returns of the estate of Charles H. Eobinson, Bessie P. Douglas, and Irene B. Eobinson Cirlder for the year 1937 or the period here involved and the returns for 1937 and 1938 of Adeline E. Morse were filed with the collector of internal revenue for the district of Minnesota.

On July 1, 1929, as well as prior thereto, the four petitioners' or their predecessors in title were owners of an iron mine situated in the State of Minnesota, known as the Pettit Mine, from which some iron ore had been removed. Bessie P. Douglas owned an undivided one-half interest in the mine and each of the others owned an undivided one-sixth interest.

On July 1, 1929, the four owners leased the mine to the Eepublic Steel Corporation for a term of 30 years commencing on that date. The lease provided that minimum royalties should be paid annually whether any ore was extracted during the year or not. Minimum royalties paid in advance of extraction of ore were to be applied on ore later mined and shipped. The lease also provided for its cancellation by the lessee, after a specified period, upon three months written notice to the lessors. As of July 1, 1937, the lessee, pursuant to the terms thereof, canceled and terminated the lease without having removed any ore from the mine during the existence of the lease.

From the date of the execution of the lease until its termination the lessee paid the agreed advance royalties to the lessors or their respective successors. Said lessors or successors in filing their income tax returns, which were prepared on the cash basis, reported, in their gross incomes for the respective years the royalties received in such years and took deductions for depletion with respect to such royalties. The depletion deductions thus taken were computed on the cost basis and were allowed by the respondent.

In determining the deficiencies herein involved for the year 1937 the respondent, pursuant 'to the provisions of paragraph (c) of article 23 (m)-10 of Eegulations 94, relating to the Eevenue Act of 1936, included the following indicated amounts in the taxable income of the respective taxpayers:

Estate of Charles H. Robinson-$9, 829.14
Bessie P. Douglas- 53, 299. 03
Adeline R. Morse_18,180. 26
Irene B. Robinson Cirkler_18,180. 26

The foregoing amounts represent the total of the depletion deductions claimed by and allowed to said taxpayers for the years prior to and including 1936 with respect to the minimum royalties received by them from the lease on the Pettit Mine.

The petitioners contend that the respondent’s action was erroneous and that in the redetermination of their respective tax liabilities for 1937 there should be eliminated from income the amounts included therein by the respondent on account of depletion deductions taken in prior years. The respondent maintains that his action was correct and proper.

Regulations 94 provides as follows:

Art. 23 (m)-10. Depletion — Adjustments of accounts based on bonus or advanced royalty.—
* W * # * * *
(b) If tbe owner has leased a mineral property for a term of years with a requirement in the lease that the lessee shall extract and pay for, annually, a specified number of tons, or other agreed units of measurement, of such mineral, or shall pay, annually, a specified sum of money which shall be applied in payment of the purchase price or royalty per unit of such mineral whenever the same shall thereafter be extracted and removed from the leased premises, an amount equal to that part of the basis for depletion allocable to the number of units so paid for in advance of extraction will constitute an allowable deduction from the gross income of the year in which such payment or payments shall be made; but no deduction for depletion by the lessor shall be claimed or allowed in any subsequent year on account of the extraction or removal in such year of any mineral so paid for in advance and for which deduction has once been made.
(e) If for any reason any such mineral lease expires or terminates or is abandoned before the mineral which has been paid for in advance has been extracted and removed, the lessor shall adjust his capital account by restoring thereto the depletion deductions made in prior years on account of royalties on mineral paid for but not removed, and a corresponding amount must be returned as income for the year in which the lease expires, terminates, or is abandoned.

In support of their contention the petitioners urge that the application of paragraph (c) of article 23(m)-10, supra, to their cases imposes upon them a severe penalty without justification. Taking the case of Bessie P. Douglas as illustrative, they state that by taking depletion deductions totaling $53,299.03 over the eight-year period, 1929 through 1936, she reduced her total income tax liability for that period by $6,923.51; that by including said $53,299.03 in income for 1937 her tax liability for that year is $26,550.65 in excess of what it was without such inclusion or approximately $20,000 more than the reduction effected by reason of the depletion deductions taken in prior years. They insist that such a result is violative of the provisions of section 23 (m) of the Revenue Act of 1936 and similar sections of prior acts allowing deduction of “a reasonable allowance” for depletion since in reality it works a denial to the taxpayers of such allowance. They contend that we should declare paragraph (c) of article 23 (m)-10, as applied to these cases, to be invalid and unauthorized by the act. As alternative procedures to that contained in said paragraph (c), the petitioners suggest the following, both of which it is claimed would protect the collection of taxes and not unjustly burden the taxpayers: (1) Permit matters to stand as they were at.the termination of the lease, thereby leaving the lowered cost as the taxpayers’ basis for depletion with respect to future leases or production, or (2) provide that as a condition precedent to the allowance in any year of a depletion deduction with respect to royalties received prior to the extraction of mineral, the taxpayer be required to waive the period of limitations for such year and that when the lease is terminated without any extraction of mineral the taxpayers’ tax liability be redetermined for the years in which depletion deductions were taken by disallowing such deductions and recomputing the tax liability on the basis of the tax rates in effect for the respective years.

As was pointed out in Grace M. Barnett, 39 B. T. A. 864, arising under the Revenue Act of 1934 and involving paragraph (c) of article 23(m)-l0 of Regulations 86, all of the regulations, beginning with Regulations 45, relating to the Revenue Act of 1918, have provided that if depletion is allowed with respect to an advance royalty or bonus and no production occurs during the life of the lease, the lessor must restore to his capital account and report as income in the year the lease terminates the amount he has been allowed to deduct as depletion in connection with the advance payment, and that that method of allowing and adjusting deductions for depletion had been considered and in effect approved by the Supreme Court in Murphy Oil Co. v. Burnet, 287 U. S. 299. That method was followed by us in the Barnett case and was applied in Sneed v. Commissioner, 119 Fed. (2d) 767; rehearing denied, 121 Fed. (2d) 725; certiorari denied, 314 U. S. 686, affirming 40 B. T. A. 1136; Crabb v. Commissioner, 119 Fed. (2d) 772, affirming 41 B. T. A. 686; and Lamont v. Commissioner, 120 Fed. (2d) 996. These cases are applicable in the instant proceedings and effectively dispose of the main contention of the petitioners.

It is to be observed that the hardship here complained of does not result entirely from the method set forth in the Commissioner’s regulation but results in part from the fact that income tax rates were increased over the period 1929 to 1937 and the depletion deductions were taken, generally speaking, in years in which the incomes of the taxpayers were at comparatively low levels. Doubtless, there are cases where the taxpayers had high incomes during the years in which depletion deductions were taken but low incomes for the year in which the deductions are included in income and who would therefore pay less tax under the method contained in the regulations than if the deductions were disallowed for the years in which they were taken. The next case coming before us may present just such a situation. The mere fact that due to his peculiar circumstances one taxpayer may, under the method contained in the regulations, effect a net saving in tax while another taxpayer differently circumstanced may pay more tax than he otherwise would, is not a sufficient reason for holding the method to be invalid in its application here. The uniformity required of tax laws is geographic uniformity, not intrinsic uniformity. Bromley v. McCaughn, 280 U. S. 124.

For the years 1938 and 1934 Bessie P. Douglas took and was allowed depletion deductions of $4,958.05 and $6,197.56, respectively, with respect to the minimum royalties received in those years from the lease on the Pettit Mine. Her net income or loss (after allowance of said deductions) and her income tax liability for said years as finally determined and assessed by respondent were as follows:

In the computation of her income tax liability for 1934 she claimed and was allowed a dividends received credit of $5,894.05 and an earned income credit of $300.

For the period August 16 to December 31, 1932, the net income of the estate of Charles H. Robinson was $620.87 after allowance of depletion of $413.19 on account of minimum royalties received in that period from the lease on the Pettit Mine. The estate was entitled to a personal exemption credit of $1,000.

With respect to Bessie P. Douglas, it is contended that the respondent erred in including in her 1937 income the amount of $4,958.05 representing the depletion deduction taken by her in 1933. It is also contended that the respondent erroneously included in income $839.90 of the depletion deduction taken by her for 1934. Said amount of $839.90 represents the difference between her net income of $3,160.10 for 1934 and $4,000, the amount above which her income was subject to surtax under the Revenue Act of 1934. With respect to the estate of Charles H. Robinson, it is contended that the respondent erroneously included in 1937 income $379.13 of the depletion allowance for the period August 16 to December 31, 1932. Said amount of $379.13 represents the difference between the net income of $620.87 and $1,000, the amount of the personal exemption credit. It is accordingly urged that the deductions in the amounts of $4,958.05 find $839.90 in the case of Bessie P, Douglas and $379.13 in the case of the estate of Charles H. Eobinson produced no “tax benefit” and that the said amounts should not therefore be included in their 1937 income.

The respondent, relying on Beckridge Corporation, 45 B. T. A. 131, on appeal to the Circuit Court of Appeals for the Second Circuit, contends that the full amount should be included in 1937 income, regardless of “tax benefit” in the years of deduction. In that case the taxpayer, in 1931, acquired certain real estate which it sold in 1937. During the period of ownership there was actual depreciation of the property, but the taxpayer, operating at a net loss during each of the years, took no deduction for such depreciation either on its books or on its income tax returns. The question presented was whether, for the purpose of computing gain or loss on the sale, the cost basis of the property was to be reduced on account of depreciation occurring during the period of ownership. We there considered the rule of United States v. Ludey, 274 U. S. 295, and other related cases, which is to the effect that when a taxpayer sells a de-preciable property after years of use, the property sold is not the original property but the original property reduced by the depreciation sustained thereon, and that accordingly depreciation must be deducted from the original cost in order to determine the cost of what was disposed of by the sale. In accordance with that rule and the pertinent provisions of the applicable act, we held that the cost basis of the property sold by the Beckridge Corporation was to be reduced by the depreciation allowable with respect to the property during the period of ownership by the corporation.

We fail to see wherein our decision in Beckridge Corporation, supra, is controlling here. In urging the applicability of that decision here the respondent assumes a position contradictory to that taken on the first issue herein. In the instant cases no property was sold nor was any depletion actually sustained. The lessors merely took and were allowed certain deductions for depletion which it was anticipated they would sustain. Upon termination of the lease in 1937, no ore having been extracted, it was found that the anticipated depletion had not been sustained and never would be sustained. The respondent thereupon included in income for 1937 the depletion deductions allowed in prior years, thereby in effect determining that the deductions so allowed were not in fact allowable deductions. Cf. Kennedy Laundry Co., 46 B. T. A. 70.

In support of their claim the petitioners rely on Central Loan & Investment Co., 39 B. T. A. 981; and Amsco-Wire Products Corporation, 44 B. T. A. 717. In Estate of James N. Collins, 46 B. T. A. 765, and John V. Dobson, 46 B. T. A. 770, we had occasion to review the decisions relied on by the petitioners herein and, in the case of John V. Dobson, said:

Where there is recovery in respect of a loss sustained in an earlier year and a deduction of such loss claimed and allowed for the earlier year had effected an offset in taxable income, the amount recovered in the later year should be included in taxable income for the year of recovery, the reason being that even though the subsequent recovery is in the nature of a capital recovery the prior deduction of the amount of the loss from taxable income has for income tax purposes already given the taxpayer a recoupment of said loss out of taxable income and the subsequent recovery, being in the nature of a replacement of taxable income, is equivalent to gain to the taxpayer. National Bank of Commerce of Seattle v. Commissioner, 115 Fed. (2d) 875, affirming 40 B. T. A. 72. But where the deduction claimed and allowed in the prior year did not effect an offset of taxable income, the amount recovered in a later year does not constitute taxable income for the year of recovery. Estate of James N. Collins, supra.

Applying the rule to tbe case of Bessie P. Douglas, who had a net loss of $13,947.51 for 1933, it is apparent that the depletion deduction of $4,958.05 taken in that year did not effect an offset in taxable income, since she had a net loss for that year of $8,989.46 aside from the depletion deduction. Accordingly we hold that the respondent erred in including said $4,958.05 in income for 1937.

After taking a depletion deduction of $6,197.56 in 1934, Bessie P. Douglas still had a net income of $3,160.10 for that year; likewise the estate of Charles H. Robinson still had net income of $620.87 for the period August 16 to December 31, 1932, after the allowance of depletion in the amount of $431.19. From this it is clear that the entire amount of said depletion allowances effected offsets in the income of these taxpayers for the taxable periods mentioned and are to be included in income for the year in which the lease was canceled. John V. Dobson, supra; Central Loan & Investment Co., supra; National Bank of Commerce of Seattle, 40 B. T. A. 72; affd., 115 Fed. (2d) 875; and Amsco-Wire Products Corporation, supra.

The respondent’s action in including in taxable income for 1937 the depletion deductions taken and allowed in prior years is sustained in all the cases involved in these proceedings except as to $4,958.05 in the case of Bessie P. Douglas.

It is stipulated that Bernice B. Dalrymple is transferee of assets of the estate of Irene B. Robinson Cirkler, deceased, and the pleadings establish the extent to which she may be so held.

Decisions will be entered imder Buie SO.


author: HaRROn:

text:
    Olcese Kramer and Ann Kramer, Petitioners, v. Commissioner of Internal Revenue, Respondent. Olcese Kramer, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 103505, 103506.
    Promulgated April 14, 1942.

      Melvin D. Wilson, Esq., for the petitioner.

      Frank T. Horner, Esq., for the respondent.
   opinion.

HaRROn:

The petitioner contends that the agreement with his attorney in the matter of compensating him for his services in the suit to establish petitioner’s title and interest in the estate of his father was such that there was an assignment of an equitable interest to the attorney in the judgment which petitioner obtained against the estate. Petitioner argues that the attorney owned a “beneficial interest in the judgment and in the assets to be received thereunder”, and that petitioner was merely a “trustee as to the attorney’s share.” Upon these contentions petitioner asks the Board to hold that the amounts which petitioner paid to his attorney in 1936 and 1937 were the attorney’s income, upon the theory that he had an equitable interest in the amounts paid to him, or in the property recovered as a result of the litigation. Petitioner cites Blair v. Commissioner, 300 U. S. 5, as authority supporting his theory in this case. In the alternative, if it is held that the amounts in question were petitioner’s income, petitioner contends that he is entitled to deductions in each year for the attorney fees paid, as ordinary and necessary business expense.

The question here is very largely a question of fact. The first inquiry is, What exactly was the agreement between petitioner and his attorney, from which the conclusions of law are to be made?

In the first place there was no written agreement between petitioner and his attorney until after the litigation had come to conclusion in a final judgment when, on September 28, 1934, petitioner executed a trust agreement for the benefit of Williams, and his associate counsel, Irwin. Whatever the arrangement was which petitioner made with Williams before suit was instituted against the Olcese estate, it was oral. Ho testimony was given in this proceeding, petitioner appearing only through his counsel who submitted the case on a written stipulation.

In 1936 and 1937 petitioner’s obligation with respect to the payment of attorney fees was controlled by the terms of the trust agreement of 1934, particularly paragraph two. There the amount of the fees to be paid is prescribed in terms of a proportion of the value of all moneys and properties received by petitioner from the estate, and payment is to be made in cash out of money distributed by the estate or out of money realized by petitioner from the sale of property distributed by the estate. Although it is provided that fees could be paid by conveyance to the beneficiaries of a specified interest in properties (the clear inference being that such arrangement would be the subject of a separate agreement) there is no evidence that such agreement had been made prior to or in the taxable years. In the taxable years the fees paid were paid in cash, there being no distribution of any property to the attorneys or any transfer of any interest in property to the attorneys.

In order for petitioner to succeed in his claim that the money paid to his attorneys was their income rather than his, it must be established, clearly, that the attorneys had a legal or an equitable interest in the properties which produced the income. (It appears that the money in question represented earnings derived from various properties.) It must be shown that the attorneys had such interest that they could have demanded and received payment direct from the Olcese estate, rather than from petitioner. Broadly speaking, the attorneys must have obtained a property, right, as a result of an agreement with petitioner, in order that the amounts paid to them can be held to constitute their income. Nelson v. Ferguson, 56 Fed. (2d) 121; certiorari denied, 286 U. S. 565; Commissioner v. Field, 42 Fed. (2d) 820; Blair v. Helvering, 300 U. S. 5; Julius E. Lilienfeld, 35 B. T. A. 391; Louis Boehm, 35 B. T. A. 1106.

Through certain decisions of California courts, and under the special facts of those cases, referred to hereinafter, the following rule has been developed in California:

Where an attorney contracts for a contingent fee consisting of a part of the property to be recovered, he becomes an equitable owner of the designated part of whatsoever thereafter results from the prosecution or compromise of the suit. 3 Cal. Juris, 695.

Illustrations of the above rule are found in the following cases: Luco v. De Toro, 91 Cal. 405; 27 Pac. 1082; Hoffman v. Vallejo, 45 Cal. 564; Elliott v. Leopard Mining Co., 52 Cal. 355. In each of these cases the client made a written agreement with an attorney to convey to him an interest in land.

In the Luco case there was an agreement in writing to convey an undivided interest in certain lands, the size of the interest depending upon the extent of a patent which was to be obtained by the attorney. The patent was obtained after performance of services by the attorney. The court held that-under the terms of the agreement an express trust was created, and that the owner of the patent to the lands held part of them in trust for the attorney. The attorney’s performance of his services entitled him to and gave him an indefeasible estate in equity. The court regarded the contract with the attorney as one similar to a contract to convey land.

In the Hoffman case, a former owner of lands, Vallejo, wished to institute proceedings against J. G. Clark, mortgagee, to set aside as fraudulent a sheriff’s sale in order to regain title to the lands. He entered into a written agreement with Hoffman and the Wilsons, attorneys, retaining them to institute suit, in which agreement Vallejo agreed:

* * * to convey by good and sufficient deed or deeds of conveyance, to the said parties of the second part [the attorneys], one undivided half of all of his right, title, and estate in said rancho or tract of land, * * * to he equally divided between the parties of the second part, and the undivided one-half of all that may be recovered, * * * or any litigation, settlement, or compromise of the matters aforesaid, * * * such deeds to be made or such moneys to be paid to the parties of the second part on demand, and no settlement or compromise of any of the matter aforesaid shall be made without the consent of the parties of the second part in writing expressed.

The agreement also provided that in the division of any property recovered the division should be equal in value between Vallejo and the attorneys, and that Vallejo should receive his proportion of the property recovered by the proceedings free from any fees of the attorneys, court costs, or referee’s fees. Later, after the attorneys had expended labor, time, and money on the matter, Vallejo secretly entered into a settlement with Clark by which he confirmed the sale previously made by the sheriff to Clark in consideration for $12,500 paid by Clark to X at Vallejo’s request. Thereupon X conveyed certain lands to Vallejo’s son, who held the lands in trust for his father. Hoffman brought suit against Vallejo’s son, praying that one-half of the lands should be conveyed to him and an accounting made for profits. The court held in the Hoffman case that the written agreement made by Vallejo constituted Hoffman and the Wilsons the equitable owners of one-half of whatever resulted from the prosecution or the compromise of the suit against Clark, and that Vallejo’s son held title to one-half of the new lands in trust for Hoffman and the Wilsons.

In Elliott v. Leopard Mining Co., supra, clients made an agreement with their attorneys, who were to institute suit to settle or quiet title to certain mining claims, to convey to the attorneys by deed an undivided one-fourth of certain mining claims, or, if the suit was settled by compromise, to give the attorneys one-fourth of the proceeds of whatever might be realized. The suit was settled by compromise. It was held that the attorneys had a right to receive one-fourth of the proceeds, their interest in them being the same as a right to an interest in the mining claims, and those who received the proceeds were required to pay one-fourth thereof to the attorneys.

In the instant proceeding there was no written agreement to convey to the attorneys a portion of any real or personal property which might be recovered, and the facts here differ materially from the facts in the above cases on which petitioner relies. The agreements in those cases differ from the oral agreement and the terms of the 1934 trust agreement involved here, chiefly, because in the agreements in the above cases reference was made to described lands, and the attorneys, without doubt, received under the agreements proportionate equitable interests therein, or in a similar proportion of any proceeds received in lieu of the properties themselves. On the other hand, in this case, under the oral agreement, as incorporated in the 1934 trust agreement, with or without modification (however that may be, the 1934 trust agreement being determinative of the question in the taxable years), title to all properties or interests in properties in the Olcese estate was to remain in petitioner, the value of petitioner’s interest in the estate had to be determined, and then the attorneys were to be paid by petitioner in cash 40 percent of the clear value up to $50,000, and 25 percent of the remaining clear value over $50,000. The agreement in this case, as it stood during and prior to the taxable years, was an agreement to pay fees to the attorneys, the amount thereof to be measured and fixed after conclusion of the litigation by reference to the clear values of all money and property (or interest therein) awarded to petitioner. It is pointed out that the 1934 trust agreement provided that it was entered into to secure “the payment of such indebtedness [for fees] ”, and that “upon payment in full of the fees due”, the trustee was to reconvey to petitioner all of the interest in property held by him. Under such agreement it can not be said that the attorneys were given an interest in the property or in the judgment, or that they were given any property rights productive of the sums which petitioner paid to them in the taxable years. That being so, the amounts in question, which were paid to the attorneys, can not be said to have grown out of any other “tree” than the bundle of property rights which vested solely in petitioner under the awards of the Superior Court. There was no equitable ownership in any part of the properties in the Olcese estate, as a result of the agreement made by petitioner with his attorneys and upon entry of judgment by the court, from which the attorneys derived a right to receive any part of the income produced by properties in the estate, directly or indirectly. Cf. Blair v. Helvering, 300 U. S. 5, and see comments on the meaning of the holding in the Blair case in Helvering v. Horst, 311 U. S. 112. Rather, complete ownership of the 21% percent interest in the Olcese estate was in petitioner. That being so, and under the rule that tax liability attaches to ownership of, and command over, property, petitioner is taxable on all of the income which he received from his interest in the properties in the Olcese estate, which, of course, includes the sums paid to the attorneys in the taxable years. Poe v. Seaborn, 282 U. S. 101; Hoeper v. Tax Commission of Wisconsin, 284 U. S. 206; Corliss v. Bowers, 281 U. S. 376; Burnet v. Wells, 289 U. S. 670.

An agreement with an attorney to pay a certain sum out of a fund one is entitled to receive, when received, does not operate as a legal or equitable assignment of a present right. Donovan v. Middleton, 88 N. Y. S. 607; Thomas v. N. Y. & G. L. R. R. Co., 34 N. E. 877. See also 6 Corpus Juris 742, par. 317, where it is said that:

* * * in order that an agreement for a contingent fee may operate as an equitable assignment, there must be in effect a constructive appropriation of so much of the amount to be recovered as will confer upon the attorney a complete and present right to receive the same without the further intervention of the client.

The facts here are rather close in similarity to the facts in Lansill v. Burnet, 58 Fed. (2d) 512, on which respondent relies. There the clients agreed to pay an attorney “a sum equal to 10 percent of the full amount or value received by the heirs in money or property resulting from litigation or compromise of the case.” It was held there that the entire money (royalties) when collected for the heirs became in fact and law the income of the heirs, and was returnable as such. In our opinion that case is controlling here. See also, United States Trust Co. of New York, Executor, 27 B. T. A. 1260.

It is held that the amounts in question were petitioner’s income and were properly included in his taxable income in 1936 and 1937. Respondent is sustained.

As an alternative contention, petitioner claims that the expenditures made for attorney fees are deductible under section 23 (a) of the Revenue Act of 1936 as ordinary and necessary business expense. Petitioner does not urge this very strongly, failing to cite any authorities which, under the facts, support this contention. It is clear that the transactions involved here which caused petitioner to pay the attorney fees were not part of any business carried on by him. The matters involved related only to petitioner’s personal interests. Under the circumstances present here the cost of defending title to property does not constitute a deductible expense under the statute. Hutchings v. Burnet, 58 Fed. (2d) 514, and cases cited therein; Robert J. Harbison, 43 B. T. A. 1098.

Decision will be entered for the respondent.

       Some letters written in May of 1941, either to petitioner or to his counsel in this proceeding, were received in evidence, which state that in 1938 and 1939 certificates for shares of various stocks which had been in petitioner’s name were canceled, and new certificates were issued to petitioner and to Williams; that since receipt of instructions from petitioner dated April 27, 1940, 25 percent of certain oil royalties, in which petitioner owns a 21% percent interest, have been paid to Williams direct; that in 1941, 5% percent of all distributions from the Olcese estate were being paid direct to Williams on account of his 25 percent interest in petitioner's 21% percent interest; and that 5% percent of certain other oil royalties were being paid in 1941 to Williams on account of his 25 percent interest in petitioner’s 21% percent interest in certain oil leases. However, none of these letters shows that any assignment of a 25 percent interest in stocks, .oil royalties, or other properties was made in 1936 or 1937, and the letters can be given no weight in our consideration of the question in 1936 and 1937. At the most, they are only indicative (and no conclusion is made here with respect thereto) that at some time after 1937 petitioner may have entered into another agreement with his attorneys that they should receive an interest in properties, as the 1934 trust agreement specified might be the subject of agreement.


author: Leech : Disney,

text:
    Estate of George H. Balzereit, a Weak-minded Person, Rosa Ida Schweiker, Leo A. Balzereit and Girard Trust Company, Guardians, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104500.
    Promulgated April 14, 1942.

      Isadore Stern, Esq., for the petitioners.

      Paul E. "Waring, Esq., for the respondent.
   OPINION.

Leech :

The petitioners are the guardians of the estate of an incompetent who was beneficiary of three testamentary trusts. The respondent determined that the income of the trusts was currently distributable to the beneficiary under the terms of the trusts and so added such income to other income of the beneficiary under the substantially similar provisions of section 162 (b) of the Revenue Acts of 1934, 1936, and 1938. The petitioners contend the respondent erred in his determination that the income was currently distributable. Was such income currently distributable ? That is the only issue submitted.

The respondent pleads and relies upon the decision of Leo A. Balzereit et al., Guardians, 38 B. T. A. 345; affd., 107 Fed. (2d) 1008, as res judicata and conclusive here. In that case, income from the same trusts for the year 1932 was held to be currently distributable and therefore taxable to the estate of George H. Balzereit. Sec. 162 (b), Revenue Act of 1934.

Petitioners rely upon three decrees of the Orphans’ Court of Philadelphia County, dated June 13, 1941, entered upon the audit of each of the three accounts of the trustees of the three trusts in which George H. Balzereit, the incompetent, was beneficiary. They say that these decrees operate to relieve the effect of the prior decision as res judicata and are controlling in this proceeding.

Whether the income received by the trusts was or was not currently distributable was finally determinable by the state court having jurisdiction of those trusts. Letts v. Commissioner, 84 Fed. (2d) 760. No question of collusion or lack of good faith is involved in the proceedings before the Orphans’ Court of Philadelphia County culminating in the three decrees upon which petitioners rely. Cf. Otto C. Botz, 45 B. T. A. 970. In fact, respondent does not charge collusion here. Pie contends only (1) that the three decrees of the Orphans’ Court of Philadelphia County upon which petitioner relies did not decide that the contested income here was or was not currently distributable and (2) that since the three decrees to which reference was made were entered nisi, they are not final and therefore not controlling here. Neither position, we think, is sound.

In each of the three decrees of the Orphans’ Court of Philadelphia County, not only principal of each trust but accumulated income therefrom was awarded to the trusts, in each instance, and not to the estate of the incompetent beneficiary. In each case this was done by that court specifically upon the authority of In re Partridge’s Estate, 241 Pa. 158; 88 Atl. 367. That case involved the question of whether accumulated income of a testamentary trust for the benefit of the lunatic daughter of the testatrix should be awarded to the trust and be retained and disbursed by it for the benefit of the beneficiary, or awarded to the committee for the lunatic for the same purpose. The Supreme Court of Pennsylvania there stated the general rule:

* * * to be tbat, where by tbe terms of tbe trust the income is payable to the beneficiary, without any duty upon the part of the trustee to see to its application, or any discretion in him to determine the amounts or manner of payments, it will go to the committee in lunacy. But where discretion as to the payment of the income is given to the trustee, or where he is directed to see to its application, the trustee should retain and disburse the income, and should not pay it to the committee.

The court then concluded that the trustees there had such discretion and accordingly awarded the income to the trusts.

We think the court thus clearly decided that the contested income from the three trusts here was not currently distributable. Cf. Letts v. Commissioner, supra.

It is true that the wording of the Pennsylvania statute providing for review of decisions of the Oi’phans’ Court is peremptory and states that within five years after a decision of that court becomes final, a review “shall” be granted upon application. However, as was stated by the Supreme Court of Pennsylvania in In re Bailey's Estate, 291 Pa. 421; 140 Atl. 145. “* * * the [statutory] language used is imperative, ‘the orphans’ court -shall grant’; but it is well settled that a review will be granted by the orphans’ court only in accordance with the general principles governing bills of review in ordinary equity practice.” Such a bill of review is a proceeding independent from that sought to be reviewed. Its purpose is to examine a decree and, if possible, to alter or reverse it. A review may be a matter of right under some circumstances and discretionary with the court in others. But, in any event, either basis must be established by bringing a bill of review for that purpose. In Re Bailey's Estate, supra. None has been brought here. The situation is thus not different from that in Letts v. Commissioner, supra, involving the question of current distributability of income of a testamentary trust. The trustees of the trust there filed their account, including the contested income, with the State Court having jurisdiction of the trust. The Circuit Court, in affirming 30 B. T. A. 800, said:

Tbe Court, after bearing the matter, made its order approving, allowing and settling the account, thereby finally determining that the $1,185,088.24 was currently distributable to the beneficiaries of the trust, including petitioner. That order has not been reversed or overruled and is, herefore, conclusive. Freuler v. Helvering, 291 U. S. 35.

We conclude that the decrees of the Orphans’ Court upon which petitioners rely have become final and are binding upon this Board. Freuler v. Helvering, 291 U. S. 35; Jennie Arrott Adams, 44 B. T. A. 408; Susan B. Armstrong, 38 B. T. A. 658; Letts v. Commissioner, supra.

The rule is clear that the effect of this rule can not be defeated by the plea of res judicata. The supervening decrees of the Orphans’ Court of Philadelphia County, Pennsylvania, are determinative of the issue here present, notwithstanding the prior decision of the Board. Blair v. Commissioner, 300 U. S. 5; F. W. Fitch, 43 B. T. A. 773. As the Supreme Court said in a similar situation involved in the Blair case:

* * * The supervening decision of the state court interpreting that law in direct relation to this trust cannot justly be ignored in the present proceeding so far as it is found that the local law is determinative of any material point in controversy. Compare Freuler v. Helvering, 291 US. 35, 54 S. Ct. 308, 78 L Ed. 634; Hubbell v. Helvering, (C. C. A.) 70 F (2d) 668.

Reviewed by the Board.

Decision will be entered, for the petitioners.

TURNER dissents.

Disney,

dissenting: I must dissent from the views expressed in the majority opinion. I feel that the sound and established principle of reliance upon res adjudicata is by the majority subordinated to an idea not safely applied here, that is, the idea that a local rule of property controls. The Fitch and Blair cases both involved supervening decisions by the state court of last resort, recognized by all as able to lay down property rules for the state. Here only an inferior court has spoken, since the decision relied upon for res adjudicata. The parties to the proceeding in the inferior court are not the same as herein, so that res adjudicata principles do not apply. Therefore the decision of the inferior court must depend upon whether it has effect to lay down a rule of property, overriding res adjudicata. Such opinion would be at-most persuasive authority in another local court of the same grade, and would not be recognized as conclusive by such other court. Even if one of the parties were the same, such other inferior court would not be bound by a decision of a coordinate court. Here only one of the parties, the Commissioner, is the same. I think we should not be more concluded by an inferior court than is another inferior court of the same grade, as against reliance upon res adjudicata. Local inferior courts, many in number, might differ widely in opinion upon like facts, and are inherently unable to lay down a local rule of property, in the absence of such common parties as to cause res ad-judicata. We have a plain case of res adjudicata here, and I think we should rely upon it, in the absence of a dictate from the state court of last resort, binding as a property rule.

Moreover, since In re Bailey's Estate, 291 Pa. 421, states that, “A review is a matter of right where the bill is founded on errors of law appearing on the face of the record”, it seems to me that the decision of the local court can not, within the five-year period for review, be relied on in the absence of a finding that no such errors of law appeared on the face of the judgment relied on.

       SEC. 162. NET INCOME. [Revenue Act of 1938.]
      Tile net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * * ♦ * * * *

        (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *

       Purdon’s Pennsylvania Statutes, Annotated, title 20, sec. 843.