author: Mellott: Arnold,

text:
    The Security Flour Mills Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90137.
    Promulgated November 12, 1941.

      Robert G. Foulston, Esq., Harry E. Lunsford, Esq., and Vincent A. Smith, O. P. A., for the petitioner.

      R. P. Hertsog, Esq., and J. T. Porter, Esq., for the respondent.
   OPINION.

Mellott:

The findings are more comprehensive than would seem to be required under the issues as stated by us in the beginning. The pleadings, stipulations, evidence, and opening .brief of petitioner indicate that we are being called upon to decide whether petitioner properly excluded $106,604.02 from its gross receipts in 1935. The first section of its opening brief concludes: “It is submitted that $106,604.02 of petitioner’s 1935 ‘gross receipts’ did not constitute income until the controversies relating thereto were determined in 1937.” Petitioner’s argument may be summarized as follows:

At the end of the taxable year 1935 it had accrued upon its books $105,054.70 as processing taxes. When the act was declared invalid (January 6, 1936) this amount was restored to income. It says: Since, instanter such unconstitutionality was declared, there accrued or vested a substantial possibility that $1.38 per barrel of flour sold (not “processed”) during the injunctive period would have to be disbursed either to customers or to the Government, the amount of $106,604.02 — the estimated amount which it might be required to repay — was set up on its books, held “in abeyance” or in a “suspense account”, and excluded from gross income in its return for 1935. Then, says petitioner, in 1937 the controversies as to these moneys were substantially resolved, whereupon it made reimbursements to its customers totaling $45,865.90 with respect to its 1935 sales. It “then recognized as income, for the first time, all of its 1935 gross receipts except the $43,865.90 thereof which it had refunded to customers. It * * * is not now asking that its income be computed upon the basis of actual income less * * * [the $105,054.70]. * * * It aslcs to. he permitted to deduct only such reimbursements as it actually made to its vendees.” (The quotations are from petitioner’s reply brief.)

Before passing to what seems to be the real issue to be decided on this phase of the proceeding — i. e., the deductibility of $45,865.90 from petitioner’s 1935 gross income — it may be stated that petitioner relies upon Commissioner v. Brown, 54 Fed. (2d) 563; certiorari denied, 286 U. S. 556, as authorizing it to set aside the entire $106,-604.02 in a “suspense account” and in refusing to include it in gross income because “a taxpayer is not required to report as income that which he may never be permitted to retain * * It points out that the moneys received by it upon the consummation of the injunction suit were “hot moneys”; that it was reasonably certain petitioner would be unable to retain them; that it was legally obligated to repay an equitable portion to its vendees; that it never asserted any claim of absolute ownership to the fund, but treated it as a “suspense account” ; and that under the accrual method of accounting such moneys did not become income until all controversy as to their ownership was settled.

The contentions set forth above are not, in our opinion, well founded. No controversy as to the ownership of the proceeds from the sale of petitioner’s flour existed. It had increased the selling price of its flour to include the processing tax and the increased price had been paid by its customers with full knowledge of the facts. It had not legally obligated itself to repay any portion of the sale price to its vendees, nor was there any equitable obligation upon it to do so. As pointed out in Moundridge Milling Co. v. Cream of Wheat Corporation, 105 Fed. (2d) 366, the sales contracts fixed a “composite price” and did not designate the product sold and the tax separately or provide for the refund of any portions of the payments made on past deliveries. Cf. Johnson v. Igleheart Brothers, Inc., 95 Fed. (2d) 4; certiorari denied, 304 U. S. 585. If petitioner were able to save on any of the items going to make up the total cost of the flour which it sold, it thereby increased its profits pro tanto. In our opinion the total amount received by petitioner from the sale of its flour constituted gross income to it. North American Oil Consolidated v. Burnet, 286 U. S. 417.

Petitioner next contends that it agreed to settle or compromise its vendees’ claims for reimbursement in the year of shipment and that therefore, under a ruling of the Department, it is entitled to treat the reimbursements as deductions from gross income for that year. The substance of the ruling is that processors, keeping their accounts and filing their returns on the accrual basis, may deduct from gross income “for the year in which they agreed with the vendees to settle or compromise the disputed claims”, the amounts so agreed upon. Petitioner argues that it “acknowledged its liability in 1935 and has maintained a consistent position throughout.” It relies chiefly upon the statements made by its officers to its customers to the effect that they would be treated fairly and as liberally as customers of other mills were treated, which, it says, constituted an agreement ultimately carried out. We do not agree with this contention. The so-called “treat fairly” agreements were no more than assurances given by petitioner to its customers to retain their good will. The testimony of petitioner’s officers indicates that they did not intend to bind petitioner to make any repayments to its vendees. Petitioner’s counsel and auditor had advised that “it was unsafe to make any definite promises as to amounts that might be paid to the flour buyer.” The officers recognized— indeed deliberately chose to bind petitioner no further — that whether any amounts were ever paid to its vendees “would depend upon some other agreement later made.” The later agreements, rather than the “treat fairly” promises, were, in our opinion, the bases upon which the payments aggregating $45,865.90 were made.

Having held, as we do that the $45,865.90 must be included in computing petitioner’s gross income for the year 1935 and having also held that the payments to its vendees, aggregating that amount, were not made pursuant to a specific obligation incurred during the year 1935, we pass to petitioner’s contention that the respondent erred “in failing to give due and proper effect to the requirements of sections 41, 4-2 and 43 of the Revenue Act of 1934 which require the Commissioner to consider credits and deductions for the taxable year in which ‘paid or accrued’ or ‘paid and incurred’, dependent upon the method of accounting upon the basis of which the net income is computed and in so disregarding the mandatory provisions of said sections 41, 42 and 43 as to distort and improperly reflect petitioner’s income for said period * *

The sections relied upon are shown in the margin.

The identical question was before us in Cannon Valley Milling Co., 44 B. T. A. 763, (on appeal C. C. A., 8th Cir.). The petitioner in that case, though under no enforceable obligation in 1935 to pay over to its vendees any of the amount refunded to it in 1936, nevertheless in 1937 paid over a substantial portion of it to them in order to avoid threatened litigation, to keep their good will, and to compromise their claims. We pointed out that the amounts so paid were ordinary and necessary expenses of carrying on a trade or business, citing Superheater Co., 12 B. T. A. 5; affd., 38 Fed. (2d) 69; O'Day Investment Co., 13 B. T. A. 1230; H. M. Howard, 22 B. T. A. 375; International Shoe Co., 38 B. T. A. 81, 95; Helvering v. Hampton, 79 Fed. (2d) 358; and Welch v. Helvering, 290 U. S. 111, and that they were so considered by the Treasury Department; held that section 43 was not meaningless and should be applied in proper cases; expressed the opinion that the Department could not, by regulation, limit the scope of the section; and concluded that the payments made to the vendees should be allowed as a deduction in computing the taxpayer’s income for 1935, since they related to the sales made in that year and did not relate to the sales made in the later period. There is no substantial difference between the facts in the instant proceeding and those in the cited case. The $45,865.90 paid by this petitioner to its vendees represented payments under claims relating to sales made in 3935. If such sales had not been made there would have been no basis for the claims and no reimbursements would have been made. On the authority of the cited case and for the reasons stated therein, we hold that the $45,865.90 in issue here should be allowed as a deduction in computing petitioner’s income tax for the year 1935.

The remaining issue arises in connection with respondent’s claim that $2,649.25 should be added to petitioner’s gross income for the year 1935. His contention is that petitioner, in 1939, was allowed a refund of processing taxes in the total principal amount of $15,928.85, of which $2,649.25 pertained to the taxable year 1935. The stipulated facts have been shown in our findings. They are not entirely clear unless reference is made to some of the figures shown in detail in the exhibits.

During the period the processing tax was being collected (1933 to 1935, inclusive) petitioner deducted from its gross income processing taxes aggregating $318,183.18; $89,151.77 was deducted in 1933, $176,761.05 in 1934, and $52,870.96 in 1935. In the computation attached to the closing agreement the Title VII refund was determined to be $15,928.82 and interest was added in the amount of $4,546.06, making a total- of $20,474.88. Petitioner’s tax liability under Title III, tax on unjust enrichment, was determined to be $36,880.21. The difference between the latter amount and $20,474.88 or $16,405.33 was paid by petitioner in conformity with the closing agreement. The portion of the “refund” allocable to 1935 was determined by taking 528709%i878378 °f $15,928.82.

Petitioner contends that the closing agreement was a compromise settlement of its Title III and Title VII controversies upon an aggregate, net basis and that no item in the accompanying schedule can be segregated and held to be a “refund” for the year 1935. It argues that the schedules became submerged into and were superseded by the written agreement; that it is the only competent evidence of the transaction; that it shows merely a payment of an additional amount of tax ($16,405.33) by petitioner; that no amount was ever “refunded” to it; and that even if a “refund” were actually made, it can not be allocated to the various years. We do not believe that any of these contentions are sound. All of the documents should be considered together. Collectively they show that petitioner was allowed a refund of $20,474.88, which, together with payment of $16,405.38, settled its tax on unjust enrichment under Title III. We think, therefore, that the only question to be considered is whether the refund in 1939 of the amount paid in 1935 as an unconstitutional tax should be determined to be income in the year of receipt, or restored to income for the year in which the deduction was taken.

The question was recently discussed at length by this Board in E. B. Elliott Co., 45 B. T. A. 82, the majority holding “that all refunds of paid taxes are to be adjusted to the years in which the taxes were paid and deductions claimed, as the best method to reflect income; the only proper departure from the rule of adjustment of the refund in the years of payment is where the statute of limitations or some other consideration has made it impossible. In such cases it is obviously inequitable to allow the taxpayer the unjust enrichment which would result and the refund must then be treated as income in the year of receipt.” This is determinative of the present controversy. It may be added that, in view of the conclusion reached upon the first issue, it would be highly inequitable to the fiscus to deny the claimed adjustment. On the authority of the cited case this issue is resolved in favor of the respondent.

Beviewed by the Board.

Decision will be entered under Bule 50.

Smith, Kern, and Opper concur in the result on the authority of E. B. Elliott Co., 45 B. T. A. 82, as to both points.

Sternhagen, Van Foss an, Murdock, and Ttson dissent.

Arnold,

dissenting: It seems to me that the majority stresses the exception contained in section 43 and ignores the general rule thereof regarding the taking of deductions. The- general rule stated in that section, and repeatedly emphasized by the courts and this Board, is that “deductions * * * shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred,’ dependent upon the method of accounting upon the basis of which the net income is computed * * Under the general rule the entire amount received from flour sales constituted gross income; with this'the majority agrees. Under the general rule no deductions could have been taken in 1935 for liabilities that were not incurred, accrued, or paid until later years; with this the majority agrees. It is my opinion that when the majority reaches this point the issue has been decided and there is no justification for carrying back from 1936,1937, and 1938 deductions accrued in those years and not paid or accruable in 1935. Petitioner’s 1935 income will be clearly reflected by taking into account all items of income and deductions of that annual accounting period.

The majority opinion states that the identical question was before us in Cannon Valley Milling Co., 44 B. T. A. 763 (on appeal C. A. A., 8th Cir.), and on the authority of the cited case and for the reasons stated therein holds that the payments to vendees in 1936, 1937, and 1938 are deductible from 1935 income, although not accruable in that year. The cited case holds that amounts so paid were ordinary and necessary expenses of carrying on a trade or business; that section\ 43 was not meaningless and should be applied in proper cases; and that respondent could not by regulation limit the scope of section 43.' That opinion further points out that few instances have arisen in which the courts or this Board have had occasion to consider section 43 and that the cases relied on by the parties litigant furnished but slight aid in determining the issue. It is important therefore to consider the intent of Congress in its enactment of the exception to the general rule contained in section 43.

The exception, as originally enacted by Congress, first appeared in the Revenue Act of 1921, which provided that losses should be deducted in the year “sustained unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period.” Sec. 234 (a) (4).

In the Revenue Act of 1924 Congress extended the exception to all deductions and credits. The exception appears in section 200 (d) of that act in identically the same language as it appears in section 43 of the Revenue Act of 1934. All intervening revenue acts and those enacted subsequent to the taxable year contain the exception in the same language.

In explaining the change made in the exception by the Revenue Act of 1924, the Committee on Ways and Means said: “The Revenue Act of 1921 * * * authorizes the Commissioner to allow the deduction of losses in a year other than that in which sustained when, in his opinion, it is necessary to clearly reflect the income. The proposed bill extends that theory to all deductions and credits. The necessity for such a provision arises in cases in which a taxpayer pays in one year interest or rental payments or other items for a period of years. If he is forced to deduct the amount in the year in which paid, it may result in a distortion of his income which will cause him to pay either more or less taxes than he properly should.” (H. R. 179, 68th Cong., 1st sess., pp. 10, 11.) The report of the Senate Committee on Finance is to the same effect and in identical language (S. Rept. No. 398, 68th Cong. 1st sess., p. 10.)

According to the reports of the Ways and Means Committee and the Senate Finance Committee Congress intended, by the exception, to make provision for cases in which “a taxpayer pays in one year interest or rental payments or other items for a period of years.” The payments made by this petitioner to its vendees were not interest payments in one year for a period of years; the payments were not rental payments made in one year for a period of years; nor were they payments in one year of other items for a period of years. As a matter of fact petitioner paid back in one year (1936, 1937, or 1938) a portion of the price of flour sold in 1935. No payments in one year for a period of years are involved in this proceeding and such payments as were made were not because of any obligation growing out of the sale itself, but primarily for the purpose of retaining the good will and the business of certain selected customers. Since the exception was designed by Congress to prevent the distortion of income which would result from deducting in one year the accumulated deductions of a period of years, I can see no reason to apply the exception to an entirely different situation and under circumstances which violate one of the cardinal rules of income tax law, namely, that tax liability shall be determined on the basis of annual accounting periods.

Furthermore, it seems to me that the Commissioner’s regulations for administering the exception are entitled to more weight and consideration than the majority has given thereto. By section 212 of the Revenue Act of 1924 and section 41 of the Revenue Acts of 1934 and 1936 Congress delegated to the Commissioner the power to determine whether the method of accounting employed by a taxpayer clearly reflects its income, and “if the method employed does not clearly reflect the income” the statutes provide that “the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.” Since a clear reflection of income requires a determination of the period in which deductions and credits shall be taken, like discretion would seem by implication to be contained in section 43. 3 Paul & Mertens Law of Federal Income Taxation, p. 307.

Respondent’s regulations have consistently construed section 43 and its prototypes, as a grant of discretion, in the exercise of which he would allow a deduction as of a different period only in exceptional circumstances. Art. 146, Regulations 62; art. 43-1, Regulations 86 and 94; T. D. 3261, 1-1 C. B. 148. The regulations have always required a taxpayer to take the deduction in the year “paid or accrued” or “paid or incurred” and to submit with the return a complete statement of facts upon which it relies to take deductions as of a different taxable year. The Commissioner would then determine from such facts whether the taxpayer was entitled to the deduction for the period requested, 'The- reqúirement in the regulation is in my opinion a reasonable one and imposes no hardship upon a taxpayer. The successive reenactment of the statutory provisions without alteration have imparted to the regulations the force and effect of law, Helvering v. Reynolds Tobacco Co., 306 U. S. 110, and unless petitioner has complied with the distinct method provided for in the regulations, it can not avail itself of the exception contained in section 43. Stokes v. United States, 19 Fed. Supp. 577, 580.

Assuming that the exception is applicable to the facts here, the record does not show that this petitioner made any effort to comply with the distinct method provided in the regulations for availing itself of the exception. In my opinion, the petitioner should have so complied if it expected the benefit of the statute. Even if petitioner had complied with the regulations, it is my opinion that the facts and circumstances here are not such as Congress had in mind when it created the exception to the general rule.

For the foregoing reasons I respectfully dissent from the opinion of the majority.

       G. C. M. 20134, C. B. 1938-1, p. 122.

       Paragraph 4 B, amended and supplemental petition.

       SEC. 41. GENERAL RULE.
      The net income shall be computed upon the basis oí the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books, of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. (Por use of inventories, see section 22 (c).)
      SEC. 42. PERIOD IN WHICH ITEMS OP GROSS INCOME INCLUDED.
      The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall -be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.
      SEC. 43. PERIOD POR WHICH DEDUCTIONS AND CREDITS TAKEN.
      The deductions and credits provided for in this title shall be taken for the taxable ■year in which “paid or accrued” or “paid or incurred,” dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period. In the case of the death of a taxpayer there shall be allowed as deductions and credits for the taxable period in which falls the date of his death, amounts accrued -up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.

       G. C. M. 20134, C. B. 1938-1, p. 122.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Marian Bourne Elbert, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100497.
    Promulgated November 12, 1941.

      G. M. Gharest, Esq., and John W. Fisher, Esq., for the petitioner.

      Z. N. Diamond, Esq., for the respondent.
   OPINION.

Van Fossan:

Reduced to its simplest terms, the first issue may be stated to be: Were the several steps taken by petitioner and her husband, i. e., the formation of the trust of which petitioner and her husband were trustees, the transfer to it of $300,000, the “borrowing” three days later by petitioner of all but $2,000 of the corpus of the trust, the giving by petitioner of a demand note without a fixed date for payment of either principal or interest — were these all steps in a single integrated transaction by virtue of which petitioner retained all the valuable incidents of ownership, control, and enjoyment of the funds while making a semblance of a gift?

A consecutive reading of the facts would lead one to answer the above question in the affirmative. When we examine the testimony of petitioner and her husband in the matter a sharp cleavage appears. The testimony of petitioner unequivocally supports the above conclusion. She testified that at the time the trust was set up she and her husband arranged that they would give her the check for $298,000 and that she would execute the promissory note. Petitioner’s husband testified categorically and with much emphasis that no such understanding existed, and that he never gave a thought to the investing of the $300,000 fund until after it was paid into the trust, when the plan of “loaning” it to petitioner came to him..

This square conflict of important testimony requires a careful weighing of the surrounding circumstances and inherent probabilities to determine wherein lies the truth. Consequent on this examination, we conclude that the testimony of petitioner is the more consonant with probability and is the more accurate story of the transaction. Having heard petitioner’s testimony and realizing that it was damaging to the case, when petitioner’s husband took the- stand he was at pains to attempt to counteract her statements, explaining that she was confused, but our study leads us to accept her guileless statement as accurate and to reject the highly improbable, though emphatic, declarations of the husband.

The above conclusion is dispositive of the first issue. Since it was intended from the start that the fund should be transferred back to petitioner, under the terms set out, no real gift occurred. The trust was merely a convenient conduit, and petitioner in effect is claiming a deduction for interest on money “loaned” to herself. See Johnson v. Commissioner, 86 Fed. (2d) 710, affirming 33 B. T. A. 1003; Irene W. Johnson, 39 B. T. A. 702, affd., 108 Fed. (2d) 104.

The second issue must also be resolved against petitioner. The evidence does not reveal that she was engaged in any trade or business. She described herself as “an old-fashioned wife.” True, having a very large independent income, more than $600,000 in the taxable year, petitioner concerned herself with the investment thereof and when in Hew York dropped into the office maintained by her husband and herself with some frequency. But looking after one’s investments, however large, does not in fact or in law constitute engaging in business. Higgins v. Commissioner, 312 U. S. 212; United States v. Pyne, 313 U. S. 127. On the record of her activities we have found as a fact that petitioner was not engaged in a trade or business. The deduction of a prorated cost of maintaining the office was properly disallowed.

It may be observed as to the foregoing issue, were our decision the converse, petitioner would yet fail for failure adequately to prove the amount of expense properly allocable to her. In fact there is no proof that petitioner paid any part of the expenses of the office.

Decision will be entered for the respondent.


author: Turner :

text:
    Estate of Dudley S. Blossom, Deceased, Carl W. Blossom, Dudley S. Blossom, Jr., and D. Lee Selover, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105266.
    Promulgated November 12, 1941.

      Sterling Newell, Esq., for the petitioners.

      Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Turner :

The respondent determined a deficiency in estate tax in the amount of $107,088.05. The issues are (1) whether the respondent erred in determining the fair market value of certain shares of stock in the Nestle Le Mur Co. at the time of the decedent’s death; (2) whether there should be deducted from the gross estate certain expenses incurred in the administration and distribution of the estate; and (3) whether there should be deducted from the gross estate certain bequests to charitable, educational, and religious institutions.

The case was submitted upon a written stipulation of facts, together with certain exhibits, which we adopt as our findings of fact and shall recite only such facts as may be required in discussing the issues. No brief has been filed by the respondent.

The decedent, Dudley S. Blossom, died estate aand a resident of Cuyahoga County, Ohio, on October 7, 1938, survived by his widow, Elizabeth B. Blossom and two children, Dudley S. Blossom, Jr., and Mary Blossom Gale. The petitioners are the executors of his estate. They filed an estate tax return on December 21,1939, with the collector for the eighteenth district of Ohio at Cleveland.

At the time of his death the decedent owned 1,500 shares of Nestle Le Mur class A stock and a promissory note from John T. Blossom secured, inter alia, by 5,415 shares of Nestle Le Mur class A stock. Petitioners concede that this stock constituted a part of the decedent’s estate and the question in dispute is the fair market value thereof.

This stock was listed on the Cleveland Stock Exchange and on the New York Curb Exchange during the entire year of 1938. Trading on the Cleveland Stock Exchange aggregated approximately 3,817 shares and on the New York Curb Exchange approximately 4,600 shares. On October 7,1938, the bid price in Cleveland was % and the asked price was y2; and in New York the bid price was %6 and the asked price was %.

In the estate tax return the petitioners reported the 1,500 shares at %6 per share and the 5,415 shares at % per share. The respondent increased the value stating in the notice of deficiency that the stock had been valued in conformity with the provisions of article 10, Regulations 80 (1937 Edition). That article provides that “In case securities are quoted on a bona fide bid and asked basis, and actual sales are not available, the mean between the bid and asked prices as of the applicable date * * * will be accepted as the value”, and that “If the security was listed upon more than one exchange, the record of the exchange where the security is principally dealt in should be employed.”

The petitioners now contend that, since the stock had a real and effective market on two exchanges with a volume of trading substantially equal on each exchange, its fair market value should be determined by taking the mean between the highest bid price on either •exchange and the lowest asked price on either exchange; further that any method of valuation which excludes the dealings on one exchange from any consideration because transactions are in slightly greater volume on another exchange, as suggested by the respondent, is arbitrary and achieves a result which does not reflect actual market conditions.

We think the petitioners’' contention must be sustained. There doubtless would be- some cases where the fair market value of a security could be more nearly approximated by taking the mean between the bid and asked prices on the exchange where the security is “principally dealt in,” but we do not think that rule should be applied here, because there was comparatively little difference between the volume of trading in the stock on the two exchanges and under such circumstances we believe that the closest approximation of its fair market value could be determined by taking the mean between the highest bid and the lowest asked on the two exchanges. This method should be used in the recomputation of the deficiency.

The next question is whether the petitioners are entitled to deduct, under section 303 (a) (1) (B) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932, the sum of $9,220.60 as administration expenses.

There was an insufficiency of cash in the decedent’s estate to satisfy the cash legacies contained in his will and it was necessary for the executors to sell certain securities to obtain cash for that purpose. The expenses in question represented the brokerage charges on the sales of such securities, including transfer charges and commissions. Such expenses have been used to diminish gain and increase losses in computing the Federal income taxes of the estate since the date of the decedent’s death. Respondent filed no brief, but his counsel stated at the hearing that it had not been “definitely shown” that the expenses were incurred in connection with the administration of the estate. We think it has been shown, and we hold that such expenses are deductible. See article 35 of Regulations 80 and Estate of Henry E. Huntington, 36 B. T. A. 698.

The last issue is whether petitioners are entitled to deduct from the gross estate certain bequests to charitable, educational, and religious institutions. In his will the decedent made various cash bequests, among which were $100,000 to his wife, $100,000 to each of his two children, and in items IY, Y, and YI he made cash bequests aggregating $500,000 to be placed in perpetual trust for the benefit of certain institutions which the respondent concedes are religious, charitable, and educational institutions within the meaning of section 303 (a) (3) of the Revenue Act of 1926, as amended.

Item IX of the decedent’s will provides:

Item IX. I have made numerous gifts in this my will for charitable, religious, benevolent or educational purposes. In the event of my death within a year from the date of the execution of my will, I hereby authorize and empower my son, Dudley S. Blossom, Jb., and my daughter, Maby Blossom Gale, or the survivor of them, to ratify and confirm each and every bequest hereinabove made to or for the use of charitable, religious, benevolent or educational purposes, and I desire and request that my said children, or the survivor of them, ratify and confirm each such bequest.
In the event my said son and daughter, or the survivor of them, shall fail to ratify any or all such bequests, and in the further event that such bequests shall be invalid because of my death within one year from the date of execution of my will, I give all such invalid legacies to my wife, Elizabeth B. Blossom, to be hers absolutely.

The decedent executed his will on December 20, 1937, and died on October 7, 1938. Section 10504-5 of the Ohio General Code provides that “If a testator dies leaving issue of his body * * * living * * * and the will of testator gives, devises or bequests the estate of such testator or any part thereof to a benevolent, religious, educational or charitable purpose, * * * such will as to such gift, devise or bequest shall be invalid unless it was executed according to law, at least one year prior to tbe death of the testator.”

The decedent’s will was probated on October 17, 1938, and on the same day, Dudley S. Blossom, Jr., and Mary Blossom Gale, decedent’s only issue surviving him, executed an instrument ratifying and confirming the above mentioned bequests, which instrument provided, after preliminary recitals, as follows:

Now, therefore, we, Dudley S. Blossom, Jb., and Mart Blossom Gale, and each of ns, the children and only lineal descendants of said Dudley S. Blossom, in execution of the authority and power conferred upon and vested in us and each of us by said Dudley S. Blossom in and by his said Last Will and Testament, to ratify and confirm the said bequests to Central National Bank of Cleveland, in trust, for the benefit of the institutions whose names appear in Items IV, Y and VI of said will, and in consideration of the premises and of the sum of One Dollar ($1.00) paid to each of us by said Central National Bank of Cleveland, the receipt whereof is hereby acknowledged, do hereby ratify and confirm each and every one of the bequests to Central National Bank contained in Items. IV, V and VI of the will of said decedent, in trust, however, for the uses and purposes and upon the conditions set forth in Items IV, V and VI of said decedent’s will, and we, and each of us, do appoint to said Central National Bank the sum of Five Hundred Thousand Dollars ($500,000) in trust, however, for the uses and' purposes, and upon the conditions set forth in Items IV, V and VI of said decedent’s will or such part of said sum of $500,000 bequeathed by Items IV, V and VI of said decedent’s will as we can or may appoint as aforesaid.

On November 11, 1940, the decedent’s executors filed in the Probate Court a “Petition for Construction of Will and for Instructions of the Court,” naming as defendants the Central National Bank of Cleveland (trustee under items IY, Y, and VI of the decedent’s will) and the decedent’s surviving wife and two children. The petition recited that the defendants were the only persons having or could have an interest in items IV, V, VI or IX of the decedent’s will; that the decedent’s sole surviving issue, defendants, Dudley S. Blossom, Jr., and Mary Blossom Gale, had ratified and confirmed the bequests contained in items IV, V, and VI of the decedent’s will; that the legatees named in items IV, V, and VI have been paid their pro rata share of all distributions made to date; that they still had in their possession funds of the estate for distribution; and that a controversy had arisen as to the persons entitled thereto under the provisions contained in items IV, V, VI, and IX of the decedent’s will, and then asked the court to construe the provisions of the will in question,, together with the ratification and confirmation executed by the decedent’s son and daughter, to determine the rights and interests of the defendants and to give direction and judgment as to the proper disposition of the estate remaining in their hands.

On December 16, 1940, the Probate Court ruled upon the questions raised by said petition. The journal entry of the court recites the joinder of all necessary parties to the proceeding, the jurisdiction of the court in the premises, and the existence of the controversy with respect to the construction of decedent’s will, and then reads in part as follows:

It further appearing to the Court that the action of decedent’s sole surviving issue of the body in ratifying and confirming the charitable, benevolent, religious and educational bequests contained in Items IV, V and VI of decedent’s will, in view of the express provisions of Item IX of said Decedent’s will nullifies the effect of Section 10504-5 of the Ohio General Code so that Items IV, V and VI of the will of said decedent are valid and effective and the Executors should, therefore, carry out the terms of Items IV, V and VI of said decedent’s will, and
It further appearing to the Court that said Executors have in their possession assets of the Estate and are in doubt as to whether the same should be distributed to the legatees named in Items IV, V and VI or to said Elizabeth B. Blossom.

It Is, Therefore, Ordered, Adjudged and Decreed,, that:

(1) The provisions of items IV, V and VI of said decedent’s will are valid and effective to give the Central National Bank of Cleveland in trust for the respective beneficiaries named therein the amounts bequeathed to said bank by such items of decedent’s will, and neither said decedent’s issue nor said decedent’s widow have or had any interest whatever in the property bequeathed by said Items IV, V and VI of decedent’s will.
(2) Carl W. [Blossom, Dudley S. Blossom, Jr., and D. Lee Selover, Executors of the Estate of Dudley S. Blossom, Deceased, be and they hereby are ordered and instructed to pay to Central National Bank of Cleveland as Trustee the respective amounts bequeathed to said bank by Items IV, V and VI of the will of Dudley S. Blossom, Deceased, in accordance with the terms of decedent’s will but subject to such abatement as may be necessary on account of insufficiency of assets to pay the legatees named in decedent’s will in full.

No appeal has been taken from the order of the Probate Court and the time for appeal has expired.

The legacies contained in decedent’s will have not been paid in full, as the assets of the estate are insufficient, but the executors have paid the institutions named in items IV, V, and VI the same percentages thereof as has been paid the other legatees.

Petitioners contend that the law of the State of Ohio controls the construction of the decedent’s will and the effect thereof, that under Ohio law, as established by the Supreme Court of that state, Thomas v. Board of Trustees of Ohio State University, 70 Ohio St. 92; 70 N. E. 896, and as applied in the instant case by the court having jurisdiction over the decedent’s estate, the prompt action of the decedent’s children in ratifying the will overcame and nullified the Ohio Mort-main Statute (sec. 10504-5) so that the property passed under the decedent’s will to the institutions in question, and, further, that the instant case is identical with First National Bank of Atlanta et al., Executors, 36 B. T. A. 491; affd., 102 Fed. (2d) 129, wherein it was held that the charitable bequests passed under the decedent’s will and were deductible from his estate. The respondent .contends that the last case cited is distinguishable in that the person waiving the rights and ratifying the provisions of the will had an interest in the specific bequest, whereas here the bequest would go to the decedent’s widow in the event the decedent’s children did not ratify the bequests in question. He contends that here the property passed by virtue of the exercise by the decedent’s children of a special power of appointment, instead of passing under the decedent’s will. He cites no authority in support of his contentions.

On questions of this nature we are bound by the state law. Blair v. Commissioner, 300 U. S. 5; Smith v. Commissioner, 78 Fed. (2d) 897; and First National Bank of Atlanta et al., Executors, supra. The Probate Court of Cuyahoga County, Ohio, the court having jurisdiction over the administration of the decedent’s estate and the construction of his will, held that the action of the decedent’s children in ratifying and confirming the bequests in question “nullifies the effect of section 10504-5 of the Ohio General Code so that items IV, V and VI of the will of said decedent are valid and effective and the Executor should, therefore, carry out the terms of items IV, V and VI of said decedent’s will, * * * and neither said decedent’s issue nor said decedent’s widow have or had any interest whatever in the property bequeathed by said items IV, V and VI of the decedent’s will.” It is thus apparent that under the law of Ohio the property in question passed to the charitable and educational institutions under the terms of the decedent’s will. This brings the case within the principle enunciated in First National Bank of Atlanta et al., Executors, supra. While there is a slight factual distinction between that case and the instant case, we do not think it is material. We hold that the respondent erred in disallowing the deductions. See Humphrey v. Millard, 79 Fed. (2d) 107, and Dimock v. Corwin, 99 Fed. (2d) 799.

Decision will he entered wnder Bule SO.


author: Sternhagen:

text:
    Bennett Properties Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102937.
    Promulgated November 13, 1941.

      James D. Benedict, Esq., for the petitioner.

      A. B. Shannon, Jr., Esq., for the respondent.
   OPINION.

Sternhagen:

The controversy, although argued more broadly, is the narrow one, whether the taxpayer, having kept its accounts generally on a cash system, is entitled to deduct taxes and mortgage interest accrued. This turns upon whether such accounting is a clear reflection of income. Petitioner has not changed its accounting method, for this is the first year of its operation of the buildings. The operation was unlike its established business and activities, and it had the right to keep its accounts relating to such new operations without regard to the method of keeping its accounts for the earlier business, so long as it maintained a clean separation which prevented confusion and resulted in a clear reflection of its entire income, Morris-Poston Coal Co. v. Commissioner, 42 Fed. (2d) 620; Huntington Securities Corporation v. Busey, 112 Fed. (2d) 368; Joseph Stern, 14 B. T. A. 838; Elsie S. Eckestein, 41 B. T. A. 746. The system used as to each separate business must, however, be consistent within itself. United States v. Mitchell, 271 U. S. 9; Cecil v. Commissioner, 100 Fed. (2d) 896, 902. It should be said that this recognition of the separate accounting systems is not due to any legal right or obligation of petitioner to carry forward the system which had been in use by the preceding owner of the buildings. When petitioner acquired the buildings, it might with propriety have fitted the accounts of their operations into its established system, and if this had been at variance with the method previously used by the former owner it would not have been significant.

The system of accounting adopted by the petitioner was a permissibly separate and distinct system embracing the operations of the buildings. It is admitted to be generally a cash system with the exception of the two accounts of taxes and interest. These items were accounted for not when they were paid, but when they accrued and before they were paid. Plainly this is inconsistent and results in a distortion of annual income. The Commissioner was empowered to reject such a method and to disallow the deductions which brought about the distortion. United States v. Mitchell, supra.

Decision will loe entered for the respondent.


author: Hill:

text:
    Schwabacher Hardware Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102339.
    Promulgated November 13, 1941.

      Charles Horowitz, Esq., for the petitioner.

      B. H. Néblett, Esq., for the respondent.
   OPINION.

Hill:

At the hearing counsel for petitioner objected to the stipulated facts regarding the receipt of funds by petitioner from the surety in 1940 on the ground of materiality. We hereby overrule the objection. The materiality of these facts will be apparent from our discussion of the second issue.

The first question presented is whether or not petitioner is entitled to a credit under section 26 (c) (1) of the Nevenue Act of 1936. Petitioner contends that it was restricted in the payment of dividends in the taxable year by a written contract executed by petitioner prior to May 1, 1936. Eespondent argues that the credit must be denied on the ground that the contract which restricted payment of dividends by petitioner was not a written contract executed by petitioner.

The contract upon which petitioner relies in its claim for the credit is contained in a letter written by the bank to petitioner in which the bank, through its manager, announced that it was placing an open line of credit at petitioner’s disposal and consented to an immediate payment of a $40,000 dividend, “with the understanding that no further dividends will be declared until the condition of the business amply warrants it * * This was the only writing involved in the contract. No one signed the contract on behalf of petitioner. In our opinion this was not a written contract executed by petitioner. In Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46, 49, the Supreme Court stated:

The natural impression conveyed by the words “written contract executed by the corporation” is that an explicit understanding has been reached, reduced to writing, signed and delivered.

We consider that “executed”, as used in the language just quoted, means signed by or for the taxpayer.

A taxpayer claiming a credit under section 26 (c) (1) of the Revenue Act of 1936 must show strict compliance with the terms of the statute. Union Telephone Co., 44 B. T. A. 607. In the Union Telephone case we held that a contract was not executed by the taxpayer within the meaning of section 26 (c) (1) where the taxpayer’s parent corporation executed the contract for which the credit was claimed, even though it was shown that it was customary for the parent corporation to enter into contracts for its subsidiaries, which acquiesced in such action of the parent. In Boeckeler Lumber Co., 48 B. T. A. 804, we held that a contract entered into by the predecessor of the taxpayer, which had orally assumed the predecessor’s liability under the contract, was not a contract executed by the taxpayer. In that case we stated:

The evidence indicates that petitioner did assume its predecessor’s liabilities under* that contract. But it did • not do this by similar contract to which it affixed its corporate signature.

In Kolor-Thru, Corporation, 44 B. T. A. 1303, we held that a contract which was executed by promoters of the taxpayers prior to its incorporation and was ratified or adopted by actions of the taxpayer was not a contract executed by the taxpayer within the meaning of section 26 (c) (1).

Upon authority of the Union Telephone Co., Boeckeler Lumber Co., and Kolor-Thru Corporation cases, we hold that petitioner is not entitled to a credit under section 26 (c) (1) of the Revenue Act of 1936.

The second issue is whether or not petitioner is entitled to a deduction for amounts embezzled from it during the taxable year for which petitioner received reimbursement from a surety in 1940. Petitioner contends that the amounts embezzled in the taxable year are deductible, since the surety did not reimburse petitioner for its losses until after that year. Respondent contends that deductions for losses by' embezzlement in the taxable year should be reduced to the extent that such losses were compensated for by insurance, notwithstanding that such compensation occurred in a taxable year subsequent to that of the embezzlement.

Petitioner relies upon the case of Cahn v. Commissioner, 92 Fed. (2d) 674, in which the Circuit Court of Appeals for the Ninth Circuit held that a loss for jewelry stolen in the taxable year was deductible in toto in the taxable year, even though a claim against an insurance company for reimbursement of the loss was compromised, and the amount agreed upon paid, in the following year. That case was apparently presented and decided on the narrow question of whether the claim against the insurance company for loss by theft was accruable in the taxable year in which the loss occurred. The court held, on the facts there, that the claim was not so aceruable and that hence the loss was not “compensated for by insurance or otherwise” in the taxable year. That question is not involved in the consideration of our decision here.

, In the instant case we hold for respondent upon the principle 'that deductions of a taxable year before us may be adjusted to /'reflect a later refund or reimbursement, even though such refund I or reimbursement may occur after the taxable year involved. E. B. I Elliott Co., 45 B. T. A. 82, and cases therein cited.

Respondent denied deductions for the amounts embezzled. during the period from May 1 to December 31,1937, on the ground that full recovery for those losses was had by petitioner from the surety in 1940. As to the amounts embezzled in the period January 1 through April 30, 1937, respondent determined that the sum of $103.71 of the $1,000 surety bond related to such losses and limited the deduction for such losses to the sum of $1,965.03. The sum of $103.71 was arrived at by determining the relation which the sum of $2,068.74, the amount embezzled from January 1 through April 30, 1937, bears to $19,947.86, the total amount embezzled prior to January 1, 1937, and through April 30, 1937, and multiplying that result by $1,000. This is the proper method of determining the proportion of the $1,000 reimbursement which relates to the em-bezzlements from January 1 through April 30, 1937. Petitioner has conceded that the additional deduction of $1,068.74 which respondent allowed in his notice of deficiency should be eliminated and that amount restored to gross income. On the authority of E. B. Elliott Co., supra, we hold that these adjustments should be made. Although the amounts received by petitioner from the surety in 1940 were in the form of a “loan”, the amounts received were repayable only out of the proceeds of a suit directed against the Union Pacific Railroad Co. There was no requirement that petitioner repay the amounts received other than from such proceeds. Accordingly, the amounts received from the surety must be deemed to be true reimbursement for the losses.

Since we have sustained respondent on both issues, we hold, in accordance with the stipulation of the parties, that there is a deficiency in petitioner’s income tax of $14,848.75.

Decision will be entered under Rule 50.

       SEC. 2G. CREDITS OE CORPORATIONS.
      In. the ease of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      * * * =« * # *
      (e) Contracts Restricting Payment or Dividends.—
      (1) Prohibition on payment or dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


author: Sternhagen :

text:
    W. J. Cheley, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Warren F. Bleecker, Deceased, Eleanor C. Warren, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102585, 102793.
    Promulgated November 13, 1941.

      Stephen H. Hcift, Esq., for thé petitioner in Docket No. 102585.

      Frank L. Moorhead, Esq., for the petitioner in Docket No. 102793.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined deficiencies in income tax.for 1936 of $1,197.09 as to Cheley and $431.65 as to Bleecker. The facts are stipulated. Both filed their individual income tax returns in Colorado.

They were shareholders of the Zero Hour Torpedo Co., Bleecker Manufacturing Co., and Zero Hour Bomb Co. On December 14, 1936, the Torpedo Co. paid cash to the other two companies and received shares of their stock which each had held in its treasury; on December 15 it distributed these shares as a dividend. Cheley and Bleecker each received his part, and the Commissioner included in the income of each the undisputed value of the dividend and thus determined a deficiency. The petitioners assail this because they say the dividend was a stock dividend, tax-free upon the same theory as that laid down in Eisner v. Macomber, 252 U. S. 189. It is stipulated that after the dividend their percentage interests in the shares of each of the three corporations were the same as before. Petitioners say that therefore they had no income. But this is to disregard the separateness of the three corporations and treat them as one, which is contrary to the recognition and treatment by the corporations themselves. Nothing in this record shows that in all respects the corporations were integrated or that they may not be treated separately. It can not be said that because the percentage of a shareholder remains the same his substantial interests are unaffected by the dividend. The Bleecker Co. and the Bomb Co. were essentially different from the Torpedo Co. in law (cf. Marr v. United States, 268 U. S. 536; New Colonial Ice Co. v. Helvering, 292 U. S. 435), and indeed, so far as the stipulation indicates, were so in fact. Normally such a dividend by one corporation in shares of another is regarded as a property dividend and taxable as such, Peabody v. Eisner, 247 U. S. 347. This is such a case unless there is reason to regard the three corporations as unified in order to bring it within the doctrine of Eisner v. Macomber, supra. But even if they were to be treated as unified, the terms of that decision would have to be stretched to include such a case as this; and there is no indication of a tendency to liberalize the doctrine of that decision. Cf. Koshland v. Helvering, 298 U. S. 441.

Decision will be entered for the respondent.

       This stipulation without explanation is difficult to understand, since one person who held no Bleecker shares was the recipient of the Torpedo dividend and thus became a new shareholder in the Bleecker Co.


author: Turner:

text:
    John D. Fackler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102063.
    Promulgated November 14, 1941.

      W. Dean Hopkins, Esq., for the petitioner.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Turner:

The petitioner appears to have acquiesced in the respondent’s determination in so far as it concerns the personal property acquired from the Sloan-Prospect Corporation and apparently used in and about the building until its sale along with the leasehold in 1938. No issue was raised in the petition with respect to it, nor was any contention made by petitioner at the hearing or on brief that the respondent’s determination with respect thereto is erroneous. The issue and the argument relate only to respondent’s determination with respect to the lease.

As to the lease, the petitioner takes the position that during 1938 his business was the practice of law and that the lease (1) was not used by him in his business, and (2) was not subject to an allowance for depreciation, but was a capital asset as defined by section 117 (a) (1) of the Revenue Act of 1938 and only 50 percent of the gain realized from the sale thereof was taxable income. The respondent did not file a brief, but, as indicated by statements of his counsel at the hearing, takes the position that the use made by the petitioner of the lease was in a trade or business, and that the lease, being depreciable property under section 23 (1), was not a capital asset within the meaning of the act.

The Revenue Act of 1938 provides as follows:

SEO. 117. CAPITAL GAINS AND LOSSES.
(a) Definitions. — As used in this title—
(1) Oapitai, assets. — The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include * * * property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (1) ;
SEO. 23. DEDUCTIONS FROM; GROSS INCOME.
In computing net income there shall be allowed as deductions:
(1) DEPRECIATION. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. * * *

It is accordingly noted that with respect to “property used in a trade or business” Congress, through section 23 (1), has provided under the heading “Depreciation” for the deduction of “a reasonable allowance for the exhaustion, wear and tear” of such property “including a reasonable allowance for obsolescence.’’ It is further noted that in defining capital assets Congress, in section 117 (a) (1), has excluded exactly the same property, namely, “property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (1).”

In the instant case the petitioner was the owner of a lease on the Sloan property, the lease having been acquired in 1933 at a cost of $5,461.08. From the date of acquisition to September 30, 1938, when the lease was sold, petitioner rented space in the building located on the property to various tenants, managing and maintaining the building for the use of those tenants under his agreements with them, and during that part of the period falling in 1938 petitioner, in addition to rents, received other income for furnishing electric current to tenants. In short he was operating and using the property for the production of taxable income. Although the Revenue Acts of 1913 and 1916 contained provisions similar to that set out above in section 23 (1) respecting an allowance for depreciation, and all acts since that of 1916 have contained a provision identical with that in section 23 (1), we have been unable to find any decision holding that where the owner of depreciable property devoted it to rental purposes and exclusively for the production of taxable income, he was not engaged in a trade or business. On the contrary, such decisions as bear on the question indicate otherwise. In W. B. Brooks, 12 B. T. A. 31; aff’d., 35 Fed. (2d) 178, the taxpayer purchased a dwelling house in 1896 and used it as his personal residence until 1910 or 1911, when its use for that purpose was abandoned. Thereafter it was rented and held for sale until in 1919, when it was sold. The question involved was whether the taxpayer had sustained a deductible loss on the sale, and, if so, the amount thereof. In holding that a deductible loss had been sustained, we said:

* * * After March 1, 1913, of course, depreciation must be taken into consideration in the instant case, since the petitioner was then required to make a return of his income and pay a tax thereon and was also entitled to deduct depreciation on the building in question, a depreciable asset which was being used in the production of income.

For other cases of the same import see Walter L. Ball et al., Co-executors, 8 B. T. A. 180; Joseph, F. Cullman, Jr., 16 B. T. A. 991; Edward L. Parker, 19 B. T. A. 171; Edwin Vosburgh, 23 B. T. A. 780; Kay Kmibell, 41 B. T. A. 940. In Flint v. Stone Tracy Co., 220 U. S. 107, it was held that a corporation owning and leasing taxicabs and collecting the rents therefrom was doing business within the meaning of the excise tax act of 1909, which imposed a tax on corporations with respect to the “carrying on or doing business” by such corporations. In George S. Jephson, 37 B. T. A. 1117, the taxpayer, who was a manufacturer of food products, purchased in 1925 a five-story residence for the purpose of renting it. From then until 1934 he attempted to rent it but without success and the house remained unoccupied. We there held with respect to the years 1932, 1933, and 3934 that there was a continuing devotion of the property to a business use and purpose and that the depreciation sustained thereon in those years represented depreciation sustained on property used in carrying on a business and deductible under the provision of the applicable acts identical with that in section 23 (1) set out above.

The rule deducible from the above decisions is that, where the owner of depreciable property devotes it to rental purposes and exclusively to the production of taxable income, the property is used by him in a trade or business and depreciation is allowable thereon. A lease is property and when its owner uses it for business purposes, including subletting to tenants, a deduction for exhaustion is allowable with respect to it on account of such use. Minneapolis Security Building Corporation, 38 B. T. A. 1220, and cases there cited.

In support of his contention that the leasehold was not property used in a trade or business and of a character subject to the allowance for depreciation and not therefore a capital asset under section 117 (a) (1), the petitioner states that there is great likelihood of continued renewals of the lease; that in accordance with certain of his testimony and the real property law of Ohio his relation to the Sloan property was essentially that of a fee owner, and that there was nothing to amortize or exhaust because the property had no limit of duration. In Weiss v. Wiener, 279 U. S. 333, the Court pointed out that in Ohio leases for 99 years, renewable forever, are treated in many respects like conveyances of the fee, but stated that the taxing act had its own criteria, irrespective of local law, with respect to liability and exemption, whatever the lessees may be called. It is unnecessary for us to decide whether the petitioner in acquiring the leasehold became the fee owner. If we should decide that he was, his position here would not be. improved. The property, including the building, was used by him in a trade or business and the building was property of a character subject to an allowance for depreciation, which would exclude it from classification as a capital asset under section 117 (a) (1). The record affords no basis for making an allocation of either the cost or the selling price between the land and the building, nor does it afford any basis for ascertaining the life of the building at the time of the acquisition of the leasehold in 1933 or what would be a proper rate of depreciation thereon. Under these circumstances we would be in no position to modify the amount of the deficiency as determined by respondent.

In view of the foregoing, it is our opinion that the use made by the petitioner of the leasehold in 1938 brings it within the meaning of property “used in the trade or business” as that phrase is employed in section 117 (a) (1) and 23 (1) of the Revenue Act of 1938 and that it is property of a character subject to the allowance for depreciation provided in the latter section. It accordingly follows that the leasehold was not a capital asset within the definition of section 117 (a) (1) and that taxation of the gain resulting from the sale thereof is not controlled by the capital gain provisions of the act.

The conclusions reached herein are consistent with our opinion at 39 B. T. A. 395, which involved an appeal of this petitioner for 1934 and 1935 as to the deductibility, as ordinary and necessary business expenses, of real estate taxes which were paid by him for 1931 and 1932 on the Sloan property and were past due at the time he acquired the lease in August 1933. We there held that the amount of such taxes, less certain recoveries with respect thereto, constituted consideration paid by the petitioner for the lease and was not deductible from income in either the year in which assumed or in the year paid, but was proratably deductible over the life of the lease as part of the cost thereof.

Decision will be entered for the respondent.


author: Harron:

text:
    International Freighting Corporation, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102558.
    Promulgated November 14, 1941.

      David G. Moore, Esq., for tbe petitioner.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Harron:

The bonus distributed by petitioner to certain of its employees in 1936 was additional compensation to the employees in 1936 for services performed in earlier years. The parties agree that the bonus constituted payment of additional compensation.

The bonus awards refer only to a stock bonus, that is, the awards do not state a monetary value of the bonus, the services, or the stock. For example, the “B” bonus awards in question were made in substantially the following terms: A “B” bonus award of X shares of du Pont Co. stock is made to John Henry, employee. The transaction was a payment for services in property, other than money. The property was not petitioner’s own stock, but stock of another company. That stock was acquired by petitioner at a cost of $16,153.36. It had a fair market value of $24,858.75 on the date of distribution. The employees who received the stock had no interest whatsoever in the stock in question until the date of the award or the date of delivery, which is the same date for the purposes of this case.

The first question relates to the correct amount of the deduction by petitioner under section 23 (a) of the Kevenue Act of 1936 as business expense. Petitioner deducted in its return $24,858.75. Respondent allowed $16,153.36, with the explanation that, “Inasmuch as the bonus was paid in property, it is held that the basis for calculation of the amount thereof is the cost of such property and not its market value as claimed on the return.”

Respondent’s argument is, briefly, that, since petitioner paid out only stock, since its obligation was only to deliver stock, petitioner did not give up, for purposes of a tax deduction, any more than the stock in question cost, or, $16,153.36. Respondent waives any claim that a deduction for $24,858.75 should be denied on the ground that such additional compensation for services, added to regular salaries, exceeds a total reasonable compensation for services rendered. We do not have before us any question of reasonableness of compensation in the taxable year.

On the first question, by force of extended authority on the question, it must be held that the deduction for the bonus awards must be measured by the fair market value of the stock on the date of distribution, or, $24,858.75. The Commissioner’s regulation applicable to the recipients of the award is that the fair market value of the stock received in payment of services is the amount to be reported as income. It has been said before, that a logical application of the above regulation requires giving effect to it by analogy to returns filed by the employer. Logically, what the employee receives as additional compensation, the employer has paid as additional compensation. Alger-Sullivan Lumber Co. v. Commissioner, 57 Fed. (2d) 3; Package Machinery Co., 28 B. T. A. 980 (and cases cited); affd., per curiam, 74 Fed. (2d) 1015; Montgomery, Federal Tax Handbook, 1940-41, p. 418.

The Board has taken the view, in its consideration of this question, that the determining factor is to be found in the nature of the liability of the employer. If the liability is not to pay a specific sum in terms of dollars and cents, but only to distribute a certain number of shares of stock, then, when the liability is to be translated into dollars and cents for purposes of a tax deduction, that translation must be based upon the fair market value of the stock as of the date of issue. Package Machinery Co., supra. Cf. Liquid Carbonic Corporation, 34 B. T. A. 1191, where the additional compensation voted to employees was at fixed amounts in dollars and cents, and it was held that the bonus liability was the amount fixed in dollars and cents, which amount was deductible. In that case the Board distinguished the Package Machinery Co. case.

It is true that in the Package Machinery Co. case the employer-petitioner gave its own stock in payment of additional compensation, whereas, in this case petitioner distributed stock of another corporation. We do not regard that difference in the facts as material. In our opinion the rule is the same whether the bonus is paid by the employer in its own stock or in stock of another corporation. The determining factor is that the employer is paying and the employee is receiving compensation. For purposes of reporting income the compensation in stock must be translated into a monetary value, and this is likewise true for the purpose of the employer’s deduction for compensation paid, where the services of the employee have not been given a stipulated price in the bonus award.

It appears to be exceptional for a bonus to be paid in stock other than the stock of the employer-corporation. The regulations of the Commissioner, however, cover both situations. In Regulations 94, applicable to the taxable year, the general provision is that if services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included in income. It is also provided, that, “If a corporation transfers to its employees its own stock as compensation for services * * *, the amount of such compensation to be included in the gross income of the employee is the fair market value of the stock at the time of the transfer.” The specific provision is the same as the broad and general provision. It is clear that when a bonus is paid in stock of another corporation the Commissioner’s regulation requires that it be returned in income by the employee at fair market value. See Crowell v. Commissioner, 62 Fed. (2d) 51, 52.

It is held that petitioner is entitled to a deduction for compensation paid in the taxable year in the amount of $24,858.75.

The second question is whether petitioner realized any gain by paying the bonus in stock which cost it $16,153.36. In the alternative respondent contends, in effect, petitioner satisfied an obligation of a value of $24,858.75 with property which cost less, and realized a gain of $8,705.39.

Under the broad definition of income in section 22 (a) of the Revenue Act of 1936, income includes gain derived from dealings in property growing out of use of or interest in such property. Where an obligation in a fixed amount is satisfied by a transfer by the obligor of property acquired at a lower amount, the obligor realizes gain in the amount of the difference. Twin Ports Bridge Co., 27 B. T. A. 346. When petitioner made the bonus awards in question it incurred an obligation. No doubt, petitioner incurred, also, an obligation to pay as damages an amount measured by the fair market value of the stock at that time in the event the stipulated stock was not distributed. Globe Refining Co. v. Landa Cotton Oil Co., 190 U. S. 540, 543 (involving a contract other than an agreement to pay a bonus). However, aside from such consideration, there was a liability for payment of additional compensation, which liability has been measured by the fair market value of the stock at the date of distribution for purposes of an expense deduction, and, so measured, the liability has been fixed at $24,858.75. Taxation is a practical subject. A taxpayer may not receive a deduction for an expense in a greater amount than it is obligated to pay. Petitioner can not at one moment claim the deduction for a business expense in the amount of $24,858.75, and at another moment say that such amount is not a true measure of its obligation. The second question involves, too, an application of logic. It must be concluded that petitioner satisfied an obligation in the above amount in a transfer of property which, having cost it less, resulted in a realized gain, and that petitioner’s income must be increased by the difference. It is so held.

Petitioner relies on General Utilities & Operating Co. v. Helvervng, 296 U. S. 200. The holding there was founded upon the premise that assets were not used to discharge an indebtedness. The premise here is that assets were used to discharge an obligation. That premise is a necessary corollary to petitioner’s claim for an expense deduction in the amount of the fair market value of the stock in question at the date of distribution. In the General Utilities case there was no such corollary. Consequently we believe that this case does not come within the rule of the General Utilities case, and that it is not controlling here.

Reviewed by the Board.

Decision will be entered that there is a deficiency of $2,156.76.

Turner and Opper concur only in the result.

       Abt. 22 (a) — 3. [Regulations 94.] Compensation paid- other than in cash. — If services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. * * *

       In the following cases it has been held that income to employees from stock given to them as compensation by the employer is measured by the fair market value of the stock when received: Lyle M. Olson, 24 B. T. A. 702, 707; Albert Russel Erskine, 26 B. T. A. 147; Crowell v. Commissioner, 62 Fed. (2d) 51; Olson v. Commissioner, 67 Fed. (2d) 726; Edward J. Epsen, 44 B. T. A. 322. See also A. R. M. 114, C. B. No. 4 (1921), p. 137.


author: Arnold :

text:
    Western Adjustment & Inspection Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100778.
    Promulgated November 18, 1941.

      Tim, G. Lowry, Esq., for the petitioner.

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

Arnold :

The petitioner filed income tax returns for 1936 and 1937 showing taxable income for each year. It now contends that it had no taxable income in such years because it derived no income from the operation of its business for its separate use, benefit, or disposal in excess of $12 a share of its outstanding stock. It claims that all excess charges above $12 a share of its outstanding stock retained by it were contractually owing and refundable to its customers under article 14 of its bylaws in proportion to the volume of business transacted and by virtue of its Avritten and printed representations to customers that it acted as a service organization not operated for profit and adjusted insurance losses at cost.

Article 14, in force and effect from 1895 to December 22, 1936, expressly refers to “surplus of this company arising from earnings other than interest earnings.” This indicates that the petitioner expected to acquire a surplus consisting of earnings derived from its business in excess of $12 per share.

“Cost” and “profit” are terms of equivocal meaning. The petitioner from the time of its organization in 1885 to 1937, inclusive, used payments received from its customers for the purchase of furniture and fixtures and other equipment, which it charged to expense of operation in the year of purchase in determining profits.. In 1936 and 1937 there were charged to expense approximately $45,000 and $56,000, respectively, which amounts represented the costs of equipment and were treated as capital expenditures on its returns. The board of directors of petitioner determined what expenditures represented “cost.” The directors determined that a reserve be established of approximately $400,000 for the purpose of providing funds for business expansion and contingencies and to carry on the business in a safe and convenient manner. It is indicated that this was regarded as a cost of operating the business. The charges in excess of cost retained for such purpose were credited, to a reserve for contingencies and expansion, thus negativing the claim of liability to customers for charges in excess of actual operating cost. Excess charges retained by petitioner and not rebated were not divided in any year “in proportions which each customer’s total charges bear to the total charges for the year” and credited to accounts of customers. Cf. Midland Cooperative Wholesale, 44 B. T A. 824. The board of directors retained control of such funds, and expended amounts therefrom from time to time for business purposes of the corporation. No objections were made by any customers, whether stockholders or nonstockholders. No claim was made by any customer for any rebate of such reserve or any other funds retained by the corporation or expended by it for furniture and equipment and establishment of branch offices. The equipment and branch offices and excess charges retained by petitioner were the property and a part of the business of petitioner. Obviously such excess charges were received and used by the petitioner for its “separate use, benefit or disposal” and hence were income as defined in Eisner v. Macomber, 252 U. S. 189. In North American Oil Consolidated v. Burnet, 286 U. S. 417, the Court stated as follows:

* * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still he claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. * * *

See also Cleveland Railway Co. v. Commissioner, 36 Fed. (2d) 347; certiorari denied, 281 U. S. 743; Co-operative Oil Association v. Commissioner, 115 Fed.(2d) 666.

The petitioner claims that it is entitled to a credit under section 26 (c) (1) of the Revenue Act of 1936. The petitioner’s bylaw restricting payment of dividends to 6 percent per annum of the par value of its paid-in capital and paid-in surplus and representations made by petitioner in letters and booklets issued by it to customers to the effect that it rendered services at cost and was not operated for profit do not constitute a “written contract executed by the corporation” within the meaning of section 26 (c) (1). A written contract under that section refers to “routine contracts dealing with ordinary debts.” Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46; Crane- Johnson Co. v. Helvering, 311 U. S. 54. A corporate bylaw is not a “written contract executed by the corporation” within the meaning of the section. Davison-Joseph Campau Realty Co., 41 B. T. A. 675. Written and printed representations made by petitioner in the course of its business to its customers may be the basis of an implied contract, but do not constitute “a written contract executed by the corporation.” That its customers may have, by virtue of petitioner’s bylaw and its representation, an enforceable right to have the charges in excess of cost rebated to them is immaterial and not determinative of petitioner’s right to the credit claimed. Such rights of petitioner’s customers, if any, are founded upon an implied contract and not upon a written contract executed by petitioner. Substantive law or state statutory law is not applicable here. The provisions of a Federal revenue statute determine whether petitioner is entitled to the credit claimed. Section 26 (c) (1) grants a credit under certain conditions. Such a tax law must be strictly construed. Crane-Johnson Co. v. Commissioner, 105 Fed. (2d) 740; affd., 311 U. S. 54. There being no written contract executed by the corporation as required by section 26 (c) (1), the petitioner is not entitled in the taxable years involved to the credit granted thereunder.

The petitioner claims a bad debt deduction of $10,587.05. During a period of years prior to 1936, items of expense incurred in connection with adjusting losses were overlooked and not charged or billed to the customers. This was due to a faulty system of reporting expenses and bookkeeping. In 1936 the system of handling such items was changed. After being billed, the customer closed its file and considered the case closed and settled in full. There is no evidence to show that these items were ever charged to the customer for whom the expense was incurred. The items were not treated as debts owing to petitioner. Apparently no attempt was made to bill or collect the items. It is indicated that the items were carried in an account designated loss expense and the customers for whom the expenses were incurred were not identified. The item was not ascertained to be worthless. It was considered to be uncollectible because the cases in which the expenses were incurred were closed so far as the customers were concerned. Section 23 (k) of the Revenue Act of 1936 allows the deduction of “debts ascertained to be worthless.” No statutory provision is made for the deduction of expense items which are un-collectible due to failure of taxpayer to bill its customers therefor. This item represents an accumulation of expenses incurred by the petitioner in the course of its business. It is not allowable as a bad debt deduction in 1936.

In 1937 the petitioner received from the Uniform Printing & Supply Co. $3,756.80 representing rebates on account of supplies purchased over a period of years from 1980 to 1936, inclusive. Of the amount of $3,756.80, $563.18 represents a rebate on account of purchases made in 1933 and $657.50 represents a rebate on account of purchases made in 1935. The petitioner concedes that the rebates received in 1937 applicable to purchases in other years are includable in income in 1937, but contends that the above amounts applicable to 1933 and 1935 are not includable in 1937 income for the reason that in 1933 and 1935 the petitioner sustained losses and gained no tax advantage by reason of the overaccrual of purchases in the above amounts.

In National Bank of Commerce of Seattle, 40 B. T. A. 72; affd., 115 Fed. (2d) 875, it was stated:

It is now well settled that where amounts previously deducted from income for losses, expenses, bad debts, taxes, etc., which effect an offset of taxable income, are recovered in subsequent years, such recoveries “should be reported as a part of gross income for the year in which * * * recovered.” Estate of William H. Block, 39 B. T. A. 338; Dixie Margarine Co., 38 B. T. A. 471. The converse of this proposition is also true — that if such amounts so deducted did not effect an offset of taxable income for the year in which deducted, then recoveries in subsequent years should not be included in gross income in the years of recovery. Central Loan & Investment Co., 39 B. T. A. 981. * * *

The evidence shows that the petitioner’s income tax returns for 1933 and 1935 showed net losses in excess of approximately $17,000 and $74,000, respectively. It is apparent that the deductions in 1933 and 1935 of the amounts herein involved accomplished no reduction in tax liability of petitioner in such years. The amounts of $563.18 and $657.50, representing recoveries on purchases made in 1933 and 1935, respectively, do not constitute taxable income to petitioner in 1937.

The respondent concedes that the amount of $550.59 should be excluded from income in 1937. Effect will be given to this concession upon recomputation under Rule 50.

Decision will be entered wader Bule 50.


author: Arnold:

text:
    Robert Bowman Peck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100604.
    Promulgated November 18, 1941.

      Louis E. Hart, Esq., and John B. Montgomery, Jr., Esq., for the petitioner.

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

Arnold:

In support of his determination that the income of the trust is taxable to petitioner respondent cites Douglas v. Willcuts, 296 U. S. 1, and Helvering v. Fitch, 309 U. S. 149. He contends that the trust income paid to Florence Eeid Peck discharged petitioner’s continuing legal obligation to support ber; that no full and complete discharge from said obligation resulted from the French decree of divorce; that said decree was rendered under circumstances amounting to fraud, because petitioner supplied the court with an erroneous address for his former wife and the court was without jurisdiction to render a valid decree.

Petitioner distinguishes Douglas v. Willcuts, supra, and Helvering v. Fitch, supra, and asserts that the rule applicable here is set forth in Helvering v. Fuller, 310 U. S. 69, and William H. Stanley, 41 B. T. A. 1233. He contends that a permanent property settlement was effected with Florence Reid Peck; that the trust was created at her request and was not created for the purpose of discharging his marital obligations; that the French court properly acquired jurisdiction of the parties under French law, found the wife at fault, and gave petitioner a divorce; that the party at fault under French law is not entitled to alimony and no alimony was decreed. Petitioner further contends that the French decree is not subject to collateral or direct attack either in France or Illinois under the circumstances existing in this proceeding.

In the Fitch case, supra, the Supreme Court laid down the rule that a taxpayer must show by clear and convincing proof that local law and the trust indenture have given him a full and complete discharge of all obligation to support his divorced wife, if he is to be relieved of the burden of the tax. The difference between the Fuller and the Fitch cases, supra, is that the proof was clear and convincing in the former but not in the latter. Likewise in Helvering v. Leonard, 310 U. S. 80, the proof was not clear and convincing that the grantor of the trust had secured an absolute discharge from his prior obligations by the divorce decree and the trust instrument. The operation of the rule is illustrated by our decision in F. W. Fitch, 43 B. T. A. 773, wherein we considered the taxpayer’s proof for years subsequent to the taxable year considered by the Supreme Court. We found the proof as to the later years to be clear and convincing and we held that the local law and the trust indenture had given the taxpayer a full and complete discharge.

Here, we have found as a fact that the property instead of being transferred directly to the wife was at her request transferred to a trustee. Had the property been transferred to the wife, as contemplated, there is no doubt but that she, and not the petitioner, would be taxable on the income. These circumstances indicate that the property settlement was intended by the spouses to be a full and complete discharge of the petitioner’s marital obligation.

Any question as to petitioner’s legal duty to support his children would seem to be resolved by their respective ages during the taxable years. In our opinion any legal obligation to support them terminated prior to the taxable years when the children reached their majority. Stephen J. Leonard, 36 B. T. A. 563; affirmed on other grounds, 310 U. S. 80.

We shall consider next respondent’s contention that the French divorce decree is invalid. An examination of the applicable sections of the French Code in the light of the testimony of a French practitioner, versed in the French law, who testified at length regarding the laws of France relating to methods of obtaining jurisdiction and the finality of a French decree of divorce, convinces us that the decree is valid. The testimony is that even if an erroneous address for Florence Reid Peck had been intentionally given by petitioner, the divorce would be voidable and not void, and the defendant would have had to take affirmative action to set aside the decree. No such action was ever taken by Florence Reid Peck, although she consulted her attorney after hearing of petitioner’s remarriage. Thereafter, she was in Europe at least three times prior to the taxable years and made no effort to question the decree. The time within which Florence. Reid Peck could have taken affirmative action after knowledge of the divorce expired long prior to the taxable years.

Furthermore, the decree shows on its face that petitioner furnished his former wife’s place of address at the time he left this country for France. Florence Reid Peck testified that she did not know where petitioner resided during the years 1920 to 1925, inclusive, and thei-e is no reason to suppose from this record that petitioner was any better informed as to where she resided. Lacking knowledge of any change of address, petitioner gave Florence Reid Peck’s last known place of address. No intention to deceive the court can be inferred from such action.

The testimony further shows that under French law the service of papers incident to a divorce proceeding on a nonresident party is made by the public prosecutor through regular diplomatic channels. The decree recites that Florence Reid Peck was regularly notified and the signatures of various French officials are duly authenticated. We can find no basis under these circumstances for imputing fraud to the petitioner.

Respondent concedes that petitioner had his “domicile” in France at the time of the divorce. The testimony shows that under French law the “domicile” of the wife follows the husband. That being true, the jurisdiction of the French court over the spouses would seem to be unquestionable where the prescribed procedure was followed in the service of papers on the absentee spouse. We are of the opinion, therefore, that the French decree of divorce was valid, and, unless it is subject to collateral or direct attack in Illinois, effect must be given thereto. And certainly, if effect is given to the provisions of the French Civil Code, set forth in our findings, the divorced wife has lost the right to all the benefits of the marriage contract and petitioner’s legal obligation to support had terminated prior to the taxable years. The testimony shows that in the absence of fraud any direct attack in the French courts would be prohibited upon the decree becoming final, which occurred long prior to the taxable years.

The Illinois courts follow the rule announced by the Supreme Court of the United States in Thompson v. Whitman, 18 Wall. 457, that recitals as to jurisdiction in the judgment record of a foreign judgment are not conclusive, but may be controverted by extraneous evidence. Baker v. Brown, 298 Ill. App. 173; 18 N. E. (2d) 578, and cases therein cited. But where the court acquired jurisdiction and entered a final order or decree, from which no appeal was taken, the decree can not be collaterally attacked. People v. Sterling, 357 Ill. 354; 192 N. E. 229, 233; Wyman v. Hageman, 318 Ill. 64; 148 N. E. 852, 855. Even though the judgment is erroneous, it has been held immune from collateral attack. Woodward v. Ruel, 355 Ill. 163; 188 N. E. 911, 914. And in Drwmmond v. Lynch, 82 Fed. (2d) 806, the Circuit Court of Appeals held that the inquiry must be confined to jurisdictional infirmities, and the judgment can not be impeached for mere irregularities.

While the cited authorities dealt with foreign judgments as between the states, or as between a state court and a Federal court, the rule is in our opinion equally applicable to the decree of a French court. Here, as we have pointed out, the French court acquired jurisdiction. The alleged fraud on the court has not been established and the French decree was valid. Under such circumstances we believe the French decree would be recognized by the Illinois courts as terminating petitioner’s obligation to support his divorced wife. This is particularly true in view of the fact that Florence Eeid Peck has made no effort to set the decree aside, has accepted the benefits of the decree, and has bought and sold property in her own right without recognizing any interest therein of the petitioner. Thus, whether the “local law” be considered the law of France or the law of Illinois, we are of the opinion that petitioner has established that by the terms of the trust and the decree of divorce he has a full and complete discharge from his legal obligation to support.

No point is made by either party that the trust indenture reserved the right to alter, change, amend, set aside, or revoke the trust with the consent in writing of the petitioner and Florence Reid Peck. Apparently, it was considered that the adverse interest of Florence Reid Peck was substantial enough to take the case outside the provisions of sections 166 and 167 of the Revenue Acts of 1934 and 1936. We direct attention thereto not for the purpose of raising the question, but to point out that it was not presented by the parties nor decided by us. The same situation exists with respect to the possibility of a reversion to petitioner; apparently the possibility was considered too remote under the decided cases to raise the question.

One other paragraph of the trust indenture deserves comment. By the terms of the fifth paragraph of the trust agreement petitioner was promised by Florence Reid Peck that she would hold him free, clear, harmless, and indemnified from all her debts and obligations, and it was agreed that if he paid any such debts or obligations for her the trustee should reimburse petitioner from the trust income for the indebtedness so paid. We can not help but feel that this paragraph, plus the testimony of Florence Reid Peck that all property rights were settled between her and petitioner in 1920 and that the conveyance was made to a trustee for her benefit and at her request, establishes that petitioner had paid and satisfied his obligation to support Florence Reid Peck. Certainly as between themselves this was true and recognized by each. Every act of the spouses subsequent to January 12, 1920, is consistent with the theory that the trust income belonged to Florence Reid Peck and that petitioner had no interest therein, control thereof, or benefit therefrom.

In this view of the principal issue, respondent’s affirmative allegation that capital gains and other trust income is taxable to petitioner must likewise fail. No income of the trust can be taxed to him where he retained no interest in the corpus or the income therefrom.

Decision will he entered- for the petitioner.