author: Goodeioh : Van Fossan,

text:
    The Stanford University Bookstore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49007.
    Promulgated February 28, 1934.

      Frederick M. Fish, Esq., W. B. Sanders, G.P.A., and Walter Fox, Jr., Esq., for the petitioner.

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

Goodeioh :

Bespondent determined deficiencies in income tax for fiscal years as follows:

August 31, 1919_ $203. 63
August 31, 1920_ 737.46
August 31, 1921_ 2,304.39
August 31, 1922_ 346. 81
August 31, 1923_ 650. 77
August 31, 1924_ $353.87
August 31, 1925_ 651. 67
August 31, 1926_ 747.41
August 31, 1927_ 197. 90
August 31, 1928_ 110.42

Petitioner assails these determinations on two grounds; first, that respondent is bound by the prior ruling of a former Commissioner of Internal Bevenue holding petitioner to be exempt from tax; and, second, that it is exempt from tax under the provisions of section 103 (6) or (14), Bevenue Act of 1928, and corresponding provisions of prior acts. We hold against petitioner on both contentions.

Petitioner is a cooperative association under the laws of California, organized for the purpose of carrying on “ a general mercantile business, for the accommodation of the students and faculty of Leland Stanford Junior University.” Membership in the association is confined to persons connected with the university and may be canceled by the directors, who, in turn, are elected by the members. The membership fee is $1, which represents the entire pecuniary interest of a member in the assets of the association and which is returned upon termination of membership. No dividends are paid on the membership fees. The directors are in charge of the business, which is run by a manager employed by them upon salary. Its sales, however, are not limited to members.

Petitioner has two stores, both located on university property, more than a mile from the nearest town. One building it owns and on it pays the university a nominal annual ground rental; the other building it rents from the university for $75 a month. It sells textbooks, stationery, engineering, laboratory and art supplies and equipment, notebooks, pens, typewriters (and rents them also), desk lamps, and other miscellaneous articles used by students, and fills special orders for personal stationery, dance programs, emblems, and books. Textbooks are stocked after inquiry amongst the faculty members as to the expected requirements of the university classes. The bulk of its business is done with students and faculty of the university; sales to outsiders, tourists and visiting parents being a small part of the total. Petitioner sells its stock at list or current retail prices, and with each sale issues a cash receipt which may be signed and turned in by the purchaser. Periodically, these receipts are totaled and rebates made to the purchasers from the profits of the association. In the period before us 10 percent of the total sales was thus rebated, except in 1918, when no rebate was paid, and 1920, when 5 percent was paid. In 1926 (the only year as to which we have detailed evidence) the average net profit of its three departments- — textbook, miscellaneous, and stationery — were 26.5 percent of its total sales. So far as this record discloses, no part of the earnings of the association was paid to- the university, or to any other exempt organization.

The bylaws of the association provide that the profits “ shall be added to the common property of the Bookstore ” and that upon dissolution of the business “ the net assets may, by the vote of two-thirds of the members, be transferred to an organization with purposes similar to those of the Bookstore, or applied to any educational, charitable or benevolent institution or purpose.”

Petitioner’s contention that respondent may not now lay a tax on its earnings because his predecessor in office was of opinion that it was exempt from taxation, we may dispose of without discussion, since that point has been previously decided adversely. James Couzens, 11 B.T.A. 1040; Arthur H. Lamborn, 13 B.T.A. 171; Frances P. McIlhenny et al., Executors, 13 B.T.A. 288.

Petitioner’s contention that it is an exempt corporation offers only little more difficulty. Clearly, it falls without the provisions of paragraph (14), for it is not merely holding property, but is actively engaged in business; moreover, it does not turn over its earnings, less expenses, to an exempt organization. The opposite view it does not press. However, it argues that it falls within paragraph (6) because, (a) it is organized and operated exclusively for educational purposes, (b) it is an integral part of the university, which is an exempt organization, and (c) any surplus which it accumulates will be distributed to some organization of similar purpose or applied to a charitable or educational institution or purpose.

We see no merit in that argument. This petitioner is neither organized nor operated as an educational institution as that term is commonly used and understood. It arranges no lectures, holds no classes, offers no courses. It sells books and supplies to persons in attendance, whether as faculty members or students, at an educational institution, and to anyone else who may come along to buy. Nor is it an integral part of the university; it is a separate legal entity; controlled by its own directors and officers. True, its directors and officers, and members as well, are members of the university faculty, but it is not shown that a part of the duties of those individuals under their employment by the university is to manage the affairs of this association. True, also, a report of petitioner’s condition is made annually to the registrar of the university, but there is nothing in the record before us to show that the university, as such, takes any action respecting the report, or exercises any control over petitioner’s affairs. As to the provision of the bylaws providing for the ultimate distribution of petitioner’s accumulated surplus to an exempt corporation, suffice it to point out that bylaws may be changed, and that up to the present no part of petitioner’s earnings has ever been paid to any educational or charitable institution. Cf. Riverdale Cooperative Creamery Assn., 18 B.T.A. 1159; affd., 48 Fed. (2d) 711.

Moreover — and this is controlling of the case without regard to the other considerations urged — the fact remains that a part of the net earnings of the association does inure to private individuals. Dividends or rebates (on its own records petitioner uses both terms) are regularly paid to such customers as turn in their purchase receipts. Though the majority of them may be students or faculty members of the university, still such customers are private individuals so far as this statutory provision is concerned (being an exemption it must be strictly construed) and it cannot be disputed that they receive such part of the association’s net earnings as its directors see fit to distribute.

Reviewed by the Board.

Judgment will Toe entered for the respondent.

Van Fossan,

dissenting: I cannot agree with the majority opinion in holding that petitioner is not exempt from tax.

The petitioner contends that while it has a separate corporate existence it is, in fact, an ancillary part of Stanford University and an essential factor in the proper administration of the university’s activities.

The petitioner’s corporate structure and its method of conducting its business show conclusively that no part of its net earnings inures to the benefit of any private stockholder or individual. The bylaws specifically provide that the pecuniary interest of a “ member ” or shareholder is limited to his $1 membership fee, that no interest or dividend shall be paid thereon, that no distribution of the profits or assets shall be made to members, and that upon the cessation of membership the fee shall be returned to the member or his legal representative. The conditions imposed by the bylaws were carefully observed. Whatever so-called profits or earnings were available were distributed by way of rebate to the students and faculty purchasers and not to the petitioner’s shareholders or members. Such “ profits ” were determined after paying all necessary expenses of operation and setting aside a reserve for working capital and emergency requirements. The only effect of this distribution was to sell the books and supplies for less than the quoted price.

The amounts retained in surplus were added to the “ common property of the Bookstore.” Since only the current excess of assets over expenditures was made the basis of rebate, the accumulated amounts so retained remained in the surplus account unless needed for expenses or an unexpected demand such as loss by fire, earthquake, etc. Upon the dissolution of the association or the discontinuance of its business the net assets may be transferred to an organization with purposes similar to those of the petitioner or applied to any educational, charitable or benevolent institution or purpose. In no event can any distribution of profits or assets be made to members. Thus in no sense can it be said that any part of the net earnings inures to the benefit of any private shareholder or individual.

We then must determine whether or not the petitioner was organized and operated exclusively for an educational purpose. It is conceded that Stanford itself is an educational institution exempt from taxation under the statute. The question is whether or not the petitioner is such an ancillary organization, essential to the proper and efficient functioning of Stanford, as to bring it within the purview of the statute. I think it is. The record shows that the sole purpose of the petitioner’s formation and operation was to provide for the students and faculty of Stanford textbooks and other necessary supplies at the lowest possible cost. The rebate system was utilized as the most convenient means of effecting the low cost. The function performed by the petitioner was as pertinent and necessary to the successful operation of the university as many other activities which, under certain circumstances, conceivably could be dispensed with — the maintenance of a dormitory, or the operation of a dining hall. Nor is the incidental receipt of an operating profit indicative of a departure from its basic purpose any more than the sale of agricultural products raised on the institution’s ground, or the charging of admission fees to athletic contests. The primary purpose for which a corporation is organized and according to which it operates determines its rights to exemption. Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578; Unity School of Christianity, 4 B.T.A. 61; Sand Springs Home, 6 B.T.A. 198; Frederic C. Leubuscher, Executor, 21 B.T.A. 1022. I conclude, therefore, that the activity itself can properly be classed as educational in character.

I am further of the opinion that the petitioner was so closely connected with Stanford as to be considered an associated part of its educational plant. The members of the petitioner all belong to the Stanford faculty. They represented many departments. In fact, no one not connected with Stanford could be a member. The kind and number of textbooks and forms carried by the petitioner were absolutely dependent upon the preference of the professor and the popularity of his course. The petitioner’s sales to persons not connected with the university were casual and insignificant — less than 1 percent of the total sales. Its sales of textbooks and supplies formed approximately 90 percent of its business. Its purchases and sales were, therefore, directly related to the needs of Stanford. The petitioner’s bookstore was situated on Stanford campus, a mile and a half from the nearest town. Geographically, therefore, as well as otherwise, its ojierations were peculiarly limited to Stanford students and professors and were essential to the efficient conduct of the university. There was no private bookstore offering the same services. The bookstore made a report to the university annually. The record establishes as a fact that the operation of a bookstore on or near the campus of the university was essential to the efficient operation of the university.

In my opinion the facts presented prove that the primary and underlying purpose of the petitioner’s organization and operation was educational and that it is entitled to exemption under the provisions of section 103 (6) of the Revenue Act of 1928 and like sections of prior acts.

Smith and Adams agree with this dissent.

Teammell agrees with the result reached in this dissent.

       (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

       (14) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title.


source: Caselaw Access Project

author: Arundell :

license: Public Domain

text:
    The Pennsylvania Company for Insurances on Lives and Granting Annuities, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64194, 64196.
    Promulgated February 28, 1934.

      Joseph A. LamoreTle, Esq., for the petitioner.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Arundell :

The respondent determined a deficiency in income for the fiscal year ended November 30,1929, in the amount of $46,307.14, of which $13,327.30 is in controversy. Two petitions have been filed and docketed based upon the one deficiency notice sent out by the respondent. The name of the petitioner is the same in both. In one, Docket No. 64194, it is alleged that petitioner was incorporated under letters patent dated June 1,1929, and in the other, Docket No. 64196, petitioner alleges it is a corporation under letters patent issued in 1930. Counsel stipulated for the consolidation of the two proceedings, that there is only one tax liability to be determined; that the petitioner named in Docket No. 64196 is the real and only taxpayer in both proceedings and whatever deficiency is ultimately determined shall be determined against it; and that an order of no deficiency shall be entéred in Docket No. 64194, which order shall not in any way prejudice whatever deficiency may be determined in Docket No. 64196.

These matters out of the way, we take up the only issue raised by the pleadings which is that of the right of petitioner to take a deduction for a net loss sustained by the Bank of North America & Trust Co. in the period January 1 to May 31, 1929. The facts were stipulated.

The Pennsylvania Company for Insurances on Lives and Granting Annuities, a Pennsylvania corporation organized in 1812 (hereinafter called the old Pennsylvania Co.), for many years prior to 1929 was engaged in carrying on a general banking, trust, and safe deposit business in Philadelphia. For about five years prior to the consolidation in 1929 hereinafter described, it had its principal office at Fifteenth and Chestnut Streets and a branch office at 517 Chestnut Street, both in Philadelphia. Its capital consisted of 450,000 shares of the par value of $10 each.

For many years prior to 1929 the Bank of North America & Trust Co., a Pennsylvania corporation, hereinafter called the Bank, conducted a general banking, trust, and safe deposit business in Philadelphia, and for about six years prior to the consolidation in 1929 it maintained its principal office at the northwest corner of Fifteenth Street and South Pennsylvania Square and a branch office at 305-307 Chestnut Street, both in Philadelphia. Its capital consisted of 200,000 shares of the par value of $25 each.

On April 25, 1925, the old Pennsylvania Co. and the Bank entered into an “ Agreement of Consolidation and Merger.” This agreement provided that upon completion of necessary details, such as stockholders5 ratification, filing of certificates, etc.,” the said merger shall be deemed to have taken place, and the said corporations, parties thereto, shall be one corporation under the name adopted in and by this agreement, possessing all and singular the rights, privileges, and franchises vested in each of them, and all estate and property, real and personal, and the rights of action of each of said corporations, parties hereto, shall be deemed and taken to be transferred to and vested in * * * the consolidated corporation, without any further act or deed.” The name adopted for the consolidated corporation was “ The Pennsylvania Company for Insurances on Lives and Granting Annuities,” hereinafter called the new Pennsylvania Co. The capital of the new Pennsylvania Co. was fixed at $9,500,000, consisting of 950,000 shares of the par value of $10 per share. The stockholders of the old Pennsylvania Co. were to retain their certificates, “ which shall be deemed to represent an equal number of shares of stock of the same par value in the Consolidated Corporation.” The stockholders of the Bank were to surrender their stock (par $25) and receive one share of stock in the new Pennsylvania Co. (par $10) for each share surrendered.

On June 1, 1929, letters patent were issued to the new Pennsylvania Co. by the Governor of Pennsylvania. The consolidation was effected and the letters patent issued pursuant to section 3 of the Act of May 3, 1909, P.L. 408, and supplements and amendments thereto, which as far as material, is set out in the margin.

Upon issuance of letters patent, the new Pennsylvania Co. immediately began the carrying on of a general banking, trust, and safe deposit business in Philadelphia, with its principal office at the corner of Fifteenth and Chestnut Streets, which had been the principal office of the old Pennsylvania Co., and branch offices at the places where the main office of the Bank had been located and also where the branch offices of both corporations had been maintained prior to the consolidation.

In 1930 the new Pennsylvania Co. and the Colonial Trust Co., a Pennsylvania corporation, effected a consolidation under the Pennsylvania statute above referred to, the consolidated corporation so resulting taking the name theretofore used by both the old and new Pennsylvania Co., namely, The Pennsylvania Company for Insurances on Lives and Granting Annuities.” The corporation so organized in 1930 is the petitioner in Docket No. 64196.

The Bank filed a corporation income tax return with the collector at Philadelphia for the period January 1 to May 31, 1929, for which period it sustained a net loss for income tax purposes amounting to $120,320.04. During that period it received nontaxable interest and' dividends amounting to $57,543.49, leaving a statutory net loss of $62,776.55. In determining the deficiency asserted in these proceedings for the fiscal year ended November 30, 1929, the respondent did not allow as a deduction to the new Pennsylvania Co. the net loss, or any part thereof, sustained by the Bank for the period January 1 to May 31, 1929.

It has been held in a number of cases that a net loss sustained by a corporation which loses its identity by merger or consolidation may not be taken as a deduction by the merged or consolidated corporation. See Maytag Co., 17 B.T.A. 182; Plumbers Supply Co., 20 B.T.A. 459; Standard Silica Co., 22 B.T.A. 97; Athol Mfg. Co., 22 B.T.A. 105; affd., 54 Fed. (2d) 230; Clark Dredging Co., 23 B.T.A. 503; Overbrook Natl. Bank of Philadelphia, 23 B.T.A. 1390; New Colonial Ice Co., 24 B.T.A. 886; affd., 66 Fed. (2d) 480; certiorari granted, 290 U.S. 621. These cases have denied the deduction sought, on the principle that the statute limits the use of a net loss to the income of the taxpayer who sustained the loss, and as the new corporation is a distinct and separate entity, it is not “the taxpayer” sustaining the loss. In Pittsburgh & West Virginia Ry. Co., 22 B.T.A. 876, presenting a jurisdictional question, there had been a consolidation under the Pennsylvania statute involved here. In that case we quoted from Continental Trust Co. v. United States, 259 U.S. 156, and also Pennsylvania decisions holding that under the consolidation statute the consolidating corporations are deemed dissolved and the consolidated corporation is a new entity. “It is an entity entirely distinct from that of its constituents.” Pennsylvania Utilities Co. v. Public Service Commission, 69 Pa. Super. Ct. 612. In Overbrooh Natl. Bank of Philadelphia, supra, there was a consolidation of Pennsylvania corporations effective April 1, 1924. Between January 1 and March 31, 1924, one of the consolidating companies sustained a net loss, and the consolidated company sought to take this as a deduction from its income for the year 1924. We sustained the respondent’s refusal to allow the deduction, on authority of a number of cases, most of which are cited herein. We concluded in that case:

Unless the principles established by these cases are overruled by higher authority, we must conform thereto and hold that petitioner is not the “ taxpayer ” within the meaning of section 206 of the Revenue Act of 1924, and, therefore, is not entitled to deduct from its income the net loss sustained by one of its predecessor corporations.

The Overbrooh case is precisely in point, and petitioner herein has not convinced us of error therein. On authority of it and other cases cited we sustain the respondent.

Decision of no deficiency will be entered in Docket No. Sfldf. Decision for the respondent will be entered in Docket No. 6I¡,196.

       Section 3. Upon the filing of said certificates and agreement, or copy of the agreement, in the office of the Secretary of the Commonwealth, and upon the issuing of new letters patent thereon by the. Governor, the said merger shall be deemed to have taken place, and the said corporations to be one corporation under the name adopted in and by said agreement, possessing all the rights, privileges and franchises theretofore vested in each of them, and all the estate and property, real and personal, and rights of action of each of said corporations, shall he deemed and taken to be transferred to and vested in the said new corporation without any further act or deed-


author: MaRquette:

text:
    Benjamin Siegel, Petitionee, v. Commissioner of Internal Revenue Respondent. Sophie Siegel, Petitioner, v. Commissioner of Internal Revenue Respondent.
    Docket Nos. 42141, 42142.
    Promulgated February 28, 1934.

      Fred B. Angevine, Esq., for the petitioners.

      James K. Polk, Jr., Esq., for the respondent.
   OPINION.

MaRquette:

These proceedings were consolidated for hearing. The following deficiencies in income tax were asserted by the respondent for the year 1923: Benjamin Siegel, $9,669.36; Sophie Siegel, $16,537.22.

The one error asserted in both proceedings is that the respondent, n determining the earnings and profits available for dividends of the Benjamin Siegel Co. (hereinafter referred to as the Company) accumulated since February 28, 1913, failed to deduct therefrom the sum of $63,952, representing net additions to the bad debt reserve shown on the books of that company.

Part of the facts were stipulated and the stipulation is made part of this report. The material facts disclosed by the record are set forth.

On January 31,1923, the last day of the fiscal year of the Company, it declared and paid a dividend of $300,000. Of this amount the sum of $52,200 was paid to the petitioner, Benjamin Siegel, and the sum of $138,000 to the petitioner, Sophie Siegel, both of whom were stockholders in the Company.

Prior to 1913 and since, the Company has maintained on its books a reserve for bad debts, which was computed on various percentages of charge sales. Subsequent to the enactment of the Revenue Act of 1921, the Company failed to exercise the option granted it by section 234 (a) (5), and continued in its income tax returns to deduct debts ascertained to be worthless and charged off its books.

The following are the amounts of cash sales, charge sales, bad debts charged to the reserve and allowed as deductions, and additions to the reserve, at the end of the following fiscal years ended January 31:

The following are the percentages of bad debts charged off to total sales, to charge sales, and to the percentage of annual additions to the reserve:

The following are accounts receivable balances at close of year, percentage of bad debts charged off, and percentage of additions to reserve to accounts receivable:

The earnings of the Company available for dividend distribution on January 31, 1923, after including therein the excess of additions to reserve for bad debts over the charges thereto for the period March 1, 1913, to January 31, 1923, were as follows:

The accumulated balance on January 31, 1923, of earnings available for dividends after the deduction of all worthless debts and the restoration to surplus of the excess of the additions to the reserve made after February 28, 1913, over the worthless debts charged to reserve, and after the deduction of prior dividends and after certain adjustments, was $178,934.61.

This sum represents the earnings available for dividends on January 31, 1923, as computed by the respondent. If the additions to the reserve be a proper deduction, then the amount of available earnings on that date is $116,789.87. The Company followed a liberal credit policy. There were carried in accounts receivable accounts which were not charged off until they were about six years old, or the debtor was dead or had absconded. This account also contained accounts against persons who had become bankrupt. The following are condensed balance sheets of the Company as shown by its boobs as of March 1, 1913, and January 31, 1923:

The following is a summary of bad debts of the Company which had been charged off and subsequently recovered as applied to the year of sale:

The following past due accounts incurred in the years shown were included in accounts receivable on January 31, 1923:

The amounts realized on these accounts in the succeeding years have also been ascertained as follows:

The sole issue is what part of the dividend of $300,000, declared and paid by the Company on January 31, 1923, was composed of “earnings and profits accumulated since February 28, 1913.” Sec. 201 (a), (b) of the Revenue Act of 1921. The petitioners assert that, in addition to the amounts deducted on account of debts ascertained to be worthless and charged off, all of which the respondent has allowed, the earnings and profits should be further reduced by the sum of $63,952, the amount of the net additions made to its reserve for bad debts since February 28, 1913. The respondent has rejected this contention and has added this amount to the Company’s surplus. In his deficiency notice the respondent gives as the reasons for this action, first, that the Company, in taking as deductions, under section 234 (a)(5) of the Revenue Act of 1921, individual debts ascertained to be worthless and charged off, indicated that the officers of the Company considered that such practice correctly reflected its earnings and, second, that the reserve was excessive. He now further contends that the Company, having followed the course of deducting individual bad debts in computing its net taxable income, should not be permitted to use the reserve method in arriving at its earnings and profits. To this the petitioners reply that net taxable income is one thing, and earnings and profits are quite a different thing, and that there is no valid reason why both should be computed in precisely the same way. It is true that the term earnings and profits may include items of nontaxable income, and that such earnings and profits may be reduced by items which do not constitute deductions as provided in the various revenue acts. Cf. National Grocer Co., 1 B.T.A. 688; L. S. Ayers & Co., 1 B.T.A. 1135; Charles F. Ayer, 12 B.T.A. 284; Stanton v. Baltic Mining Co., 240 U.S. 103; Untermyer v. Commissioner, 59 Fed. (2d) 1004. The fallacy of this contention lies in the fact that while these terms differ in several particulars they have elements which are common to both. Among these is a deduction of or a provision for worthless debts. Section 234 (a)(5) of the Revenue Act of 1921 gave the Company the option of using for this deduction a reasonable addition to its reserve for bad debts. It did not see fit to avail itself of this option, but continued to deduct as before the passage of that act. In order to maintain its position the Company must now assert that in respect of items common to both net income and to earnings and profits it has the right to use one method of getting the benefit of its worthless debts in respect of income taxable to itself, and to use another method in computing that part of its income which is taxable to its stockholders. The Company having elected to use the charge-off method when it could have used the reserve method, either of which could have been used to compute both net income and earnings and profits, should, in our opinion, be held to its election in both cases. It should be compelled to turn square corners in its dealings with the Government. Rock Island, A. & L. R. Co. v. United States, 254 U.S. 141; cf. Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718.

We also think that the respondent should be sustained on the ground that the net additions to the reserve for bad debts does not truly represent the condition of the Company with respect to such items.

The reserve sought to be deducted is composed of additions made since February 28, 1913, without any reduction except on account of worthless debts charged to it. It is reasonably clear that practically all charge accounts for the first years subsequent to that date have been absorbed either into surplus or charged off. That this assumption is reasonable is demonstrated by the fact that for the six years ended January 31, 1919, the total charge sales amounted to over $7,500,000, and that of this sum there remained on the Company’s books on January 31,1923, only $6,160.44, and yet we find no transfer from the reserve to surplus. The result of this method was that the total net additions made to the reserve for the period March 1,1913, to January 31, 1923, both inclusive, are over ten times the amount of the debts actually charged off in the fiscal year ended January 31, 1923. This does not take into consideration the net amount of the whole reserve if we add thereto the credit balance on March 1, 1913, of $23,275.95. The method by which this reserve was built up is thus stated by one of the petitioners’ witnesses:

The company, on its books and records, as far back as 1915, had adopted a plan of charging in its accounts a provision based on two per cent, of the charge sales of the period. That may, from time to time, have varied depending on the profits, probably, of the company. They may have continued that for six or eight months, and they might have dropped off a month or two; for example, in the course of the year, the charge for the year was based on the percentage for a particular period. '

Even this irregular method was not always followed; thus, on January 31,1923, the net additions to reserve since February 28, 1913, amounted to $63,952, against an accounts receivable balance of $476,937.39. In the fiscal year 1924, the net addition to reserve was $5,282.23. Although the amounts of charge sales in 1925 and 1926 were larger than those in 1913, and although the accounts receivable balances were at the end of 1925, $468,941.65, and at the end of 1926, $489,971.45, we find that no addition was made to the reserve in either of these years, with the result that net additions to reserve since January 31, 1923, were over $24,000 less than at the end of the fiscal year 1923. We are not convinced that a reserve computed in this peculiar way reflected the true condition of the Company with respect to its worthless debts, and it is probable that these are the reasons the Company did not use its reserve in computing its taxable income.

This leaves the question of what worthless debts or debts recoverable only in part, if any, were included in the Company’s accounts receivable as of January 31, 1923. On this issue tbe petitioners introduced as a witness a certified public accountant who, when he made the examination from which he largely testified, was in the employ of an accounting firm, but at the time of the hearing was the auditor of the Company. This witness, after testifying that the Company followed no system with respect to the deduction of its bad debts, stated that there were accounts on the books which were not charged off until they were about six years old (the period of limitations on open accounts in Michigan- — sec. 12323, Comp. Laws of Michigan) or the person was dead or had absconded. He also further stated that the books contained accounts of persons who had become bankrupt. He introduced a statement relative to the accounts in arrears which we have inserted in our findings. He stated that the total of $127,531.46 “represents the accounts six months to four years and later in arrears January 31, 1923”, and that this amount was included in the balance sheet for that year. It appears that of the total amount the sum of $34,593.88 represented accounts incurred in the last six months of the fiscal year ended January 31, 1923. We have the right to assume that this was the fact, since petitioners’ counsel in his brief reaches the same conclusion.

From the statement of the witness as to the policy of the Company, we conclude that no accounts were carried on the books which were barred by limitation or where the debtors were dead or had absconded. With reference to the bankrupts, we can only say that the petitioners have furnished us no evidence as to who were bankrupt, nor the amount of such bankrupts’ debts. Nor are we impressed with the statement that the accounts were not charged off until the debtor was dead or had absconded. In the first case the debtor may have been solvent, and in the second place there is nothing to indicate that prior to a debtor’s absconding he was not able to pay. We do not think that lapse of time, nothing else being shown, will convert an otherwise good debt into a worthless one. W. C. Mitchell Co., 27 B.T.A. 645. A debtor may be good, but slow. We are given no facts as to the financial condition of such debtors. It may be that the Company was liberal in the matter of charge-offs, but we can give no relief in the absence of testimony showing what accounts in addition to those already charged off were worthless. Neither are we impressed with the fact that on June 30,1930, $42,335.69 of the total $127,531.46 remained uncollected. All these accounts may have been collectible on January 31, 1923. We do not know what may have occurred in later years which affected the collectibility of these particular accounts, nor do we think that what occurred subsequent to January 31, 1923, is material except to the extent that it is corroborative. Eli J. Taylor, 9 B.T.A. 442.

Taking into consideration the fact that beginning with the calendar year 1921 the Company had the right to deduct not only all worthless debts, but also those debts which were recoverable only in part, we believe that the respondent’s method of computing the accumulated earnings and profits of the Company is a nearer approximation of the truth than that which petitioners ask us to adopt.

Judgment will be entered for the respondent.


author: Van Fossan:

text:
    L. B. Reakirt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71904.
    Promulgated February 28, 1934.

      J. W. Peck, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

Van Fossan:

In this proceeding petitioner contests a deficiency of $1,875 for the year 1930. The deficiency arose upon respondent’s disallowance of a deduction claimed by petitioner on account of a fee of $7,500 paid to lawyers for services rendered in preventing an illegal taking of property by condemnation. Petitioner maintains the payment was either a proper business expense or a loss.

The facts were largely stipulated.

The petitioner is an individual residing in Cincinnati, Ohio, and is engaged in the business of real estate and investments for his own account.

In March 1928 the city of Cincinnati, by its city council, passed an ordinance to appropriate a strip of- land 25 feet in width adjacent to the south line of Fifth Street, one of the principal thoroughfares of the city, for the purpose of widening the street. By the same ordinance, the city undertook to condemn additional areas adjacent to this strip by way of “ excess condemnation.”

The petitioner owned a tract at the corner of Fifth and Sycamore Streets, Cincinnati, Ohio, fronting approximately 138 feet on Fifth Street and 149 feet on Sycamore Street, in the central part of the city, valued for taxation at $277,400. During the injunction proceedings hereinafter mentioned and the year 1930 there was a small temporary oil station on this tract near the corner and the remainder of it was for the time being used as a parking lot, although the improvement of the area by a large building was then in contemplation. The 25-foot strip of petitioner’s tract actually being used for street widening constituted about one sixth of the area of the lot, but the city proposed to take the entire lot under its aforesaid ordinance, condemning additional areas adjacent to this strip by way of “ excess condemnation.”

In 1928 the petitioner and two other owners of property fronting on Fifth Street commenced actions in the Federal court to enjoin the city from appropriating and taking property beyond the 25-foot strip and lying within this additional area, upon the grounds that the taking was not in accordance with the applicable provisions of the Constitution and statutes of Ohio and would constitute a deprivation of property without due process of law in violation of the Fourteenth Amendment, it being alleged that the appropriation of the areas was not for a public use, but for the purpose of speculating in real estate.

Under the laws of Ohio this question could be raised only by injunction proceedings. Decrees in favor of the petitioner and the other complainants in the said actions for a permanent injunction against the appropriation were entered in the District Court and were affirmed by the Circuit Court of Appeals, 33 Fed. (2d) 242, and by the United States Supreme Court, 281 U.S. 439, the reported decisions thereof being hereby made a part of this stipulation.

For the prosecution of said injunction proceedings and for services in said three courts the petitioner incurred attorney fees in the amount of $7,500, which he paid in 1930. The petitioner claimed the attorney fees as a deduction in his income tax return for the year 1930.

Respondent’s theory is that the fees paid by petitioner for legal services in opposing the attempted taking of his land were capital expenditures and therefore not deductible.

We note first that the petitioner was successful in his opposition. He won his case in every court, including the Supreme Court of the United States, and was thus sustained in his position that the condemnation in question was illegal and violative of his constitutional rights. We next note that the litigation was not in defense of title or to perfect petitioner’s title. It was to enjoin the taking of the land itself by the exercise of the power of condemnation, a right of sovereignty. Petitioner’s title was assumed to be valid and the effectiveness of the condemnation, if successful, would have depended on the validity of petitioner’s title. The decision of the Supreme Court perpetually enjoining the condemnation did not add one cent to the value of petitioner’s property, nor. did it add any rights of title. We are unable to follow respondent in arguing that the expense so incurred was a capital expenditure.

A condemnation is in fact an involuntary sale of property, the price being fixed by the court having jurisdiction. This concept underlies the whole theory of taxation of profit acquired in such proceedings. See sections 112 (f) and 113 (a) (10) of the Revenue Act of 1928 and comparable sections of other' acts.

The injunction proceeding was a proper and effective means of resisting an unlawful attempt to compel petitioner to sell part of his property to the city. Petitioner did not contest the condemnation of the 25-foot strip for street widening. What petitioner did resist was the attempt to take additional or excess land not required for the public use. And in this he was sustained.

Generally speaking, where one is engaged in business, the necessary expense of maintenance and protection of the property used in the business constitutes a proper deduction from income.

Ifc is stipulated that petitioner was “ engaged in the business of real estate and investments for his own account.” Basic in this business was the ownership, possession, and availability for advantageous development or disposition of the property in question. Being so engaged, it is undoubted that petitioner could have employed a watchman to remain on this very property to prevent unlawful entry or misuse by trespassers. An expenditure for such a purpose would have been an ordinary and necessary expense and allowable as such. Similarly, it would seem that if court action were necessary to oust a trespasser and a lawyer were employed to eject him, the fee paid would be a comparable expense of the business. Such an expense “ is directly connected with, or, as otherwise stated (Sarah Backer, 1 B.T.A. 214, 216), proximately resulted from, his business.” Kornhauser v. United States, 276 U.S. 145.

In Carlos W. Munson, 18 B.T.A. 232, w'e held that expenses incurred by employing private detectives to guard farm property where serious labor trouble had occurred were deductible as business expenses of running a farm and trucking business.

In Lena G. Hill, 8 B.T.A. 1159, we held that attorney fees paid in defending foreclosure suits brought by lienors to obtain payment for material used in improving petitioner’s property were deductible as ordinary and necessary expenses of conducting a hotel business.

Again, in Samuel D. Leidesdorf, 26 B.T.A. 881, we approved the deduction of attorney fees incurred by a man engaged in the real estate business in defending a suit which threatened his full enjoyment of certain stock. In the instant case the condemnation threatened to deprive petitioner permanently of a valuable business asset.

In H. M. Howard, 22 B.T.A. 375, attorney fees paid in connection with effecting a compromise of litigation, the same growing out of his business, were held deductible. And in E. L. Bruce Co., 19 B.T.A. 777, we approved the allowance of attorney fees incurred as a result of litigation over taxes.

Without further citation of authority it is sufficient for the purposes of this opinion to state that in our judgment the expenditure of $7,500 was directly related and incident to petitioner’s real estate and investment business. It was an ordinary and necessary expense of such business and was properly deductible in the taxable year.

Decision will Toe entered for the 'petitioner.


author: Leech :

text:
    Florence H. Fitch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51670.
    Promulgated February 28, 1934.

      Otto J. Korb, Esq., for the petitioner.

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

Leech :

Petitioner seeks redetermination of a deficiency in income tax of $10,947.54 asserted by respondent for the calendar year 1925 and assigns two errors, (a) the inclusion by respondent of any amount in her income as representing a profit taxable to her upon the sale in that year of 2,400 shares of Standard Oil Co. stock and, (b) in the alternative, if it be held that such sale was made, the computation of a profit upon the basis of the March 1, 1913, value of such stock rather than its value at the time distributed to petitioner from a certain trust estate.

Petitioner is a resident of New York City. Her father, George H. Hopper, died in 1898. His large estate was given by his will to his wife in trust, the income to be paid during her life, one half to her and one sixth to each of his three children, Jennie H. Nicholas, Charles H. Hopper, and petitioner. In case either one of the children should predecease the mother, leaving issue, such issue would take the parent’s share of the trust income. The will further provided for the termination of the trust upon the death of testator’s widow as follows:

Seventh: Upon the death of my wife Harriet A. Hopper, in case it should not precede my own decease, and in case it should precede my decease, then upon my death I hereby give, devise and bequeath all of my estate, real, personal and mixed, to my children aforesaid, to wit: Charles H. Hopper, Jennie M. Nicholas and Florence Lynnette Hopper, and to their heirs forever, as tenants in common, and not as joint tenants, share and share alike, one-third to each. In the event of the death of any of my said children before this devise and bequest shall become effectual their respective heirs shall take the proportion which such deceased child would have taken, and not otherwise.

On June 17, 1916, Charles H. Hopper died intestate and without issue, leaving a widow surviving him. The latter thereupon instituted a proceeding in the Surrogate’s Court of New York County, asserting a right to her deceased husband’s one-sixth share of the income of the George H. Hopper trust. In this proceeding construing the will of George H. Hopper the surrogate held that Charles H. Hopper took a vested interest in one sixth of the income from the trust for the term of his mother’s life and in one third of the remainder, subject to be divested in the event he predeceased her leaving no issue, and that by the “ Seventh ” clause of the will above set out the testator intended that the time at which the devise and bequest of the corpus of the trust was to become effectual was the date of the death of the testator’s widow, at which time the estate was to vest in possession of the remaindermen. It was accordingly held that the widow of Charles H. Hopper had no interest in income of the George H. Hopper trust accruing subsequent to her husband’s death. The decision of the Surrogate’s Court was affirmed by the New York Court of Appeals, In re Hopper, 228 N.Y. 669; 119 N.E. 1049.

Petitioner’s mother duly served as trustee of the George H. Hopper trust up to the time of her death on October 4, 1919. For some years prior to her death the Equitable Trust Co. of New York had acted as her agent in the administration of the trust and had custody of the securities and moneys of the trust estate. It collected and distributed all income of the trust as required from time to time to the beneficiaries. The trust estate at the time of the death of petitioner’s mother consisted of a large amount of real estate in Ohio and shares of stock in approximately 39 corporations, including 1,116 shares of the stock of the Standard Oil Co. of New Jersey.

Shortly after her mother’s death petitioner, together with her' sister, Jennie H. Nicholas, applied in person to the Equitable Trust C'o. and requested delivery to them of the securities of the George H. Hopper trust as property which had vested in them in equal shares upon their mother’s death. In response to this request the Equitable Trust Co. delivered to them the securities held by it, executing in each instance, as executor of the estate of their mother, a transfer of the stock certificates to them in equal shares. Petitioner and her sister thereupon presented these stock certificates to the transfer agents of the various corporations for reissue, half and half to each individually. In most instances the reissue of the stock was made without question. However, the transfer agent of the Standard Oil Co. of New Jersey requested that they first obtain either an order of court authorizing the transfer or qualify a successor trustee of the George H. Hopper trust to endorse the certificates for transfer. About this time this company issued a 400 percent stock dividend and changed its shares from a $100 par value to $25 per share. The additional shares due the trust estate were issued in the same manner as the original 1,116 shares. These additional shares were delivered by the company to petitioner and her sister. The total number of shares of Standard Oil Co. stock thereafter held was 22,320.

About this time the widow of Charles H. Hopper instituted various suits in the State of Ohio, together with proceedings in New York State, the purposes of which were to establish a right claimed by her to one third of the corpus of the George H. Hopper trust. One proceeding brought in New York State made a defendant of the Equitable Trust Co., charging the latter with having wrongfully delivered the assets of the estate to petitioner and her sister, and asked damages of approximately $1,000,000 for such alleged conversion. Thereupon the Equitable Trust Co. appealed to petitioner and her sister to furnish it some guarantee against liability by reason of the delivery to them of the securities of the trust estate, and in compliance with this request petitioner and her sister delivered back to the Trust Co. all of the securities theretofore turned over to them by it, including the stocks which had been reissued to them individually.

Following this a suit instituted by the widow of Charles H. Hopper in New York County was heard, but prior to the rendering of a decision a settlement was effected by petitioner and her sister with the widow of Charles H. Hopper providing for the payment to the latter of $302,000, one half of this sum to be paid by petitioner and one half by her sister. Counsel for petitioner and her sister, in order to effect a full1 and complete settlement of the claims of the widow of Charles H. Hopper and to obviate any question in respect to a transfer of the securities of the George H. Hopper trust to petitioner and her sister, applied on their behalf for the appointment by the court of the Equitable Trust Co. as successor trustee of the George H. Hopper trust and on behalf of such trustee instituted a formal proceeding making all parties defendants, including the widow of Charles H. Hopper, seeking an accounting with these parties to carry into effect the settlement agreed upon. In this proceeding a decree was thereupon presented and entered directing the payment by the trustee of the amount of the liabilities of petitioner and her sister to the widow of Charles H. Hopper and their liabilities to pay certain attorney fees and expenses. This decree provided:

* * aft * * _ * *
Ordered, Adjudged and Decreed that the plaintiff, in its capacity as Trustee under the Will of George H. Hopper, deceased, sell sufficient common stock of the Standard Oil Company of New Jersey constituting a part of the principal of the trust fund created by the will of the said deceased, to enable it to make the payments hereinafter directed, and it is hereby further
* * * * ‡ * %
And It Is Herebt Further, Ordered, Adjudged and Decreed that the defendant Florence H. Fitch is entitled to retain all of the principal and income of the estate of George H. Hopper, deceased, and of the trust fund created by his will heretofore paid to her.

During the progress of the litigation hereinbefore detailed petitioner’s sister, Jennie H. Nicholas, had died and the executors of her will had been substituted in her place. Upon the entry of the decree above set out these executors requested the Equitable Trust Co., as substituted trustee, to sell 4,200 shares of the 11,160 shares of the stock of the Standard Oil Co. of New Jersey which such trustee was holding for the estate of Jennie H. Nicholas and apply the proceeds to the settlement of the one half which that estate was obligated to bear of the settlement due the widow of Charles H. Hopper and other obligations set out in the decree. Petitioner, however, objected to the sale by the Equitable Trust. Co. of any part of the 11,160 shares of the Standard Oil Co. stock being held for her account, advising the Trust Co. that she wished to retain this stock and would raise in some other way her one half of the payments for which she was obligated. The Equitable Trust Co. thereupon agreed to loan petitioner the sum of $200,000 upon her note if secured by 6,500 shares of her Standard Oil Co. stock. On July 1, 1925, petitioner called at the office of the Equitable Trust Co. to close up the details of her loan from them of $200,000, to give the necessary security for such loan and to secure the settlement of the obligation upon her to make payment of her one half of the total indebtedness of $365,973.79. Petitioner was thereupon offered a letter prepared by the Trust Co. for her signature, addressed to the Equitable Trust Co. and reading in part as follows:

In connection with the settlement of the litigation in this estate, you were directed as such substituted trustee to sell sufficient Standard Oil Company of New Jersey common stock to provide the necessary cash to be used in such settlement. I understand that you have sola Standard Oil Company of New Jersey common stock as follows:
1,000 shares at 44⅜
1,400 shares at 44%
1,800 shares at 44½
Loss commissions and stamps, the proceeds thereof being $185,678, that being the share of my sister, Mrs. Nicholas estate.
I do now purchase from you and acknowledge receipt from you of 4,200 shares of the common stock of Standard Oil Company of New Jersey at the same price and I now give you my check in payment thereof for $185,720 which is the above-mentioned sum plus transfer tax stamps of $42, the stamps for which were affixed by you.
I am also making a loan from you individually of the sum of $200,000.00 secured by 6,500 shares of common stock of Standard Oil Company of New Jersey said loan being for a period of six months with interest at 4¾. I hand you herewith my duly executed note therefor and I direct you to deposit the proceeds of such note to the credit of my account in your Importers and Traders branch.
I also hand you herewith 4,200 shares of common stock of Standard Oil Company of New Jersey, being the stock hereinbefore referred to, to be held as collateral to said loan, and I authorize you as trustee to deliver to yourselves individually an additional 2,300 shares of Standard Oil Company of New Jersey common stock out of the shares to which I am entitled after same have been transferred into my name, to be held as additional collateral to said loan, and in this connection I hand you herewith a power of attorney in blank for said 2.300 additional shares.

Upon reading the letter in question petitioner advised the Trust Co. that she did not desire the stock sold and it was for this reason that she was securing the loan from them and that she could not understand how she was buying stock which already belonged to her. She was advised by the Trust Co. that this was the method of effecting the result which she desired and that all that would be necessary was for her to sign the letter, the note for $200,000, and a check for the amount stated, deliver to them the 4,200 shares of the common stock of the Standard Oil Co., and execute the power of attorney in blank for 2,300 additional shares; the settlement would be effected, and she would continue to own her stock. Thereupon petitioner signed the letter and the other documents referred to. The Trust Co. credited the proceeds of its loan to petitioner to her personal account and charged against it the check for $185,720. The proceeds of this check it credited to petitioner’s account with the trust estate and against this credit it charged its payment in her behalf of $182,986.90, being one half of the total of the payment of $265,973.79 provided to be paid by the decree of the court hereinbefore set out. Petitioner in subsequent years paid off the loan of $200,000 and received back the 6,500 shares of Standard Oil Co. stock deposited as collateral.

The Equitable Trust Co. for the calendar year 1925 made a return as successor trustee of the George H. Hopper trust and reported a capital gain of $214,948 realized from the sale of 8,400 shares of Standard Oil Co. stock upon a March 1, 1913, value for such stock of $156,450. It paid a tax of $26,868.50 upon this reported gain from funds then in its hands belonging to petitioner and the Nicholas estate. It subsequently filed claim for refund of this payment as one erroneously made and this claim was allowed. The resulting refund was credited by respondent, one half to the Nicholas estate and one half to petitioner.

In determining the present deficiency against petitioner respondent contends that the Equitable Trust Co. as successor trustee of the George H. Hopper trust sold 8,400 shares of Standard Oil1 Co. stock under authority of the court decree set out above; that 4,200 shares of this amount, held for the account of the Nicholas estate, were sold on the market and 4,200 shares, held for the account of petitioner, were sold at the same figure to petitioner; and that on the latter sale it realized a profit which was thereupon distributed by it to petitioner by application of it in payment of her personal obligation. The pending deficiency is thus computed on the alleged profit represented in the consideration petitioner is charged with having paid.

Petitioner denies that she purchased any stock or that the trustees sold any stock for her account. She contends, and in this is, we think, borne out by the proof, that the transaction in question was for the purpose of avoiding sale of her stock under the court’s decree. She testified that she wished to retain her stock and, to make this possible, arranged for a personal loan to her by the Trust Co. of an amount sufficient to satisfy the obligation resting upon her share of her father’s estate, represented by one half of the total obligations directed to be paid by the decree of distribution. The testimony on the part of the Trust Co. is equally positive that it never intended to sell petitioner 4,200 shares of her Standard Oil Co. stock, but merely to effect payment of the obligation of petitioner, which represented a lien on her share of the estate. The purpose of the transaction, it contends, was to effect a delivery to her of the stock in such manner that it would represent, upon the transaction being closed, collateral security to it for the loan which it was making to petitioner of the funds necessary to satisfy her obligation.

The question presented to us for determination is whether there was in fact a transfer of ownership for a consideration upon which a profit accrued which is taxable to petitioner. If there was in fact no sale, the execution of agreements designating it as such and book entries so recording it have no effect to make it so. Doyle v. Mitchell Bros., 247 U.S. 179.

Upon this question the facts proved make it clear, we think, that there could have been no actual sale by the Trust Co. to petitioner of the stock in question. The George H. Hopper trust had terminated by operation of law upon the death of petitioner’s mother. The title of petitioner and her sister to the trust corpus had then vested in possession, irrespective of the fact that the naked title of record to the personal property was still in a trustee, even though the latter might have a power of sale. A sale if made under such conditions was one for the account of the remaindermen. As we said of a similar situation presented in Francis Francis, Guardian, 15 B.T.A. 1332:

With the death of the life tenant, these petitioners as remaindermen became at once entitled, despite the nominal power of the trustee, to sell and distribute the proceeds. New York Real Property Law, §§92, 93; Personal Property Law, §11; Cochrane v. Schell, 140 N.Y. 516; Brown v. Richter, 25 App. Div. 239; In re O’Reilly’s Estate, 82 App. Div. 374; Steinert v. Steinert, 161 App. Div. 841; In re Finck's Estate, 103 Misc. 526. The sale thereafter must be regarded as a sale by them with such resulting gain or loss to each as may be recognized by the statute.

The corpus of the George H. Hopper trust had not only vested in petitioner and her sister’s estate, but actual division of the personal property had been made and physical delivery had been effected. This property was subsequently redelivered to the Trust Co. to hold as security to indemnify the latter against loss from any judgment rendered. The court recognized this in its decree in providing that petitioner was entitled to retain the property delivered to her. That part of the decree of distribution above set out directing sale of “ sufficient ” common stock of the Standard Oil Co. to pay the indebtedness manifestly has no application where petitioner furnishes the trustee with funds for that purpose, for then no insufficiency exists.

Although the letter prepared for petitioner’s signature is an offer to buy, the transaction is wholly lacking in the essentials of a sale. The offer to buy is by the one already owning the property. No change of ownership whatever is effected by the transaction. The so-called consideration for the sale represents money borrowed by the petitioner with which to satisfy a personal obligation resting upon her and is so applied for her benefit by the so-called seller. Prior to the transaction petitioner owned the stock in question. At the close of the transaction it was still her property. At no time during the course of the transaction was it ever the property of another. If the so-called sale had been at a figure below cost and petitioner were here attempting to sustain it as such and take credit for a deductible loss, we would assuredly look through form to substance and deny the claim as the adoption of a mere subterfuge to create a seeming loss where none had been realized in fact. United States v. Phellis, 257 U.S. 156. Cf. J. L. McInerney, 29 B.T.A. 1; Nace Realty Co., 28 B.T.A. 467; S. A. McQueen Co., 26 B.T.A. 1337; affd., 67 Fed. (2d) 857; Agnes A. McAuliffe, 29 B.T.A. 624.

We hold that in determining the deficiency, respondent was in error in increasing the petitioner’s gross income by $82,799.64 as representing capital gain to her in the sale by the trustee of Standard Oil Co. stock. Our conclusion makes it unnecessary to pass upon the alternative issue submitted.

Judgment will 5e entered under Rule 50.


text:
    The Pennsylvania Company for Insurances on Lives and Granting Annuities, Florence W. Henderson and D. Webster Bell, Executors of the Estate of J. D. C. Henderson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44756.
    Promulgated February 28, 1934.

      Joseph A. Lanrwrelle, Esq., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   0RINI0N.

Van Fossan:

In addition to the facts set out in our findings of fact the parties conditionally stipulated the contents of certain letters written by various officials of the several insurance companies to the executors or their attorneys purporting to interpret or construe various provisions of the several insurance contracts and to indicate the position the companies would have taken had certain questions been presented to them for decision. Mutual reservations were made to preserve the rights of the parties on appeal in event of the respective admission or rejection of the offered evidence. The stipulation went only to the authenticity of the letters and did not purport to cover their competency, relevancy, or materiality as evidence.

On consideration of the matter we are of the opinion that the evidence is inadmissible and have omitted the same from our findings. The statements found in the several letters written at the instance of the petitioners are of various purport. Some are mere statements of the contents of the policies, but largely they represent the interpretation the company would have given to the contract provisions. As such they are in the nature of opinion evidence on a matter not requiring or permitting opinion, evidence. The contracts are not, in our opinion, ambiguous or obscure. Their interpretation is a matter for the tribunal in which the controversy is being adjudicated. In short, we believe the questions to which these letters were addressed are among the questions which we have to decide by our own examination of the contracts. To admit the letters as evidence would be to abdicate pro tambo our own functions. What the company would or would not have done in various given situations does not' determine the legal rights of the parties. See Sampson v. United States, 1 Fed. Supp. 95. Assuming an unfavorable interpretation by the company, the legal rights of the beneficiary would have been fixed by the courts to which resort would have been open.

The respondent relies on Chase Nat. Bank v. United States, 278 U.S. 327, to support his contention that the proceeds of policies Nos. 1 to 14, inclusive, in excess of $40,000 are subject to inclusion in the decedent’s gross estate by reason of their containing clauses reserving to the insured the right to change the beneficiary. The petitioners challenge the inclusion, for tax purposes, of the proceeds of all policies, whether containing such reservation clause or not, taken out prior to the enactment of the Federal estate tax act, or prior to the Federal estate tax act in effect at the time of the decedent’s death, and cite Lewellyn v. Friok, 268 U.S. 238, to sustain their view of the case.

In Bessie M. Ballinger, Executrix, 23 B.T.A. 1312, we discussed at length the effect of the decision in the Frick case upon facts similar to those in the case at bar in that policies antedating the revenue acts were involved, and there held that “ where the decedent reserved the right to change the named beneficiary, or to revoke a prior assignment, the proceeds of life insurance policies taken out by him upon his own life should be included in his gross estate,” applying the rule laid down in Chase Nat. Bank v. United States, supra. See also Helena Liebes, Executrix, 20 B.T.A. 731; affd., 63 Fed. (2d) 870; Philip W. Blood et al., Executors, 22 B.T.A. 1000; David A. Reed et al., Executors, 24 B.T.A. 166; Richmond Trust Co., Executor, 28 B.T.A. 152; Sally S. Levy et al., Executors, 25 B.T.A. 1174; affirmed as to that point, 65 Fed. (2d) 412. We do not believe Lewellyn v. Frick, supra, to be controlling in the instant case.

The proceeds of policies numbered 1 to 14, inclusive, should be included in the gross estate.

The respondent asserts that he erred in his original action in excluding the proceeds of policies Nos. 15 to 20, inclusive, from the taxable estate and now contends for an increased deficiency.

In none of these policies was the right to change the beneficiary reserved. Respondent maintains, however, that each of these policies carried provisions that were valuable to the decedent in his lifetime and. prevented the estate from vesting in the beneficiary until the death of the decedent. We are of the opinion the respondent is correct in his present position as to five of the policies. As appears in our findings of fact, five of these policies variously carried provisions for loan privileges, cash and paid-up values and other similiar provision or options, exercisable by the insured. They were all 20-pay-ment life policies. We are cited to no statutory provision in the law of Pennsylvania requiring the consent or joinder of the beneficiary in applications for loans or in exercising the other privileges granted the insured by the policies. On the contrary, it has been held that the insured may borrow under the “ cash loan ” clause without the beneficiary’s consent, notwithstanding the latter’s vested interest. Schuberth v. Prudential Ins. Co. of America, 86 Pa. Super. Ct. 80 (1925). See also provisions of the Insurance Law of Pennsylvania, par. 510, Title 40, Purdon’s Pennsylvania Statutes Annotated. This fact distinguishes the case of Levy v. Commissioner, 65 Fed. (2d) 412, which was controlled by the laws of New York. The proceeds of these policies should be included in the taxable estate. Bessie M. Ballinger, Executrix, supra; Sampson v. United States, supra; Chase Nat. Bank v. United States, supra.

As to policy No.-19 a different situation obtains. This policy bears no provisions comparable to those just referred to. On the margin of the policy is a notation in handwriting indicating that the present policy superseded a former policy and referring to the original application. No copy of the former policy or application was submitted. Since the burden of proving the facts as to this policy was assumed by respondent when he asked affirmative relief, ■he must abide the consequences of the failure of proof.

Decision will be entered under Rule 50.