author: Hill:

text:
    Mountain View Cemetery Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83757.
    Promulgated April 20, 1937.

      M. S. Galasso, Esq., for the petitioner.

      W. E. Dmis, Esq., for the respondent.
   OPINION.

Hill:

The only question for determination is whether the $2,045 received by petitioner in 1933 in connection with the sales of burial rights in its “perpetual care plot” and added to its endowment fund for the permanent maintenance and care of graves should be included in petitioner’s gross income for 1933 for income tax purposes.

The petitioner contends that it should not be so included for the reason that it is part of a trust fund for the maintenance of the graves in that part of the cemetery embraced within the “perpetual care plot” and that its disposition or use for any other purpose was beyond the legal control of petitioner. The respondent contends that the amount of money in question should be included in petitioner’s gross income for income tax purposes for 1933 for the reason that such money and the fund into which it was paid were in 1933 under the unrestricted legal control of petitioner and could have been devoted to any use or purpose dictated by petitioner.

Petitioner claims that the establishment of the fund in question for the permanent care and upkeep of graves in the perpetual care plot of its cemetery was in compliance with the requirement of the laws of Montana and by such law the fund is constituted a trust fund. In support of its contentions petitioner cites certain sections of chapter 31, part 3, volume 2, Revised Codes of Montana, 1921 (Laws of 1905 as amended). Chapter 31 embraces sections 6469-6502 of the revised codes. This chapter provides expressly and exclusively for the incorporation and organization of cemetery associations as eleemosynary institutions with perpetual existence, without capital stock, to be operated without profit. Petitioner was not incorporated under the provisions of chapter 31, supra. It was incorporated and organized under the general laws of Montana (Comp. Laws 1887, div. 5, ch. 25, now ch. 1, part 3, vol. 2 E. C. M., 1921) which authorize the formation of corporations fór the purpose of carrying on general business enterprises therein named. However, certain provisions in chapter 31, supra, are applicable to petitioner in respect of a fund for permanent care and improvement of its cemetery. Such provisions are found in sections 6488, 6489, and 6494. Section 6488 is as follows:

Permanent Improvement Fund. Any association formed under the provisions of this Act, or any corporation heretofore formed under the laws of this State, which shall have established and be maintainvng a cemetery, shall provide, in the manner set forth in this chapter, for the establishment and maintenance of a permanent fund, the income of which shall be devoted to the care, maintenance and improvement of such cemetery, which fund shall be known as the “permanent care and improvement fund” of such cemetery association. [Emphasis supplied.]

It is provided in section 6489 that:

Whenever moneys to the amount of $100 shall have been received by such corporation, or association, heretofore or hereafter formed for such a fund, either from the sales of lots or from direct payments of such corporation or association toward such a fund by lot owners, or otherwise, the trustees of such association shall immediately make application to the Judge of the District Court for the judicial district in which the cemetery for which such trust fund exists for the appointment of a board of trustees of such fund, and the judge of such court shall thereupon appoint said board of trustees from a list submitted to him by the trustees of such association. * * * Upon the election, appointment, and qualification, as hereinafter provided, of the said trustee of such fund, all the title to the fund included in said trust, and all the rights, powers, authorities, franchises, and trusts whatsoever thereunto appertaining, shall at once vest in them; * * *

Section 6494 provides:

In the case of the failure of the trustees of such an association to make application to the judge of said District Court for the appointment of a board of trustees of such fund, as provided in section 6489', or in ease of the death, removal, resignation, or disability of all the members of such board, the said rights, titles, interest, authority, powers, franchises, and trusts, until the appointment and qualification of a new board of trustees of such fund shall vest in the District Court of the county in which! such cemetery, or the greater part thereof, shall be situated. In such cases such boards of trustees of such fund shall be appointed by the-District Court of said county on application of any person interested, on notice to such other persons interested, as the judge of said court may order. * * *

Under the provisions of section 6488, supra, it was mandatory that petitioner establish and maintain a permanent fund the income of which should be devoted to the care, maintenance, and improvement of its cemetery. The petitioner complied with these requirements. Petitioner delayed full compliance with the requirements of section 6489, supra, in that it failed to make application to the judge of the district court for the appointment of trustee of such fund until about the first of the year 1936. As a consequence of such delay such trustees were first' appointed in January 1936 and thereupon “all the title to the fund included in said trust, and all the rights, powers, authorities, franchises, and trusts whatsoever thereunto appertaining” at once vested in such trustees. Sec. 6489, supra.

During the time from 1925 when the fund was established until the appointment of the trustees thereof in January 1936, the title to the fund and the rights, authority, power, franchises, etc., appertaining thereto were vested in the district court of the county in which the cemetery was situated. Sec. 6494, supra.

It is our opinion that, under the facts herein and the statutes of Montana applicable thereto, the fund in question established by petitioner constituted a trust fund composed of moneys paid into such fund by purchasers of burial rights and that the title to the moneys composing such fund passed directly from such purchasers to the District Court and thence to the appointed trustees of the fund. The petitioner never had title to the moneys composing the fund nor the fund itself and had no power to cancel or withdraw the fund or to divert either the fund or its income from the use for which it was established. It was petitioner’s duty to put into the fund the money received from the purchasers of burial lots for that purpose and it had no legal power to make any other use or disposition of it.

We held, therefore, that the amount in question here, having been so received and paid into the fund, was not income to petitioner and that it is not taxable thereon. Los Angeles Cemetery Association, 2 B. T. A. 495; Metairie Cemetery Association, 4 B. T. A. 903; Englewood Park Cemetery Association, 6 B. T. A. 386; Evergreen Cemetery Association of Chicago, 21 B. T. A. 1194. Cf. Portland Cremation Association v. Commissioner, 31 Fed. (2d) 843. Cf. American Cemetery Co. v. United States, 28 Fed. (2d) 918.

Judgment of no deficiency will be entered.


source: Caselaw Access Project

author: Disney:

license: Public Domain

text:
    George H. Horning and Julia M. Horning, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80860.
    Promulgated April 20, 1937.

      Chester B. Money, Esq., for the petitioners.

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

Disney:

The respondent determined a deficiency in income tax of $266.75 for the year 1932 against the petitioners. The entire amount is in controversy.

The record shows that the deficiency notice was addressed to George H. Horning and Julia M. Horning and that the petition was subscribed and sworn to under said names, though at the hearing it appears from the testimony of George E. Horning that he is one of the petitioners and that the middle initial of his name is “E” instead of “H”, as stated in the petition filed herein. No explanation of the error is stated in the record and we assume that it may have been thought that in filing a petition to this Board the same name and middle initial given him in the deficiency notice should be used. However, the record shows that George E. Horning and his wife, Julia M. Horning, received the deficiency notice and are the persons for whom the same was intended.

The petitioners assign as error that, in determining the taxable net income of the petitioners for the year 1932, the respondent erroneously disallowed a deduction of $2,525 representing the cost or purchase price to them of stock .of the Middle West Utilities Co. Petitioners insist that the stock became worthless in 1932 and that they thereby sustained a loss in 1932 of the full amount of said cost.

The facts are either stipulated or established by oral testimony and by exhibits introduced in evidence, without objection, at the hearing, and are hereinafter stated so far as material to the issue herein.

The petitioners are husband and wife and reside in Seattle, Washington, though formerly residents of Chicago, Illinois. During the period from 1925 to 1929, inclusive, they purchased 10 shares of preferred stock and 150 shares of common stock in the Middle West Utilities Co. for a total sum of $2,525, the stock being purchased at the then market price.

The Middle West Utilities Co.,, hereinafter referred to as the Utilities Co., was a holding company and its assets consisted of the stocks and bonds of various subsidiaries- engaged in the business principally of supplying electrical service-

On April 15, 1932, the United States District Court for the Northern District of Illinois, Eastern Division, appointed receivers in equity of the Utilities Co., who acted as such receivers until July 24, 1934. Also, on April 15, 1932, an involuntary bankruptcy petition was filed in said court against the Utilities Co. and shortly thereafter, July 13, 1932, an amended petition was filed, but there was no adjudication of bankruptcy resulting from either petition.

On June 7 and June 14, 1934, petitions were filed praying that said company be reorganized pursuant to the provisions of section 77 B of tbe Bankruptcy Act, and the court thereupon appointed a temporary trustee. A plan of reorganization, dated September 24, 1934, in which the affairs of the company were thoroughly reviewed, was filed with ¡the clerk of the court on October 23, 1934. Petitioners at the hearing herein offered said plan in evidence, without objection, and likewise introduced in evidence, without objection, a “Report of Noteholders’ Committee”, dated November 12, 1932, relative to the then condition and affairs of the Utilities Co.

In behalf of respondent there was offered in evidence, without objection, a copy of a report, dated April 27, 1934, regarding the Utilities Co., made by a valuation auditor and approved by the chief of the securities section of the Bureau of Internal Revenue.

In the plan of reorganization filed in October 1934 there were ¡statements and figures compiled from the records of the receiver and trustee of the Utilities Co. and from other sources believed to be reliable. It is stipulated that in said plan the following statement appears:

The liabilities of Middle West to its creditors are in excess of $65,000,000. The value of its assets is substantially less than the amount of such indebtedness. Middle West is accordingly insolvent and the holders of its Preferred and Common stock therefore have no equity in its assets.

It is further stipulated: '

That the bonds and general obligations of the company were superior in rank and preference to any rights of the preferred or common stockholders to receive any returns.
That the stock quotations on the stocks owned by the petitioner have averaged as follows for the following years:

The report of the noteholders’ committee dated November 12, 1932, introduced in evidence by petitioners, as heretofore stated, shows that assets of the Utilities Co., as then appraised, were placed at $13,-526,879.20 and liabilities at $57,080,460.56, but that certain notes, bonds, advances, and stocks carried on the books of the Utilities Co. in the aggregate amount of $90,486,925.77 were not included, in the assets, though obviously having some value. In that report all liabilities were allowed in full. In closing its report, the noteholders’ committee, among other things, stated:

Finally, after a careful consideration of what has been ’accomplished- and a proper appreciation of the relative importance of the fact that other things remain to be done, the Gommittee finds much in the present to suggest an optimistic view of the future. The situation is by no means hopeless. Until, however, business conditions confirm our belief in the potentialities of the Middle West system, we cannot give you anything but a coldly conservative statement of the exact facts of today as we believe them to be. This we have tried to do.

The report of tbe valuation auditor heretofore mentioned and introduced in evidence by the respondent shows the detailed financial history and progress of the receivership, and shows that as late as April 1934 stock of the Utilities Co. was listed on the New York Curb and that there was then trading in both classes of its stock, though at low values. Such trading is some indication of value and is to be considered, though not decisive on that question.

Whether the stock in question became worthless in 1932 is one of fact. The determination of the Commission is prima facie correct. Has the presumption of its correctness been overthrown and the burden of proof resting on petitioners been sustained by the evidence submitted ?

The fact that the report of the noteholders’ committee disclosed liabilities greatly in excess of assets does not necessarily show that petitioners’ stock in question had then become worthless, in view of the fact that, in making its estimate of the value of assets, certain notes, bonds, stocks, etc., of uncertain value but carried on the books of the Utilities Co. at an amount in excess of ninety million dollars, were not included, whereas in estimating on the same date the Utilities Co.’s liabilities, all liabilities were allowed or included in full. Simon Sherman, 18 B. T. A. 969. Worthlessness of petitioners’ stock was not established in 1932 merely because receivers of the Utilities Co. were appointed by a court. The report of the valuation auditor mentioned above shows that as late as 1934 stock of the Utilities Co. was listed on the New York Curb and both its preferred and common stock were then traded in. The stipulation by the parties in this proceeding shows that in 1932 stock quotations on the character of stock owned by these petitioners and here involved indicate that both preferred and common had value — were not absolutely or practically worthless — and were in 1933 also quoted at a lower figure.

It is true that the plan of reorganization dated September 24,1934, embodied the statement relied on by petitioners, that the preferred and common stockholders of the Utilities Co. had no equity in its assets, its liabilities to its creditors being in excess of $65,000,000. That situation or condition did not, however, appear to exist in 1932, when the noteholders’ committee reported it found much “in the present to suggest an optimistic view of the future.”

After carefully considering the entire record, we find no identifiable event which establishes the worthlessness of petitioners’ stock in 1932. In our opinion, the record indicates that at that date and under the then existing circumstances it was practically impossible for the petitioners or any one to have known that petitioners’ stock was worthless, the facts and circumstances then known indicating-such stock was not worthless. There is no identifiable event in the record showing the stock became worthless in 1932. United States v. White Dental Manufacturing Co., 274 U. S. 398. We, therefore, are of the opinion and hold that the respondent did not err in his determination of the deficiency in- tax and his action in respect thereto is approved.

Decision'will he entered for the respondent.


author: HaeROn: DisNey,

text:
    Sigurd A. Emerson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77307, 77309.
    Promulgated April 20, 1937.

      Clark MoK. Whittemore, Esq., for the petitioner.

      S. L. Young, Esq., for the respondent.
   OPINION.

HaeROn:

On the pleadings petitioner raises an issue with respect to the bar of the statute of limitations against the assessment of a deficiency for both of the taxable years involved. This contention appears to have been abandoned but in any case it must fail in the absence of evidence showing the date on which the petitioner’s returns were filed. Fremont Canning Co., 17 B. T. A. 484; Mary G. Iba, 20 B. T. A. 222.

The remaining issue in these proceedings is whether petitioner’s compensation as township attorney for the township of Hillside, New Jersey, in 1930 and 1932 is exempt from Federal income tax under the constitutional immunity of officers of state instrumentalities from Federal taxation. Petitioner contends that he was an officer of a political subdivision of the State of New Jersey.

We agree that the petitioner was an officer of the township of Hillside. Under the Township Act of New Jersey, a township attorney is specifically designated as one of the “appointive township officers” to be appointed by the township committee. Pursuant to the statute the township committee duly appointed the petitioner to that office by official resolution. He took the oath of office which the statute requires of all officers whether elective or appointive. His term was fixed by statute at one year and he handled all the legal business of the township during his two terms of office. It is conceded by the respondent that in all of his work for the township the petitioner was engaged in the performance of essential governmental functions. The case of Halsey v. Helvering, 75 Fed. (2d) 234, held that a township engineer in New Jersey, another of the “appointive township officers” provided for in the same section of the New Jersey Township Act involved here, was a township officer within the constitutional immunity of officers of state subdivisions from Federal taxes. On the authority of that case we hold the petitioner to be an officer of the township of Hillside.

The question then arises whether the petitioner’s entire compensation received from the township of Hillside was received by him as an officer and is therefore exempt from tax, or whether the fees he recéived over and above his1 retainer were for services outside of his official, duties and were therefore not received by him-as an officer. Where the local statutes require that the compensation of an officer be fixed in advance and shall not be subject to increase or diminution during his term of office, it has been held that any compensation in addition to that fixed in advance was necessarily paid under special engagements for the performance of services outside of the duties of office because of the well established principle that where the emoluments of an office are fixed no additional compensation can be paid for the performance of the required duties of office. George M. Stevens, 31 B. T. A. 1035. That principle, by its terms, applies where the compensation is “fixed” in amount in advance. The compensation of this petitioner was not fixed in amount, in advance, except the retainer covering his attendance at meetings, nor does it appear from the terms of the New Jersey Township Act, or from any local decisions which we have been able to find, that the statute requires the amount of the compensation of the township attorney to be fixed in advance. Comp. Stats. of New Jersey, vol. 4, p. 5585, § 32. Cf. Smathers v. Board of Chosen Freeholders, 113 N. J. L. 281; 174 Atl. 336, where the amount of compensation was fixed after the performance of services. The Township Act apparently provides that if the amount of compensation is fixed in advance it shall not be altered so as to affect any one then in office. Potter v. Union Township, 103 Atl. 78, affirming 106 Atl. 215.

In the case of Halsey v. Helvering, supra, the compensation of the township engineer was fixed as to a retainer of $200 per annum, plus 5 percent of the amount of all contracts for public improvements awarded by the township during his administration. It is apparent that the amounts Halsey received above the retainer were subsequently approved by the township committee each time contracts were approved and these amounts were at a rate of 5 percent. His compensation was not fixed in advance except as to the rate and method of payment. The. Court of Appeals for the District of Columbia found that all of Halsey’s services were performed in execution of his duties as township engineer. In this proceeding, all the services performed by petitioner were those ordinarily performed by a township attorney and we conclude were in the execution of his official duties. Cf. State Consolidated Publishing Co. v. Hill, 3 Pac. (2d) 525 (Ariz., 1931). While no rate of compensation was fixed, as in the Halsey case, the method was clearly ■to pay him on a quantum meruit basis by approving payment of fees to him after services were completed. The township committee •approved all the payments made to him during his two terms of •office in the amounts involved here, thereby fixing his compensation retroactively. We believe this is permissive under the Township Act governing the township of Hillside, Comp. Stats, of New Jersey, vol. 4, p. 5585, § 32, which gives the township committee authority to fix the method of compensation as well as the compensation. See also, Smathers v. Board of Chosen Freeholders, supra, where the fixing of compensation retroactively is approved under a similar statute.

It is accordingly held, following the authority of Halsey v. Helvering, supra, that in view of the pertinent statute of New Jersey governing townships, the entire compensation paid by the township to its officer, the petitioner, for services in execution of his duties, is properly exempt from Federal taxation.

Eeviewed by the Board.

Decision will be entered for the petitioner.

DisNey,

dissenting: I dissent except as to the amount of the retainer received by petitioner. The appointment of petitioner was on “a $500 retainer” for the year 1930, and on “a retainer of $500 per annum and fees” for the year 1932. It seems obvious that the “fees” above the retainer were necessarily the subject, in each instance, of agreement. Agreement is contract. It seems to me, therefore, that it is inescapable that as to the compensation received above the retainer the petitioner was an independent contractor. Certainly, as to said fees, his original employment did not comprise a completed contract, the amount of compensation being left undecided. If petitioner and the township had been unable to agree upon the fees, the township, so far as I can see, could have employed someone else to do the work in any particular instance; or, if petitioner had performed the services in any particular instance without previous agreement as to fees, he would have had to rely upon quantum meruit. His original appointment, therefore, offered no means of determining his compensation. Further contract being necessary as to all amounts except the retainer, in my opinion petitioner was an independent contractor.

Furthermore, his duties were not prescribed either by statute or township ordinance, and,, except for the attendance of meetings of the township committee for which he was paid $500, he had no tenure of office, but each case in which he rendered service was a separate matter, subject to agreement as to payment of fees. This situation seems to me squarely to negative the essential elements of the definition of the term “officer.” The very fact that the $500 was received for definite services — attendance of township committee meetings — seems to exclude the remainder of petitioner’s earnings from consideration in the same category with those earned under the continuous tenure of an officer, on a fixed basis, and necessarily to leave them subject to contract in each instance. In Saxe v. Anderson, 19 Fed. Supp. 21, the earnings of a special guardian and referee appointed by the court were refused exemption with the statement: “Here the taxpayer’s tenure and jurisdiction were limited to the case referred to him.” Except as to the attendance at township committee meetings, duly compensated for by a fixed sum and contracted for a fixed period, I must apply the above language to the present petitioner.

Leech agrees with this dissent.


author: Disney : Hill,

text:
    Erie Lighting Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59568.
    Promulgated April 20, 1937.

      Charles M. Trammell, Esq., Francis J. Sweeney, Esq., and Bradford S. Magill, Esq., for the petitioner.

      Chester A. Gwinn, Esq., and Charles E. Lowery, Esq., for the respondent.
   OPINION.

Disney :

The deficiencies involved are income taxes in the amounts of $74,814.83 and $60,464.59 for the calendar year 1927 and for the taxable period beginning January 1 and ending October 31, 1928, respectively.

The facts herein are set forth in a stipulation of facts filed with the Board, which we adopt as our findings of fact without express repetition here, except so far as necessary for discussion of the case.

Petitioner, a Pennsylvania corporation, had outstanding during the taxable years both preferred and common stock without par value. The holders of preferred stock were entitled at all times to full voting power, except that they had no power to vote the preferred stock at any election for directors, unless the dividends on the preferred shares for two quarterly periods, whether consecutive or not, should remain unpaid, in case of which default preferred stock could be voted even in election of directors. Such default in preferred dividends had not existed for two quarterly periods during the taxable years in question here. The preferred stock carried a right to $2 per-share per annum, payable quarterly. After the payment thereof, common stock carried a right to $2 per share per annum, and all additional distribution of surplus or net profits as dividends was distributable at the same rate per share per annum to holders of stock of both classes. Upon any liquidation or distribution of the capital of the corporation the preferred stock carried a right to $35 per share in addition to all unpaid dividends accumulated and accrued thereon, whether or not there was any surplus or net profits, after which any property remaining was to be distributed ratably among the holders of common shares.

At all times material all of the petitioner’s common stock -was owned by the Pennsylvania Electric Co. of Pennsylvania and a substantial amount of the preferred stock was owned by outside interests.

The only question for decision is the right of the petitioner to be affiliated with the Pennsylvania Electric Co. of Pennsylvania. The parties are in agreement that the issue turns upon whether the preferred stock of petitioner is “nonvoting stock which is limited and preferred as to dividends” as provided by section 240 (d) of the Revenue Act of 1926 and section 142 (c) of tlie Revenue Act of 1928, which is identical with section 240 (d) of the 1926 Act, so far as herein material.

The general rule on this question is well stated in Fletcher on Corporations, vol. 5, par. 2027, p. 107, as follows:

In tlie absence of express charter or statutory provision to the contrary, the general rule is that every member of a corporation not having a capital stock, and every legal owner of shares in a stock corporation, has a right to be present and vote at all corporate meetings * * *.

Among the authorities cited for the above statement is Commonwealth ex rel Eberhardt v. Dalzell, 152 Pa. St. 217; 25 Atl. 535, from Pennsylvania, the situs of the corporation here at hand.

The preferred stock was entitled “at all times to full voting power” except as to participation in election of directors. Does such exception constitute a designation that the preferred stock is not voting stock within the purview of the revenue acts in question? Petitioner is, therefore, faced with the necessity both of meeting the above statement as to the general rule being that stock is votable and of demonstrating that what is in terms only a partial limitation upon voting is effective to brand the stock as nonvoting stock, for the stock certificates specifically provide that, with the exception as to voting for directors, the stock carries full voting rights, and in the contingency of two quarterly dividends being passed, then the right to vote even in election of directors. The terms of the stock certificate, as set forth in the above statements of fact, do not designate such preferred stock as nonvoting. Petitioner seeks, however, so to interpret the language because of the view that voting stock includes only that which controls management of the corporation. A number of cases are cited seeking to bear out that contention. Most of them, however, do not involve the precise question here, nor assist in its determination.

There is nothing in the statutes controlling here that discloses Congressional intent to limit stock ownership essential for affiliation to stock having unlimited voting privileges. Affiliation is a privilege, and any doubt about the meaning of the provision must be decided against the taxpayer. Commissioner v. Manus Muller & Co., 79 Fed. (2d) 19; certiorari denied, 296 U. S. 657.

Cases interpreting earlier revenue acts than the one here in question are not of great value in the solution of the present problem, for it is obvious that there was an evolution of the statute on this question, resulting, in section 240 (d) of the Revenue Act of 1926 herein involved, in the use of the expression “stock” and its definition by exclusion of nonvoting stock limited and-preferred as to dividends,whereas the 1924 statute had used the expression “voting stock”, so that it is seen that in the 1926 Act there is a reversal of the previous situation. Under the 1926 Act, one seeking affiliation must show ownership of 95 percent of “stock”, that is of all stock — with the designated exception set forth in the statute as to stock nonvoting and limited and preferred as to dividends. Acts earlier than 1924 did not specify a percentage, and were based upon the idea of ownership or control of substantially all of the stock. Thus, a clear distinction is seen in the treatment which must be accorded the 1926 Act and previous a^sts, and in the burden upon the one seeking to establish affiliation. Of course those citations based upon the un-controverted premise either of voting stock or of nonvoting stock offer no assistance here where the question is whether the particular stock is voting or nonvoting stock; nor can it ;be said that those cases, interpreting the statutes at a time when the language used and primary question involved control, are authority herein. Thus, Commissioner v. Shillito Realty Co., 89 Fed. (2d) 830, involving the Act of 1918, was concerned with the question of control. All stock, both preferred and common, had full voting power, so that it is apparent that the question was not one of right to vote, but of ability to control. The court considered the fact that the preferred stock was hedged with limitations, making it ineffective for any control or domination, had an annual fixed dividend of 6 percent, was redeemable after 1924 at $105 per share, was payable in full on liquidation, and bore no burden of taxation, and concluded that its redeemability gave it the color of indebtedness. There is no feature of redeemability in the preferred stock involved in the instant case. We think the Shillito Realty Co. case affords little assistance herein. Indeed, it is questionable whether Shillito Realty Co. can now be regarded as authority since Handy & Harman v. Burnet, 284 U. S. 136, considering the emphasis which the latter case placed upon the thought that control alone is not sufficient for affiliation purposes.

Wurlitzer Co. v. Commissioner, 81 Fed. (2d) 971, only decides that the Constitution and the Supreme Court of Illinois forbid the denial of voting rights to preferred stockholders and that therefore in that state preferred stock is voting stock. We discern in this no assistance in the solutions of the present problem, which is, of course, simply one of interpreting the meaning of the language in the stock certificate of the petitioner corporation. We think the ratio decidendi in that case does not turn upon or stress the right to vote for directors as contended by petitioner, but, as stated in the opinion, “The actual controversy here is whether these preferred shares fall in the category of voting or nonvoting stock.” The .statute involved was section 141 (d) of the Revenue Act of 1928, identical so far as material here, with section 240 (d) of the Revenue Act of 1926. As we view it, therefore, the decision merely holds that under the Act of 1928 voting stock must be included in the 95 ■percent required for affiliation — and the case consequently is no authority whatever here.

The present case, therefore, seems res integra on the decisive question involved. Starting with the general idea above expressed that corporate stock is ordinarily voting stock, we examine the language involved in the instant case. The expression of the stock -certificate is that the holders of preference shares shall be entitled at all times to full voting power, except as limited with regard to election of directors. The matter of election of directors is specifically an exception. To say that such exception nullifies altogether the language of the first clause of the sentence is to do plain violence to logic and ordinary rules of construction and interpretation. Sufficient reason for so doing can not be imported because of general theories as to voting stock being limited to stock having management or control. The statute does not so provide and we can not, if we would, legislate here. The language seems as plain as English could be made. The salient thought is emphasized: that holders of preference shares are entitled “to full voting power”; they are entitled thereto “at all times”, with a stated exception; then the thought is, in a way, put in the converse, when it is stated that holders of preference shares “shall have no power to vote the same at any election for directors” — unless dividends have been passed. This, in line with the other language just above considered, connotes that otherwise they do have power to vote such stock. Even as to election of directors there is a further exception and bestowal of power to vote in case of default in dividends. However, during the period here in question this contingency had not occurred, and therefore can not be considered. Vermont Hydro-Electric Corporation, 29 B. T. A. 1006; Pantlind Hotel Co., 23 B. T. A. 1207. The terms of the stock certificate having bestowed voting power on preferred stock with a definite exception, the exception can not be allowed to override a general provision so pointed as the one here in question.

We think further that it can not be said that the preferred stock is deprived of all powers of control or management, as argued by petitioner. It could by its vote affect and effect action in various ways, such as in regard to increase of stock, number of directors, time of election, place of principal office, time of stockholders’ meetings, increase of capital indebtedness, reduction of capital stock, consent to manager, approval of investment of surplus, and any other subject, except only the election of directors. We find it impossible to conclude that stock, voting upon all of theses subjects, has no voice in the management or control of the corporation, and we think that the term “management” should be construed to include the general direction of policies and disposition of the corporation’s affairs as a whole, and not merely the executive functions entrusted to directors. Stock having a voice by vote in management within such broader view can not, we think, be considered as nonvoting stock.

We conclude further that the preferred stock here in question was not both “limited and preferred as to dividends.” Preference alone is not effective. The statute provides that to meet the definition of stock which is not included in that term, it must be both “limited and preferred” as to “dividends.” It was preferred as to dividends, but carried no limitations as to dividends which were not common to both the common and preferred stock. If on a parity with the common stock as to limitation of dividends, obviously this stock can not be called limited in that regard. Examination of the facts discloses that after preferred stock had received a dividend of $2 per share per annum, the common stock should then receive $2 per share per annum, after which common and preferred stock are equal as to dividends. So far, certainly, as the $2 per share per annum is concerned, this is a preference, and not a limitation on dividends. The common stock, then receiving an equal amount, to wit,, the next $2 per share per annum, obviously assumes a place of equality with the preferred stock, and the apparent limitations upon the two classes of stock are equalized — which means that there is no limitation upon the preferred stock. Thereafter, each class of stock participates equally in all “additional distribution of surplus or net profits as- dividends.” The record does not show what actual dividends were received during the periods here involved. It is true that the preferred stock is entitled to receive only $35 per share “upon any liquidation or distribution of the capital of the said corporation”, but the record does not indicate that there was any liquidation or distribution of capital within the taxable periods here involved, so that this question too can not here be considered, under Vermont Hydro-Electric Corporation, supra, and Pantlind Hotel Co., supra. We therefore discern no limitation upon dividends in the preferred stock herein.

We hold, therefore, that the stock in question here was not “nonvoting stock which is limited and preferred as to dividends”, that there was therefore no right to" affiliation, and that, in accordance-with the stipulations entered into between the parties, the amounts of the deliciences herein are as follows: for the taxable year 1927, $56,266.30; for the period from January 1 to October 31, 1928, $37,678.01.

Reviewed by the Board.

Decision, therefore, will be entered for the respondent in the above amounts.

Hill,

concurring in the result: To constitute affiliation of two or more corporations, the Revenue Acts of 1926 and 1928, in sections 240 (d) and 142 (c), respectively, require the ownership by one corporation of at least 95 per centum of the “stock” of the other or others, or the ownership by the same interests of the same per centum of the “stock” of all the corporations; and it is further provided that the term “stock” as used in the statutes “does not include nonvoting stock which is limited and preferred as to dividends.”

The majority opinion holds that the “preference stock” involved in this proceeding was not “nonvoting” but voting stock, which was preferred, but not limited, as to dividends. I agree that this stock was preferred, but not limited, as to dividends, but in my opinion the conclusion reached that it was not “nonvoting” but voting stock, within the purview of the statutes, is erroneous.

The certificates of preference stock provided that the holders should have no power to vote the same at any election for directors, unless the dividends on such shares for two quarterly periods remained unpaid; and that otherwise the holders of preference shares should be entitled at all times to full voting power. During the taxable periods here involved, the dividends payable on the preference shares were not in default, and hence the provision conferring power to vote at an election for directors in event of default is béside the point. It is the situation actually existing which is determinative. Vermont Hydro-Electric Corporation, 29 B. T. A. 1006, 1011.

Under the terms of issuance, it appears that the holders of preference stock, while they had no part in the management of the corporation and its affairs through the selection of directors, could vote to increase or decrease the capital stock, the number of directors, time of election, place of principal office, time of stockholders’ meeting, approval of investment of surplus, and other like things. Because of these matters the majority concludes that the preference stock was “voting stock” within the meaning of the revenue acts.

Solution of the question presented requires interpretation of the statutory provisions. Obviously, the same stock could not be both voting stock and nonvoting stock at the same time. The one is the opposite of the other. Yet, the stock in controversy was in some respects voting stock and in others nonvoting stock. How then is it to be classified? Because it could be voted in the determination of such minor matters as above referred to, is it to. be treated as “voting stock” and placed in the same category as the common stock, which, because of its unrestricted voting power, was undeniably in control of the corporation? Where might such a construction of the statutes lead us ? .

Let us suppose that this preference stock carried only the right to vote on the question of changing the place of the corporation’s-principal office, in the event such a proposal should ever be made. Having such voting power, could it be properly classified as “voting stock” for the purpose of determining affiliation ? If not, where is the line to be drawn? Such reasoning, it seems to me, would inevitably lead to incongruous and absurd results, never contemplated by the revenue acts.

The Revenue Acts of 1918 and 1921 provided for the affiliation of corporations upon the basis of the ownership or control of substantially all the stock of one or more corporations by another, or the ownership or control of substantially all the stock of two or more corporations by the same interests. The Commissioner interpreted these provisions as referring to “voting stock.” See article 638 of Regulations 45 and 62. In the Revenue Act of 1924, section 240 (c), the term “voting stock” was substituted for the word “stock” used in the previous acts, thus embodying in the later act the Commissioner’s prior interpretation. The Revenue Acts of 1926 and 1928, in providing the requirements for affiliation, used the term “stock”, and then defined that term as not including “nonvoting stock which is limited and preferred as to dividends.” It seems clear that the requirement, running through all the revenue acts from 1918 to 1928, respecting the ownership of corporate “stock”, refers to “voting stock,”

It seems equally *clear to me, from a consideration of the legislative history of the various enactments and the evident purpose of the affiliation provisions, that “voting stock” means only that stock which, by virtue of the right to vote at the election of directors, exercises control oyer the management of the corporation and its business affairs.

The purposes to be served by the filing of consolidated returns of affiliated corporations are aptly stated in article 631 of respondent’s Regulations 45 and 62, and may be summarized as based upon the principle of levying the tax according to the true net income of a single business enterprise, even though the business is operated through more than one corporation. In some cases the filing of separate returns by affiliated corporations might result in tax eva-. sion, through an arbitrary shifting of income; and, in other cases, without a consolidated return excessive taxation might be imposed as a result of purely artificial conditions existing between corporations within a controlled group.

It seems too obvious for argument that the term “controlled group”, when referring to corporations, implies an ownership of that stock of each member which carries the right to vote in the selection of directors, who, together with the officers elected by the directors, control the operation and management of the corporations and their respective businesses.

The ownership of the preference stock involved in this proceeding had nothing whatever to do with constituting the corporations “a controlled group.” Control, as that term is ordinarily understood, during the taxable years vested exclusively in the holder of the common stock. The fact that the preference stock carried the right to vote on’ minor matters in no material respect affecting the control and management of the corporation, does not characterize it as “voting stock” within the meaning of the taxing acts.

“Voting stock” may very properly be termed “management stock.” Thompson on Corporations, 3d ed., vol. 5, sec. 3449.

“* * * Congress had in mind voting stock only, or such stock as carried control by one corporation over its affiliated corporation. Unless this was the purpose and meaning of Congress, the statute is .* * * wholly incapable of enforcement.” In re Temtor Corn & Fruit Produce Co., 299 Fed. 326.

Preferred stock, which normally carried voting power coequally with the common stock but which under agreement on its issuance was so circumscribed and hedged in by restrictions and limitations as to nullify that power as a practical matter, is not to be treated as “voting stock.” Detour Dock Co., 22 B. T. A. 925.

The term “stock” as used in the affiliation provisions of the statute embraces preferred stock with voting rights which enable the holders to participate in the direction of the undertaking. Atlantic City Electric Co. v. Commissioner, 288 U. S. 152.

“We think the term ‘stock’, as used in the statute, is clearly intended to mean stock with a potential voting power which, if asserted, will be effective in the management or control of the corporation.” Commissioner v. Shillito Realty Co., 39 Fed. (2d) 830.

Preferred stock having no voting power can not be a means of controlling the corporation, and is not to be considered in determining affiliation, Commissioner v. City Button Works, 49 Fed. (2d) 705, but preferred stock which carries the legal right to vote for the election of directors is not “nonvoting” but voting stock, and is not to be-excluded in determining affiliation, Wurlitzer Co. v. Commissioner, 81 Fed. (2d) 971.

In Pantlind Hotel Co., 23 B. T. A. 1201, the Board held that preferred stock was voting stock and not to be excluded in determining affiliation, where the holders of the preferred stock acquired the right to vote during the taxable year equally with the holders of the common stock, share and share alike, in the election of the directors and control of the corporation, because of the fact that dividends due on the preferred stock remained unpaid. The case of Vermont Hydro-Electric Corporation, supra, is not in point on this question, since the holders of the preferred stock there involved were not entitled to vote on any matter during the taxable year.

For the reasons above indicated, I can reach no other conclusion than that the term “stock” or “voting stock” as used in the taxing statutes, including the Revenue Acts of 1926 and 1928, means stock which, by reason of its voting power, is effective in the management of the corporation and controls the conduct of its business affairs. Under this interpretation of the statutes, the preference stock involved in the instant case is “nonvoting” stock.

It does not necessarily follow, however, that because the preference stock in question was “nonvoting” that it is to be excluded in determining affiliation. The statute requires exclusion only of nonvoting stock which is (1) limited as to dividends, and (2) preferred as to dividends. The conditions are expressed conjunctively and not disjunctively. All the elements prescribed, therefore, must be present in order to exclude. United States v. Field, 255 U. S. 257.

That the stock in controversy was “preferred” as to dividends is conceded by all parties, but I think it is clear that it was not “limiter!” as to dividends, as concluded in the majority opinion. The holders of the preference shares were entitled to receive out of the surplus or net profits of the corporation quarterly cumulative dividends at the rate of $2 per share per annum before any dividends could be declared on any other stock; when the preferred dividends had been paid, the holders of common shares were then entitled to receive dividends of $2 per share per annum out of any remaining surplus or net profits, and all additional surplus or net profits became distributable as dividends at the same' rate per share to the holders of the stock of both classes. Thus, the holders of the preference stock might have received a greater return by way of dividends than the holders of the common stock, but conceivably could not have received less.

The preference stock, therefore, was not limited as to dividends, and, although nonvoting, must be included with the voting common stock in determining the ownership of 95 per centum of the “stock” required for purposes of affiliation.

Black, Leech, and IIaeiíon concur in the above.

       Sec. 240. (d) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, or (2) if at least 95 per centum of the stock of two or more corporations is owned by the same interests. As used in this subdivision the term “stock” does not include nonvoting stock which is limited and preferred as to dividends. This subdivision shall be applicable to the determination of affiliation for the taxable year 1926 and each taxable year thereafter.


author:
HarRon :
      Murdock, Leech,

text:
    Guaranty Trust Company of New York and J. Whitney Peterson, Executors of Will of Jonathan Peterson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72503.
    Promulgated April 23, 1937.

      E. H. Shelton, Esq., for the petitioners.

      Frank D. Strader, Esq., for the respondent.
   OPINION.

HarRon :

The sole question in this proceeding is whether the notes of Jonathan Peterson, deceased, given to his wife as trustee under several trusts were given bona fide and for full consideration in money’s worth so as to constitute obligations of his estate which are deductible from the gross estate within the provisions of section 303 (a) (1) of the Revenue Act of 1926, which is quoted in the margin. The facts have been set forth fully and under the circumstances which they describe the question before us must be determined by our conclusions with respect to whether the decedent,' hereafter referred to as Peterson, made completed gifts inter vivos to his wife, individually or as trustee, of the four sums of money which constituted the corpus of the several trusts and which were transferred back to Peterson in return for his notes, the payment of which petitioners contend is deductible from decedent’s estate. If there were no gifts in fact and in law to Mrs. Peterson, individually, or as trustee, of the money put into the trusts and for which the notes were given, then Peterson only “borrowed” his own money and the notes were given without consideration in money’s worth.

Counsel for petitioner contends that Peterson made complete legal gifts of money to his wife and that title thereto became vested in her so that Peterson’s notes were given for full consideration and represented valid obligations of his estate. Respondent attacks the validity of the gifts and contends that all the transactions constituted a plan preconceived by Peterson whereby he never- lost control of the money constituting the alleged gifts. Respondent interprets the various transactions, identical in form, as a tax avoidance scheme whereby Peterson gave his notes to trusts without receiving consideration in money or money’s worth from the trusts. Respondent’s contention implies that Peterson may have anticipated avoidance of income tax during his life on allowances paid to his wife, children, sisters and cousin and also eventual partial avoidance of estate taxes.

There is no admission in the evidence that Peterson resorted to these transactions to avoid taxation and we are reluctant to interpret the motives of a decedent. Even if an ulterior motive of tax avoidance may be implied from the circumstances, this alone can not determine disallowance of the deductions claimed if the transactions are at law within the exemption from estate tax which is claimed. The decision must turn upon whether the various completed transactions bring the present claim within the scope of the pertinent statutory provision. Gregory v. Helvering, 69 Fed. (2d) 809, 810; affd., 293 U. S. 465.

The answer to the question whether Peterson made gifts of certain large amounts of money must come from the facts before us. The first transaction in July 1924 established a pattern for the three succeeding transactions and it is therefore discussed fully with consideration of the interpretation of blew York decisions on the law of gifts.

Mrs. Peterson testified that she believed her husband had made a gift to her and yet her belief alone can not be determining. Snavely v. Henderson, 204 Fed. 978. We must examine the acts of the alleged donor to discover whether they were such that we may conclude there was a bona fide gift. If he did not have a clear and unmistakable intention to divest himself of the title, dominion, and control of the funds he failed to make such delivery of the subject matter of the gift as is required by law for a gift in praesenti. As was stated in Matter of Bolin, 136 N. Y. 177; 32 N. E. 626:

The law never presumes a gift. To constitute a valid gift there must have been the intent to give and a delivery of the thing. The evidence must show that the donor intended to divest herself of the possession of her property and it should he inconsistent with any other intention or purpose. [Italics supplied.]

The elements necessary to constitute a valid gift are well understood and have been set forth frequently. The law of the State of New York is applicable. In Beaver v. Beaver, 117 N. Y. 421, 428; 22 N. E. 940, it was stated:

There must be on the part of the donor an intent to give, and a delivery of the thing given, to or for the donee, in pursuance of such intent, and on the part of the donee, acceptance. * * * But delivery by the donor, either actual or constructive, operating to divest the donor of possession of and dominion over the thing, is a constant and essential factor in every transaction which takes effect as a completed gift. Anything short of this strips it of the quality of completeness which distinguishes an intention to give, which alone amounts to nothing, from the consummated act, which changes the title. The intention to give is often established by the most satisfactory evidence, although the gift fails.

The necessity for a delivery of the thing given with intention to vest in the donee control over it is pointed out in Jackson v. Twenty Third Street Railway Co., 88 N. Y. 520, where the question was whether a gift of certain stock had been effected during the decedent’s lifetime, as follows:

Delivery is essential to constitute a valid gift. The delivery must be such as to vest the donee with the control and dominion over the property, and to absolutely divest the donor of his dominion and control, and the delivery must he made with the intent to vest the title of the property in the donee. The intent is a necessary element of the transaction. Delivery, without intent to vest the title in the donee, could pass no title to him. Here it may be admitted that the payment of the money by Sharp [decedent], the entry of the stock on the books of the company in the name of Youmans, and the delivery to him of the receipt of July 11, 1872, would have been sufficient to constitute a delivery of the stock to Youmans, and sufficient to make a valid gift thereof, if such had been the intention of Sharp; but it is clear that such was not the intention. He did not, in any event, intend to vest the title in Youmans for himself * * *. [Italics supplied.]

The same principle is also set forth in In re Van Alstyne, 207 N. Y. 298, 100 N. E. 802, 805, 806:

There must be a delivery which results in a present change of dominion and ownership. Intention or mere words cannot supply the place of an actual surrender of control and authority over the thing intended to be given. * * * The delivery necessary to consummate a gift must be as perfect as the nature of the property and the circumstances and surroundings of the parties will reasonably permit.

See also Gannon v. Maguire, 160 N. Y. 476; Edson v. Lucas, 40 Fed. (2d) 398, 404.

Upon review of tlie facts it is our opinion that Peterson did not make absolute and unconditional gifts to his wife, individually or as trustee. This is based upon the conclusion that the facts show lack of intention on his part to divest himself at the time of complete control and dominion- over the funds and that the deposit of funds in the trusts and the return of them to Peterson in the form of loans was, pursuant to an agreement between Peterson and his wife, that the funds were to be used in only one way, i. e., to set up trusts and be returned to him. The transaction of July 17, 1924, was a pattern for the subsequent transactions, which on three later occasions — two in the same year — were carried out under the same terms and pursuant to like agreement. In each instance, the separate steps were taken at the same time in the course of a few days and as part of one transaction. Comment on the transaction of July 17, 1924, is pertinent to the subsequent ones.

On July 17, 1924, Peterson borrowed $225,000 on his unsecured demand note. The same evening he presented checks to his wife totaling $240,000. Before the conclusion of the evening Mrs. Peterson and her husband discussed setting up trusts for his sisters, whom he looked after, and herself, to whom he gave liberal allowances. It was agreed that she would put the money in trusts temporarily and return it to him at once in the form of loans in return for his notes. It was agreed that he would pay 6 percent on the notes. In the testimony of Mrs. Peterson appears the following:

Question: It was liis suggestion that you put the money in trust?
Answer: (Mrs. Peterson) I think it was. I am not sure. It is a long while ago.

Although this complex procedure was carried out four times, Mrs. Peterson’s testimony shows a vagueness of the character illustrated above with respect to the significance of the execution of the trust instruments, which were evidently prepared for her signature at the direction of someone other than herself, so as to refute any contention that Mrs. Peterson acted otherwise than under the direction of her husband. The procedure followed by Peterson in making the purported gifts is a long way from being normal. It is unique, for by this plan he purportedly gave $1,048,000 cash to his wife— of which he had only $370,000 in his own cash balances without borrowing. In the first three transactions he allegedly gave his wife $640,000 of which he had only $15,000 in his own cash balance, and later $400,000, none of which he had on hand. It was clearly not Peterson’s intention to give up present and complete control over the money used in these transactions. He had borrowed the sums practically in entirety in three transactions and a substantial amount in the last one and it is evident that he intended to retrieve the sums advanced immediately to pay the loans and for his own uses. He accomplished the happy effect of giving away over a million dollars without making himself poorer by that amount. Such procedure could only be carried out with some other object in mind than making completed gifts. That object is apparent. It was to circulate a stream of cash upon which to float his notes so as “to give the character of interest payments to money used to pay” allowances he was in the habit of making to relatives and members of his family. (See Johnson v. Commissioner, 86 Fed. (2d) 710, which discusses a transaction similar to the ones involved here.)

The first trusts were executed by Mrs. Peterson before depositing her husband’s checks ■ pursuant to the agreement between herself and her husband as to the use of the money. It is noted that a check can not constitute a gift until it is paid. (Curry v. Powers, 70 N. Y. 212; Matter of Smither, 30 Hun. 632; In re Gibbon's Will, 254 N. Y. S. 566). Mrs. Peterson entered upon execution of the steps agreed to before there was a momentary opportunity of independent action and throughout we are unable to find that she had any real scope of independent control over the purported gifts. It is our opinion that in all the transactions Mrs. Peterson acted under the direction and control of her husband under agreement to return the funds to him in the form of loans and that he did not for an instant lose control of his “gift.” Under such circumstances, we are constrained to hold that Peterson did not make valid gifts to his wife individually or as trustee. See In re Halligan's Estate, 143 N. Y. S. 676; In re Von Benuth's Estate, 143 N. Y. S. 672; Schwab v. Schwab, 163 N. Y. S. 246; Schneider v. Schneider, 107 N. Y. S. 792—all relating to attempted gifts of bank deposits—In re Miller's Estate, 236 N. Y. S. 290; 140 N. E. 701, 702.

Having concluded that Peterson did not convey title (by way of' gifts) to the money used in these transactions, it follows that he supplied his own money to the trusts and the practical and legal effect of what was done was to set up trusts composed solely of his notes given without consideration. We believe Peterson could have set up defense against payment of these notes of lack of consideration. Believing that there would be no legal obligation to pay the notes, the fact that he assigned stock as collateral becomes immaterial, for any equitable claim to the stock could be defeated by the failure of the claim they allegedly secured. See Bogert on Trusts and Trustees, vol. I, p. 358, ¶ 114; American Law Institute, Restatement of Trusts, § 26; Id., Restatement of Contracts, vol. 1, p. 81, ¶ 75 (b); Dougherty v. Salt, 227 N. Y. 200; 125 N. E. 94; Holmes v. Roper, 141 N. Y. 64, 66. The notes were only promises to make gifts in the future.

It is noted in the findings of fact that a gift tax was paid on the first transfer of funds to Mrs. Peterson. -This tax was not in effect when the subsequent transfers of funds were made. The payment of the gift tax may or may not be indicative.of the intent to make a gift; It is of little weight if bona fides are lacking and it is not determinative of the question whether delivery of the gift is such as to divest the donor of dominion and control over the thing given. Consequently, this fact, in the presence of the general circumstances involved, is not material.

The facts in this proceeding are similar to those in the case of Johnson v. Commissioner, supra. In the transactions described in the report of that case Johnson borrowed $400,000; presented a check to his wife for that amount, whereupon she executed a trust and deposited the check therein pursuant to an agreement with her husband. The trust instrument required the trustee to loan Johnson (naming him) all or part of the trust fund for his 6 percent demand notes. The trustee “loaned” him all the trust funds and he paid the bank loan he had obtained. The trust instrument re-, quired the trustee to apply the funds to pay premiums on Johnson’s insurance policies. The Circuit Court held that there was no gift and that “the practical and legal effect of what was done was to set up a trust composed solely of Johnson’s note given, without consideration” in “an ingenious attempt to reduce taxes by means of a plan which was intended to give the character of interest payments to money used to pay insurance premiums on policies upon the life of the petitioner.”

It is noted that in the Johnson case the trustee was required by the trust instrument to loan all the funds in the trust to Johnson. This fact was held indicative of lack of donative intent in the Johnson case. In this proceeding the facts show an agreement prior to the execution of the trusts to “loan” the money involved to Peterson at the agreed rate of 6 percent interest. The terms of the Peterson trusts that the trustee could loan the trust funds to anyone may be considered in the light of the settlor’s intent and all surrounding circumstances and the prior agreement between Mrs. Peterson and her husband is as strong evidence of lack of donative intent in these transactions as were the express terms of the Johnson trusts. (See A. L. I., Restatement of the Law of Trusts, sec. 164, pp. 403, 404.) It was as certain that she, as trustee, would loan the funds to Peterson as though the trust instrument had expressly limited the trustee to loan trust funds to Peterson only. In addition, the conclusion reached that no gift was completed results in the finding that the trustee in this proceeding had no money with title in herself to “loan” and the terms in the trust instrument which petitioner contends would distinguish this proceeding from the Johnson case have no operative significance. We believe this proceeding is not distinguishable from the Johnson case.

The courts and this Board have looked through the forms of transactions to their substance, particularly where an effort to reduce or avoid the payment of taxes is the evident real purpose of the transactions. Such intent was admitted in the Johnson case. We are convinced that such purpose was also present in the mind of decedent here, who held himself out to be a “donor” in transactions which were unreal in view of the means at his command to make a bona fide valid gift at the time without resorting to such complex procedure of creating forms without substance in fact or in law. The courts have been as diligent in requiring compliance with the technical requirements of the law of gifts and sales to bring transactions within the exemptions of the revenue acts as individuals have been in straining to apply the technical forms of law to bring about that result, and in the following decisions the separate transactions in a preconceived plan were not regarded as having effected gifts or sales of property: Commissioner v. Dyer, 74 Fed. (2d) 685; S. A. Macqueen Co. v. Commissioner, 67 Fed. (2d) 857; Shoenberg v. Commissioner, 77 Fed. (2d) 446. In Jackson v. Commissioner, 64 Fed. (2d) 359, and the following decisions it was held that attempted gifts and sales were not consummated: J. L. McInerney, 29 B. T. A. 1; affd., McInerney v. Commissioner, 82 Fed. (2d) 665, where it was held that there was no bona fide gift. It is noted that all arrangements had been completed in advance and that the transfer of property to a wife was an incident in a plan. Adolph Weil, 31 B. T. A. 899; affd., 82 Fed. (2d) 561; certiorari denied, 299 U. S. 552; Theodore C. Jackson et al., Administrators, 32 B. T. A. 470; Joseph Blumenthal, 30 B. T. A. 125; D. A. Belden, 30 B. T. A. 601; F. Coit Johnson, 33 B. T. A. 1003; affd., Johnson v. Commissioner, supra.

Petitioners rely on D. B. Malernee, 31 B. T. A. 662, but that case is distinguishable on the facts. It was held there that a valid gift had been made. The circumstances showed that the donor relinquished control over the subject matter of the gift and that he did not have any preliminary understanding with his wife as to what disposition she would make of the gift.

Under the facts it is held that Peterson’s notes to the several trusts were not given for full consideration in money or money’s worth and the claims based on these notes are not deductible from his gross estate under section 303 (a) (1) of the Revenue Act of 1926. Respondent did not err in disallowing the deduction claimed.

Reviewed by the Board.

Decision will be entered for the respondent.

Murdock,

dissenting: This is a case where differences of opinion may be expected. However, I think too many inferences or suspicions have been used to overcome the petitioners’ nncontradicted evidence.

Smith, Yah Foss an, and Leech agree with this dissent.

Leech,

dissenting: The necessary premise of the majority opinion is that Jonathan Peterson retained a right to the purported gifts after they were made. Supplementing the statement of Member Murdock, with which I agree, the only direct evidence in the record on that point is the statement of the donee. She denies the existence of that retained right — not vaguely but categorically. Her testimony is neither contradicted nor discredited. The fact that the money for the gifts was borrowed does not seem to me to do so. Not only that, but, contrary to the situation existing in the case of F. Coit Johnson, 33 B. T. A. 1003; affd., 86 Fed. (2d) 710, upon the authority of which the majority opinion is largely supported, and contrary to the view expressed in the prevailing opinion here, the purposes of the present trusts were not for the benefit of Jonathan Peterson, except in so far as they relieved him of his legal obligations. Obviously, such obligations did not include the support of his sisters nor his competent children then of age, the provisions for which third parties were not even limited, by the trust, to Peterson’s life. Likewise, differentiating the facts in this case from those in the Johnson case, the trusts here did not limit the trust in its use of the funds to a loan to Peterson.

At most, it seems to me this record discloses that Jonathan Peterson gave his wife these gifts, unconditionally, relying on the return of them to him as loans, not upon any agreement of his wife, but wholly upon her doing so in the exercise of her absolute discretion. Such reliance does not establish the essential retained right of Peterson to the gifts when made, which, alone, defeats them as completed gifts. As stated another way by the Second Circuit Court of Appeals in the Johnson case, supra:

* * * The distinction, though often hard to detect in fact, is perfectly clear in principle between creating rights which you trust will not be exercised and creating no legal right at all; a transaction of the first kind changes existing legal relations between the parties, the other does not. * * *

Smith, Arundell, and Tyson agree with the above dissent.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      (I) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except, in the case of a resident decedent, -where such property is not situated in the United States), to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth * * *