author: Van Fossan:

text:
    Alfred E. Stern, Petitioner, v. Commissioner of Internal Revenue, Respondent. Irvin Stern, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fanny C. Holzheimer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 105438, 105439, 105440.
    Promulgated February 24, 1942.

      Arthur B. Sehaffner, Esq., Harry B. Sutter, Esq., and Peter L. Wentz, Esq., for the petitioners.

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

Van Fossan:

The petitioners’ denial of the taxability of the preferred stock dividend in controversy rests on five contentions.

The first is that the stock dividend was not taxable under the law when distributed, They support this contention by the argument that from the daté of passage of the Revenue Act of 1921 until June 22, 1936, the day on which the Revenue Act of 1936 was enacted, all stock dividends were exempt from taxation by specific provision of the intervening revenue acts. With the 1936 Act, however, the law was changed. Constitutionality was made the test. The stock dividend in question here was not constitutionally exempt from taxation. It gave the holder of common stock an interest different from that represented by his common stock and, hence, was taxable. Koshland v. Helvering, 298 U. S. 441; Strassburger v. Commissioner, 124 Fed. (2d) 315, affirming memorandum opinion dated February 10, 1941; Frank J. and Hubert Kelly Trust, 38 B. T. A. 1014; Albert E. Smith, 39 B. T. A. 80; Edith B. Bass, 45 B. T. A. 1117.

We are not unmindful of the recent decision of the United States Circuit Court of Appeals for the Ninth Circuit in Sprouse v. Commissioner, 122 Fed. (2d) 973, reversing John M. Keister, 42 B. T. A. 484, but with all deference we adhere to our view as expressed in the Kelly Trust, Smith, Keister, and Bass cases and affirmed in the Strassburger case.

Petitioners’ second contention is a corollary to the first and based on the premise that the Revenue Act of 1936 does not apply retroactively to January 1, 1936. The petitioners contend that because of the restrictive character of the language used in the act it is effective only on June 22,1936, and thereafter. They quote section 1, which reads: “The provisions of this title shall apply only to taxable years beginning after December 31, 1935”, and section 1003, which reads: “Fixcept as otherwise provided, this Act shall take effect upon its enactment.” They thereupon contend that section 1 limits the applicability of the act by excluding a taxable year beginning before December 31, 1935, and ending after the enactment of the act. As to this question generally, we refer to Winterbottom Book Cloth Co., Ltd., 43 B. T. A. 572, where we said: “Albeit the act [1936] was not approved until June 22,1936, there is nothing unusual in the fact that the provisions of the act and its taxing scope dated back to the beginning of the year 1936.”

Moreover, section 115 (a) (2) and section 115 (f) (1) of the Revenue Act of 1936, peculiarly applicable to the cases at bar, clearly contemplate that all dividends declared and paid during the year 1936 shall be subject to the provisions of the 1936 Act and thus do “otherwise provide” that the applicable date is not June 22, 1936, but January 1, 1936.

The third contention of the petitioners is that although Congress has the power to enact retroactive provisions in income tax legislation, the circumstances of the present case render the imposition of the tax so arbitrary and oppressive as to be a denial of due process of law. They argue that, through their controlled directors, they would not have declared the dividend if they had suspected its taxability. They point with particular emphasis to the high rate of tax to be paid by one petitioner. This argument, which might be made in almost any instance involving the retroactive effect of a taxing statute, fails to impress us. The dividend was declared on May 20,1936. At that time the tax status of the petitioners was only a matter of conjecture.

The petitioners cite Welch v. Henry, 305 U. S. 134, to support their position, but we note in the Court’s opinion the following statement:

Property taxes and benefit assessments of real estate, retroactively applied, are not open to the objection successfully urged in the gift cases. * * * Similarly a tax on the receipt of income is not comparable to a gift tax. We can not assume that stockholders would refuse to receive corporate dividends even if they knew that their receipt would later be subjected to a new tax or to the increase of an old one.

It is well established that a taxpayer has no vested right in the existing rates of taxation, exemptions, credits, etc. Welch v. Henry, supra; United States v. Hudson, 299 U. S. 498; Milliken v. United States, 283 U. S. 15. In the cases at bar the petitioners are in no better position than the taxpayers who were parties in the cited cases.

The petitioners’ fourth point is that, in any event, the stock dividends under consideration did not constitute income under the Sixteenth Amendment to the Constitution. They advance the same argument as that made under the first point and suggest that in the Kelly Trust, Keister, and Strassburger cases the Board erroneously applied the statement of the court in the Koshland case that a stockholder receives income when a stock dividend gives him “an interest different from that which his former stock holdings represented.” As stated heretofore, we reaffirm the conclusion reached in those cases.

The petitioners’ final argument is that even if the stock dividend be held taxable, Progress did not have sufficient earnings and profits accumulated since February 28, 1913, from which to pay, in 1936, all of the stock dividends and the cash dividends paid on the preferred and common stock.

During 1936 Progress paid dividends óf $250,000 in its preferred stock and $169,166.67 in cask, or a total of $419,166.67. Its income for the year, available for dividends, was not less than $268,031.26. The amount of its earnings and profits accumulated from March 1, 1913, to January 1, 1936, was at least $292,851.80. Therefore, the aggregate amount of earnings and profits from March 1, 1913, to the end of 1936 available for dividends, was $560,883.06. This sum was ample to cover all distributions made during 1936.

Petitioners’ chief contention with respect to this phase of the cases is that all of the losses of the subsidiaries of Progress, aggregating $302,858.14, must be deducted in determining its earnings and profits during the period from March 1, 1913, to January 1, 1934. They claim that the subsidiaries were only “departments” of Progress and were maintained solely to take advantage of the “trade names” borne by those companies.

The obvious answer to this contention is that in making the above computation of earnings and profits accumulated between March 1, 1913, and December 31, 1935, the losses of subsidiaries have been deducted and the earnings and profits to December 31, 1936, are nevertheless sufficient to cover the dividends. It may be added, however, that if an issue were made over the propriety of such deductions, the evidence does not support petitioners’ position as to the status of the subsidiaries.

The books of Progress showed definite, determinable sums charged as losses from the operations of the various subsidiaries. They had their own sales and expense accounts, kept separately from the Progress items. Progress, as the parent company, supervised the several operations of its subsidiaries, which had their own individual outlets. In fact, the consolidated return of Progress and its subsidiaries for the year 1924 shows the assets and liabilities of each affiliated corporation. Items such as inventories, accounts receivable, advertising, sample books, etc., owned by the subsidiaries appear thereon. One asset common to all subsidiary companies is an item called “trade name”, but that is a possession of those companies individually and not of Progress.

In 1934, when the privilege of filing a consolinated return was withdrawn (except to railroad corporations), the subsidiaries proceeded to declare and pay dividends to Progress. In so far as the record shows, their several operations were carried on precisely as in the preceding years. Their corporate entity was preserved; their corporate identity recognized; and their corporate functions exercised. The petitioners cite various cases holding that when subsidiaries are nothing more than “voiceless departments or instrumentalities of the parent corporation” their separate entities may be disregarded. The facts in the cases at bar do not bring them within the scope of such decisions. The effect of this conclusion, if applied in the present cases, would be to increase by a large sum the amount of earnings and profits available for distribution in 1936.

Decisions will Toe entered under Bide 50.

       SEC. 115. DISTRIBUTIONS BV CORPORATIONS.
      (a) Definition of Dividend. — The term “dividend” when used in this title (except in section 203 (a) (3) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
      * « * * * * *
      (f) Stock Dividends.—
      (1) General Rule. — A distribution made by a corporation to its shareholders in its stock or in rights to acquiré its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.


source: Caselaw Access Project

author: Abundell :

license: Public Domain

text:
    Maurice Levy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105086.
    Promulgated February 25, 1942.

      Andrew B. Trudgian, Esq., and Sidney /. Roberts, Esq., for the petitioner.

      Allen T. Ahin, Esq., for the respondent.
   OPINION.

Abundell :

The only question before us is whether or not petitioner is entitled to a deduction for a partial bad debt with respect to the account receivable sold by petitioner in the taxable year or whether he is limited in his deduction by section 117 of the Revenue Act of 1936. Petitioner contends that he ascertained the account to be partially uncollectible and charged off that amount in the taxable year. Respondent argues that the sale of the account receivable gave rise to the loss and that the transaction was a sale or exchange of a capital asset within the purview of section 117.

Section 23 (k) of the Revenue Act of 1936 permits a deduction for a debt ascertained to be partially worthless and written off in the taxable year. Section 117 provides that a loss on the sale or exchange of capital assets will be allowed only to the extent of $2,000 plus gains from sales or exchanges of such assets.

Petitioner concedes that the account receivable here under consideration is property. It follows that it must also constitute a capital asset. Ralph Perkins, 41 B. T. A. 1225. Unquestionably, the account was sold. It would seem therefore that, unless petitioner has shown the deduction to be allowable under section 23 (k), the limitations of section 117 must be imposed.

We do not disagree with petitioner’s claim that he ascertained the account to be partially worthless. Petitioner was in full possession of all facts concerning the debtor’s condition and the fact that he sold the account for a price far less than its face amount is strong indication of ascertainment of partial worthlessness. But this fact does not change what occurred. The debt was sold and at the time the charge-off was made on the books of the petitioner he was not in fact the owner of the account receivable. McClain v. Commissioner, 110 Fed. (2d) 878; affd., 311 U. S. 527; Leslie E. Reed, 45 B. T. A. 1130.

We may pass the query as to what would have happened had the partial write-off taken place in a prior year when petitioner was still the owner of the debt. Nor are the cases in point which deal with a settlement made directly between a creditor and debtor where the debt is liquidated for less than the amount due. Cf. James R. Stewart, 39 B. T. A. 87. In such circumstances the creditor would ordinarily have a right to charge off the difference.

What actually is done rather than what might have been done usually determines the tax consequences. Here there was, within the taxable year, before the actual charge-off of the indebtedness, the sale of the account. The facts bring the case squarely within the provisions of section 117 and, in our opinion, that fact must control, with the consequent limitation of the loss from the sale.

McClain v. Commissioner, supra, is helpful. While in that case the court was concerned solely with determining whether certain bond transactions would be regarded as retirements so as to bring into play section 117 (f), the broad question of the deductibility of a bad debt where there was a sale or exchange was necessarily involved. The holding of the court was that the transaction resulted in a retirement of bonds and must necessarily be treated as a sale or exchange with a consequent limitation of the loss. In so holding, the court stated that in such circumstances Congress intended by the new subsection (f) to take out of the bad debt provision certain transactions and to place them in the category of capital gains and losses.

It follows that the respondent’s determination must be sustained.

Decision will he entered for the respondent.


author: Van Fossan :

text:
    Estate of James H. Lockhart, Deceased, Charles Lockhart, George D. Lockhart, James H. Lockhart, Jr. and John L. Walker, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92375.
    Promulgated February 25, 1942.

      J. Merrill Wright, Esq., for the petitioners.

      William 8. Schmitt, Esq., for the respondent.
   OPINION.

Van Fossan :

The question for determination is the value for purposes of section 506 of the Revenue Act of 1932, relating to gift tax, of the insurance policies which James H. Lockhart transferred in 1935. The cited section reads: “If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.”

Petitioner included the policies in his gift tax return at the cash surrender value, according to his computation. Respondent valued the policies in accordance with article 19 (9) of Regulations 79, thereby increasing the valuation.

In Guggenheim v. Rasquin, 312 U. S. 254, the Supreme Court rejected cash surrender value as a measure of value of a single premium policy. Cost was used as the measure of value in that case. In Powers v. Helvering, 312 U. S. 259, and United States v. Ryerson, 312 U. S. 260, decided the same day as the Guggenheim, case the Court adopted replacement cost as the proper criterion of value of single premium insurance policies for gift tax purposes. The doctrine of those cases was expanded by the Circuit Court of Appeals for the Third Circuit in Houston v. Commissioner, 124 Fed. (2d) 518, to cover a gift of 20-payment life policies which were fully paid up. Finally, in Margaret R. Phipps, 48 B. T. A. 790, this Board applied the rationale of the Supreme Court cases and held with respect to policies which are not paid up at the time of the gift that the' cost of duplicating the policies is the proper criterion of value.

Petitioner has not contested the accuracy of respondent’s computation under article 19 (9) of Regulations 79 (1936 Edition). It appearing that such computations are in accordance with rules of valuation laid down in the above cited cases, the action of the respondent is affirmed.

Decision will be entered for the respondent.


author: Black :

text:
    The Greenwood Packing Plant, Greenwood, South Carolina, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105211.
    Promulgated February 25, 1942.

      Theodore B. Benson, Esq., for the petitioner.

      Charles Oliphant, Esq., for the respondent.
   OPINION.

Black :

The questions which we have to decide in the instant case are as follows:

(1) Did the Commissioner correctly determine that the petitioner realized taxable gain of $5,500 in 1936 from the sale of a building in that year to two of its stockholders, which building petitioner had acquired in 1935 at no cost from its lessee, who had erected the building in 1934 and relinquished the possession of it to petitioner in 1935 ?

(2) Did the Commissioner correctly disallow $199.62 of a claimed loss of $600 by petitioner from fire damages in 1936 ?

(3) Is the petitioner entitled to a credit of $1,000 under section 26 (c) of the Bevenue Act of 1936 in computing its surtax on undistributed profits ?

We shall first take up and decide issue (1). Both parties are agreed that the building erected by a lessee in 1934 upon a lot owned by petitioner was released and abandoned to petitioner in the year 1935 and that the building had a fair market value of $5,500 at the time it was turned back to petitioner. Both parties agree that under the decision of the Supreme Court of the United States in Helvering v. Bruun, 309 U. S. 461, which was decided subsequent to 1935 and 1936, the value of the building was taxable income to petitioner in 1935.

It is also conceded that petitioner did not return the value of the building in question as income in 1935. Bespondent contends that, by the failure to report as income in 1935 any value for the building thus acquired by abandonment, the petitioner in effect declared that such property had no value at that time and the petitioner can not, since the statute of limitations has run as to the year 1935, now take advantage of its omission in 1935 by claiming there was no taxable gain when it sold the property in the taxable year 1936.

Respondent in his answer did not .affirmatively plead that petitioner was estopped to so claim. The substance of petitioner’s contention in response to the position of respondent is that whatever gain it received from the repossession of the premises occurred in 1935 and was taxable in that year; that in good faith it filed its income tax return for 1935 reporting no gain from such transaction because the Supreme Court had not yet decided Helvering v. Bruun, supra; that its mistake in not reporting the gain in that year was one of law; and that it made no misrepresentation of any fact to the Commissioner with reference to said transaction; that when it sold the building in question in 1936 for $5,500 it was for the same price as its value when acquired in 1935 and, therefore, it had neither gain nor loss in 1936 on the sale and is not estopped to so contend.

Incidentally it should be noted that the respondent makes no claim for an adjustment for depreciation (sec. 113 (b) (1) (B) and sec. 114 (a), Revenue Act of 1936) on the building in determining gain or loss. The adjustment for the period November 25 to December 31, 1935, the respondent concedes would he trivial, and any reduction for depreciation from January 1 to July 1, 1936, the date of the sale, he concedes would be for all practical purposes offset by a corresponding allowance since this was a business property. (Sec. 23 (1), Revenue Act of 1936.)

Respondent did not plead estoppel in his answer, and, even if he had done so, we do not think the facts would have sustained it. Nevertheless, we think the Commissioner’s determination that petitioner had a taxable gain of $5,500 on this property must be sustained. The following are the applicable provisions of the Revenue Act of 1936:

SEC. 112. RECOGNITION OE GAIN OR LOSS.
(a) General Rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) or Property. — The basis of property shall be the cost of such property; except that—
*******
(b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
(1) General Rule. — Proper adjustment in respect of the property shall in all cases be made—
(B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. * * *

Did the property in question have any cost to petitioner ? Admittedly it did not have any actual cost to petitioner. The building had been erected by petitioner’s lessee without any cost to petitioner. If petitioner had taken the vakic of the property into its taxable income in 1935 then it would have had thereafter a cost basis of the fair market value so taken into income. But it is conceded that petitioner did not take the value of this property into its taxable income in 1935, the year in which it was acquired.

Under these circumstances, we do not think that it can claim a cost basis of $5,500 when it sold the property in 1936 for that amount. See Alamo National Bank of San Antonio, Executor, 36 B. T. A. 402; affd., 95 Fed. (2d) 622; William Merriam Crane, 27 B. T. A. 360; affd., 68 Fed. (2d) 640.

We think the instant case is distinguishable from American Light Traction Co., 42 B. T. A. 1121. In that case the question was whether the taxpayer should retain the old basis of cost of its transferor or take the normal basis of cost which it had paid for the debentures sold. The taxpayer clearly had the real basis of cost which it was claiming, but the Commissioner claimed that it should take the basis of its tranferor because certain gains had not been reported in the transaction in a prior year. We held there was no estoppel and that the taxpayer had the right to claim its real cost basis. We think that situation is different from the one we have here and is, therefore, distinguishable on its facts. On this issue we hold for the respondent.

We next take up issue (2). Petitioner had a fire loss in 1936, for which it was compensated by an insurance company to the extent of $2,000. In its income tax return it claimed a deduction of $600 on account of this fire loss, which represented damage to its property for which it was not compensated by insurance. Of this $600 claimed loss the Commissioner disallowed $199.62 on the ground that petitioner had sustained losses not compensated by insurance to the extent of only $400.38.

At the hearing the petitioner offered the testimony of two witnesses who gave testimony specifying the property which was damaged, the original cost of such property, the depreciation which had occurred since the property was purchased, and the nature and extent of the damage to the property by the fire.

From this evidence we are convinced that petitioner suffered a loss of at least $600 in excess of the insurance which is collected from the insurance company and we have so found in our findings of fact. Accordingly the Commissioner’s action in disallowing $199.62 of the claimed fire loss of $600 by petitioner is reversed.

The nest and final issue which we have to decide is issue (3), whether petitioner is entitled to a credit of $1,000 under section 26 (c) of the Revenue Act of 1936 in computing its surtax on undistributed profits.

The relevant portions of section 26(c) of the Revenue Act of 1936 are printed in the margin.

It is perfectly clear that the written contract in question does not fall within section 26 (c) (1), for it nowhere prohibited the payment of dividends. Petitioner appears to concede that the contract in question does not fall under section 26 (c) (1), but petitioner contends that it is entitled to the credit under section 26 (c) (2). Even if we assume that the language of the contract does fall within the ambit of section 26 (c) (2), we think that the claim for credit must nevertheless fail. Respondent points out correctly in his brief, we think, that it is fundamental that as a prerequisite to the credit claimed under section 26 (c) (2) it must he shown that the taxpayer corporation either paid or set aside within the taxable year the amount for which it claims credit in discharge of its debt. See paragraph (3) o'f the things stated to be necessary to a credit under section 26 (c) (2) in G. B. R. Oil Corporation, 40 B. T. A. 738. Respondent points out that there is no evidence whatever that any amount, current earnings, or profits, or any other amount was in fact paid to the Bank of Greenwood in the taxable year or irrevocably set aside in its behalf.

The petitioner did offer in evidence the contract in question and we have set it out in our findings of fact, but certainly petitioner did not offer any evidence as to any payments made to the bank in 1936 on petitioner’s indebtedness owed to it, nor is there any evidence that any of petitioner’s profits or other funds were irrevocably set aside during the taxable year in the bank’s behalf. In this state of the evidence we sustain respondent’s action in disallowing the credit claimed. There must be either a paying or irrevocable setting aside within the taxable year of the amount claimed as a credit under section 26 (c) (2). Cf. Strong Manufacturing Co., 41 B. T. A. 1273; affd., 124 Fed. (2d) 360.

Decision, will he entered v/nder Bule 50.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the ease of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      *******
      (c) Contracts Restricting Payment oit Dividends.—
      (1) Prohibition on payment op dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. * * *
      " (2) Disposition op profits op taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. * * *


text:
    George W. Crawford Estate, Annie Laurie Crawford and The Union Trust Company of Pittsburgh, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. Martha Sharp Crawford Trust, Annie Laurie Crawford and The Union Trust Company of Pittsburgh, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104196, 104197.
    Promulgated February 25, 1942.

      John G. Buchanan, Esq., and Drnid B. Buerger, Esq., for the petitioners.

      Orris Bennett, Esq., for the respondent.
   OPINION.

Van Fossan:

The problem before us is to determine the effect of Annie Laurie Crawford’s election to take under the law rather than under the will of her deceased husband George W. Crawford. Prior to the election the executors had distributed the assets, from which the income here in question was derived, to a trust for the widow. The trust filed a return and paid the tax on the income from the property distributed to it. Respondent now contends that, by reason of the fact that under Pennsylvania law the widow’s election related back to the time of the death of the husband, In re Fitzgibbon's Estate, 276 Pa. 105; 119 Atl. 837, the trust became a nullity ab initio and the entire amount of the income should be taxed to the petitioner estate.

The widow’s election and the distribution of a portion of the assets to her did not render the trust a complete nullity. The remainderman, Martha Sharp Crawford, still had an interest in the property which was not distributed to Annie Laurie Crawford. Because the remaining property was held in a trust identical in its terms with the Martha Sharp Crawford trust, the agreement of June 16, 1936, provided that the two should be consolidated. Until that agreement there was a valid separate trust as to the daughter’s portion of the property even after the widow’s election to take under the law and the distribution of two-thirds of the trust corpus to her. Reighard's Estate, 253 Pa. 43; 97 Atl. 1044. Accordingly, there is no basis for respondent’s contention that one-third of the trust income, or $156,680.69, should be taxed to petitioner estate or for respondent’s earlier contention that it should be taxed to petitioner trust. That income was income of the Annie Laurie Crawford trust and the tax thereon was properly paid by that trust.

As to the remaining two-thirds of the income, petitioners argue that during the taxable year 1935 the Annie Laurie Crawford trust was a valid existing taxable entity and that income taxes are not to be determined upon the basis of evidence taking place subsequent to the taxable year. We are of the opinion that petitioners’ contention must be sustained. During 1935 the trust was in existence and through the sale of certain property it received income in the form of capital gains. What it did with that income or with its property in a later year is immaterial in determining the tax liability for the year 1935.

Respondent, while conceding that ordinarily income tax liability must be determined for annual periods on the basis of facts as they existed in each period, claims that the Annie Laurie Crawford trust never held the income in question free from restriction as to its disposition. In support of his position respondent cites McCaughn v. Girard Trust Co., 19 Fed. (2d) 218, and G. A. Buder, Executor v. United States (E. Dist. Mo., 1941, unreported). Both of those cases are distinguishable on the ground that the taxpayers therein never had a right to the income in question, whereas in the cases at bar the Annie Laurie Crawford trust had a right to the income, subject to the contingency that the widow might elect to take under the law and the further contingency in the case of such election that her statutory half might be taken out of the property distributed to the trust. At the time the income was received and the tax return was filed there was no reason to believe that the widow would elect to take against her husband’s will. Furthermore, it was impossible to tell at that time what portion of the widow’s share would be taken out of the trust in the event that she should elect to take under the law.

It is true, as respondent points out, that under Pennsylvania law the executors could not have been required to distribute the property to the Annie Laurie Crawford trust at the time the distribution was made and that the distribution without audit of their accounts was at the executors’ own risk. Title 20, Purdon’s Penna. Stats. Anno., secs. 861 and 862. The executors, however, had a full right to make the distribution and in fact the distribution to the trust was subsequently approved by the Orphans’ Court of Allegheny County, which had jurisdiction over the administration of the estate.

Since we have reached the conclusion that the tax was properly paid by the Annie Laurie Crawford trust, it follows that respondent’s determination of deficiencies against the petitioner estate and petitioner trust was erroneous.

Decisions toill be entered wider Rule 50.


text:
    Laurens Cotton Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 108098.
    Promulgated February 25, 1942.

      John C. Reid, Esq., for the petitioner.

      Charles W. Waring, Esq., for the respondent.
   OPINION.

Van Fossan:

Section 501 (a) (1) of the Eevenue Act of 1936 limits the unjust enrichment tax to 80 percent of the taxpayer’s net income for the entire taxable year from the sale of articles with respect to which the excise tax was imposed. Petitioner’s entire net income for the taxable year was $17,460.40, from which respondent deducted $3,123.59, the same being income from a farm and having no relation to net income from the sale of articles with respect to which the processing tax was imposed. Petitioner contends that the resultant sum of $14,347.01 should be further reduced by deducting, as an unrelated activity, the sum of $21,253.82, the net profits from the operation of the store. If petitioner be sustained in this there will be no unjust enrichment tax due, because petitioner derived no net income from the sale of articles with respect to which the processing tax was imposed.

The facts dictate that petitioner’s contention should be sustained. The store is operated not as a unit of the mill, but as an independent business. It faced keen competition in merchandise, prices, and service from several competitors. The fact that most of its patrons were mill employees does not indicate that the store was an integrated part of the mill operation. It sold for cash or credit to patrons outside the mill rolls. The mill employees were under no compulsion to buy at the company store. It survived and prospered only by successfully competing with other stores.

Eespondent’s principal argument respecting this phase of the case is that certain items of overhead were not accurately and separately kept, a flat charge of $1,000 per year being made to cover depreciation, light, fuel, water, etc. On the record we are convinced that $1,000 is an inadequate sum and we have accordingly fixed the sum of $3,500 as a proper charge for overhead. The fact that we have increased the amount chargeable to overhead does not require a conclusion different from that above indicated, i. e., that the operation of the store was an independent business enterprise carried on for profit, only incidentally related to the mill operation. Eespondent excluded the income from the farm in making his computations. In our opinion he should also have excluded the net income from the store.

We have found that the net income of the store amounted to $18,753.82. If this be deducted from petitioner’s net income for the taxable year, it is obvious that petitioner derived no net income from the sale of articles with respect of which the processing tax was imposed and no tax is due.

Decision will be entered for the petitioner.

       SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES.
      (a) The following taxes shall be levied, collected and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
      (1) A tax equal to 80 per centum of that portion of the net income from the sale of articles with respect to which a Federal excise tax was imposed on such person but not paid which is attributable to shifting to others to any extent the burden of such Federal excise tax and which does not exceed such person’s net income for the entire taxable year from the sale of articles with respect to which such Federal excise tax was imposed.


author: Turnee :

text:
    Walter H. Sutliff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103669.
    Promulgated February 25, 1942.

      Dmid A. Gasl&ill, Esq., for the petitioner.

      Thomas F. Gallaham,, Esq., for the respondent.
   OPINION.

Turnee :

The first question to be considered is whether the portion of the net proceeds received by petitioner from the sale of the property represented consideration received from the sale of his lease, as petitioner contends, or was payment to him for the cancellation of his lease, as respondent contends.

In support of his contention the respondent points to the agreement between the petitioner and the son respecting the division of the net proceeds and containing the provision that the petitioner agreed “to cause his lease to be canceled and released of record as a part of the closing of the transaction”, and urges that under the decision in Hort v. Helvering, 318 U. S. 28, the amount received by petitioner was essentially a substitute for the rental payments which the petitioner might receive throughout the unexpired period of his lease. From the testimony of Bobert F. Bingham, the attorney who drew not only the lease for the petitioner but also the agreement containing the above quoted provision, it appears that said provision was intended to be merely procedural and for the purpose of providing for the petitioner’s disposition of his interest in the property, and that it was not inserted to show that the parties were intending to follow the particular method which cancellation would imply. The sale of the property was consummated by two deeds which were prepared by the purchaser or his representative. The petitioner’s conveyance of his interest in the property was by quitclaim deed which indicated the petitioner’s intention to convey all his rights and interest in the property including all his rights under his lease. Aside from the quitclaim deed, petitioner executed no other form of' conveyance of his lease nor of his interest arising therefrom. Neither was there any instrument of cancellation executed by the petitioner and the son nor was any endorsement of cancellation entered on the lease instrument. In addition, the warranty deed from the son to Avis specifically provided that the latter accepted the premises subject to the occupancy thereof by A & P under a lease. This indicates an intent to preserve as between Avis and A & P the latter’s rights and liabilities with respect to the property arising from its lease, which was obtained from the petitioner, who in turn held his lease from the son.

From the evidence before us we are unable to find that the petitioner canceled his lease or that the amount received by him from the sale of the property was anything other than consideration received by him through the sale of his leasehold interest. We are also unable to see wherein the decision in Hort v. Helvering, supra, is applicable to the instant case. In the Hort case the taxpayer was the owner of certain real estate which he had acquired by devise from his father in 1928. Prior to his death the father executed a lease on a portion of the property to a trust company for a period of 15 years beginning on February 1,1932, at an annual rental of $25,000.' In 1933 the trust company found it unprofitable to continue the occupancy of the property. After some negotiations the taxpayer in December 1933 canceled the lease in consideration of the payment to him of $140,000 by the trust company. In his income tax return for 1933 the taxpayer claimed a loss deduction on the transaction of $21,494.75 on the theory that the amount he received for cancellation was $21,494.75 less than the difference between the present value of the unmatured rental payments and the fair rental value of the portion of the property covered by the lease. The respondent disallowed the loss deduction claimed and included the $140,000 in income. The Court held that the taxpayer was not entitled to deduct the claimed loss because to allow it would result in the reduction of ordinary income actually received and reported by the amount of income that the taxpayer had failed to realize, a result which was not permissible under the act. It was also held that the $140,000 received was essentially a substitute for the unmatured rental payments under the lease and as such constituted ordinary income and not capital gain.

Obviously the factual situation in the instant case is materially different from that in the Hort case. That case was grounded on the uncontroverted and apparently conceded fact that the taxpayer had canceled a lease on real estate which he owned in fee. Here the petitioner was not the owner of the fee nor was the amount in controversy received by him from his lessee. After the sale of his lease he no longer owned any interest in the property. To apply to the instant case the rule of the Hort decision would be the equivalent of holding that when the owner of an interest in a rental property disposes of such interest the consideration received therefor in excess of the cost basis is essentially the equivalent of anticipated rentals therefrom. We find nothing in the Hort decision to indicate that the Court intended that it should be given such a construction.

Under his lease from the son the petitioner was required to pay a rental of $25 a year for the property. Concededly such a rental was nominal and obviously was not intended to and did not approximate the annual rental value of the property. Under the circumstances we think the lease is to be considered as a gift from the son to the petitioner. Since the lease appears to have been of considerable value, it is our opinion that for the purpose of computing the gain to the petitioner from its disposition he is entitled to the use of a basis. Secs. Ill (a) and 113 (a) (2) of the Revenue Act of 1936. At the hearing the parties stipulated that in event we should hold that the petitioner is entitled to a basis in computing Ms gain from tlie transaction the amount of such basis is $7,909.90. Accordingly we hold that amount to be the basis to which the petitioner is entitled.

The lease was an asset in the hands of the petitioner and we think comes within the definition of capital assets as contained in section 117 of the applicable act. .Therefore the gain realized by the petitioner from the sale of the lease was capital gain within the meaning of that section of the act. But compare Jofm D. Fadder, 45 B. T. A. 708, arising under section 117 of the Revenue Act of 1938, which contained a different definition of capital assets from that contained in the act applicable herein. In his petition the petitioner alleged that only 30 percent of the gain realized from the sale was to be taken into account in computing net income. However, on brief he concedes that he held the lease for more than five years but less than ten years. In view of this and in accordance with the provisions of section 117, supra, 40 percent of the gain is to be taken into account in computing his net income.

Decision will be entered under Rule 50.


author: Tyson:

text:
    The Cincinnati Rubber Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104530.
    Promulgated February 25, 1942.

      John H. More, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

Tyson:

This proceeding seeks redetermination of an income tax deficiency of $521.16 for the calendar year 1938.

The only issue is whether respondent erred in disallowing a claimed deduction of $2,742.93 representing the amount of unjust enrichment tax paid by petitioner during the taxable year 1938.

We find the facts as stipulated by the parties and such stipulated facts as are not set forth herein are incorporated by reference.

The petitioner, an Ohio corporation having its principal office at Norwood, Ohio, filed its Federal income tax return for the calendar year 1938 with the collector of internal revenue for the first district of Ohio.

Petitioner keeps its books and records and files its tax returns on the accrual basis of accounting. During 1938 it paid to the United States Government certain unjust enrichment taxes described by Title III of the Revenue Act of 1936, in the amount of $2,742.93.

In its income tax return for 1938 petitioner deducted the amount of $2,742.93 from gross income as “taxes paid or accrued within the taxable year” under the provisions of section 23 (c) (1) of the Revenue Act of 1938. The respondent disallowed the claimed deduction on the ground that the unjust enrichment tax is an income tax which is not deductible from gross income under section 23 (c) (1), supra.

The petitioner contends that under the various provisions prescribing the levy, computation, etc., of the unjust enrichment tax as set forth in sections 501-506 of Title III of the Revenue Act of 1936, Congress intended to levy a special tax to accomplish certain purposes, i. e., the recapture of the Agricultural Adjustment Act excise taxes (which act had been held by the Supreme Court to be unconstitutional) , the burden of which was shifted by the taxpayer to other persons ; that such unjust enrichment tax is not a true income tax, but is intended to be of a different character from the “Income Tax” imposed by Title I of that act, since if not so intended Congress would have merely amended Title I so as to embrace therein such unjust enrichment tax; and that Congress did not intend to include such unjust enrichment tax within the exception provided in section 23 (c) (1), supra.

Section 501 (a) of Title III of the Revenue Act of 1936 defines the tax on unjust enrichment as a tax “upon the net income of every person which arises from the sources specified” and as being “in addition to any other tax on net income” (italics supplied), and other subdivisions of section 501 set forth the various elements which enter into and the method of computation of “gross income” and the “deductions” allowable in arriving at the “net income” subject to the tax. Section 502 provides for a credit against the unjust enrichment tax of an amount computed with reference to “other Federal income and excess-profits taxes” and, further, section 503 (a) provides that all the provisions applicable to taxes imposed by Title I, in so far as not inconsistent with Title III, shall be applicable to the taxes imposed by Title III, with certain exceptions not material here. The prescribed method of computation to be made in order to reach the amount of net income derived from unjust enrichment, for the purpose of applying thereto a rate of taxation different from the rate applied to other net income, clearly demonstrates that Congress intended the tax imposed by section 501, supra, to be an income tax separate, distinct, and apart from and in addition to other income taxes, but nevertheless an income tax just as are the income taxes imposed by Title I.

In Steinhagen Rice Milling Co. v. Scofield, 87 Fed. (2d) 804; certiorari denied, 300 U. S. 663, where the contention was made by the taxpayer that the tax on unjust enrichment there involved was not an income tax within the meaning of the Sixteenth Amendment, the court, in denying an injunction sought to stay the collection of such unjust enrichment tax, held, inter alia, that “the tax imposed * * * is an income tax, notwithstanding the rate of taxation is very much greater than that imposed on any other source of income.” See also Kingan & Co. v. Smith, 17 Fed. Supp. 217 (Dist. Ct. S. Dist. Ind.).

The unjust enrichment tax is, by the very terms of the statute imposing it, an income tax, and, in our opinion, it clearly falls within the specific exception of section 23 (c) (1), supra, which denies as a deduction from gross income all Federal income taxes other than certain enumerated excess profits taxes.

The respondent did not err in his determination that the amount of $2,742.93 unjust enrichment tax paid by petitioner during 1938 is not deductible from gross income for that year under section 23 (c), supra.

Decision will he entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      *******
      (c) Taxes Gexekally. — Taxes paid or accrued within the taxable year, except—
      (1)Federal income, war-profits, and excess-profits taxes (other than the excess-profits tax imposed by section 106 of the Revenue Act of 1935 or by section 602 of this Act).

       SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES.
      (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below :
      (1) A tax equal to 80 per centum of that portion of the net income from the sale of articles with respect to which a Federal excise tax was imposed on such person but not paid Which is attributable to shifting to others to any extent the burden of such Federal excise tax and which does not exceed such person’s net income for the entire taxable year from the sale of articles with respect to which such Federal excise tax was imposed.
      (2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees.
      (3) A tax equal to 80 per centum of the net income from refunds or credits to such person from the United States of Federal excise taxes erroneously or illegally collected with respect to any articles, to the extent that such net income does not exceed the amount of the burden of such Federal excise taxes with respect to such articles which such person shifted to others.

       SEC. 502. CREDIT FOR OTHER TAXES ON INCOME.
      There shall be credited against the total amount of the taxes imposed by this title an amount equivalent to the excess of—
      (a) The amount of the other Federal income and excess-profits taxes payable by the taxpayer for the taxable year, over
      (b) The amount of the other Federal income and excess-profits taxes which would have been payable by the taxpayer for the taxable year if his net income were decreased by the amount of net income taxable under this title.

       SEC. 503. ADMINISTRATIVE 'PROVISIONS.
      (a) All provisions of law (including penalties) applicable with respect to taxes imposed by Title I of this Act, shall, insofar as not inconsistent with this title, be applicable with respect to the taxes imposed by this title, except that ihe provisions of sections 101, 131, 251, and 252 shall not be applicable.


author: Disney:

text:
    Moses L. Parshelsky, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103476.
    Promulgated February 26, 1942.

      Lawrence A. Baker, Esq., for the petitioner.

      Thomas H. Lewis, Jr., Esq., for the respondent.
   OPINION.

Disney:

The petitioner and his brother each invested $200,000 in contracts of annuity. The petitioner applied for and received contracts known as Exhibits 6 to 10 and his brother applied for and received contracts known as Exhibits 1 to 5. This was done by agreement. Each made his brother annuitant, with himself and his estate beneficiary or remainderman if he survived the brother. The cost of the annuity for life, the refund annuity (annuity payable after annuitant’s death) to petitioner, and to the brother dependent upon survival, is shown by the evidence;

In the taxable year the petitioner received from contracts 1 to 5 the sum of $14,980 and from contracts 6 to 10 the sum of $14,390.50. The question is to what extent such sums constitute taxable income.

The respondent, having asked for an increased deficiency, has the burden of proof in that respect. He argues, in effect, that, though each brother appears as applicant for the contracts which name his brother as annuitant and himself as beneficiary, if he survive, looking to substance it appears that in fact each brother purchased those contracts in which he is annuitant and his estate a contingent re-mainderman; that therefore the $200,000 paid by the petitioner is to be considered paid for the different privileges conferred by the contracts in the proportions which nominally those privileges cost the brother; that out of the $200,000 paid, petitioner in substance paid $170,141.64 for the annuity for himself, $3,685.08 for the right in his estate to receive payment after his death if he survive the beneficiary-brother, and $26,178.28 for the right of the beneficiary-brother (or his estate) to receive payment if he survive the petitioner; that the latter right, so costing $26,173.28, was reciprocal with, and in effect exchanged for, the same right in the contracts purchased nominally by petitioner but in substance by his brother, and that therefore his brother transferred that right to him, within the intendment of section 22 (b) (2), Revenue Act of 1938. Respondent therefore argues that, since the petitioner survived his brother and received the payments, he received them under a “transfer”-and must be taxed upon the full amount ($14,390.50) received in that respect in the taxable year, since prior thereto he had received from the contracts more than the consideration paid for that right, i. e., the $26,173.28 paid for the reciprocal right under the contracts in fact purchased by him; and, finally, as to the $14,980 received upon annunities, that under section 22 (b) (2), supra, as to tax upon annuities, the petitioner is taxable upon 3 percent of the amounts paid for the right of the petitioner and his estate to the payments to be received if he survived the brother. That amount should be $6,000, he argues, because the whole $200,000 was paid for the contracts in general, and the tax should not be diminished because only $170,141.64 was in a sense applicable to the annuity.

To this theory the petitioner in effect replies that it is not shown that petitioner purchased in substance the contracts applied for and received by his brother, but that each paid for what he applied for and received; that petitioner invested $200,000 in the contracts and, therefore, there being no “transfer” but only annuities, the maximum tax should be 3 percent of $200,000 or $6,000; or, if the tax should be laid upon the cost of the contracts purchased by his brother, that there was no possibility of profit in three of the contracts purchased by himself and, the other two not being straight annuities, no tax is due on more than the five contracts purchased by the brother. The petitioner argues that no evidence establishes any reason why each of the brothers should be considered to have purchased the contracts applied for by the other. He challenges respondent’s view that the difficulties of the two brothers with creditors, and the Government as to unpaid income taxes, and provisions in the contracts for escape of the proceeds of such contracts from liability to creditors, offer proof that there was such reciprocal purchase of the contracts.

The respondent, in the alternative, contends that if it be considered that there was no “transfer” within the language of section 22 (b) (2), then the tax should be laid upon 3 percent of the entire consideration, $400,000 paid by both brothers, on the theory that the Act of 1938, different in that respect from earlier law, does not limit the tax to consideration paid by the recipient of the annuity. Title Guarantee & Trust Co., Executor, 40 B. T. A. 475, is cited as authority.

Disposing first of the alternative, we do not find in the case last cited sufficient authority to bear out respondent’s view. It is true that there the 3 percent was computed upon consideration paid by another, but the present question was not considered. The question there posed was that of constitutionality. Therefore we do not think the answer to the present question would be well based upon that opinion. Though there is some indication in committee reports that the statute enacted in 1938 is not intended to limit the consideration to be considered in fixing the amount taxable, to that paid by the transferee, the conclusion to which we have come renders it unnecessary to consider the effect of the statutory expression in that regard.

After much consideration of this novel and interesting question, we have arrived at the conclusion that the petitioner must be considered as the purchaser of the contracts which his brother applied for and received, but that the whole $200,000 consideration can not be applied to the annuities purchased, only $173,826.62 (amount paid for annuity $170,141.64 plus $3,685.08 paid for right of annuitant’s estate to payments) being the basis for 3 percent taxed against annuities, and that the remainder, or $26,173.28 must be considered the consideration paid for a transfer, by petitioner’s brother, of the right to receive payment upon survival of the brother.

We find, in the difficulties and investigations as to taxes, the existence of creditors, and the provisions as to liability of the contracts to levy by creditors, reason for the “crossing” or reciprocity in the contracts. The contracts issued by the Mutual Life Insurance Co. provide partial escape from creditors in the prohibition of encumbrance, transfer, or anticipation by the annuitant. Those issued by the John Hancock Mutual Life Insurance Co. recite an agreement “in accordance with the request of the applicant” that there shall, except in so far as contrary to state law, be no right in either annuitant or beneficiary to assign or encumber and that payment shall not be subject to levy against either. That this agreement is made upon request of the applicant shows that each brother had in mind the escape from creditors. The two contracts issued by the Aetna Life Insurance Co., one upon the application of each brother, each provides against levy by creditors of the annuitant, and against assignment, anticipation, or commutation by the annuitant. The provision indicates that it was by agreement with the applicant. The annuitant’s interest was the prime interest, in a sense, in each contract. Clearly these contracts were reciprocal, for a like consideration paid by each brother for the other’s benefit, and did not constitute gifts from either to the other. In our opinion the contracts were intentionally crossed, or purchased in the name of the brother by mutual agreement, and that petitioner in substance and fact purchased those applied for by his brother. Lehman v. Commissioner, 109 Fed. (2d) 99; Purdon Smith Whiteley, 42 B. T. A. 316; Estate of Frederick S. Fish, 45 B. T. A. 120. We therefore hold that the petitioner’s tax should be computed upon a basis of 3 percent of the “annuity” rights. It is clear that that term as used in section 22 (b) (2) includes those rights arising after the death of the annuitant, whereby his estate, if he has survived the beneficiary, receives payment, for it is defined as “an allowance or payment from the income of a fund at specific periods and during a prescribed term.” Title Guarantee & Trust Co., Executor, supra, quoting Continental Illinois Bank & Trust Co. v. Blair, 45 Fed. (2d) 345. Obviously the etymology of the word, from “annus” or year, indicates that its application is not limited to a life or lives. We are of the opinion that the 3 percent is to be computed on all of the $200,000 consideration paid by the taxpayer, except the amount that was paid for a “transfer” under the statute. To apply the 3 percent to the full $200,000 would be duplication. We hold that therefrom $26,173.28 was paid for a transfer from petitioner’s brother. The petitioner, because he survived his brother, received $14,390.50 from the contracts in substance paid for by his brother. He received such right because of the provision, in the contracts in substance paid for by him, for a reciprocal right in the brother had he survived. Thus there was receipt of payment by him because of transfer of the contract to him. Chase National Bank v. United States, 278 U. S. 327. The evidence shows that more than the amount of the consideration had been recovered prior to the taxable year. Therefore, under the latter portion of section 22 (b) (2), the entire $14,390.50 was taxable to the petitioner in the year here involved.

The petitioner argues that under some of the contracts the petitioner can not recover more than the amount invested and therefore that section 22 (b) (2) should not be applied. We find no such distinction indicated in the statute. The amounts are annuities, in one case a transfer. We see no sound reason for not applying the statute as written.

Reviewed by the Board.

Decision will he entered wnder Bule 50.

       SEC. 22. GROSS INCOME.
      *******
      (b) Exclusions Fbom Gboss Income.. — -The following items stall not be included in gross income and shall be exempt from taxation under this title:
      *******
      (2) Annuities, etc. — Amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideraton paid (whether or not paid during the taxable year) then the excess shall be included in gross income. Amounts received as an annuity under an annuity or endowment contract shall be included in gross income; except that there shall be excluded from gross income the excess of the amount received in the taxable year over an amount equal to 3 per centum of the aggregate premiums or consideration paid for such annuity (whether or not paid during such year), until the aggregate amount excluded from gross income under this title or prior income tax laws in respect of such annuity equals the aggregate premiums or consideration paid for such annuity. In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph.