author: Muedock :

text:
    George H. Jones, Executor and Trustee of the Estate of Myrtilla A. Jones, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63408.
    Promulgated April 7, 1936.

      George T. Rogers, Esq., for the petitioner.

      T. M. Mather, Esq., and E. L. Weber, Esq., for the respondent.
   OPINION.

Muedock :

The notice of deficiency in this case was addressed to “Mr. G. H. Jones, Executor, Estate of Myrtilla A. Jones.” George H. Jones described himself in the caption of the petition which he filed as “Executor and Trustee of the Estate of Myrtilla A. Jones, Deceased.” No deficiency has been determined against the trustee, the notice of deficiency was not mailed to the trustee, and, therefore, the reference to the trustee in this proceeding must be treated as mere surplusage. The petitioner before the Board is the estate of Myrtilla A. Jones, represented by the executor, George H. Jones. That petitioner had no net income subject to tax for the calendar year 1929. Practically the entire gross income of the estate for that taxable year was to be distributed currently by the fiduciary to the beneficiary, and the estate was entitled to a deduction under section 162 (b) in that amount. The petitioner did not claim that deduction on its return, but it did claim a deduction for taxes paid which was allowed in the amount of $44,692.14. These two deductions to which it was entitled were greatly in excess of the gross income of the estate for the year. Thus there was no net income and no tax due from the estate for the year 1929 under the statute. Helvering v. Butterworth, 290 U. S. 365. The function of the Board in such cases is to decide whether or not the deficiency determined by the Commissioner was correct in the light of the issues and evidence properly before the Board, and then to state its decision in terms ,of a deficiency, or an overpayment, as the case may be. The facts in the present case relating to the tax liability of the estate show that the petitioner had no tax liability, that $12,024.62 was paid as tax, and, therefore, the decision of the Board must be that there has been an overpayment of the tax liability of the petitioner for the calendar year 1929 in the amount of $12,024.62. The Board will also determine as a part of its decision that the tax of $12,024.62 was paid within two years before the filing of the claim for refund. See section 504 (a) of the Revenue Act of 1934, amending the last sentence of section 322 (d) of the Revenue Act of 1928. The Commissioner has not challenged in any way the sufficiency of the claim for refund which was offered in evidence in this proceeding.

The Commissioner concedes that the statute imposed no tax liability upon the petitioner. But he argues, nevertheless, that he has a valid defense to the recovery of any money by this petitioner. He explains that prior to the decision of the Supreme Court in Hel-ver ing v. Butterworth, supra, he was relying upon decisions of the Board and of several courts which held that a surviving spouse who elected to take income for life under the will of the deceased spouse was not subject to income tax on distributions of income under the will until such distributions exceeded the fair market value, at the decedent’s death, of the rights in the estate which the surviving spouse relinquished by election to take under the will, and the estate was not entitled to deduct such distributions in computing its net income. The Supreme Court in the Butterworth case held that that was an incorrect interpretation of the law, and the estate, in computing its net income subject to tax, was entitled to deduct all income currently distributable by the fiduciary to the beneficiary. The Commissioner now argues that the present proceeding is in effect a suit against the Government to recover a certain sum as money had and received, to which the Commissioner has established a defense “by 'way of equitable set-off, unjust enrichment, or re-coupment.” He says it is not estoppel and he does not claim he has been misled. He does not claim that taxpayers have any choice under section 162 (b). He seems to concede that the provisions of section 162 (b) are mandatory, that is, they grant the estate the deduction and require that the same amount be included in the income of the beneficiary. His argument is that George H. Jones, the individual and the life beneficiary, received distribution of the income of the estate for the taxable year, unlawfully failed to include in his income for the calendar year 1929 the amount distributed to him by the estate, failed to pay the tax lawfully due on a proper return of his own income for that year, has already benefited due to the fact that the additional tax which he owed the Government but failed to pay exceeds the taxes here in controversy, and will further benefit unlawfully if the taxes here in controversy are refunded since they will be distributed to him as beneficiary; the statutory period for assessment and collection of the taxes lawfully due from the individual, George H. Jones, has now expired; all these things happened without fault of the Commissioner, and, therefore, in equity the petitioner now before the Board is not entitled to a refund or credit of the taxes which it paid for the calendar year 1929. It is not clear whether the Commissioner would carry this argument to the extent of claiming that the Board should determine a deficiency, or whether it only goes to the question of an overpayment. There is evidence in the record bearing upon this question, but that evidence is not material to the real issue before the Board.

Proceedings before the Board are not for the recovery of money had and received. The Board has no authority to order the Commissioner to refund or credit amounts overpaid as taxes. This is so even though refund or credit seems to follow as a necessary consequence of a decision by the Board. See section 322 (d), Revenue Act of 1928, as amended by section 504 (a), Revenue Act of 1934. Collection, payment, credit and refund are matters over which the Board has no jurisdiction whatsoever, and which it has no reason to consider, except as they may affect the question of the correctness of the deficiency as determined by the Commissioner. The function of the Board in this case ends when it determines that in fact there has been an overpayment of a certain amount and that a claim for refund was filed within two years after the overpayment was made. The Commissioner’s alleged defense is in opposition to the refunding of the overpayment, not to the fact of overpayment. Although the statute seems to require him to refund or credit, any overpayment determined by the Board, nevertheless, if he has any defense to the actual recovery of the amount by the taxpayer, there must be some way in which he can assert it. But, in any event, Congress has not given the Board jurisdiction to consider and decide that question. After carefully considering the respondent’s contentions, we have come to the conclusion that they are immaterial to the only issue which the Board has jurisdiction to decide in this proceeding.

The respondent cites a number of cases, but relies principally upon First National Bank of Birmingham v. United States, 12 Fed. Supp. 301, and also upon White v. Stone, 18 Fed. (2d) 136. Those cases, however, are not in point, although their facts are somewhat similar. They were suits for the recovery of money had and received. The courts had general jurisdiction and the authority to order the return of money to the plaintiff by the Government. This is not such a proceeding.

Decision will be entered for the petitioner.


source: Caselaw Access Project

author: Mellott:

license: Public Domain

text:
    The Union Trust Co. of Pittsburgh, Trustee Estate of Annie M. Wallace, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78914.
    Promulgated April 8, 1936.

      William A. Wilson, Esq., for the petitioner.

      B. N. McMillcm, Esq., and W. H. Payne, Esq., for the respondent-
   OPINION.

Mellott:

Petitioner contends that the agreement of the parties “constituted a trust, inter vimos, among the beneficiaries interested in' the estate of Annie M. Wallace and John C. Wallace”; that it was not a modification of a will or wills but was directly contrary to the will of Annie M. Wallace; that the payments to the beneficiaries (the nieces) were not in the nature of bequests or gifts to them, but were made under a trust which the parties created; and that such amounts are deductible as income of a trust “distributed currently by the fiduciary to the beneficiaries.”

Section 161 (a) of the Revenue Act of 1932 provides that “the taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust.” Subsection (b) requires that “the tax shall be computed upon the net income of the estate or trust and shall be paid by the fiduciary.”

Petitioner bases its claim that the income in question is deductible, on section 162 (b) of the Revenue Act of 1982, which reads as follows:

(b) There shall be allowed as an additional deduction in computing the net income o£ the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

Did the agreement of the parties constitute a modification of the will of John G. Wallace or of the will of Annie M. Wallace? A few states, among them Rhode Island, recognizing that it is frequently desirable to adjust by compromise controversies arising either under or because of the will of a testator, have enacted statutes providing, in substance, for the modification of a will in accordance with a compromise, and for the administration of a testator’s estate under the will as modified. But no such statute has been enacted in Pennsylvania, though our attention has been called to the Pennsylvania Fiduciary Act of 1917, p. 1, 447, section 140, shown in the margin. This section has not been construed by the courts of Pennsylvania, but, as we read it, it does not seem to permit the probate of a will when modified by a compromise of the litigants as the Rhode Island statute apparently does. We conclude, therefore, that the agreement in evidence before us is not, under the law of Pennsylvania, a part of the will nor a modification of it. (Cf. Hu L. McClung et al., Executors, 13 B. T. A. 335, and cases cited; Barber v. Westcott, 43 Atl. 844; Godman v. Commissioner, 50 Fed. (2d) 763.) But our decision upon this point does not determine the question we are called upon to decide.

Petitioner apparently believes that since the agreement provides for the payment of the income to the beneficiaries (the nieces), it follows as a matter of course that they, rather than the trust estate, must pay the tax; but we are of the opinion that under the facts before us the tax is payable by petitioner rather than by the annuitants.

It is immaterial how the rights of the beneficiaries arose, whether under the will, under a modification of it, or under the agreement. The statute applies to “any kind of property held in trust.” The tax is computed upon the net income of the trust and is payable by the fiduciary unless deductible under 162 (b), supra. This is true whether the trust is testamentary or established by agreement of the parties. The statute makes no distinction and we see no reason why we should do so.

It will be noted that the “annuities” are payable to the nieces at all events, without reference to the existence or absence of income. This, we believe, requires the application of the rule enunciated by the Supreme Court in Burnet v. Whitehouse, 283 U. S. 148, and Helrering v. Pardee, 290 U. S. 365. These cases hold that where an annuity is “not one to be paid from income, but of a sum certain, payable at all events during each year so long as” the annuitant shall live, it is not taxable to the annuitant. While both of the cited cases involved testamentary trusts, no reason is apparent why a different rule should be applied to a trust inter vivos. It would be an anomaly to tax the distributions received by beneficiaries under a trust inter vivos, and exempt them from tax when the distributions are made under a testamentary trust. The statute by its terms is applicable to “income of estates or of any kind of property held in trust”, which, as pointed out above, makes it applicable to the facts before us.

The recent case of Old Colony Trust Co., Trustee, 33 B. T. A. 311, decided by us October 29, 1935, seems to be quite similar upon its facts. In that case a trust deed was executed, creating a trust for the purpose of carrying out some wishes of the grantor’s brother, who had died intestate, leaving the grantor as his sole heir. The trust deed directed the trustees to pay certain annuities, and, as we pointed out, disclosed “an intention on the part of the grantor to make the annuities charges upon both the income and corpus.” We held that “the annuities were, therefore, gifts and the trustees were not entitled to deduct the amounts paid to the annuitants”, citing in that connection Helvering v. Pardee, supra; Burnet v. Whitehouse, supra; Boston Safe Deposit & Trust Co. v. Commissioner, 66 Fed. (2d) 179 (affirming 26 B. T. A. 486); certiorari denied, 290 U. S. 700, and Bridgeport-City Trust Co., Trustee, 32 B. T. A. 1181.

In Bay Trust Co., Trustee, 34 B. T. A. 233, we held, under facts quite similar to the facts of the instant case, that the amount of a fixed annuity, payable in any event and irrespective of the amount of trust income, was taxable to the trustee of a trust notwithstanding that in the taxable year the payment was made solely from trust income. Cf. Warner v. Commissioner, 66 Fed. (2d) 403, and cases cited.

The respondent did not err in holding that petitioner could not deduct the distributions of income made by it to the nieces of Annie M. Wallace, and the deficiency as determined by him is approved.

Judgment will be entered for the respondent.

       Whenever it shall be proposed to compromise or settle any claim, whether in suit or not, by or against a minor or the estate of a decedent, or to compromise or settle any question or disputo concerning the validity or construction of any last will and testament or the distribution of any decedent’s estate, the orphans’ court having jurisdiction of the accounts of the fiduciary shall he authorized and empowered, on petition by such fiduciary, setting forth all the facts and circumstances of such claim or question and proposed compromise or settlement, and duly verified by oath or affirmation, and after due notice to all parties interested, and after due consideration, aided, if necessary, by the report of a master, if satisfied that such compromise or settlement will be for the best interests of such minor or of the estate of such decedent, to enter a decree authorizing the same to he made, which decree shall operate to relieve the fiduciary of responsibility in the premises.


text:
    Decatur Water Supply Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68149, 72706.
    Promulgated April 9, 1936.

      Ralph J. Monroe, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Muedock :

The Commissioner determined the following deficiencies in the petitioner’s income tax:

The questions presented for decision are (1) whether amounts required by its charter to be used, and used, by the petitioner out of its alleged income for tlie respective years to retire its preferred stock were income to the petitioner subject to tax, or (2) whether these funds are to be excluded from gross income and exempt from taxation under the provisions of section 116, paragraph (d), Eevenue Act of 1928. The facts have been stipulated. However, the stipulation need not be set forth in full in this report.

The city of Decatur, Illinois, for many, years had supplied its inhabitants and industries with water from a nearby stream. When this system became inadequate and unsatisfactory, the city formulated a plan in 1920 for the creation of an adequate reservoir by constructing a dam across the entire valley of the stream near the city. The contract for the dam was let. Bonds were sold for the payment of the contract price. These bonds brought the city up to its constitutional debt limit and it was prohibited from obtaining further credit. It did not have money to purchase the lands necessary to complete the reservoir. The city, through its legal counsel, formulated a plan for completing the waterworks. The petitioner was organized and chartered on February 2, 1921, as a public utility to assist in carrying out the plan. The petitioner then entered into a contract with the city on April 4, 1921, under which the watex*-works was constructed and operated until March 30, 1934, when the entire property was conveyed to the city and the petitioner dissolved.

The petitioner was incorporated under an act relating to corporations for pecuniary profit. Its authorized capital stock consisted of $999,000 par value of preferred and 100 shares of common stock without par value. The holders of the preferred stock were entitled to cumulative dividends at the rate of 7 percent per amium and no more. The company could retire the preferred stock at par at any time when the cumulative dividends had been fully paid. The charter further provided:

* * * No earnings of the Company available for the payment of dividends shall be used for capital expenditures after two years from the date of the incorporation of the Company, but must be used either to pay dividends on the preferred stock or to retire the preferred stock. All sums realized from the sale of capital assets after two years from the date of the incorporation of the Company shall be used to retire preferred stock.
Whenever all of the preferred stock of the Company shall have been retired and all the debts and obligations of the Company shall have been fully paid and discharged, save current expenses, then, upon the assumption or payment of such current expenses by the City of Decatur, Illinois, a municipal corporation, or its successor, and upon the further payment to the Company of the sum of One Thousand Dollars, to be distributed by the Company to the holders of the common stock of the Company, the Company shall thereupon convey to the said City of Decatur, or its successor, all of the property and assets of the Company and the Company shall thereupon be dissolved.

One thousand dollars was paid in for common stock.

The company agreed in the contract of April 4, 1921, to acquire the necessary land and the right to flood it, to prepare it as a reservoir, to pay all expenses of altering roads and constructing bridges, and to make other necessary expenditures not to exceed $1,000,000. The city agreed to complete the dam and to supply the water to the city, through the system which it then owned, at reasonable rates to be fixed and collected by the city for the joint account of the city and the company. The water rents were to be deposited in a bank to the joint account of the city and the company. All water rents accruing and collected after May 1, 1921, were to be divided monthly between the parties as follows: first, the city was to receive a sum equal to its expenses incurred during the preceding month in the operation of the water system; 10 percent of the remainder was to go to the city and 90 percent to the water company. The contract was to continue in effect for 30 years, unless sooner terminated. All capital expenditures by the company were to be made only with the approval of the city. The city had the option to purchase within the 30 years the entire interest of the company in the joint undertaking at a sum sufficient to retire the outstanding obligations, to retire the outstanding preferred stock at par and accumulated dividends, and to pay the expenses of winding up and dissolving the company, including the sum of $1,000 to be distributed among the holders of its common stock.

Public-spirited citizens subscribed and paid for the entire stock issue of the petitioner. The petitioner had no other business or source of income aside from its operations under the contract. The water rents were collected by the city and deposited and disbursed in accordance with the contract and the charter of the petitioner. The amounts paid to the petitioner exceeded its operating expenses and the dividend requirements on preferred stock, and from the excess it retired portions of its preferred stock.

The city, on August 28, 1933, authorized the acceptance of the option to purchase contained in the contract. Thereafter, it sold its water revenue bonds and from' the proceeds paid the petitioner on March 30, 1934, $214,978.98, with which the latter retired its common stock at $1,000, without dividends, retired all of its outstanding preferred stock at par with accrued dividends, and paid its miscellaneous bills and debts outstanding. The city in addition deposited in escrow with two banks the sum of $63,000 to cover the contingent liability of the petitioner for the tax herein involved and costs. The petitioner conveyed all of its property to the city on March 30, 1934.

The petitioner made income tax returns and reported as net income for each year, including the taxable years here in question, the amount of dividends paid to its stockholders. The balance of its gross receipts over current expenses and dividends was not returned as income but was used to retire its preferred stock in accordance with its charter. With the exception of an item of $912, disallowed as a deduction for 1929, the entire deficiency determined by the Commissioner in each year has been computed by including in income the amount used in retiring its preferred stock.

The Commissioner, after the present proceedings had been instituted, made a jeopardy assessment of the taxes in question. The petitioner, with the approval and authorization of the city, paid the amounts under protest on April 25, 1934, from the funds deposited in escrow.

The parties are in agreement as to all facts and figures involved in this proceeding. The petitioner has always returned as its gross income an amount sufficient to pay its current expenses and the dividends on its preferred stock. It argues that the additional amounts which it received under the contract and which it was required by its charter to use in the retirement of its preferred stock were not income within the meaning of that term as used in the Sixteenth Amendment to the Constitution and in the Revenue Act of 1928. We have carefully considered the facts and circumstances of this case in connection with this argument of the petitioner, which it has so earnestly and capably presented, but we are unable to agree that the amounts in question were not income to the petitioner under the Constitution and also under the Revenue Act of 1928.

The petitioner is a private corporation, incorporated under an act chartering corporations for pecuniary profit. The evidence does not show that it received any more of the water rents collected than its proper share, based upon the portion of the plant which it owned. Obviously all of the amounts collected from the users of water were income to someone. The share allocated to the petitioner was not income to the city. We see no sound reason in this case for holding that less than all of the amount received by the petitioner was income to it. Amounts collected by a water company for water which it supplies to its customers represent gross income regardless of what use the utility makes of the funds thus collected. Cf. Cleveland Railway Co. v. Commissioner, 36 Fed. (2d) 347, affirming on this point 10 B. T. A. 310; certiorari denied, 281 U. S. 743. The mere fact that a part of the receipts must be used by the petitioner to retire its preferred stock is no justification for excluding that part of the rents from gross income. The receipt of such amounts increased the petitioner’s net worth and gave it an earned surplus during the taxable years. In this respect it was no different from any other corporation. It is true that the common stockholders of the petitioner could never receive any greater benefit from the successful operation of the petitioner than the return of their original capital investment of $1,000. Furthermore, the preferred stockholders could not benefit beyond the return of their capital investment, with accumulated dividends to the date of retirement of their stock. But the taxpayer here is the corporation and not the stockholders. The corporation as such derived the same benefit from these earnings as any other corporation would derive. The city, of course, had the option to purchase the petitioner’s property in such a way that it would ultimately receive the benefit of the use of the funds in question for the retirement of the preferred stock. But in the taxable years it had not exercised that option and had not received any benefit from the retirement of the preferred stock. The payment of dividends on the preferred stock was just as beneficial to the city. Neither represented income to the city during the taxable years. If the operations of the petitioner had proven unsuccessful, the city might never have taken over its property. Losses in such case would have been losses of the company. Its stockholders would have been the ultimate losers in that case. This corporation must be treated as any other corporation for the purpose of computing its income tax liability. Cleveland Railway Co. v. Commissioner, supra. Cf. Citizens Water Co., 32 B. T. A. 750; Citizens Water Works, Inc., 33 B. T. A. 201.

The petitioner’s next contention is that the funds in question must be excluded from gross income and exempt from taxation under the provisions of section 116, paragraph (d) of the Revenue Act of 1928. Section 116 entitled, “Exclusions from Gross Income” and provides that “the following items shall not be included in gross income and shall be exempt from taxation.” Paragraph (d) is entitled, “Income of States, municipalities, etc.” The first sentence is as follows:

Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof.

The income in question did not accrue to the city of Decatur within the meaning of this provision. Citizens Water Co., supra; Citizens Water Works, Inc., supra. The provision applies to the 10 percent of the remainder of the joint funds retained by the city, rather than to the 90 percent turned over to the petitioner. The further provisions of section 116 (d) can have no application whatever to this case, since they apply only where a contract was entered into prior to September 8, 1916, whereas the petitioner in this case was not organized until 1921.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Seawell:

text:
    The London and Lancashire Insurance Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73179.
    Promulgated April 9, 1936.

      William H. Hotchkiss, Esq., and John S. Breckinridge, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Seawell:

The Commissioner determined a deficiency of $5,123.91 for the calendar year 1930. The facts have been either stipulated or established by allegations in an amended petition which are admitted in the answer thereto.

The petitioner is a foreign insurance company, incorporated finder the laws of Great Britain and Ireland, with its head office in London, England. It transacts fire, marine, accident, life, and other classes of insurance throughout the world. During the year 1930, and for many years prior thereto and since, it carried on a fire and marine insurance business in the United States, its principal office in this country being in Hartford, Connecticut.

Four issues are presented for decision of the Board.

1. The first issue is whether the Commissioner erred in excluding tax-exempt interest and dividends from domestic corporations in the sum of $383,456 from gross income from sources within the United States in ascertaining the proper ratio for determining the portion of home office taxes and expenses applicable to the United States income, which may be allowed as deductions. It is stipulated that such interest amounts to $68,617 and such dividends amount to $314,839, a total of $383,456.

It is not disputed that foreign insurance companies transacting in the United States the business of fire and marine insurance are entitled to take as deductions from their gross income from sources within the United States ratable parts of their expenses at their head offices and income taxes paid there attributable to their income from sources within the United States.

Based on the stipulation of the parties, the following illustrates by comparison the method of computation used by each in arriving at the ratios claimed by the petitioner and those allowed by the respondent:

The net income of every insurance company, other than life or mutual companies, is subject to tax under the provisions of the Revenue Act of 1928. The petitioner is subject to tax imposed by said act. The pertinent provisions of the Revenue Act of 1928 are as follows:

SEO. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.
(a) Imposition of tax. — In lieu of the tax imposed by section 13 of this title, there shall be levied, collected, and paid for each taxable year upon the net income of every insurance company (other than a life or mutual insurance company) a tax as follows:
i'fi ' ⅜ ⅜ ⅜ S¡5 ⅜ *
(2) In the case of such a foreign insurance company, 12 per centum of its net income from sources within the United States.
(b) Definition of income, etc. — In the case of an insurance company subject to the tax imposed by this section—
(1) Gross income. — “Gross income” means the sum of (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain during the taxable year from the sale or other disposition of property;
(2) Net income. — “Net income” means the gross income as defined in paragraph (1) of this subsection less the deductions allowed by subsection (c) of this section.
(3) Investment income. — “Investment income” means the gross amount of income earned during the taxable year from interest, dividends, and rents, computed as follows:
* * * * * ⅞ *
(c) Deductions allowed, — In computing the net income of an insurance company subject to the tax imposed by this section there shall be allowed as deductions:
(1) All ordinary and necessary expenses incurred, as provided in section 23 (a) ;
⅜ ⅜ ⅜ ⅝ sfc ⅝ s£
(3) Taxes as provided in section 23 (c) ;
sjs ⅜ ⅜ ⅝ * * *
(7) The amount received as dividends from corporations as provided in section 23 (p) ;
(8) The amount of interest earned during the taxable year which under section 22 (b) (4) is exempt from taxation under this title, and the amount of interest allowed as a credit under section 26;
⅜ * ⅜: ⅜ ⅝ # ⅜
(d) Deductions of foreign corporations. — In the case of a foreign corporation the deductions allowed in this section shall be allowed to the extent provided in Supplement I.
(e) Double deductions. — Nothing in this section shall be construed to permit the same item to be twice deducted.
⅜ M ⅜ ⅜ ⅜* ⅜ ¡Je
SEC. 2 07. COMPUTATION OF GROSS INCOME.
The gross income of insurance companies subject to the tax imposed by section 201 or 204 shall not be determined in the manner provided in section .119.
*******
Supplement I — Foreign Corporations
SEC. 2 31. GROSS INCOME.
(a) General rule. — In the case of a foreign corporation gross income includes only the gross income from sources within the United States.
⅜ # ⅜ ⅜8 ⅜ ⅝ *
SEC. 232. DEDUCTIONS.
In the case of a foreign corporation the deductions shall be allowed only if and to the extent that they are connected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 119, under rules and regulations prescribed by the Commissioner with the approval of the Secretary.
⅜ ⅝ ⅝ ¾: ⅜ sjc ⅝:
SEC. 237. FOREIGN INSURANCE COMPANIES.
For special provisions relating to foreign insurance companies, see Supplement G. [See. 204 is in Supplement G.]

That part of section 119, above referred to, which relates to apportionment and allocation of deductions is contained in subsection (e), which provides:

* * * Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some item or class of gross income. * ⅜ *

Considering the provisions of the Revenue Act of 1928 with reference to foreign corporations engaged in fire and marine insurance within the United States, it clearly appears: First, that foreign corporations are subject to tax only on income from sources within the United States; second, that deductions are allowed only if and to the extent that they are connected with income from sources within the United States; third, that in the case of deductions which can not be matched against some particular item or class of income, a ratable part only is to be allocated to items of income from United States sources; and, fourth, that the same item shall not be twice deducted.

When these provisions are applied to the instant case we find this situation: The petitioner has investment income from sources in the United States in the form of dividends received from domestic corporations (exempt under section 28 (p)) and interest (exempt under section 22 (b) (4)); both of these items are allowed as deductions under section 204 (c) (7) and (8), but since the petitioner is a foreign insurance company these items must be matched against the particular items of gross income to which they relate, which, of course, is the identical item included in gross income. The effect of these two provisions is to exempt from United States income tax certain dividends and certain interest. The taxes paid to Great Britain by the petitioner on its income were measured by its income from all sources, which included both taxable income from United States sources, as well as tax-exempt income from United States sources and income from sources other than the United States. The United States statute, as we construe it, allows as a deduction in computing net income subject to tax only so much of the British taxes paid by the foreign insurance company as is properly allocable to the taxable gross income from sources in the United States. The same thing is true with respect to the home office expenses. Cf. Waldorf Astor, 31 B. T. A. 1009.

The Commissioner has not prescribed any regulations with respect to the method by which a foreign insurance company shall determine the ratable portion of the expenses and other deductions which is to be allocated to United States gross income. Section 207 provides that the gross income of insurance companies subject to the tax imposed by section 201 or 204 shall not be determined in the manner provided in section 119; and the only regulations which the Commissioner has prescribed with respect to apportionment of deductions relates to the method of apportioning deductions to the items of income determined under the provisions of section 119. See art. 680, Regulations 74.

The method here followed by the respondent in determining what portion of the British taxes and home office expenses are allowable deductions results in allowing to the petitioner the ratable portion of the British taxes and the home office expenses allocable to taxable gross income from sources within the United States. To allow any greater portion of the home office expenses and British taxes would be in effect allowing the same item to be deducted twice, which is prohibited by section 204 (e).

The Commissioner, looking at the statute as a whole and the objects and policy as indicated by its various provisions, has, in our opinion, given the statute such construction as will carry into execution the will of Congress with respect to the allowance of deductions to a foreign insurance company. We approve the Commissioner’s determination on this issue.

2. The second issue is whether the income tax which the petitioner paid to Great Britain and deducted from dividends to its shareholders is, under our Revenue Act of 1928, an allowable deduction from its gross income, as claimed by the petitioner, or is a tax paid or borne by the recipients of the dividends, as the respondent contends.

In Welch v. St. Helens Petroleum Co., Ltd., and three other cases, 78 Fed. (2d) 631, involving the precise question we are discussing, the court said:

These actions were brought by the taxpayers, St. Helens Petroleum Company, Limited, a British Corporation, and the Kern River Oilfields of California, Limited, a British corporation, to recover money paid for excess profit taxes and income taxes upon incomes accruing to the taxpayers derived from oil wells in California. The primary question involved is whether or not the amounts of taxes paid upon their incomes to the British government under the British law imposing such taxes are to be deducted from the gross incomes of the companies derived from their oil wells in California in the proportion fixed by the law of the United States in ascertaining the net incomes upon which the excess profit taxes and the income taxes are to be determined. The Commissioner of Internal Revenue, in fixing the amounts of taxes to be paid by the taxpayers, made no deduction for the taxes paid to the British government.
* * * * * ⅝ ⅜
We conclude that in determining the net incomes taxable to the appellee corporations that the law required the deduction of the taxes they had paid to the British government upon income from sources within the United States.
This conclusion would result in a corresponding reduction in the amounts of income taxes payable by the taxpayers. Consequently, the decisions in cases Nos. 7491, 7492, and 7489 should be affirmed. [Said numbered cases refer to the Kern River Oilfields of California, Ltd., supra.]

See also Mary Duke Biddle, 38 B. T. A. 127, in which we have to some extent discussed the British income tax statutes.

In the light of the above cases and the authorities therein cited, we are of the opinion and hold in favor of the petitioner with respect to this, the second, issue. It is accordingly entitled to the deductions claimed and as stipulated by the parties in the event our determination on said issue should be in its favor.

3. The third issue is whether or not the respondent erred in disallowing as a deductible loss to petitioner the sum of $52,790, being the difference between the cost, $162,290, to the petitioner of 500 shares of stock of the London & Lancashire Indemnity Co. of America and the price, $109,500, at which it was sold in the United States in 1930 to the Orient Insurance Co., both companies being domestic insurance companies with more than 95 percent of the stock of each owned by petitioner at the date of said sale.

Since the petitioner is a foreign corporation and its subsidiaries, the London & Lancashire Indemnity Co. of America and the Orient Insurance Co. (to which latter company the stock in question was sold by the petitioner) are both domestic corporations, the three companies do not constitute an “affiliated group” and a consolidated return for the taxable year 1930 for all said companies was not permissible and separate returns for each were filed. See Commissioner v. Manus-Muller & Co., 79 Fed. (2d) 19; certiorari denied, 296 U. S. 657; Commissioner v. Silk Center Building, Inc., 82 Fed. (2d) 20.

Had the petitioner been a domestic corporation and filed a consolidated return, the sale, in our opinion, would have been an inter-company transaction from which no deductible loss would have resulted.

Does the fact that the petitioner is a foreign corporation and filed a separate return as the law required, there being no affiliation, entitle it to take as a deductible loss the aforesaid sum of $52,790? It is stipulated that there was no open market transaction involving the purchase or sale of shares of the London & Lancashire Indemnity Co. of America in 1930 or prior thereto and that the petitioner, as of the date of such sale, owned 9,955 shares of the 10,000 shares of capital stock of the Orient Insurance Co. then outstanding. Under the circumstances and conditions described and in view of the principles enunciated and applied in Founders General Corporation v. Commissioner. 79 Fed. (2d) 6, and A. S. Eldridge, 30 B. T. A. 1322; affd., 79 Fed. (2d) 629, we are of the opinion and hold that the petitioner did sustain a loss by reason of said stock sale or transaction. We, therefore, determine this issue in favor of tne petitioner.

4. The fourth issue is whether interest received by the petitioner during the year 1930 on refunds of Federal income taxes constitutes taxable income from sources within the United States. The respondent included in petitioner’s taxable income for 1930 the amount of $4,178.60, representing interest received by the petitioner on a refund of Federal income taxes. This issue has recently been decided by the United States Supreme Court in favor of the respondent’s contention and determination. See Helvering v. Stockholms Enskilda Bank, 293 U. S. 84; British-American Tobacco Co., Ltd. v. Helvering, 293 U. S. 95; Oceanic Steam Navigation Co., Ltd., 31 B. T. A. 781. We determine this issue in favor of the respondent.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: McMahon:

text:
    Hiram R. Lloyd, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49400.
    Promulgated to April 9, 1936.

      Howard A. Johnson, Esq., for the petitioner.

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

McMahon:

This is a proceeding for the redetermination of a deficiency in income taxes for the year 1928 in the amount of $706.18. It is alleged that the respondent erred in holding that a certain loss sustained by the petitioner in the amount of $11,250 was not sustained in the year 1928.

The petitioner is an individual with residence at Butte, Montana.

About 1913 the petitioner purchased for $11,250, certain bonds of the Butte-Duluth Mining Co., a corporation, receiving at the same time, as a bonus, certain common stock of that corporation of a par value of about half of the amount paid for the bonds.

On December 3, 1927, the sheriff of Silver Bow County, State of Montana, sold all of the property of the corporation under and by virtue of an order of sale issued by the District Court of the Second Judicial District of the State of Montana in and for the County of Silver Bow, in an action pending in that court, being the suit of A. J. Davis, as trustee, plaintiff, against the Butte-Duluth Mining Co., a corporation, et al. The sale was to satisfy a judgment “for damages, with interest and costs”, amounting to $1,138,395.06. Upon such sale the property brought $47,172.75. The property was sold “subject to redemption at) any time within twelve months from date of said sale, pursuant to the statute in such cases made and provided” and included equitable as well as legal title to its property.

After the sheriff’s sale, and in 1927, petitioner asked other bondholders about charging his investment off on his income tax return for 1927. They advised him that that was not proper and that he should wait a year, since under the law there probably would be something done by the bondholders with regard to redemption of the property.

There were some prominent people who owned stock and bonds of this corporation who talked to the petitioner about forming some kind of an association of persons similarly interested to effect a redemption of the property. This was in 1927 after the sheriff’s sale. They asked him several times if he would be willing to enter into such an association and he told them he would, but nothing was done toward redeeming the property and the property was not redeemed.

In 1928 petitioner went to another to have his income tax made out and explained the matter to him. He was advised to make a sale of his bonds to establish their worthlessness. Petitioner accordingly sold the bonds to his brother for $1. His brother did not own any bonds of the Butte-Duluth Mining Co.

Petitioner was not familiar with the affairs of the Butte-Duluth Mining Co.

Petitioner never received any interest on these bonds.

The petitioner did not, in 1927 or at any other time, receive anything as a result of this sheriff’s sale.

The common stock of the Butte-Duluth Mining Co. was worthless prior to the year 1928.

The respondent determined that all of petitioner’s loss, in question here, occurred in 1927.

Upon the foregoing facts which we find, the only issue presented is whether the petitioner is entitled to deduct the amount of $11,250, representing his investment in bonds and common stock of the Butte-Duluth Mining Co., from gross income of 1928. There is no controversy between the parties as to the amount of such investment. The respondent determined that the petitioner’s loss occurred in 1927, from which it follows that he determined that the amount in question is not deductible from the gross income of 1928. The year 1927 is not now before us, the proceeding in so far as it purported to relate to the year 1927 having been dismissed for lack of jurisdiction upon motion of the respondent granted with the consent of the petitioner.

While the petitioner refers to a “loss” sustained by him, the evidence shows that his investment of $11,250 was for bonds, which are evidences of indebtedness and within the bad debt provisions of the applicable revenue act (Mutual Life Insurance Co. of New York, 23 B. T. A. 749; affd., 65 Fed. (2d) 1014; certiorari denied, 290 U. S. 670), and for common stock of the Butte-Duluth Mining Co., which is not evidence of indebtedness and is within the loss provisions of such revenue act. Losses are deductible in the taxable year in which actually sustained, whereas bad debts are deductible in the taxable year in which they are ascertained to be worthless and charged off. There are set forth in the margin the applicable provisions of the Revenue Act of 1928.

The ruling of the Commissioner has the support of a presumption of correctness and the petitioner has the burden of proving it erroneous. Welch v. Helvering, 290 U. S. 111. Here the petitioner has failed to show that the respondent’s determination is erroneous. On the contrary, there is considerable evidence in the record tending to sustain the respondent’s determination.

The petitioner has failed to show us the nature of the suit of A. J. Davis, trustee, against the Butte-Duluth Mining Co. All we know is that the judgment in such action was for damages with interest and costs, all in the amount of $1,138,395.06. We do not know whether Davis was trustee for the benefit of the bondholders, of which petitioner was one. Probably he was not, since the petitioner does not claim that such was the case. There is no evidence to show that the judgment did not have priority over the obligation of the bonds held by petitioner. We do not know the amount of the outstanding bonds and stock of the corporation.

Upon a consideration of all the facts and circumstances we have found as a fact, and now hold, that the common stock of the Butte-Duluth Mining Co. was worthless prior to 1928. Under the applicable statute the petitioner’s investment in such stock should have been deducted prior to the taxable year 1928. Plere petitioner has failed to show to our satisfaction that the bonds were not worthless prior to the year 1928 and that he should not have reasonably ascertained them to be worthless prior to 1928. However, assuming for purposes of discussion only that the investment in the bonds was not deductible prior to 1928, we are unable to allow any deduction on account of the bonds in 1928 for the reason that there is no evidence in the record upon which an allocation of the petitioner’s investment of $11,250 can be made as between the bonds and the common stock. See C. H. Mead Coal Co., 28 B. T. A. 599; affirmed in part and, upon other grounds, reversed in part, in Mead Coal Co. v. Commissioner, 72 Fed. (2d) 22.

It is the contention of the petitioner that his “loss” did not occur until 1928, when the right of redemption expired. Petitioner refers us to provisions of the law of the State of Montana providing for a right of redemption within one year, by a stockholder, of property of a corporation sold in satisfaction of a judgment against the corporation, and further providing for a right of redemption by the corporation from such stockholder. It is to be noted that this is true as to a judgment in a suit other than a foreclosure suit.

The fact that it was proposed to form an association for the purpose of redeeming the property of the corporation is not determinative. The evidence shows that the association was not formed and that the property was never redeemed. This may be open to the inference that the property was not worth redeeming and so far as we know the respondent, in making his determination, may have drawn such inference. Furthermore, petitioner has failed to show that, even if the property had been redeemed, it could have been reasonably expected that any value would have resulted to either the common stock or bonds. It is to be remembered that at the time of the sheriff’s sale there was outstanding against the Butte-Duluth Mining Co. a judgment in the amount of $1,138,395.06, whereas all the property of the corporation, legal and equitable, brought only $47,1 72.75 on the sheriff’s sale. Hence there is evidence tending to show that the bonds were actually worthless prior to the year 1928.

While it is true that debts are deductible in the year in which they are ascertained to be worthless, yet a taxpayer may not close his eyes to the obvious and ignore that which he reasonably should have known as to the worthlessness of the debts in any given year. Hence, the fact that the petitioner testified that he determined to his own satisfaction that his investment in the stocks and bonds was lost in 1928 is not determinative.

There is evidence, and we have found, that, pursuant to advice, petitioner in 1928 sold his bonds to his brother for $1 to establish their worthlessness. This is not determinative. Under the statute a sale or other identifiable event is not a prerequisite to a taxpayer’s right to a deduction for a bad debt, and such a sale for a nominal consideration can not operate to allow the deduction in the year in question when it should have been taken in a prior year. As previously stated, the petitioner has not shown that the deduction for the investment in the bonds should not have been taken prior to 1928.

Upon the whole record the determination of the respondent is approved.

Decision will be entered for the respondent.

       SBC. 23. DEDUCTIONS FROM GROSS INCOME.
      * * * * * * *
      (e) Losses by individuáis. — In the case of an individual, losses sustained during the taxable year and not compensated lor by insurance or otherwise—
      (1) if incurred in trade or business; or
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
      * ⅛ * * * * * _
      (j) Bad debts. — Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

       Secs. 9442 and 9444, Revised Codes of Montana, 1923-1927 Supplement; and sec. 9443, Revised Codes of Montana, 1921.

       See Meritt J. Corbett, 15 B. T. A. 698; affd., Corbett v. Burnet, 50 Fed. (2d) 492; certiorari denied, 284 U. S. 646.

        Henry C. Heinz, 28 B. T. A. 276; affd., 70 Fed. (2d) 461.

        New York, Chicago & St. Louis Railroad Co., 26 B. T. A. 1229; affd., New York, Chicago & St. Louis Railroad Co. v. Helvering, 71 Fed. (2d) 956.


author:
Leech :
      Matthews,

text:
    M. W. Dobrzensky, as Executor of the Estate of William Glenn Marvin, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77017.
    Promulgated April 10, 1936.

      M. W. Dobrzenslcy, Esg., pro se.

      G. W. BrooJes, Esg., for the respondent.
   OPINION.

Leech :

This proceeding attacks the determination of an estate tax deficiency of $1,003.78 against the estate of William Glenn Marvin, who died January 5,1932, a resident of California.

In making his determination of the deficiency the respondent included in the gross estate of the decedent the proceeds of six policies of life insurance in the amount of $90,763.72, which the representative of the estate did not return for taxation.

We find the facts as stipulated. Only those essential to an understanding of the issues will be repeated here.

The decedent was for many years the attorney and managing director of the American Manufacturers Foreign Credit Underwriters, Inc. On December 9, 1927, on application of the corporation the John Hancock Mutual Life Insurance Co. issued a group policy of life insurance for $1,000, including the decedent as one of the insured. This was increased to $1,500 on December 9, 1929. This policy was \ applied for and the premiums paid by the corporation. Decedent’s J1 wife was designated as beneficiary, but he had the right to change"" the beneficiary. In July 1931, the insured Marvin became totally disabled and became entitled to and was paid $125 per month under the terms of the policy. At the time of his death there was a balance due on the policy of $763.72, which respondent included in his gross estate for taxation.

On January 29, 1924, the Travelers Insurance Co. on the applica tion of the decedent Marvin issued a term policy on his life for / $50,000 in which the American Manufacturers Foreign Credit Under-; writers, Inc., was named as beneficiary. This term policy, on the joint application of the decedent and the American Manufacturers Foreign Credit Underwriters, Inc., was converted into a limited payment life policy on June 16, 1925, for $50,000 in which the ¿ame beneficiary was designated. On June 20, 1925, the American Manufacturers Foreign Credit Underwriters, Inc., assigned T]ae contract to the decedent, who on June 22, 1925, designated his wife as the beneficiary, but reserved the right to revoke the designation and subject to the consent of the insurance company to name a new beneficiary.

The board of directors of American Manufacturers Foreign Credit Underwriters, Inc., passed the following resolution on February 1, 1926:

Upon motion duly made and seconded, the following resolution was adopted:
Whereas the American Manufacturers Foreign Credit Underwriters, Inc. had the life of its Managing Director, William G. Marvin, insured in the amount of $50,000.00, the beneficiary under the policy being the company, and
Whereas, William G. Marvin was not maintaining a sufficient amount of insurance to cover his personal estate and as his state of health was not such as to make it desirable to approach any insurance company for additional insurance, and
Whereas, William G. Marvin has given unstintedly of his time, energy and great abilities, and has borne all the large responsibilities of Managing Director of this corporation without salary or compensation, and, notwithstanding his change of residence to California, continues to serve the corporation in the capacity of Managing Director, actively cooperating with the management in his invaluable advice, counsel and personal influence which would justify a very large compensation.
Now, Therefore, Be It Resolved :
First: That as some slight evidence of appreciation and recognition of these valuable services, it is the sense of this directorate, and it is so ordered, that the above life insurance policy be converted into a twenty year payment life policy, payable to the estate of said William G. Marvin, and
Second: That all premiums and costs incidental to the conversion of said policy, and the renewal premiums thereof be assumed by this corporation, all of which is hereby confirmed, ratified and approved.

All of the premiums oil both policies were paid by the American Manufacturers Foreign Credit Underwriters, Inc.

The decedent Marvin was, for many years, a practicing lawyer in New York City and was the senior member of the law firm of Marvin & Pleasants and its successor, Marvin & Bergh. Both firms had an extensive commercial practice and had as one of their regular clients the American Manufacturers Foreign Credit Underwriters, Inc.

The firm of Marvin & Bergh was formed by written contract January 17, 1927, at which time the decedent Marvin was living in California because of ill health. After many detailed clauses relating to the duties and interests of the various partners it was provided as follows:

21. Inasmuch as the predecessor firm of Marvin and Pleasants paid premiums on life insurance policies upon the life of the said Marvin totaling Fifty Thousand Dollars ($50,000.), and paid premiums on policies totaling Fifteen Thousand Dollars ($15,000.) on the life of the said Bergh, all such premiums being paid as a firm expense, the parties hereto agree to continue the payment of premiums upon the said policies as an expense of the firm of Marvin and Bergh, except that the total of the life insurance policies paid for the account of the said Marvin shall be reduced to Forty Thousand Dollars ($40,000).
22. In the event of the death of either Marvin or Bergh, life insurance proceeds received by the beneficiary designated in the insurance policies mentioned in paragraph 21 shall be received in lieu of interest and good will of ‘xthe said firm, and shall entitle the remaining partners to use the name of kny such deceased partner in the firm style in perpetuity.

Section 23 of the contract provided that upon the death of any partner his estate should be paid his participation percentage in the appraised value of the furniture, library, carpets, and equipment of the firm, and in section 24 it was agreed that if Marvin was unable to return to active practice within seven years, he would sell his good will in the firm to the remaining partners for a sum equal to four times his interest in the firm profits for the year preceding the sale.

On April 30, 1929, a new contract of partnership was entered into by the firm admitting new members and providing for the interests of the decedent Marvin as retiring partner. Among other things it was provided as follows:

That Marvin in consideration of any services that he may in his discretion render to the firm, and in consideration of giving to the other parties hereto the right in perpetuity to use his name “Marvin” in the firm name and style, whether in the present style or in some other combination of names, as the present active partners, Bergh, Greaves and O’Melia, or their successors and/or assigns may determine, is to receive the following participation in the net profits of the firm for a period of twelve years:
Year commencing May 1,1929 — 34 points
Year commencing Máy 1,1930 — 31 points
Year commencing May 1,1931 — 28 points
Year commencing May 1,1932 — -25 points
Year commencing May 1,1933 — 20 points
Year commencing May 1,1934 — 20 points
Year commencing May 1,1935 — 18 points
Year commencing May 1,1936 — 16 points
Year commencing May 1,1937 — 16 points
Year commencing May 1,1938 — 16 points
Year commencing May 1,1939 — 10 points
Year commencing May 1,1940 — 10 points
* * * * * * *
That during- the life of this agreement, the firm is to continue to pay the premiums on the life insurance policies totaling $40,000 on the life of the said Marvin that it has heretofore been paying; that it is to continue to pay the premiums on the life insurance policies on the life of the said Bergh that it has been paying, and is in addition to pay premiums on other policies on the life of Bergh so as to bring the total amount of such policies up to $40,000; that it is to pay premiums on life insurance policies totaling $15,000 on the life of the said O’Melia; and that it is to pay premiums on life insurance policies totaling $15,000 on the life of the said Greaves, or at its option, in the event that premiums therefore should be extremely high, may elect to carry such insurance itself, and in the event of his death, pay his estate the sum of $15,000, payable in four (4) semi-annual installments during the course of two (2) years.
That in the event of the death of Marvin or Bergh or O’Melia, the life insurance proceeds received by the beneficiary designated in the life insurance policies mentioned in the last preceding paragraph shall be received in lieu of interest in the good will of the said firm, and in the case of said Marvin, in lieu of the payment of any further participation as provided in paragraph 6 above, and shall entitle the remaining partners to use the name of any such deceased partner in the firm style in perpetuity.

Under these contracts, four policies of insurance, each for the sum of $10,000, were applied for by the decedent Marvin and issued by the Travelers Insurance Co. Marvin’s wife was the designated beneficiary in two of the policies, and in the other two his estate was named as beneficiary. These latter two policies were assigned by him to the partnership, and were immediately reassigned to him by the partnership. He then changed the beneficiary to his wife. In all four policies he retained the right to change the beneficiary. All premiums were paid by the succeeding partnerships. Marvin’s average participation in the profits of the firms during the existence of these policies was 42.34 percent.

The Revenue Act of 1926, section 302 (g), is controlling. It provides;

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — (a) To the extent of the interest therein of the decedent at the time of his death; ⅜ ⅜ * (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to theextent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

Since the decedent, at death, possessed the reserved right to change the beneficiary in all the disputed policies the amounts receivable by the beneficiaries under those policies were properly included in decedent’s gross estate here (Louise C. Moore, Executrix, 33 B. T. A. 108), if, and only if, those policies were “taken out by the decedent upon his own life.”

In Bessie M. Ballinger, Executrix, 23 B. T. A. 1312, this Board construed the quoted words literally. The group insurance policy, the subject of inquiry there, was similar in all material respects to the group policy here. The fact that disability payments had been made to the insured under the present group policy clearly does not change the fact that the contested death benefits under the policy, matured only at the death of the insured and was an “amount receivable by other beneficiaries [not the estate of the insured] as insurance.” In excluding the proceeds of that policy from the gross estate of the insured, the Board said:

With respect to the group policy, it appears that the insurance was taken out by the Ballinger Company for its employees, and was not taken out by decedent upon his own life. The statute covers amounts received “by the executor as insurance under policies taken out by decedent upon Ms own Ufe’’, and the excess over $40,000 received by all other beneficiaries from insurance “taken out by decedent upon his own life.” Since the statute fails to provide for the inclusion of the proceeds of insurance policies taken out by others on the decedent’s life, it would seem that Congress did not intend to include such proceeds in computing a decedent’s gross estate. As to the group policy, therefore, we hold that the proceeds should be excluded from decedent’s gross estate, because sueh policy was not taken out by decedent upon his own life.

Upon the authority of that case we hold that respondent erred in including the amount received by decedent’s widow under this group policy in decedent’s gross estate. See Revenue Act of 1934, sec. 22 (a) (3), G. M. C. 16069.

The $50,000 policy described in the facts was applied for by decedent. The American Manufacturers Foreign Credit Under-, writers, Inc., was named as beneficiary thereunder. Later, decedent assigned the policy to that company. Following this, the policy, then a term policy, was converted into a limited payment life policy and then, still later, on June 20, 1925, the company assigned it to decedent and he made his wife the beneficiary with the right reserved to make further change thereof. Almost a year later, on February 1, 1926, the resolution by the directorate of the company, appearing in the facts, was adopted. The adoption of no such resolution by the shareholders is disclosed. The directors could not legally give away the corporate property. We will not assume they acted illegally. Decedent had furnished and was even then furnishing the company with his “invaluable advice, counsel and personal influence which would justify a very'-large compensation.” True, decedent was not paid a salary by the company directly, but the law firm of which he was a member and in the profits of which he shared, drew large fees from the company.

Then, “as some slight evidence of appreciation and recognition of these valuable services” the directorate assumed the costs incidental to the conversion of this policy from a term to a limited payment life policy, and its future premiums. We conclude that action constituted not a gift to decedent but compensation paid to him for those services. Frank D. Yuengling, 27 B. T. A. 782; affd., 69 Fed. (2d) 971; George Matthew Adams, 18 B. T. A. 381; Chauncey L. Landon, 16 B. T. A. 907. Cf. David Herbert Botchford, 29 B. T. A. 656; affd., 81 Fed. (2d) 914.

And, since decedent acquired this policy for such services, that policy must be regarded, in law, as “taken out by the decedent upon his own life.” Edgar A. Igleheart et al., Executors, 28 B. T. A. 888; affd., 77 Fed. (2d) 704.

We now consider the four $10,000 policies, the premiums on which were paid by decedent’s succeeding law firms, of the last of which decedent was a member at his death.

The decedent’s average percentage in the profits of these law firms during the existence of these policies was 42.34 percent. It is petitioner’s position that the decedent paid the premiums on the presently disputed policies only to the extent of 42.34 percent thereof, and that it follows that the proceeds of this insurance includable in the decedent’s estate is limited to the same percentage of the proceeds of the policies.

The applications for these policies were signed by decedent.

Despite the agreement that these premiums were to be “paid as firm expense”, our inquiry is to the actual status of those payments. Mitchell v. Doyle, 247 U. S. 179. The premiums on these policies, after the second partnership agreement, were paid by that firm, of which decedent was a member at his death, not as a distribution of the proceeds of the partnership, as such, but as consideration for the right to use decedent’s name as a member of the firm in perpetuity, decedent’s interest in the good will of the firm, which was valued at four times the value of a year’s interest in the business, and his right to limited participation in partnership profits until May 1, 1941, as provided by that agreement. Conversely, by so assigning those rights and interest to his law firm, decedent bought these policies and they are therefore regarded as having been “taken out by the decedent upon his own life.” Edgar A. Igleheart et al., Executors, supra.

The inclusion of the proceeds of these policies in the gross estate of petitioner’s decedent, tmder the controlling statute, is, therefore, sustained.

In the case of Boston Safe Deposit & Trust Co., et al., Executors, 30 B. T. A. 679, the Government attempted to include in decedent’s gross estate, not only the value of decedent’s partnership interest, but also the proceeds of a policy of life insurance having a status substantially similar to the last four policies with which we are here concerned. We properly held that such would result in unjustifiable double taxation.

It is apparent the result there reached was correct but that the theory supporting it was wrong. The rationale of the Igleheart case, supra, was controlling there as well as here. The double taxation feature does not make it less so. Decedent acquired the insurance policy there involved by purchase or exchange. The consideration therefor was decedent’s relinquishment of certain rights in partnership property. After that acquisition decedent no longer had any right, at his death, in the relinquished assets, but, instead, had a taxable interest in an insurance policy. Obviously, the decedent could not be taxed with an asset, as his own, at death, and, at the same time, taxed with the consideration he relinquished for that asset. But, we there sustained the inclusion of the value of the assigned partnership interest which was the consideration decedent paid or exchanged for the insurance policy, and excluded from decedent’s gross estate, the proceeds of that policy which was the asset he thus acquired. This was error. The proceeds of the insurance policy, in full, were includable in decedent’s gross estate there within the provisions of section 302 (g) of the Revenue Act of 1926, which is applicable here. Edgar A. Igleheart, et al., Executors, supra. However, since decedent had relinquished certain partnership interests in exchange for the insurance asset purchased, only the value of his remaining partnership interests, at his death, was includable in his gross estate. On the record there before us, the value of this remaining partnership interest was the amount by which the value of decedent’s full partnership interest, at his* death, exceeded the amount of the proceeds of the insurance policy.

Reviewed by the Board.

Decision will be entered under Rule 50.

MxjRdock concurs in the result.

Matthews,

dissenting on the second point. I disagree with the reasoning in the majority opinion in so far as it relates to the insurance policies which were carried on the life of the decedent by the partnership of which he was a member at the date of his death. These policies were carried by the firm at firm expense and had been so carried by the predecessor partnerships in the same manner.

Under the partnership agreement in effect at the date of decedent’s death, it was provided in paragraph 6 that decedent, in consideration of any services he might render to the firm and in consideration of giving the other partners, and any successor firm, the right in perpetuity to use his name, “Marvin”, was to receive diminishing portions of the profits of the firm for a period of 12 years, “and that upon making these payments Marvin will be retired from the firm and his entire interest therein liquidated.” The firm was to continue to pay the premiums on the life insurance policies on Marvin’s life and to pay premiums on policies on the lives of the other general partners. In the event of the death of Marvin or any other partner on whose life insurance was carried by the firm, the proceeds received by the beneficiary designated in the policies were to be received in lieu of the deceased partner’s interest in the good will of the firm, and in the case of Marvin, in lieu of the payment of any further participation, as provided in paragraph 6, and the remaining partners would be entitled to use the name of any such deceased partner in the firm in perpetuity.

As between themselves the partners provided a means whereby the survivors could pay for a deceased partner’s interest in the good will of the firm at the date of death. Therefore, regardless of whether the beneficiary designated was the estate of the partner or a person other than his estate, the proceeds discharged the obligation of the survivors to pay the deceased partner for his interest in the good will of the firm.

Although the amounts in the instant case were received by Marvin’s wife as the proceeds of the policies on his life, the amount of such proceeds was the value at his death of his interest in the good will of the firm and the right to the use of his name. The full amount of such payment should be included in the estate tax return as the value of decedent’s interest in the partnership and not as insurance proceeds.

It so happens that in the instant case the amount to be included in the gross estate will be the same whether it is called insurance proceeds or partnership interest. But a case might arise where it would affect the amount to be included in the gross estate. For example, suppose a decedent’s life was insured under only one policy, that carried by his partnership under an agreement similar to the agreement in the instant case, and that the face amount of the policy was $100,000 and was all payable to a beneficiary other than decedent’s estate, and that, under the terms of the partnership agreement, the proceeds were to be in lieu of the decedent’s interest in the partnership. His partnership interest under these circumstances would have a value at death of $100,000 and such amount should be included in the estate tax return. Under the principle of the majority opinion there would be nothing included in the return as partnership interest and only $60,000 returned as insurance proceeds, because all of the amount was payable to a beneficiary other than the estate of the insured.

The majority opinion holds that the premiums on the policies were paid by the firm of which decedent was a member at his death, as consideration for the right to use decedent’s name as a member of the firm in perpetuity, for his interest in the good will of the firm, and for his right to limited participation in partnership profits until May 1, 1941; and that by so assigning those rights and interest to the partnership decedent bought these policies. With this I can not agree. Under the partnership agreement, decedent was to be a member of the partnership until his death or May 1941, whichever occurred first. He was to participate in the profits until 1941. As long as he was a member of the firm, the other members did not have to pay for use of his name. The provisions with respect to the policies were not provisions whereby each member was buying policies of insurance on his life or selling his interest in the firm for such policies, but were provisions whereby the firm was carrying insurance which would inure to the benefit of the surviving partners and provide them with the means to pay for the interest of a deceased partner immediately upon his death. The right of the insured partner to name the beneficiary to whom such proceeds should be paid was nothing more than a designation by him of the person to whom the value of his partnership interest was to be paid.

I think the reasoning in Boston Safe Deposit & Trust Co. et al., Executors, 30 B. T. A. 679, was correct and that the reasoning on the second point in this case is wrong. That decision should not be modified. The Commissioner filed a petition to review the Boston Safe Deposit & Trust Co. case in the Circuit Court of Appeals for the First Circuit, but later asked that the petition to review be dismissed and the case was affirmed per curiam December 10, 1934. There is nothing in the Igleheart case, 28 B. T. A. 888; affd., 77 Fed. (2d) 704, which requires any modification of the rule in the Boston Safe Deposit & Trust Co. case. The facts are entirely different. There Igleheart purchased for an amount equal to the cash surrender value, 13 policies on his life taken out and carried by the corporation of which he was an employee, and in which the corporation was beneficiary. Thereafter, Igleheart had the beneficiary changed to his wife and he paid subsequent premiums until his death. The question was whether the policies were taken out by decedent on his own life, and we properly held that the acquisition of the policies by purchase was, in result, the taking out of the policies by the decedent on the date of purchase by him of all the rights thereunder. In the instant case, the decedent did not purchase any policies from the partnership, and we do not get to the question of whether the policies were taken out by decedent upon his own life.

While respondent treated the $40,000 as insurance proceeds, paid to beneficiaries other than estate of the insured, and included the proceeds with other proceeds paid to beneficiaries other than his estate, he should have included the $40,000 in gross estate as the value of decedent’s interest in the good will of the partnership at the date of his death, and have excluded it altogether from the amount includable in gross estate as insurance. The record does not show what was included in gross estate as the value of decedent’s interest in the partnership at date of death. In the recompu-tation under Rule 50, the $40,000 should be added to the value of the partnership interest if it has not already been included therein. This will not result in any additional deficiency.


author: Aeundell:

text:
    Thomas E. Wells, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78829.
    Promulgated April 10, 1936.

      Thomas M. WilMns, Esq., for the petitioner.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

Aeundell:

The respondent has determined a deficiency in gift tax under the Revenue Act of 1932 in the amount of $601.06. The petitioner alleges error in the respondent’s determination that three gifts were transfers of future interests in property and in failing to exclude from the amount of each gift the sum of $5,000. The facts were stipulated.

The petitioner is an individual, a citizen and resident of the United States. On December 27, 1933, he created three irrevocable trusts, one for each of his three minor children. Thereafter, but within the calendar year 1933, he transferred, without any valuable consideration whatsoever, to each of the three trusts his entire right, title, and interest in and to certain shares of corporate stock having an aggregate value at that time of $103,803.06. The value of the shares so transferred to each of the trusts was $34,601.02. Certificates representing the shares were delivered to the trustee of the three trusts during the calendar year 1933 and were accepted by the trustee.

Each of the trust instruments directed the trustee to collect the income from the trust corpus, and after paying expenses, taxes, etc., to accumulate the remainder of the income until the child named therein attained the age of 21 years or died before that time. Upon reaching the age of 21 each child was to receive the trust income until he reached the age of 30, or until the death of his mother, who was trustee, whichever event occurred first, then he was to receive the corpus. In the event of the death of any child before the time of distribution of the trust created for him, the corpus was to go to his issue, and in default of issue, to the other children of petitioner.

The petitioner filed a gift tax return with the collector at Chicago, Illinois. He reported therein the gifts above described in the aggregate amount of $103,803.07. He deducted from that amount $15,000, being $5,000 for each trust, and the specific exemption of $50,000, leaving a net taxable amount of $38,803.07. The respondent disallowed the deduction of $15,000, stating in his notice of deficiency that: “The gifts * * * are determined to constitute gifts of future interests, and, therefore, no exclusions are allowed.”

Section 501 (a) of the Revenue Act of 1932 provides for the imposition of a tax “upon the transfer * * * by an individual ⅞ * * 0| pr0perty by gift”, and subsection (b) provides that “The tax shall apply whether the transfer is in trust or otherwise * * *.” Section 504 (b) reads as follows:

(b) Guts Less Than $5,000. — In the ease of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.

It is under this last quoted provision that the present controversy arises. The question is whether the gifts made to the three trusts in this case were “gifts (other than future interests in property)”, or whether, as the respondent held, they were future interests.

It has been suggested that the quoted parenthetical phrase refers only to interests which were future interests in the hands of the donor. If so, it would not apply to this case for the donor here had a present interest in the property and it was that interest that he transferred. However, we do not believe that it was the intent of Congress in enacting the statute to relate this phrase to the donor’s interest. The Committee reports accompanying the revenue bill of 1932 indicate that the “future interests” provision was aimed at the interest taken by the donee. While the tax is laid upon the donor and the basis is the value of the property that he transfers by way of gift, the amount of the tax is affected by various deductions or exemptions. One of these is the $5,000 allowance or exclusion under section 504 (b), which operates as a measure of the amount of the tax. In order to determine whether it applies it is necessary to find the character of the interest that the donee takes.

Proceeding on the premise that the statute is to be applied from the standpoint of the donees’ interests, we reach the question whether in this case the gifts in the hands of the donees were “other than future interests.” To state it shortly, were they present interests or future interests? If they were gifts of present interests, the petitioner in making his return properly excluded $5,000 of the value of the property transferred to each trust; if they were gifts of future interests, the Commissioner was right in refusing to allow the exclusion.

Congress has not defined in the statute the term “future interests.” The definition in the quoted Committee reports, if standing alone, would lead to the conclusion that the term was intended to apply to any interest of which the donee would not take immediate and actual physical possession. But the possibility of this being the true intent is tempered by the next sentence, which gives the reasons for the insertion of the future interests provision. The exclusion is to be allowed in so far as the donees are ascertainable and denied in the case of future interests because of an apprehended difficulty of determining the number of eventual donees and the values of their respective gifts. In a case like that before us, where the eventual donees are named and the value of the gifts to them readily ascertainable, there is no such difficulty as the Congressional Committees feared. Where in a given situation the reasons which prompted the enactment of a provision are absent, we doubt the propriety of our attempting to spell out of the situation some possibility which might make it come within the statute. While not necessary to a decision in this case to determine the inner or outer boundaries of the definition in the Committee reports, it would appear that what was in mind as a future interest was a remainder or a reversion, supported by an intervening estate. In such, cases there exists the apprehended difficulty of which the reports speak.

The search for the answer to the question here leads first to the matter of identifying the donees. The present gift tax statute, like that of its predecessor, the Revenue Act of 1924, “is aimed at transfers that have the quality of a gift.” Burnet v. Guggenheim, 288 U. S. 280. We can eliminate the trustee from consideration as a donee. The transfer to the trustee does not have the quality of a gift, as the trustee has no beneficial use of the property. Hence, the donee with which we are concerned must be either the beneficiary, or the trust considered as an entity.

In these cases the designated beneficiaries of the trusts have the present beneficial ownership of the entire corpus and of the income being accumulated. There is no intervening estate. The trust corpus is being administered and the income accumulated for the sole use of the beneficiaries. They alone have the enjoyment of it, even though physical possession is postponed. In this view of the question it is our opinion that the beneficiaries have present interests in the property which are subject to the $5,000 exclusion.

If it can not be said that the beneficiaries alone are the donees, we think it may with reason be held that the trusts considered as entities are the donees and take present interests. While trusts are abstractions, they have long been treated by the taxing statutes as entities having a separate existence. Anderson v. Wilson, 289 U. S. 20. Section 504 (b) of the Revenue Act of 1932 refers to gifts “made to any person” and section 1111 (a) (1) of the same statute defines “person” as meaning “an individual, a trust, or estate.” Considering the trusts in these cases as embracing the trustee as well as the beneficiaries, we find that they have all the interests with which the donor parted and it is beyond question that the donor parted with a present interest in the property. The trusts have both legal title and the beneficial interest. The trusts being “persons” and each taking the entire interest with which the donor parted, they may properly be regarded as the donees and as taking the present interest in the property to which the $5,000 exclusion applies.

While the wording of the statute when considered in conjunction with the Committee reports is not entirely free from doubt, we believe that the answer here arrived at correctly interprets the statute and gives effect to the Congressional intent.

Reviewed by the Board.

Decision will he entered for the 'petitioner.

Smith, Sternhagen, and Murdock concur in the result.

Seawell dissents.

       Tlie exemption does not apply with respect to a gift to any donee to whom is given a future interest. The term “future interests in property” refers to any interest or estate, whether vested or contingent, limited to commence in possession or enjoyment at a future date. The exemption being available only in so far as the donees are ascertainable, the denial of the exemption in the case of gifts of future interests is dictated by the apprehended difficulty, in many instances, of determining the number of eventual donees and the values of their respective gifts. Rept. No. 665, p. 41; Rept. No. 708, p. 29, 72d Cong.. 1st sess.